<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 1998
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
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 Code 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:
A. MICHAEL HAINSFURTHER, ESQ.
MARK A. KOPIDLANSKY, ESQ.
MUNSCH HARDT KOPF
HARR & DINAN, P.C.
1445 ROSS AVE., SUITE 4000
DALLAS, TX 75202-2790
(214) 855-7500
--------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effectiveness of this Registration Statement.
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. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE(2)
<S> <C> <C> <C> <C>
12% Senior Notes due 2008, Series B $150,000,000 100% $150,000,000 $44,250
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Calculated in accordance with Rule 457(f)(2) based on the book value on
September 28, 1998, of the securities to be received by the Registrant in
the Exchange Offer.
--------------------------
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 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 29, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
[LOGO]
OFFER TO EXCHANGE
12% SENIOR NOTES DUE 2008, SERIES B
FOR ALL OUTSTANDING
12% SENIOR NOTES DUE 2008, SERIES A
OF
CAPROCK COMMUNICATIONS CORP.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME
ON , 1998 UNLESS EXTENDED.
------------------------
CapRock Communications Corp. ("CapRock" or the "Company") is hereby offering
(the "Exchange Offer"), upon the terms and subject to the conditions set forth
in this Prospectus and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange $1,000 principal amount at maturity of its 12% Senior
Notes due 2008, Series B (the "Exchange Notes"), which exchange has been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to a registration statement of which this Prospectus is a part, for
each $1,000 principal amount at maturity of its outstanding 12% Senior Notes due
2008, Series A (the "Private Notes"), of which $150,000,000 in aggregate
principal amount at maturity was issued on July 16, 1998 and is outstanding as
of the date hereof (the "Private Offering"). The form and terms of the Exchange
Notes are identical in all material respects to those of the Private Notes,
except that the Exchange Notes will bear a Series B designation and will have
been registered under the Securities Act and except for certain transfer
restrictions and registration rights relating to the Private Notes and certain
interest provisions related to such registration rights. The Exchange Notes will
evidence the same indebtedness as the Private Notes (which they replace) and
will be entitled to the benefits of an Indenture dated as of July 16, 1998
governing the Private Notes and the Exchange Notes (the "Indenture"). The
Private Notes and the Exchange Notes are sometimes referred to herein
collectively as the "Notes." See "The Exchange Offer" and "Description of the
Notes."
Interest on the Exchange Notes will be payable semi-annually in arrears on
January 15 and July 15 of each year, commencing on January 15, 1999, at the rate
of 12% per annum. The Exchange Notes will mature on July 15, 2008. The Exchange
Notes will be redeemable at the option of the Company, in whole or in part, at
any time on or after July 15, 2003 at the redemption prices set forth herein,
together with accrued and unpaid interest, if any, to the Redemption Date (as
defined herein). See "Description of the Notes." Upon the occurrence of a Change
of Control (as defined herein), each holder of Notes may require the Company to
purchase all of such holder's Notes in whole or in part in integral multiples of
$1,000, at a purchase price in cash equal to 101% of the principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
purchase. See "Description of the Notes--Repurchase of Notes Upon a Change in
Control." There can be no assurance that the Company will have available, or
will be able to acquire from alternative sources of financing, funds sufficient
to repurchase the Notes in the event of a Change of Control. See "Risk
Factors--Purchase of Notes Upon a Change of Control."
The Exchange Notes will be senior unsecured obligations of the Company and,
as such, will rank PARI PASSU in right of payment with all existing and future
unsecured and unsubordinated Indebtedness (as defined herein) of the Company.
The Exchange Notes will be effectively subordinated in right of payment to all
secured Indebtedness of the Company to the extent of the value of the assets
securing such Indebtedness. In addition, the Company is a holding company and
the Exchange Notes will be effectively subordinated to all existing and future
Indebtedness and other liabilities (including trade payables) of the Company's
subsidiaries. As of June 30, 1998, after giving pro forma effect to the Private
Offering and the application of the net proceeds therefrom and the consummation
of the Combination, the Company and its subsidiaries, on a consolidated basis,
would have had approximately $19 million of total outstanding liabilities
(including trade accounts payable and accrued liabilities but excluding
intercompany payables and the Private Notes), all of which would have been
liabilities of subsidiaries of the Company and all of which would have been
structurally senior to the Private Notes. See "Description of the
Notes--Ranking."
The Company will accept for exchange any and all validly tendered Private
Notes not withdrawn prior to 5:00 p.m. New York City time, on , 1998,
unless the Exchange Offer is extended by the Company in its sole discretion (the
"Expiration Date"). Tenders of Private Notes may be withdrawn at any time prior
to the Expiration Date. Private Notes may be tendered only in integrals of
$1,000. The Exchange Offer is subject to certain customary conditions. See "The
Exchange Offer."
SEE "RISK FACTORS" COMMENCING ON PAGE 19 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN CONNECTION WITH THE
EXCHANGE OFFER AND AN INVESTMENT IN THE EXCHANGE NOTES.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is , 1998.
<PAGE>
NOTICE TO INVESTORS
The Exchange Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement (as
defined herein). Based on interpretations by the staff of the Securities and
Exchange Commission (the "Commission") set forth in no-action letters issued to
third parties, the Company believes that the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Private Notes may be offered for resale,
resold and otherwise transferred by any Holder thereof (other than any such
Holder which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such Holder's business and
such Holder has no arrangement with any person to participate in the
distribution of such Exchange Notes. However, any holder of Private Notes who is
an "affiliate" of the Company or who intends to participate in the Exchange
Offer for the purpose of distributing the Exchange Notes (i) will not be able to
rely on the interpretations of the staff of the Commission, (ii) will not be
able to tender its Private Notes in the Exchange Offer and (iii) must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any sale or transfer of the Private Notes. Each holder of the
Private Notes (other than certain specified holders) who wishes to exchange
Private Notes for Exchange Notes in the Exchange Offer will be required to
represent that (i) it is not an affiliate of the Company, (ii) any Exchange
Notes to be received by it, will be acquired in the ordinary course of its
business and (iii) at the time of commencement of the Exchange Offer, it had no
arrangement with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes. In addition, each
broker-dealer that receives Exchange Notes for its own account pursuant to the
Exchange Offer must acknowledge that (i) Private Notes tendered by it in the
Exchange Offer were acquired in the ordinary course of its business as a result
of market-making or other trading activities and (ii) it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of Exchange Notes received in the Exchange Offer. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with any resale of the Exchange Notes received in exchange for Private Notes
where such Private Notes were acquired by such broker-dealer as a result of
market-making or other trading activities (other than Private Notes acquired
directly from the Company or an affiliate of the Company). The Company has
agreed that, for a period of 180 days after the Expiration Date, it will make
this Prospectus available to any broker-dealer for use in connection with any
such resale. See "Plan of Distribution."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF PRIVATE NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
PRIVATE NOTES PURSUANT TO THE EXCHANGE OFFER.
Tenders of Private Notes pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date. The Exchange Offer is subject to certain
customary conditions. In the event the Company terminates the Exchange Offer and
does not accept for exchange any Private Notes, the Company will promptly return
the Private Notes to the Holders thereof. The Company will give oral or written
notice of any extension, amendment, non-acceptance or termination of the
Exchange Offer to the Holders of the Private Notes as promptly as practicable,
such notice in the case of any extension to be issued by means of a press
release or other pubic announcement no later than 9:00 a.m., New York City time,
on the next business day after the previously scheduled Expiration Date. The
Company can, in its sole discretion, extend the Exchange Offer indefinitely,
subject to the Company's obligation (a) to pay Special Interest (as defined
herein) if (i) the Exchange Offer is not consummated or, if required, a shelf
registration statement with respect to the Private Notes is not declared
effective, by February 16, 1999 or (ii) the Exchange Offer Registration
Statement is declared effective but thereafter ceases to be effective or usable
and (b), under certain circumstances, to file a shelf registration statement
with respect to the Private Notes. The Company has agreed to pay the expenses of
the Exchange Offer. The Company will not receive any proceeds from the Exchange
Offer. No underwriter is being used in connection with the Exchange Offer. See
"Use of Proceeds," and "Plan of Distribution."
2
<PAGE>
Prior to the date of this Prospectus, there has been no public market for
the Exchange Notes. The Company does not currently intend to list the Exchange
Notes on any securities exchange or to seek approval for quotation through any
automated quotation system. Accordingly, there can be no assurance as to the
development or liquidity of any public market that may develop for the Exchange
Notes, the ability of holder to sell the Exchange Notes, or the price at which
holders would be able to sell the Exchange Notes. The National Association of
Securities Dealers, Inc. ("NASD") has designated the Private Notes as securities
eligible for trading in the Private Offerings, Resales and Trading through
Automatic Linkages ("Portal") market of the NASD, and the Company has been
advised that Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson,
Lufkin & Jenrette Securities Corporation and Banc One Capital Markets, Inc.
(together, the "Initial Purchasers") have heretofore acted as market makers for
the Private Notes. The Company has been advised by each of the aforesaid market
makers that it currently intends to make a market in the Exchange Notes. The
Initial Purchasers are not obligated, however, to make a market in the Exchange
Notes and any such market-making activities, if commenced, may be discontinued
at any time. Future trading prices of the Exchange Notes will depend on many
factors, including among other things, prevailing interest rates, the Company's
operating results and the market for similar securities. Historically, the
market for securities similar to the Exchange Notes, including non-investment
grade debt, has been subject to disruptions that have caused substantial
volatility in the prices of such securities. There can be no assurance that any
market for the Exchange Notes, if such market develops, will not be subject to
similar disruptions. See "Risk Factors--Absence of a Public Market for the
Exchange Notes; Possible Volatility of Note Price."
The Private Notes were sold by the Company to the Initial Purchasers on July
16, 1998 (the "Original Issue Date" or "Closing Date") in transactions which
were not registered under the Securities Act, in reliance upon the exemption
provided by Section 4(2) of the Securities Act. The Initial Purchasers
subsequently placed the Private Notes with qualified institutional buyers in
reliance upon Rule 144A under the Securities Act. Accordingly, the Private Notes
may not be reoffered, resold or otherwise transferred in the United States
unless registered under the Securities Act or unless an applicable exemption
from the registration requirements of the Securities Act is available.
The Exchange Notes will be available initially only in book-entry form and
the Company expects that the Exchange Notes issued pursuant to the Exchange
Offer will be represented by one or more Global Notes (as defined herein), which
will be deposited with the Trustee as custodian for, and registered in the name
of a nominee of, The Depository Trust Company ("DTC"). Ownership of beneficial
interests in the Global Notes will be shown on, and the transfer of that
ownership will be effected only through, records maintained by DTC and its
participants. After the initial issuance of the Global Notes, Exchange Notes in
certificated form will be issued in exchange for Global Notes only under certain
limited circumstances as set forth in the Indenture. See "Book-Entry; Delivery
and Form."
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Exchange Offer Registration Statement") under the Securities Act with
respect to the Exchange Notes covered by this Prospectus. This Prospectus does
not contain all of the information set forth in the Exchange Offer Registration
Statement and the exhibits and schedules thereto, certain portions of which have
been omitted pursuant to the rules and regulations of the Commission. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document are not necessarily complete. With respect to each such contract,
agreement or other document filed or incorporated by reference as an exhibit to
the Exchange Offer Registration Statement, reference is made to such exhibit for
a more complete description of the matter involved, and each such statement is
qualified in its entirety by such references.
The Company is subject to the information reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, is required to file reports, proxy and information
statements and other information with the Commission. The Exchange Offer
Registration Statement and 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 Room 1024, 450 Fifth
Street, 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,
3
<PAGE>
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., 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 the Company (http://www.sec.gov).
The Company's Common Stock is listed on the Nasdaq National Market and such
information with respect to the Company may also be inspected at the offices of
the National Association of Securities Dealers, Inc, 1735 K Street, N.W.,
Washington, D.C. 20006. In addition, the Indenture provides that, at all times
from and after the earlier of (i) the date of the commencement of the Exchange
Offer or other registration of the Exchange Notes and (ii) the date that is six
months after the Closing Date, in either case, regardless of whether the Company
is then required to file reports with the Commission, the Company shall file
with the Commission all such reports and other information as would be required
to be filed with the Commission if the Company were subject to the reporting
requirements of the Exchange Act. The Company shall also supply or cause the
Trustee to supply, to each holder of Notes, without cost, copies of such reports
or other information, including reports on Forms 10-K, 10-Q and 8-K. On August
14, 1998, each of the Company and IWL Communications, Incorporated, a Texas
corporation ("IWL"), filed with the Commission its Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998, and caused copies of such reports to be
sent to each holder of Private Notes in accordance with the Indenture. In
addition, at all times prior to the earlier of (i) the date of the commencement
of the Exchange Offer or other registration of Exchange Notes and (ii) the date
that is six months after the Closing Date, upon the request of any holder of
Notes or any prospective purchaser of Notes designated by a holder, the Company
shall supply to such holder or prospective purchaser the information required
under Rule 144A.
FORWARD-LOOKING STATEMENTS
This 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 the Company set forth under "Business,"
"Summary--Summary Supplemental Consolidated Condensed Financial Data," "Selected
Supplemental Consolidated Financial Data of CapRock," "Management's Discussion
and Analysis of Financial Condition and Results of Operations of CapRock,"
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 report are based on
management's current expectations of the Company's near term results, based on
certain assumptions and current information available pertaining to the Company,
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 the
Company 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, the ability
of the Company to manage rapid change and to integrate the business of three
companies and achieve the benefits of the Combination (as defined below), the
Company's ability to fund the significant capital requirements, risks related to
building a fiber network, risks associated with the development of accounting,
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 and suppliers, risks associated with international
operations, 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, risks relating
to ownership of proprietary rights, risks associated with the Year 2000 issues,
and risks associated with general business and economic conditions.
4
<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 PROSPECTUS, THE
APPENDICES HERETO AND THE DOCUMENTS OTHERWISE REFERRED TO HEREIN, INCLUDING THE
FINANCIAL STATEMENTS AND NOTES THERETO. PROSPECTIVE INVESTORS SHOULD CAREFULLY
CONSIDER THE FACTORS SET FORTH HEREIN UNDER THE CAPTION "RISK FACTORS" AND ARE
URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. UNLESS THE CONTEXT OTHERWISE
REQUIRES, ALL DISCUSSIONS HEREIN OF THE HISTORICAL BUSINESS OPERATIONS OF THE
COMPANY GIVE EFFECT TO, ON A PRO FORMA BASIS, THE CONSUMMATION ON AUGUST 26,
1998 OF THE COMBINATION (THE "COMBINATION") OF THE BUSINESSES OF CAPROCK
TELECOMMUNICATIONS CORP., A TEXAS CORPORATION ("TELECOMMUNICATIONS"), CAPROCK
FIBER NETWORK, LTD., A TEXAS LIMITED PARTNERSHIP (THE "PARTNERSHIP") AND IWL
CONTEMPLATED BY THE MERGER AGREEMENT (AS DEFINED BELOW). UNLESS THE CONTEXT
OTHERWISE REQUIRES OR AS OTHERWISE EXPRESSLY PROVIDED HEREIN, REFERENCES IN THIS
PROSPECTUS TO "CAPROCK" OR THE "COMPANY" REFER TO CAPROCK COMMUNICATIONS CORP.
AND ITS SUBSIDIARIES, COLLECTIVELY, TELECOMMUNICATIONS, THE PARTNERSHIP AND IWL
AND THEIR RESPECTIVE SUBSIDIARIES AND PREDECESSORS. SEE "THE COMBINATION."
THE COMPANY
The Company is a regional facilities-based integrated communications
provider (an "ICP") offering local, long distance, Internet, data and private
line services to small and medium-sized businesses. The Company also provides
switched and dedicated access, regional and international long distance, private
lines and dark fiber to carrier customers. The Company currently owns and
operates a 260 route mile fiber optic network along the Texas Gulf Coast,
linking Houston, Victoria and Corpus Christi, Texas, and is in the process of
expanding its network to approximately 800 route miles in Texas by the end of
1998. The Company intends to expand its network to approximately 5,500 route
miles throughout Texas, Louisiana, Oklahoma, New Mexico and Arkansas ("Texas and
the Gulf Coast region") by the end of 2000. The Company has over 60 carrier
customers, including AT&T Corp. ("AT&T"), IXC Communications, Inc. ("IXC"), MCI
Communications Corporation ("MCI"), Qwest Communications International Inc.
("Qwest") and Sprint Corporation ("Sprint"), as well as various regional
independent telephone companies, such as Century Telephone Enterprises, Inc. and
Lufkin Conroe Telephone. The Company's volume of monthly long distance minutes
of traffic has grown from approximately 3.0 million minutes in April 1994 to
approximately 82 million minutes in August 1998, which included approximately
10.8 million minutes of traffic terminated in Mexico.
The Company is also a leading provider of communications services to
offshore oil and gas customers in the Gulf of Mexico and the North Sea, where it
provides turnkey communications solutions to multi-site clients such as Amoco
Eurasia Petroleum Company, Chevron Information Technology Company, Polar Lights
Company (a joint venture of Conoco Oil Company), Exxon Computing Services
Company and Shell Offshore Services Company.
The Company has been providing telecommunications services in Texas for more
than 15 years. IWL began providing telecommunications services in Texas and
Louisiana in 1981. IWL's core business initially focused on the provision of
communications solutions to customers in the oil and gas industry. These
business activities included the provision of advanced communications solutions
to customers with operations in remote, difficult-access regions of the world.
In 1992, the Company began providing voice, data and broadband services to
carrier and commercial customers in Texas. As a result of its experience in
providing a wide range of communications services, the Company believes that it
has built significant name recognition and a valuable customer base in Texas and
the Gulf Coast region.
The Company intends to leverage its experience, name recognition and
existing customer base to become the leading facilities-based ICP and the
premier provider of carriers' carrier services in Texas and the Gulf Coast
region. One of the keys to this strategy is completing the build out of its
fiber optic network to approximately 5,500 route miles. The Company completed
construction of the first 260 route miles of its fiber network in January 1997.
The Company is currently expanding its network to approximately 800 route
5
<PAGE>
miles by the end of 1998, linking San Antonio, Austin, Laredo, McAllen,
Harlingen, and Corpus Christi, Texas. The Company intends to expand its network
to approximately 3,000 route miles by the end of 1999 and approximately 5,500
route miles by the end of 2000. The Company 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 Company to serve nearly every primary,
secondary and tertiary city in the region. The Company's network is designed to
be scalable and will have significant flexibility to meet future demand. The
Company intends to include in its network advanced fiber capable of supporting
dense wave division multiplexing with an OC-48 backbone scalable to OC-192. The
Company intends to install 96 fibers and two spare ducts throughout most of its
network and intends to 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, Inc.
("WorldCom"). The fiber network will also interconnect with the fiber networks
of selected Mexican carriers at multiple border crossings. To reduce the cost of
fiber retained for its own use, the Company has purchased pipelines, sold duct
and dark fiber to third parties, and jointly constructed segments with Teleport
Communications Inc., a competitive local exchange carrier ("CLEC"), and with TCI
Communications Inc., a cable television company. CapRock believes that its
network, upon completion, will be one of the lowest net cost networks on a per
fiber mile basis in Texas and the Gulf Coast region.
The Company believes that the Combination will enable it to significantly
accelerate the implementation of its business plan and to more rapidly achieve
its business objectives by:
- ENHANCING ITS REVENUE OPPORTUNITIES. The Company believes it will be able
to enhance its revenue opportunities by leveraging the existing and
planned fiber and switching network infrastructure of Telecommunications,
the Partnership and IWL to offer voice, data and broadband services in
markets geographically clustered near such infrastructure;
- CREATING GREATER ORGANIZATIONAL DEPTH. The Company believes it will be
able to create greater organizational depth through the combination of the
sales, customer service and networking expertise 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;
- PROVIDING IT WITH THE OPPORTUNITY TO CROSS-SELL PRODUCTS. The Company
believes it will be able 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;
- CAPITALIZE ON INTERNATIONAL REVENUE OPPORTUNITIES. The Company believes it
will be able to capitalize 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
- REDUCING CAPITAL EXPENDITURES. The Company believes it will be able to
reduce the combined capital expenditures of the three companies through
the construction of a single communications infrastructure.
MARKET OPPORTUNITY
The Company believes that the geographic market in which it competes offers
significant opportunities for growth. Texas is the second largest state in the
U.S. with a 1997 population of approximately 19.5 million and population growth
of approximately 2% annually. Based on statistics published by the Federal
Communications Commission ("FCC"), in 1998 it is expected that there will be
over 3.7 million business access lines, approximately 7.7 million residential
access lines and a total of approximately 11.5 million access lines in Texas,
including those in the public sector. The Company believes that the
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growth rate of access lines in Texas will be approximately 5% annually. Based on
published FCC statistics, in 1998 it is expected that the approximate number of
access lines for business users, residential users and total lines in Texas and
the Gulf Coast region will be approximately 5.4 million, 12.0 million, and 17.4
million, respectively.
The Company believes it is well positioned to capture a significant portion
of the growing international traffic between the United States and Mexico due to
its location, its network buildout in Texas and its intent to interconnect with
several Mexican carriers at multiple border points. In 1996, Mexico was the
second largest destination for U.S. outbound telecommunications traffic,
accounting for approximately 12.5% of the total international traffic
originating in the U.S. The U.S. is the largest destination of outbound traffic
from Mexico, accounting for approximately 86% of its total international
traffic. In 1997, the telecommunications traffic into Mexico was approximately
2.9 billion minutes, while outgoing traffic amounted to approximately 1.2
billion minutes, with approximately 86% of this traffic originating or
terminating in the United States. The Company estimates that over half this
volume passed through gateways along the Texas border. In 1996, approximately
70% of the telecommunications traffic between the two countries originated in
the U.S.
BUSINESS STRATEGY
The Company's business objectives are to (i) 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) 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) capitalize on the growing opportunities to
provide international long distance and international project services. To
achieve these objectives, the Company intends to:
BECOME A SINGLE SOURCE PROVIDER OF COMMUNICATIONS AND NETWORK INTEGRATION
SERVICES. The Company 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. The Company currently offers, on a non-integrated
basis, local, domestic and international long distance, data (including
asynchronous transfer mode ("ATM"), frame relay, and Internet) and broadband
(including T-1, DS-3 and dark fiber) services. By the end of 1998, the Company
intends to offer these services to customers as an integrated suite of products
that will be invoiced on a single, convergent bill. The Company 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.
STRATEGICALLY BUILD OUT ITS REGIONAL FIBER NETWORK. The build-out of the
Company's fiber optic network is a key element of the Company's objective of
becoming the leading ICP and the premier carriers' carrier in its target
markets. The Company's 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
Company intends to expand its network to cover approximately 5,500 route miles
throughout Texas and the Gulf Coast region by the end of the year 2000, creating
the most extensive alternative fiber network in the region. The Company believes
that existing communications networks are inadequate for future requirements in
Texas and the Gulf Coast region and that the secondary and tertiary markets
located between the major markets in this region are currently underserved,
creating a significant market opportunity for network expansion. The Company's
network will provide other carriers with diverse routing and additional capacity
to meet their future bandwidth demands. The Company's network will also
interconnect with the networks of selected Mexican carriers at multiple border
crossings, creating
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multiple synchronous optical network ("SONET") ring connections between the
United States and Mexico. The completion of the Company's network will allow it
to (i) originate and terminate most of its customers' voice and data traffic
within the region on-net, (ii) dramatically increase its available broadband
capacity and (iii) 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 CUSTOMER TURNOVER. Data services represent one of the
fastest growing product segments in the communications industry. The Company
believes it can accelerate new account penetration and minimize potential
customer turnover by offering local area network ("LAN") interconnection, frame
relay, 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 the Company intends to charge) in conjunction with traditional
local and long distance services. The Company intends to leverage its expertise
in providing multi-point and last mile solutions for data-intensive customers by
offering such services to small and medium-sized business customers, as well as
by targeting data-intensive and multi-point customers, such as banks, financial
institutions and health care providers. In addition, the Company believes that
it can take advantage of opportunities for revenue growth through cross selling
its onshore integrated data services to existing oil and gas customers and
customers with operations in remote, difficult-access regions.
BUILD MARKET SHARE THROUGH PERSONALIZED SALES AND CUSTOMER SERVICE. The
Company 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.
Management believes that small and medium-sized business customers in its target
markets have been neglected by the ILECs with respect to these approaches. The
Company's sales management team is composed of executives with experience in
managing a large number of direct and agent sales specialists in the
telecommunications industry. As of August 31, 1998, the Company's direct sales
force consisted of 41 account executives, and the Company had 100 sales agents
located throughout Texas. The Company intends to recruit, train and deploy
approximately 60 additional account executives by the end of 1998 and an
additional 100 account executives by the end of 1999. The Company 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 a comprehensive set of products and services and customer care options,
and (iii) participate in the potential economic returns made available through a
results-oriented compensation package emphasizing sales commissions and equity
incentives.
DEVELOP EFFICIENT AUTOMATED BACK OFFICE SYSTEMS. The Company handles 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 the Company 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 the
Company's expected future back office requirements. The system, when fully
implemented, will enable the Company 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. The Company 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.
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EXPAND INTERNATIONAL SERVICE OFFERINGS. The Company believes that it can
leverage its existing international commercial relationships, its regulatory
expertise, its extensive relationships with domestic carriers and its points of
presence in Texas, Russia and Scotland to significantly increase the Company's
international traffic, including traffic to and from Mexico. Based on published
FCC statistics, in 1997 the incoming telecommunications traffic for Mexico was
approximately 2.9 billion minutes, while outgoing traffic amounted to
approximately 1.2 billion minutes, and approximately 86% of this traffic
originated or terminated in the United States. The Company estimates that over
half this volume passed through gateways along the Texas border.
PURSUE ACQUISITIONS AND STRATEGIC ALLIANCES. In the Company's 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 the Company to
acquire industry participants that can provide technical support, management
talent, customers and product extensions and could enable the Company to
accelerate the implementation of its business plan. The Company also intends to
pursue strategic relationships with utilities, state transportation departments
and other governmental authorities. As part of its growth plan, the Company has
been discussing and continues to discuss with other companies in its region
business ventures and combinations, including potential mergers and
acquisitions.
LEVERAGE ITS EXPERIENCED MANAGEMENT TEAM. The Company's management team
includes individuals with significant experience in the deployment and marketing
of communications services. Jere W. Thompson, Jr., Chief Executive Officer of
the Company, founded the Partnership in 1992. Ignatius W. Leonards, President of
the Company, 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 the Company, 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, an Executive Vice President of the Company,
has five years of experience in the domestic and international
telecommunications industry, and Kevin W. McAleer, the Company's Chief Financial
Officer, has over 16 years of experience as the chief financial officer of
publicly-held companies.
NETWORK BUILDOUT AND FINANCING PLAN
By the end of the year 2000, the Company intends to build out its fiber
optic network to approximately 5,500 route miles throughout Texas and the Gulf
Coast region. CapRock intends to use advanced fiber capable of supporting dense
wave division multiplexing with an OC-48 backbone scalable to OC-192. The
Company intends to install 96 fibers throughout most of its network and intends
to retain on average 48 fiber strands. The Company estimates total gross capital
expenditures of approximately $340 million to complete its planned network
buildout, including fiber, switching equipment, construction costs and network
electronics. The Company believes that the net proceeds from the Private
Offering, together with cash flow from operations, borrowings under the Credit
Facility (as defined below), or other credit facilities or bank debt, vendor
financings, sales of dark fiber and other sources of financing, will be
sufficient to fund its capital expenditures and working capital requirements for
the next 18 months. Additional capital will be required after such time to
finance the Company's network buildout. If the Company is unable to obtain such
capital, the build out of its network may be significantly delayed, curtailed or
abandoned. The Company is currently negotiating with a lender to obtain a senior
credit facility in the amount of $25 million (the "Credit Facility"). In
addition, the Company may accelerate the rate of deployment of its network,
which in turn may accelerate the Company's need for additional capital. The
Company's actual capital requirements will also be affected, possibly
materially, by various factors, including the timing and actual cost of the
deployment of the Company's network, the timing and cost of expansion into new
markets, the extent of competition and the pricing of telecommunications
services in its markets.
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THE COMBINATION AND ISSUANCE OF THE PRIVATE NOTES
The Company is a Texas corporation that was formed on February 3, 1998 to be
a holding company for Telecommunications, the Partnership and IWL and their
respective subsidiaries following the consummation of the Combination. On
February 16, 1998, Telecommunications, the Partnership, IWL, the Company and
certain other parties entered into an Agreement and Plan of Merger and Plan of
Exchange, as amended (as so amended, the "Merger Agreement"), providing for the
mergers (the "Mergers") of newly-formed subsidiaries of the Company into IWL and
Telecommunications, with IWL and Telecommunications surviving such Mergers as
wholly owned subsidiaries of the Company, and the exchange (the "Interest
Exchange") of the general partnership interest and all of the limited
partnership interests (collectively, the "Partnership Interests") in the
Partnership that are validly tendered to and accepted by the Company for shares
of the common stock, par value $.01 per share, of the Company (the "Common
Stock" or "CapRock Common Stock" ). On August 26, 1998, the Company announced
that it had completed the Mergers and the Interest Exchange pursuant to the
Merger Agreement. At the effective time of the Mergers and the Interest
Exchange, all previously outstanding shares of IWL common stock ceased to exist
and each such share was converted into and became exchangeable for one share of
CapRock Common Stock, all previously outstanding shares of Telecommunications
common stock ceased to exist and each such share was converted into and became
exchangeable for 1.789030878 shares of CapRock Common Stock and each one percent
(1%) of the Partnership Interests issued and outstanding was exchanged for
63,194.54 shares of CapRock Common Stock. In addition, IWL and
Telecommunications stock options and warrants that were outstanding and
unexercised at the Effective Time were assumed by the Company and converted into
options and warrants to purchase shares of CapRock Common Stock. Prior to the
Effective Time, the shares of CapRock Common Stock issuable in connection with
the Combination were registered for issuance under the Securities Act, and the
CapRock Common Stock was approved for listing on the Nasdaq National Market
under the symbol "CPRK."
On July 16, 1998, the Company, Telecommunications and the Partnership (with
IWL as a guarantor of certain obligations with respect to the Private Notes)
sold, through a private placement under Rule 144A under the Securities Act,
Private Notes in the aggregate principal amount of $150 million. The Indenture
provided that the Company, Telecommunications and the Partnership (with IWL as a
guarantor) would be required to make an offer to purchase the Private Notes at
101% of their principal amount, plus accrued and unpaid interest to the date of
repayment, in the event that the Combination was not consummated and certain
other conditions were not satisfied by August 31, 1998, or if it appeared, in
the sole judgment of the Company, Telecommunications, the Partnership and IWL,
that the Combination would not be consummated or such conditions would not be
satisfied by such date. In addition, in connection therewith, prior to a
specified date, approximately $145 million of the net proceeds from the offering
of the Private Notes were held in an escrow account pursuant to the terms of an
escrow and security agreement. In connection with the consummation of the
Combination on August 26, 1998, Telecommunications and the Partnership were
released as (and are no longer) co-obligors under the Private Notes (and IWL was
released from its obligations under such offer to purchase), with the Company
remaining the sole obligor thereunder, and the proceeds from the offering of the
Private Notes held in escrow were disbursed to the Company.
The mailing address of the Company's principal executive offices is Two
Galleria Tower, 13455 Noel Road, Suite 1925, Dallas, Texas 75240 and its
telephone number is (972) 982-9500.
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THE EXCHANGE OFFER
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The Exchange Offer................ The Company is hereby offering to exchange $1,000
principal amount at maturity of Exchange Notes for each
$1,000 principal amount at maturity of Private Notes
that are properly tendered and accepted. As of the date
hereof, $150,000,000 aggregate principal amount at
maturity of Private Notes is outstanding. The Company
will issue the Exchange Notes to Holders promptly
following the Expiration Date. See "Risk Factors--
Consequences of Failure to Exchange." Holders of the
Private Notes do not have appraisal or dissenter's
rights in connection with the Exchange Offer under the
Texas Business Corporation Act, the governing law of the
state of incorporation of the Company.
Minimum Condition................. The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Private Notes being
tendered or accepted for exchange.
Expiration Date................... 5:00 p.m., New York City time, on , 1998 unless
the Exchange Offer is extended, in which case the term
"Expiration Date" means the latest date and time to
which the Exchange Offer is extended.
Registration Rights
Agreement....................... The Private Notes were sold by the Company on July 16,
1998 to Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation and Banc One Capital Markets, Inc., who
placed the Private Notes with qualified institutional
buyers in reliance on Rule 144A under the Securities
Act. In connection therewith, the Company executed and
delivered for the benefit of the holders of the Private
Notes a registration rights agreement (the "Registration
Rights Agreement") providing for, among other things,
certain exchange and registration rights. The Exchange
Offer is intended to satisfy such rights. Holders of the
Exchange Notes will not be entitled to any exchange or
registration rights with respect to the Exchange Notes.
Conditions to the Exchange The Exchange Offer is subject to certain customary
Offer........................... conditions, which may be waived by the Company. The
Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Private Notes being
tendered for exchange. See "The Exchange
Offer--Conditions." The Company reserves the right to
terminate or amend the Exchange Offer at any time prior
to the Expiration Date upon the occurrence of any such
condition. NO VOTE OF THE COMPANY'S SECURITY HOLDERS IS
REQUIRED TO EFFECT THE EXCHANGE OFFER AND NO SUCH VOTE
(OR PROXY THEREFOR) IS BEING SOUGHT HEREBY.
Procedures for Tendering Private
Notes........................... Each Holder of Private Notes wishing to accept the
Exchange Offer must complete, sign and date the Letter
of Transmittal, or a facsimile thereof, in accordance
with the instructions
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contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such facsimile,
together with the Private Notes and any other required
documentation to PNC Bank, National Association, as
exchange agent (the "Exchange Agent"), at the address
set forth herein. By executing the Letter of Transmittal
and tendering the Private Notes, each signatory thereto
will represent to the Company that (i) the Exchange
Notes acquired pursuant to the Exchange Offer are being
acquired in the ordinary course of business of the
person receiving such Exchange Notes, (ii) neither the
Holder nor any such other person has an arrangement or
understanding with any person to participate in the
distribution within the meaning of the Securities Act of
such Exchange Notes, (iii) if the Holder is not a
broker-dealer, or is a broker-dealer but will not
receive Exchange Notes for its own account in exchange
for Private Notes, neither the Holder nor any such other
person is engaged in or intends to participate in the
distribution of such Exchange Notes, and (iv) neither
the Holder nor any such other person is an "affiliate"
of the Company within the meaning of Rule 405 under the
Securities Act or, if the Holder or such other person is
an "affiliate," that it will comply with the
registration and prospectus delivery requirements of the
Securities Act to the extent applicable. If the Holder
or the person receiving the Exchange Notes is a
broker-dealer (whether or not it is also an "affiliate")
that will receive Exchange Notes for its own account in
exchange for Private Notes, it will represent that such
Private Notes were acquired as a result of market-making
activities or other trading activities, and it will
acknowledge that it will deliver a prospectus meeting
the requirements of the Securities Act in connection
with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by
delivering a prospectus, a broker or dealer will not be
deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. See "The Exchange
Offer--Procedures for Tendering" and "Plan of
Distribution."
Special Procedures for Beneficial
Owners.......................... Any beneficial owner whose Private Notes are registered
in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender should
contact such registered Holder promptly and instruct
such registered Holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to
tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of
Transmittal and delivering such owner's Private Notes,
either make appropriate arrangements to register
ownership of the Private Notes in such owner's name or
obtain a properly completed bond power from the
registered Holder. The transfer of registered ownership
may take considerable time and may not be able to be
completed prior to the Expiration Date. See "The
Exchange Offer--Procedures for Tendering."
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Guaranteed Delivery Procedures.... Holders of Private Notes who wish to tender their
Private Notes and whose Private Notes are not
immediately available or who cannot deliver their
Private Notes, the Letter of Transmittal or any other
documents required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date must tender
their Private Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer--Guaranteed
Delivery Procedures."
Withdrawal Rights................. Tenders may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date. See "The
Exchange Offer--Withdrawal of Tenders."
Acceptance of Private Notes and
Delivery of Exchange Notes...... The Company will accept for exchange any and all Private
Notes which are properly tendered in the Exchange Offer
prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Notes issued pursuant to
the Exchange Offer will be delivered promptly following
the Expiration Date. See "The Exchange Offer--Terms of
the Exchange Offer."
Certain United States Federal The exchange of Private Notes for Exchange Notes by
Income Tax Consequences......... tendering holders will not be a taxable exchange for
United States federal income tax purposes, and such
holders will not recognize any taxable gain or loss or
any interest income for United States federal income tax
purposes as a result of such exchange (assuming no
Special Interest becomes due). However, the Company
recommends that each holder consult such holder's own
tax advisor. See "Certain United States Federal Income
Tax Considerations."
Use of Proceeds................... There will be no proceeds to the Company from, and the
Company has agreed to bear the expenses of, the Exchange
Offer.
Resales of Exchange Notes......... Based on interpretations by the staff of the Commission
set forth in no-action letters issued to third parties,
the Company believes that the Exchange Notes issued
pursuant to the Exchange Offer in exchange for Private
Notes may be offered for resale, resold and otherwise
transferred by any Holder thereof (other than any such
Holder which is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act), without
compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of
such Holder's business and such Holder has no
arrangement with any person to participate in the
distribution of such Exchange Notes. However, any holder
of Private Notes who is an "affiliate" of the Company or
persons who intend to participate in the Exchange Offer
for the purpose of distributing the Exchange Notes (i)
will not be able to rely on the interpretations of the
staff of the Commission, (ii) will not be able to tender
its Private Notes in the Exchange Offer and (iii) must
comply with the registration and prospectus delivery
requirements of the Securities Act in connection with
any sale or
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transfer of the Private Notes unless such sale or
transfer is made pursuant to an exemption from such
requirements. Each holder of the Private Notes (other
than certain specified holders) who wishes to exchange
Private Notes for Exchange Notes in the Exchange Offer
will be required to make representations in the Letter
of Transmittal in order to satisfy the requirements set
forth in the no action letters described above. The
Company has not sought a no action letter for the
registration of the Exchange Offer and is instead
relying upon the interpretations issued by the staff of
the Commission to other issuers. See "Plan of
Distribution."
Registration Requirements......... The Company has agreed to pay Special Interest on the
Private Notes if (i) the Exchange Offer is not
consummated or, if required, a Shelf Registration
Statement (as defined below) with respect to the Private
Notes is not declared effective, by February 16, 1999 or
(ii) the Exchange Offer Registration Statement is
declared effective but thereafter ceases to be effective
or useable. In the event that (i) the Company is not
permitted under the Securities Act to consummate the
Exchange Offer because the Exchange Offer is not
permitted by applicable law or Commission policy, (ii)
the Exchange Offer is not for any other reason
consummated by February 16, 1999 and (iii) certain other
circumstances occur, then the Company has agreed to file
a shelf registration statement (the "Shelf Registration
Statement") with the Commission to cover resales of the
Private Notes and to use its best efforts to cause such
Shelf Registration Statement to be declared effective
under the Securities Act and, subject to certain
exceptions, to keep such Shelf Registration Statement
effective until the earlier of (a) the second
anniversary of the effective date of the Shelf
Registration Statement and (b) such time as all of the
Private Notes covered by the Shelf Registration
Statement have been sold thereunder or otherwise cease
to be subject to restrictions on resale. See
"Registration Rights Agreement."
Effect on Holders of Private As a result of the making of the Exchange Offer, and
Notes........................... upon acceptance for exchange of all validly tendered
Private Notes pursuant to the terms of the Exchange
Offer, the Company will have fulfilled certain
obligations under the terms of the Private Notes and the
Registration Rights Agreement and, accordingly, the
holders of the Private Notes will have no further
registration or other rights under the Registration
Rights Agreement, except under certain limited
circumstances. See "The Exchange Offer--Purpose and
Effect of the Exchange Offer." Holders of the Private
Notes who do not tender their Private Notes in the
Exchange Offer will continue to hold such Private Notes
and will be entitled to all the rights (including the
accrual of interest) and limitations applicable thereto
under the Indenture. All untendered, and tendered but
unaccepted, Private Notes will continue to be subject to
the restrictions on transfer provided for in the Private
Notes and the Indenture. To the extent that
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Private Notes are tendered and accepted in the Exchange
Offer, the trading market, if any, for the Private Notes
not so tendered could be adversely affected. See "Risk
Factors--Consequences of Failure to Exchange."
Exchange Agent.................... PNC Bank, National Association, is serving as Exchange
Agent in connection with the Exchange Offer. See "The
Exchange Offer--Exchange Agent."
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SUMMARY DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Offer applies to $150,000,000 aggregate principal amount at
maturity of Private Notes. The terms of the Exchange Notes are identical in all
material respects to the Private Notes, except that the Exchange Notes will bear
a Series B designation and will have been registered under the Securities Act
and, therefore, will not bear legends restricting their transfer and will not
contain certain terms providing for an increase in the interest rate on the
Private Notes under certain circumstances relating to the timing of the Exchange
Offer, which rights will terminate when the Exchange Offer is consummated. The
Exchange Notes will evidence the same debt as the Private Notes and will be
entitled to the benefits of the Indenture, under which both the Private Notes
were, and the Exchange Notes will be, issued. See "Description of the Notes."
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The Exchange Notes................ $150,000,000 aggregate principal amount at maturity of
12% Senior Notes due 2008, Series B.
Maturity Date..................... July 15, 2008
Interest.......................... Interest on the Exchange Notes is payable semiannually
in cash on January 15 and July 15 of each year,
commencing January 15, 1999.
Ranking........................... The Exchange Notes will be general senior unsecured
obligations of the Company, and as such, will rank PARI
PASSU in right of payment with all existing and future
unsecured and unsubordinated Indebtedness of the
Company. The Exchange Notes will be effectively
subordinated in right of payment to all secured
Indebtedness of the Company to the extent of the value
of the assets securing such Indebtedness. In addition,
the Company is a holding company, and the Exchange Notes
will be effectively subordinated to all existing and
future Indebtedness and other liabilities (including
trade payables) of the Company's subsidiaries. As of
June 30, 1998, after giving pro forma effect to the
Private Offering and the application of the net proceeds
therefrom and the consummation of the Combination, the
Company and its subsidiaries, on a consolidated basis
would have had approximately $19 million of liabilities
(excluding intercompany payables and the Private Notes),
all of which would have been liabilities of subsidiaries
of the Company and all of which would have been
structurally senior to the Private Notes and the
Exchange Notes. See "Description of the Notes--
Ranking."
Optional Redemption............... The Exchange Notes will be redeemable at the Company's
option, in whole or in part, at any time on or after
July 15, 2003 at the redemption prices set forth herein
together with accrued and unpaid interest, if any, to
the date of redemption.
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Change of Control................. Upon the occurrence of a Change of Control, each holder
of Exchange Notes may require the Company to make an
offer to purchase all outstanding Exchange Notes at a
purchase price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest, if
any, to the date of purchase. See "Description of the
Notes--Certain Covenants." There can be no assurance
that the Company will have available, or will be able to
acquire from alternative sources of financing, funds
sufficient to repurchase the Exchange Notes in the event
of a Change of Control. See "Risk Factors--Purchase of
Notes Upon a Change of Control."
Certain Covenants................. The Indenture contains certain covenants that restrict,
among other things, the ability of the Company and its
Restricted Subsidiaries to (i) incur certain
indebtedness, (ii) pay dividends and make certain other
restricted payments, (iii) create liens, (iv) permit
other restrictions on dividends and other payments by
Restricted Subsidiaries, (v) issue and sell Capital
Stock of Restricted Subsidiaries, (vi) guarantee certain
indebtedness, (vii) sell assets, (viii) enter into
transactions with Affiliates (as defined), (ix) merge,
consolidate or transfer substantially all of the assets
of the Company and (x) make investments in any
Unrestricted Subsidiary (as defined). The covenants
require the Company to make an offer to purchase
specified amounts of Notes in the event of certain asset
sales. There can be no assurance that the Company will
have sufficient funds to complete any purchase of
Exchange Notes upon such a sale of assets. See
"Description of the Notes--Certain Covenants."
</TABLE>
RISK FACTORS
See "Risk Factors" beginning on page 19 for a discussion of certain factors
that should be considered by prospective investors in connection with the
Exchange Offer and an investment in the Exchange Notes.
16
<PAGE>
SUMMARY SUPPLEMENTAL CONSOLIDATED CONDENSED FINANCIAL DATA
On August 26, 1998, the Company completed the Combination with
Telecommunications, IWL and the Partnership. The Combination was accounted for
as a pooling-of-interests. All financial data of the Company, including the
Company's previously issued financial statements for the periods presented in
this Prospectus, have been restated to include the historical financial
information of Telecommunications, IWL and the Partnership in accordance with
generally accepted accounting principles and pursuant to Regulation S-X.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling-of interests
methods in financial statements that do not include the date of consummation.
These supplemental consolidated financial statements do not extend through the
date of consummation. However, they will become the historical consolidated
financial statements of CapRock Communications Corp. and its subsidiaries after
financial statements covering the date of consummation of the Combination are
issued. The supplemental consolidated condensed financial data 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 and the supplemental consolidated financial
statements and notes thereto, which are included elsewhere in this Prospectus.
In May 1998, IWL changed its fiscal year end to coincide with the fiscal years
of the Company, Telecommunications and the Partnership. Accordingly, the
supplemental consolidated 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 supplemental consolidated balance sheet data and statement of
operations data at and for the six-month period ended June 30, 1998 also combine
the financial statements of IWL with those of Telecommunications and the
Partnership. The unaudited supplemental consolidated condensed statements of
operations data for the years ended December 31, 1995 and 1996 combine IWL's
consolidated statements of operations data for the years ended June 30, 1995 and
1996 with the Telecommunications and Partnership statements of operations data
for the years ended December 31, 1995 and 1996. The net income of IWL for the
six month period ended December 31, 1996 was excluded from the supplemental
consolidated condensed statement of operations for the year ended December 31,
1996, as a result of the non-conforming year ends for such period in the amount
of approximately $260,000. This amount was included as an adjustment to retained
earnings in the Supplemental Consolidated Statement of Stockholders' Equity.
IWL's cash flow for this period was added to the 1997 beginning balance in the
Supplemental Consolidated Statement of Cash Flows.
The summary 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 Combination had been consummated as presented in the
accompanying Supplemental Consolidated financial statements of CapRock
Communications Corp. and subsidiaries, nor is it necessarily indicative of
future operating results or financial position.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues(1)........................................................ $ 29,407 $ 50,970 $ 75,350 $ 35,671 $ 51,420
Cost of revenues................................................... 21,185 39,357 52,472 25,843 34,035
--------- --------- --------- --------- ---------
Gross profit....................................................... 8,222 11,613 22,878 9,828 17,385
Operating expenses:
Selling, general and administrative.............................. 7,326 8,983 14,074 6,453 9,560
Depreciation and amortization.................................... 1,186 1,536 3,346 1,419 2,250
--------- --------- --------- --------- ---------
Total operating expenses........................................... 8,512 10,519 17,420 7,872 11,810
Operating costs and expenses....................................... 29,696 49,876 69,892 33,715 45,845
--------- --------- --------- --------- ---------
Operating income (loss)............................................ (289) 1,094 5,458 1,956 5,575
Other income (expense)............................................. 150 41 220 110 104
Interest expense, net.............................................. (484) (585) (1,603) (839) (919)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and extraordinary item........... (623) 550 4,075 1,227 4,760
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C>
Income tax expense (benefit)....................................... 48 226 1,514 391 1,887
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item............................ (671) 324 2,561 836 2,873
Extraordinary item, net of tax..................................... 645 -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss).................................................. $ (26) $ 324 $ 2,561 $ 836 $ 2,873
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma income taxes:
Income (loss) before income taxes and extraordinary item........... $ (623) $ 551 $ 4,075 $ 1,227 $ 4,760
Pro forma income taxes(2).......................................... (211) 143 1,475 383 1,887
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item............................ (412) 408 2,600 844 2,873
Extraordinary item, net of pro forma taxes (3)..................... 397 -- -- -- --
--------- --------- --------- --------- ---------
Pro forma net income (loss)........................................ $ (15) $ 408 $ 2,600 $ 844 $ 2,873
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma and historical earnings (loss) per common share(4):......
Income (loss) before extraordinary item.......................... $ (.002) $ 0.01 $ 0.09 $ 0.03 $ 0.10
Extraordinary item, net of tax................................... .002 -- -- -- --
--------- --------- --------- --------- ---------
Basic and Diluted.............................................. $ -- $ 0.01 $ 0.09 $ 0.03 $ 0.10
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares used in per share computation.............. 25,921 27,146 27,984 27,295 28,850
OTHER DATA:
Ratio of earnings to fixed charges(5).............................. 1.0x 1.6x 2.7x 2.1x 4.2x
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------
(IN
THOUSANDS)
-------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................... $ 742
Working capital (deficit)............................................... (15,563)
Property, plant and equipment, net...................................... 33,953
Total assets............................................................ 60,048
Long-term debt and capital lease obligations, net of current portion.... 1,748
Stockholders' equity.................................................... 18,647
</TABLE>
- ------------------------------
(1) Includes the resale of Alcatel Network Systems, Inc. ("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 the Company approximately $10.6 million and
$2.9 million of Alcatel products and other equipment and hardware,
respectively. 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) Pro forma income taxes include a pro forma tax benefit adjustment of
$11,000, $84,000, $39,000 and $8,000 for the years ended December 31, 1995,
1996 and 1997 and for the six months ended June 30, 1997, respectively.
These adjustments were made to reflect the tax expenses that would have been
recorded if the Partnership had been taxed as a C Corporation in those
years. The Partnership elected to be taxed as a corporation in January,
1998.
(3) The extraordinary gain of approximately $397,000 relates to the
extinguishment of certain lease obligations in 1995 for the Partnership. The
extraordinary item is shown on a pro forma basis, net of income taxes of
$248,000 (See Note 2).
(4) Pro forma and historical earnings (loss) per common share amounts have been
calculated in accordance with SFAS No. 128, "Earnings Per Share" for all
periods presented.
(5) The ratio of earnings to fixed charges was computed by dividing earnings by
fixed charges. For this purpose, earnings consist of income from continuing
operations, before income taxes and fixed charges of the Company. Fixed
charges consist of interest charges, amortization of debt issuance costs,
capitalized interest and the portion of rent expense under operating leases
representing interest (estimated to be one-third of such expense).
18
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, BEFORE TENDERING
THEIR PRIVATE NOTES FOR THE EXCHANGE NOTES OFFERED HEREBY, HOLDERS OF PRIVATE
NOTES SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS, WHICH MAY BE GENERALLY
APPLICABLE TO THE PRIVATE NOTES AS WELL AS TO THE EXCHANGE NOTES.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Private Notes who do not exchange their Private Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Private Notes, as set forth in the legend
thereon, as a consequence of the issuance of the Private Notes pursuant to
exemptions from, or in transactions not subject to, the requirements of the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Private Notes under the
Securities Act. Based on interpretation by the staff of the Commission set forth
in no-action letters issued to third parties, including Exxon Capital Holdings
Corporation, SEC No-Action Letter (available April 13, 1988) (the "Exxon Capital
Letter"), Morgan Stanley & Co. Incorporated, SEC No-Action Letter (available
June 5, 1991) (the "Morgan Stanley Letter"), and similar letters, the Company
believes that the Exchange Notes issued pursuant to the Exchange Offer may be
offered for resale, resold or otherwise transferred by any Holder thereof (other
than any such Holder which is an "affiliate" of the Company within the meaning
of Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such Holder's business and
such Holder has no arrangement with any person to participate in the
distribution of such Exchange Notes. Notwithstanding the foregoing, each
broker-dealer that receives Exchange Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. The Letter of Transmittal states that by
so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with any resale of Exchange Notes
received in exchange for Private Notes where such Private Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities (other than Private Notes acquired directly from the Company). The
Company has agreed that, for a period of 180 days from the Expiration Date, it
will make this Prospectus available to any broker-dealer for use in connection
with any such resale. See "Plan of Distribution." Any holder who tenders in the
Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes cannot rely on the Morgan Stanley Letter or similar letters and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction. To the extent
that Private Notes are tendered and accepted in the Exchange Offer, the trading
market, if any, for the Private Notes not so tendered could be adversely
affected. See "The Exchange Offer."
FAILURE TO COMPLY WITH EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for the Private Notes pursuant to
the Exchange Offer will be made only after timely receipt by the Exchange Agent
of such Private Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of the Private
Notes desiring to tender such Private Notes in exchange for Exchange Notes
should allow sufficient time to ensure timely delivery. The Company is under no
duty to give notification of defects or irregularities with respect to tenders
of Private Notes for exchange. Holders of Private Notes who do not exchange
their Private Notes for Exchange Notes pursuant to the Exchange Offer will
continue to be subject to the restrictions on transfer of such Private Notes as
set forth in the legend thereon. See "The Exchange Offer."
19
<PAGE>
SUBSTANTIAL INDEBTEDNESS; RESTRICTIVE COVENANTS
As a result of the Private Offering, the Company is highly leveraged. At
June 30, 1998, on a pro forma basis after giving effect to the consummation of
the Combination and the Private Offering and the application of the net proceeds
therefrom, the Company would have had total consolidated indebtedness of $150
million before the costs of the Combination and the Private Offering (or
approximately 90% of the total capitalization of the Company) and the total
liabilities of the Company (including trade accounts payable and accrued
liabilities) would have been approximately $169 million. See "Capitalization."
The degree to which the Company is leveraged may adversely affect the Company's
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 the Company.
The successful implementation of the Company's 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 the Company's cash flow, will be necessary for the Company to be able
to meet its debt service requirements, including its obligations under the
Notes. There can be no assurance that the Company will successfully implement
its strategy or that the Company 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 the Company's strategy
is delayed or is unsuccessful or the Company does not generate sufficient cash
flow to meet its debt service and working capital requirements, the Company may
need to seek additional financing. There can be no assurance that any such
financing could be obtained on terms that are acceptable to the Company, or at
all. In the absence of such financing, the Company 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 the
Company's assets could be sold quickly enough or for sufficient amounts to
enable the Company to meet its obligations, including its obligations with
respect to the Notes.
The Credit Facility is likely to and the Indenture (as defined below) does
impose operating and financial restrictions on the Company and its Subsidiaries.
These restrictions will affect, and in certain cases significantly limit or
prohibit, among other things, the ability of the Company and its Subsidiaries to
incur additional indebtedness, create liens upon assets, apply the proceeds from
the disposal of assets, make investments, make dividend payments and other
distributions on capital stock (other than to the Company) and redeem capital
stock. In addition, the Credit Facility is expected to require the Company to
maintain certain financial ratios and meet certain financial covenants relating
to the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations of CapRock-- Credit Facility" and "Description of the
Notes." There can be no assurance that the Company will be able to maintain such
ratios or that such covenants will not adversely affect the Company's ability to
finance its future operations or capital needs or to engage in other business
activities that may be in the best interest of the Company.
HOLDING COMPANY STRUCTURE; STRUCTURAL SUBORDINATION
The Company is a holding company with no direct operations and no
significant assets other than its direct and indirect ownership interests in the
Subsidiaries. The Private Notes are and the Exchange Notes will be general
unsecured obligations of the Company and will rank pari passu in right of
payment with all future senior indebtedness of the Company, if any, and senior
in right of payment to all future subordinated indebtedness of the Company, if
any. The Company does not currently have any other existing debt other than debt
of the Subsidiaries. Each of the Company's Subsidiaries is a separate legal
entity that has no obligation to pay any amounts due pursuant to the Notes or to
make any funds available therefor, whether by dividends, loans or other
payments. Because the Notes are not be guaranteed by the Subsidiaries, all
indebtedness of the Subsidiaries, including the Subsidiaries' borrowings under
the Credit
20
<PAGE>
Facility, any vendor financings and trade payables, will be structurally senior
to the Notes. In addition, the Company may be required to pledge the stock of
Telecommunications and IWL, its direct wholly owned Subsidiaries, to secure the
borrowings under the Credit Facility and other vendor financings and the
Subsidiaries and any other subsidiaries will 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 the
Subsidiaries, the right of the Company to receive assets of the Subsidiaries
upon such liquidation or reorganization (and the consequent right of holders of
the 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 the Company is itself a creditor of
such Subsidiary, in which case the claims of the Company would still be
effectively subordinated to any security interest in the assets of such
Subsidiary held by other creditors. As of June 30, 1998, after giving effect to
the Private Offering and the application of the net proceeds therefrom and the
consummation of the Combination, the Company and its subsidiaries, on a
consolidated basis, would have had approximately $19 million of total
outstanding liabilities (including trade accounts payable and accrued
liabilities but excluding intercompany payables and the Private Notes), all of
which would have been liabilities of subsidiaries of the Company and all of
which would have been structurally senior to the Private Notes. See
"Capitalization." The Company is dependent on the cash flow of the Subsidiaries
to meet its obligations, including the payment of interest and principal
obligations on the Notes when due. Accordingly, the Company's ability to make
principal, interest and other payments to holders of the Notes when due will be
dependent on the receipt of sufficient funds from the Subsidiaries. Receipt of
such funds will be restricted by the terms of existing and future indebtedness
of the Subsidiaries, including the Credit Facility. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations of CapRock--Credit
Facility."
In addition, the Indenture permits the Company to incur additional secured
indebtedness, and such secured indebtedness would have a prior claim over the
Notes to the assets of the Company that secure such indebtedness. See
"Description of the Notes--Certain Covenants."
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. This growth has resulted in
an increase in the level of responsibility for management personnel. The
Combination is intended in part to help fuel additional growth and expansion,
which could add additional strain on the Company's resources and will increase
demands on its systems and controls. The Company's ability to continue to manage
its growth successfully will require the Company 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 the Company will be able to do so.
The Combination involves the integration of three companies, which will
impose many risks on the Company, including risks associated with assimilating
the operations, services, products and personnel of the three companies. No
assurance can be given that the Company 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 the Company to, among other things,
access significant amounts of growth capital, to complete successfully the
approximately 5,500 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 Combination, to incur significant costs
in connection with the integration of IWL's, Telecommunications' and the
Partnership's operations, financial reporting and
21
<PAGE>
accounting systems, and networks, as well as other costs relating to
transitional planning and implementation. The incurrence of any such costs, as
well as any unexpected costs or delays in connection with such integration,
could have a material adverse effect on CapRock's financial condition, results
of operations and cash flow.
SIGNIFICANT CAPITAL REQUIREMENTS
The expansion of the Company's 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 the Company's growth will require substantial capital and operating
funds. The Company currently estimates that its aggregate capital expenditure
requirements will total approximately $45 million during the second half of 1998
and $150 million for 1999. The Company 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. The Company believes that the net
proceeds from the Private Offering, together with cash flow from operations,
borrowings under the Credit Facility that the Company is currently negotiating
with a bank lender, vendor financings, sales of dark fiber and other sources of
financing, will be sufficient to fund its capital expenditures and working
capital requirements for the next 18 months. No assurance can be given, however,
as to when and if the Company 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 the Company's
network. If the Company is unable to obtain such capital, the build out of its
network may be significantly delayed, curtailed or abandoned.
The actual amount and timing of the Company's future capital requirements
may differ materially from the Company's estimates, depending on the demand for
the Company's services and as a result of regulatory, technological and
competitive developments, including new market developments and new
opportunities, in the Company's industry. The Company 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 the Company 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 the Company and within the limitations contained
in the Company's financing arrangements. See "--Substantial Indebtedness;
Restrictive Covenants." Failure to generate or raise sufficient funds, whether
in the Offering, the Credit Facility, through vendor financings, sales of dark
fiber or otherwise, may require the Company to delay or abandon some or all of
its future expansion plans or expenditures, which could have a material adverse
effect on the Company's financial condition, results of operations and cash
flow. Such failure could also limit the ability of the Company to make principal
and interest payments on its indebtedness, including the Notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of CapRock."
RISKS RELATED TO THE FIBER NETWORK
CapRock's ability to achieve its strategic objectives will depend in large
part upon the successful, timely and cost-effective completion of its planned
5,500 route mile fiber network. Additionally, CapRock 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
CapRock's fiber network may be affected by a variety of factors, uncertainties
and contingencies, many of which are beyond CapRock's control, including but not
limited to, CapRock's access to sufficient capital, access to rights-of-way, the
22
<PAGE>
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 CapRock believes that its cost
estimates and build-out schedule are reasonable, there can be no assurance that
the actual construction costs or time required to complete the construction of
CapRock's fiber network will not exceed current estimates. CapRock 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 CapRock 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 CapRock's
fiber network or to successfully market the capacity of the network, could have
a material adverse effect on CapRock's financial condition, results of
operations and cash flow.
DEVELOPMENT OF PROVISIONING, BILLING, CUSTOMER SERVICE AND MANAGEMENT
INFORMATION SYSTEMS
Sophisticated OSS systems are vital to CapRock's 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. CapRock 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
CapRock will be able to timely and successfully develop, acquire or operate such
systems. As CapRock begins to provide local switched services, the need for
sophisticated billing and information systems will also increase significantly,
and CapRock will have significant additional requirements for electronic data
interfaces with ILECs and other CLECs. Additionally, any acquisitions would
place additional burdens on CapRock's accounting, information and other systems.
Unanticipated problems in any of the above areas, or CapRock's 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 CapRock to
reach its objectives and on its financial condition, results of operations and
cash flow. See "Business--Customer Care and Support."
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 the
Company expects competition to increase in the future. The Company believes that
existing competitors are likely to continue to expand their service offerings to
appeal to existing or potential customers of the Company. Many of the Company's
existing competitors have financial, personnel and other resources, including
brand name recognition, substantially greater than those of the Company.
Moreover, the Company expects that new competitors are likely to enter the
communications market, and some of these new competitors may market
communications services similar to the Company's services. In addition, some of
these new competitors may have financial, personnel and other resources,
including brand name recognition, substantially greater than those of the
Company.
In addition, the regulatory environment in which the Company 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 the Company's 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 the Company, and many communications
companies operate generally in the same long distance and local service
submarkets as the Company. As a service provider in the long distance
23
<PAGE>
communications industry, the Company competes with several well established
providers, as well as many other long distance providers with less significant
market shares.
DOMESTIC AND INTERNATIONAL LONG DISTANCE. The Company 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
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 the Company. Moreover, there can be no
assurances that certain of the Company's competitors will not be better situated
to negotiate contracts with suppliers of telecommunications services which are
more favorable than contracts negotiated by the Company. Many of the Company's
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 the Company.
The Company 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 the Company will be able to compete effectively
in the domestic or international long distance markets.
LOCAL EXCHANGE SERVICE. CapRock 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 CapRock 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 CapRock's competitors will
not be better situated to negotiate contracts with suppliers of
telecommunications services which are more favorable than contracts negotiated
by CapRock. CapRock 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 CapRock
will be able to compete effectively in the local service markets.
FIBER NETWORKS. CapRock intends to expand its fiber optic network to
approximately 5,500 route miles throughout Texas and the Gulf Coast region.
CapRock 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,
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technical and marketing resources than CapRock. CapRock 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 CapRock's network. In addition to IXCs and LECs,
entities potentially capable of offering broadband services in competition with
CapRock's 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 CapRock's existing and planned network and may be positioned
geographically to compete directly with CapRock's 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 CapRock or the carrier customers of CapRock will not
experience substantial decreases in call volume, pricing and/or margins due to
IP Telephony. There can also be no assurance that CapRock 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 the Company 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 CapRock
expects that competition will continue to intensify. CapRock's 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
CapRock.
TECHNOLOGICAL ADVANCES. In the future, CapRock 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 CapRock. 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 CapRock. There can be no assurance
that CapRock's services will satisfy future customer needs, that CapRock's
technologies will not become obsolete in light of future technological
developments, or that CapRock will not have to make significant additional
capital investments to upgrade or replace its system and equipment. The effect
on CapRock's operations of technological changes cannot be predicted, and if
CapRock 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
CapRock.
OFFSHORE AND REMOTE TELECOMMUNICATIONS SERVICES. Currently, the Company
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, the Company 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
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the region. The Company provides private-line telecommunications services in
Russia. In Russia, the major competitors for networks are SOVAMTEL and AMRUSCOM.
Although the Company believes that it competes successfully in each of its
markets today, there can be no assurance that the Company will be able to
continue to compete successfully in the future. The Company 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 the
Company.
DEPENDENCE ON OTHER LONG DISTANCE CARRIERS
CapRock 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 CapRock 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
CapRock's financial condition, results of operations and cash flow.
More than half of CapRock's international traffic is to Mexico. In January
and February 1998, many carriers, including one used by CapRock, 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 CapRock's
customers with quality and rates CapRock is unable to match, CapRock could lose
a significant portion of its traffic into Mexico or any other foreign country,
which could have a material adverse effect on CapRock's financial condition,
results of operations and cash flow.
DEPENDENCE ON INCUMBENT LOCAL EXCHANGE CARRIERS
In addition to reselling local service from ILECs, CapRock 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 CapRock's 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 CapRock or (ii) that CapRock will be successful
in negotiating with ILECs the necessary co-location, interconnection and resale
agreements, particularly the unbundled network elements that CapRock intends to
resell, on terms that will be favorable to CapRock. Any substantial limitation
on CapRock's ability to secure reasonable and timely access to ILEC services and
unbundled network elements could have a material adverse effect on CapRock's
financial condition, results of operations and cash flow. See "Regulation and
Licenses-- Government Regulation."
DEPENDENCE ON KEY PERSONNEL
The success of CapRock's business will depend, in part, on the continued
services of certain members of the management of CapRock. 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 CapRock, Ignatius W. Leonards, President
and Vice Chairman of the Board of CapRock, Byron M. Allen, Scott L. Roberts,
Timothy W. Rogers or Timothy M. Terrell, each Executive Vice Presidents of
CapRock, could have a material adverse effect on the business, results of
operations and financial condition of CapRock. The competition for qualified
managers and employees in the telecommunications industry is intense.
Accordingly, there can be no assurance that CapRock 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.
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DEPENDENCE ON MAJOR CUSTOMERS
CapRock's carrier customers generally use more than one service provider for
switched access services and can quickly reduce their use of CapRock's services
and move to other providers without incurring significant expense. CapRock's
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 CapRock will be able to retain its
carrier customers. For the year ended December 31, 1997, and for the six months
ended June 30, 1998, revenues from services provided to MCI accounted for more
than 10% of the Company's revenues. The loss of or a significant decrease of
business from any of CapRock's largest customers would have a material adverse
effect on CapRock's financial condition, results of operations and cash flow.
Customers in the oil and gas industry accounted for substantially all of
CapRock's offshore and project related sales in the fiscal year ended December
31, 1997 and for the six months ended June 30, 1998. 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 CapRock's
financial condition, results of operations and cash flow.
RISKS ASSOCIATED WITH INTERNATIONAL CUSTOMERS
A portion of the Company'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 CapRock's 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 CapRock's 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 the Company 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 the Company's
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 the Company intends to operate, in ways not
necessarily to the Company's advantage.
The Company is currently subject to federal and state government regulation
of its long distance and local telephone services. The Company 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, the Company is required to obtain and maintain a
certificate, issued by the FCC, in connection with its international services.
The Company 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
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FCC) and facilities-based services. The Company 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 authorizations if a carrier violates applicable laws or regulations.
Intrastate long distance telecommunications operations are also subject to
various state laws and regulations, including prior certifications,
notification, or registration requirements. The Company 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, the Company must file and obtain prior
regulatory approval of tariffs for intrastate services. In addition, the Company
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, the Company filed notices and/ or
applications for approval of the Combination, and the receipt of certain of such
approvals (which the Company received) was a condition to the consummation of
the Combination.
The Company's 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.
The Company's cost of providing long distance service, and its revenues from
providing local services, will both be affected by changes in "access charges"
and universal service. 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 CapRock's 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 the Company's 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 the Company's financial condition, results of operations and cash flow. See
"Business--Competition" and "Regulation and Licenses--Government Regulation."
POSSIBLE SERVICE INTERRUPTIONS; NATURAL DISASTERS
CapRock's 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 CapRock's voice traffic currently passes
through its single Dallas switch. A second switch is not
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planned to be operational until the fourth quarter of 1998, and no assurance can
be given that such additional switch will be installed on a timely basis or at
all. CapRock's operations in remote and underdeveloped areas of the world make
CapRock'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 CapRock to
provide services is housed in a single location in CapRock's 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, CapRock 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 CapRock's equipment, which could have
a material adverse effect on CapRock's financial condition, results of
operations and cash flow. Also, networks and switching facilities experience
periodic service interruptions and equipment failures, and the operation of such
networks will be subject to international, national and regional
telecommunications outages or regulatory issues from time to time. It is
therefore possible that the networks and facilities utilized by CapRock may from
time to time experience service interruptions or equipment failures that would
have a material adverse effect on CapRock's 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, some 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 service 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 service providers for information
which they host, distribute or transport could materially change the way they
must conduct business and could impact the determination by the Company to
expand or continue this business and could subject the Company to litigation
which could have a material adverse effect on the Company's financial condition,
results of operations and cash flow.
NEED TO OBTAIN AND MAINTAIN RIGHTS-OF-WAY
The Company 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 Company
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 the Company's financial
condition, results of operations and cash flow.
PURCHASE OF NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes will be
entitled to require the Company to purchase any or all of the Notes held by such
holder at the prices stated herein. However, the Company's ability to repurchase
the Notes upon the occurrence of a Change of Control may be limited by the terms
of then existing contractual obligations of the Company and its subsidiaries. In
addition, the Company may not have adequate financial resources to effect such a
purchase, and there can be no assurance that the Company would be able to obtain
such resources through a refinancing of the Notes to
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be purchased or otherwise. If the Company fails to repurchase all of the Notes
tendered for purchase upon the occurrence of a Change of Control, such failure
will constitute an Event of Default (as defined) under the Indenture.
With respect to the sale of assets referred to in the definition of Change
of Control, the phrase "all or substantially all" as used in such definition
varies according to the facts and circumstances of the subject transaction, has
not clearly established meaning under relevant law and is subject to judicial
interpretation. Accordingly, in certain circumstances there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the assets of a person and
therefore it may be unclear whether a Change of Control has occurred and whether
the Notes are subject to an offer to purchase.
The Change of Control provision may not necessarily afford the holders of
the Notes protection in the event of a highly leveraged transaction, including a
reorganization, restructuring, merger or other similar transaction involving the
Company that may adversely affect the holders, because such transactions may not
involve a shift in voting power or beneficial ownership or, even if they do, may
not involve a shift of the magnitude required under the definition of Change of
Control to trigger such provisions. Except as described under "Description of
the Notes--Change of Control," the Indenture does not contain provisions that
permit the holders of the Notes to require the Company to repurchase or redeem
the Notes in the event of a takeover, recapitalization or similar transaction.
VARIABILITY IN OPERATING RESULTS
The timing of the Company's project-related sales have varied significantly
in the past and are expected to vary significantly in the future. This could
cause the Company's 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 the
Company."
POSSIBLE CLAIMS RELATING TO OWNERSHIP OF PROPRIETARY RIGHTS
Notwithstanding that the Company 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 the Company to obtain a license from them
for the use of the name "CapRock" within those defined territories or require
the Company to change its name, either of which could require the Company to
incur additional expenses. Additionally, if the Company were required to change
its name, it could lose goodwill, if any, associated with the CapRock name.
ABSENCE OF A PUBLIC MARKET FOR THE EXCHANGE NOTES; POSSIBLE VOLATILITY OF NOTE
PRICE
The Private Notes are eligible for trading in the Private Offerings, Resale
and Trading through Automated Linkages ("PORTAL") Market. The Company has been
advised by each of the Initial Purchasers that it heretofore acted as market
makers for the Private Notes and that it currently intends to make a market in
the Exchange Notes. The Initial Purchasers are not obligated, however, to make a
market in the Exchange Notes and any such market-making activities, if
commenced, may be discontinued at any time without notice. The Exchange Notes
will be securities for which there is no established trading market. The Company
does not intend to apply for listing of the Exchange Notes on any securities
exchange or for quotation of the Exchange Notes on the Nasdaq National Market.
No assurance can be given that an active trading market for the Exchange Notes
will develop, or if one develops and if maintained, as to the liquidity of the
trading market, the ability of holders to sell the Exchange Notes, or
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the price at which holders would be able to sell the Exchange Notes. If an
active trading market for the Exchange Notes does not develop, the market price
and the liquidity of the Exchange Notes may be adversely affected. See "Plan of
Distribution." Historically, the market for non-investment grade debt has been
subject to disruptions that have caused substantial volatility in the prices of
securities similar to the Exchange Notes. There can be no assurance that if a
market for the Exchange Notes were to develop, such a market would not be
subject to similar disruptions.
CONCENTRATION OF OWNERSHIP
The current officers and directors of the Company beneficially own, in the
aggregate, approximately 83% of the outstanding shares of CapRock Common Stock.
Accordingly, the current officers and directors of the Company, acting as a
group, will have the ability to elect all of the directors of CapRock and to
control CapRock's management, operations and affairs.
YEAR 2000 COMPLIANCE
Some computers, software, and other equipment include computer code in which
calendar year data is abbreviated to only two digits. As a result, some of these
systems could fail to operate or fail to produce correct results because they
may interpret "00" to mean 1900, rather than 2000--widely known as the "Year
2000 Problem." These problems are likely to increase in frequency and severity
as the year 2000 approaches. CapRock 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. CapRock is in the process of identifying the
computers, software applications, and related equipment used in connection with
its operations that must be modified, upgraded, or replaced to minimize the
possibility of a material disruption of its business, and is currently assessing
the potential effect of, and costs of remediating, the Year 2000 problem on its
office and facilities systems and equipment. CapRock has also initiated
communications with third party suppliers of the major computers, software, and
other equipment used, operated or maintained by CapRock to identify and, to the
extent possible, to resolve issues involving the Year 2000 problem. However, the
Company has limited or no control over the actions of these third party
suppliers. Given information known at this time about its systems having such
issues, coupled with its 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 CapRock's financial condition, results of operations or cash flow. To the
extent that either CapRock's systems or the systems of the entities with which
CapRock contracts are not fully Year 2000 compliant, potential systems
interruptions or the cost necessary to update software by CapRock or one of its
major vendors or customers could have a material adverse effect on CapRock's
financial condition, results of operations and cash flow. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
CapRock-- Year 2000."
CERTAIN ANTI-TAKEOVER MATTERS
CapRock is subject to prior regulatory approval by the FCC and various state
regulatory agencies for a transfer of control of CapRock or for the assignment
of CapRock's (or its subsidiaries') intrastate certification authorities, 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 CapRock (or its subsidiaries) holds FCC authority to provide
international service, the FCC will scrutinize an ownership interest in CapRock
of greater than 25%, or a controlling interest at any level, by a dominant
foreign carrier. International carriers, such as
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CapRock, 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, the
Indenture provides for a mandatory purchase of the Notes upon a Change of
Control (as defined therein) and it is currently expected that the Credit
Facility will provide that an event of default or redemption event thereunder
will occur if all or a controlling interest in CapRock'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 CapRock. The
Articles of Incorporation of CapRock provide that Article 13.03 of the Texas
Business Corporation Act, which includes statutory anti-takeover measures, will
not apply to CapRock. See "Regulation and Licenses--Government Regulation" and
"Description of Capital Stock--Preferred Stock" and "--Certain Anti-Takeover
Effects."
ASSUMPTION OF GENERAL PARTNER LIABILITIES
In connection with the Combination, Telecommunications became a substitute
general partner in the Partnership. As a general partner, Telecommunications is
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 June 30, 1998
consisted of trade accounts payable and accrued expenses of $2.3 million and a
term construction loan of $8.9 million, due December 31, 2001. The Partnership
was in violation of certain debt covenants contained in the loan agreement for
such term construction loan as of December 31, 1996 and 1997 and June 30, 1998.
The Partnership has obtained a waiver for its covenant violations and the term
construction loan has been repaid. There can be no assurance that these
obligations will not have a material adverse effect on CapRock's financial
condition, results of operations and cash flow.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Private Notes were sold by the Company on July 16, 1998 to the Initial
Purchasers, who privately placed the Private Notes with qualified institutional
buyers under Rule 144A under the Securities Act. In connection therewith, the
Company and the Initial Purchasers entered into a Registration Rights Agreement
(the "Registration Rights Agreement"), pursuant to which the Company agreed, for
the benefit of the holders of the Private Notes, that the Company would, at its
sole expense, (i) within 120 days following the original issuance of the Private
Notes ("Original Issue Date"), file with the Commission the Exchange Offer
Registration Statement (of which this Prospectus is a part) under the Securities
Act with respect to an issue of a series of Exchange Notes of the Company
identical in all material respects to the series of Private Notes, (ii) use its
best efforts to cause such Exchange Offer Registration Statement to become
effective under the Securities Act within 180 days following the Original Issue
Date, and (iii) use its best effort to consummate the Exchange Offer within 215
days after the Original Issue Date. Upon the Exchange Offer Registration
Statement (of which this Prospectus is a part) being declared effective, the
Company will offer the Exchange Notes in exchange for the Private Notes. The
Company will keep the Exchange Offer open for not less than 20 business days (or
longer if required by applicable law) after the date notice of the Exchange
Offer is mailed to the holders of the Private Notes. For each Private Note
surrendered to the Company, the Holder of such Private Note will receive an
Exchange Note for a like principal amount at maturity equal to that of the
surrendered Private Notes. The term "Holder" with respect to the Exchange Offer
means any person in whose name Private Notes are registered on the books of the
Company or any other person who has obtained a properly completed bond power
from the registered holder.
The Exchange Offer is not being made to, nor will the Company accept tenders
for exchange from, holders of Private Notes in any jurisdiction in which the
Exchange Offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction. Based on interpretations by
the staff of the Commission set forth in no-action letters issued to third
parties, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Private Notes may be offered for resale, resold
and otherwise transferred by any Holder thereof (other than any such Holder
which is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Exchange Notes are
acquired in the ordinary course of such Holder's business and such Holder has no
arrangement with any person to participate in the distribution of such Exchange
Notes. However, any holder of Private Notes who is an "affiliate" of the Company
or who intends to participate in the Exchange Offer for the purpose of
distributing the Exchange Notes (i) will not be able to rely on the
interpretations of the staff of the Commission, (ii) will not be able to tender
its Private Notes in the Exchange Offer and (iii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Private Notes unless such sale or
transfer is made pursuant to an exemption from such requirements. Unless an
exemption from registration is otherwise available, any such resale transaction
should be covered by an effective registration statement containing the selling
security holders information required by Item 507 of Regulation S-K under the
Securities Act. This Prospectus may be used for an offer to resell, resale or
other retransfer of Exchange Notes only as specifically set forth herein.
By executing the Letter of Transmittal and tendering its Private Notes, each
signatory thereto will represent to the Company on behalf of themselves or the
beneficial owner as applicable that (i) the Exchange Notes acquired pursuant to
the Exchange Offer are being acquired in the ordinary course of business of the
person receiving such Exchange Notes, (ii) neither the Holder nor any such other
person has an arrangement or understanding with any person to participate in the
distribution within the meaning of the Securities Act of such Exchange Notes,
(iii) if the Holder is not a broker-dealer, or is a broker-dealer but will not
receive Exchange Notes for its own account in exchange for Private Notes,
neither the Holder nor any such other person is engaged in or intends to
participate in the distribution of such
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Exchange Notes, and (iv) neither the Holder nor any such other person is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act or, if the Holder or such other person is an "affiliate," that it will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable. If the Holder or the person receiving
the Exchange Notes is a broker-dealer (whether or not it is also an "affiliate")
that will receive Exchange Notes for its own account in exchange for Private
Notes, it will represent that such Private Notes were acquired as a result of
market-making activities or other trading activities, and it will acknowledge
that it will deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of such Exchange Notes. By acknowledging that it
will deliver and by delivering a prospectus meeting the requirements of the
Securities Act in connection with any resale of such Exchange Notes, the Letter
of Transmittal provides that the Holder is not deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. Any Holder of Private
Notes who tenders in the Exchange Offer for the purpose of participating in a
distribution of the Exchange Notes cannot rely on the position of the staff of
the Commission in certain no-action letters and, in the absence of an exemption
therefrom, must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction of the Exchange Notes, in which case the registration statement must
contain the selling security Holder information required by Item 507 or Item
508, as applicable, of Regulation S-K of the Securities Act. The failure to
comply with such requirements in such instance could result in the Holder
incurring liability under the Securities Act for which the Holder is not
indemnified by the Company.
The Commission has taken the position that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with respect to the Exchange
Notes (other than a resale of an unsold allotment from the original sale of the
Notes) with the prospectus contained in the Exchange Offer Registration
Statement. In addition, under the Registration Rights Agreement, the Company is
required to allow Participating Broker-Dealers and other persons, if any,
subject to similar prospectus delivery requirements to use the prospectus
contained in the Exchange Offer Registration Statement in connection with the
resale of the Exchange Notes. Accordingly, this Prospectus, as it may be amended
or supplemented from time to time, may be used by a broker-dealer in connection
with any resale of the Exchange Notes received in exchange for Private Notes
where such Private Notes were acquired by such broker-dealer as a result of
market-making or other trading activities (other than Private Notes acquired
directly from the Company). The Company has agreed that, for a period of 180
days after the Expiration Date, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
In the event (i) that any changes in law or applicable interpretations of
the staff of the Commission do not permit the Company to effect the Exchange
Offer, (ii) for any other reason the Exchange Offer Registration Statement is
not declared effective with 180 days following the Original Issue Date or the
Exchange Offer is not consummated within 215 days following the Original Issue
Date, or (iii) within 120 days after the Original Issue Date, any holder of
Private Notes notifies the Company that (a) due to a change in law or policy it
is not entitled to participate in the Exchange Offer, (b) due to a change in law
or policy it may not sell the Exchange Notes to the public without delivering a
prospectus and (x) this Prospectus is not appropriate or available for such
resale by such holder and (y) this Prospectus is not promptly amended or
modified in order to be suitable for use in connection with such resales by such
holder and all similarly situated holders or (c) it is a broker-dealer and owns
Private Notes acquired directly from the Company or an affiliate of the Company
for its own account or (iv) holders of a majority of the Private Notes may not
sell the Exchange Notes acquired or that would be acquired by them pursuant to
the Exchange Offer to the public without restriction under the Securities Act
and without restriction under applicable blue sky or state securities laws, the
Company will, at its cost (a) as promptly as practicable, but in any event prior
to the later of (i) 120 days after the Original Issue Date or (ii) 30 days after
the obligation to file the Shelf Registration Statement arises, file the Shelf
Registration Statement covering resales of the Private Notes, (b) use its best
efforts to cause the Shelf Registration Statement to be declared effective under
the Securities Act as promptly as practicable but no later than the 60th day
after
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such filing obligation arises and (c) use its best efforts to keep effective the
Shelf Registration Statement until two years after its effective date or such
shorter period which will terminate when all of the Private Notes covered by the
Shelf Registration Statement have been sold pursuant thereto. The Company will,
in the event of the filing of a Shelf Registration Statement, provide to each
holder of the Notes copies of the prospectus which is a part of the Shelf
Registration Statement, notify each such holder when the Shelf Registration
Statement for the Notes has become effective and take certain other actions as
are required to generally permit unrestricted resales of the Notes. A holder of
the Notes that sells such Notes pursuant to the Shelf Registration Statement
will be required to be named as a selling securityholder in the related
prospectus and to deliver a prospectus to purchasers, will be subject to certain
of the civil liability provisions under the Securities Act in connection with
such sales and will be bound by the provisions of the Registration Rights
Agreement which are applicable to such a holder (including certain
indemnification obligations). In addition, each holder of the Notes will be
required to deliver information to be used in connection with the Shelf
Registration Statement and to reasonably cooperate to the extent necessary with
the Company's preparation of the Shelf Registration Statement.
In the event that (i) the Exchange Offer Registration Statement is not filed
with the Securities and Exchange Commission within 120 days after the Original
Issue Date or is not declared effective on or prior to the 180th calendar day
following the Original Issue Date, (ii) the Exchange Offer is not consummated
or, if required, a Shelf Registration Statement with respect to the Private
Notes is not declared effective on or prior to the 215th calendar day following
the Original Issue Date or (iii) the Exchange Offer Registration Statement is
declared effective but thereafter ceases to be effective or usable (each event
referred to in clauses (i) through (iii) above, a "Registration Default"), then
the Company will be required to pay additional interest in cash on each Interest
Payment Date in an amount equal to one-half of one percent (0.5%) per annum of
the principal amount with respect to the first 90-day period following such
Registration Default. The amount of such additional interest will increase by an
additional one-half of one percent (0.5%) to a maximum or one percent (1.0%) per
annum for each subsequent 90-day period until such Registration Default has been
cured. Upon (x) the filing of the Exchange Offer Registration Statement after
the 120-day period described in clause (i) above or the effectiveness of the
Exchange Offer Registration Statement after the 180-day period described in
clause (i) above, (y) the consummation of the Exchange Offer or the
effectiveness of a Shelf Registration Statement, as the case may be, after the
215-day period described in clause (ii) above, or (z) the cure of any
Registration Default described in clause (iii) above, such additional interest
shall cease to accrue from the date of such filing, effectiveness, consummation
or cure, as the case may be, if the Company is otherwise in compliance with this
paragraph; provided, however, that if, after any such additional interest ceases
to accrue, a different event specified in clause (i), (ii), and (iii) above
occurs, such additional interest will again accrue pursuant to the foregoing
provisions. During any 365-day period, the Company will have the ability to
suspend the availability of the Shelf Registration Statement and the use of the
related prospectus for up to two periods of up to 45 consecutive days (except
for the consecutive 45-day period immediately prior to the maturity of the
Private Notes), but no more than an aggregate of 60 days during any 365-day
period, if any event shall occur as a result of which it shall be necessary, in
the good faith determination of the Company's Board of Directors, to amend the
Shelf Registration Statement or amend or supplement any prospectus or prospectus
supplement thereunder in order that each such document not include any untrue
statement of material fact or omit to state a material fact necessary to make
the statements therein not misleading in light of the circumstances under which
they were made.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provision of the Registration Rights
Agreement, a copy of which is available upon request to the Company. As a result
of the making of this Exchange Offer, and upon acceptance for exchange of all
validly tendered Private Notes pursuant to the terms of this Exchange Offer, the
Company will have fulfilled certain obligations under the terms of the Private
Notes and the Registration Rights Agreement and, accordingly, the holder of the
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Private Notes will have no further registration or other rights under the
Registration Rights Agreement, except under certain limited circumstances.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Private
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time,
on the Expiration Date. The Company will issue $1,000 principal amount at
maturity of Exchange Notes in exchange for each $1,000 principal amount at
maturity of outstanding Private Notes accepted in the Exchange Offer. Holders
may tender some or all of their Private Notes pursuant to the Exchange Offer.
However, Private Notes may be tendered only in integral multiples of $1,000
principal amount at maturity.
The form and terms of the Exchange Notes will be identical in all material
respects to the form and terms of the Private Notes, except that (i) the
Exchange Notes will have been registered under the Securities Act and hence will
not bear legends restricting the transfer thereof and (ii) the holders of the
Exchange Notes will not be entitled to certain rights under the Registration
Rights Agreement, including the terms providing for an increase in the interest
rate on the Private Notes under certain circumstances relating to the timing of
the Exchange Offer, all of which rights will terminate when the Exchange Offer
is consummated. The Exchange Notes will evidence the same debt as the Private
Notes and will be entitled to the benefits of the Indenture under which the
Private Notes were, and the Exchange Notes will be, issued.
As of the date of this Prospectus, $150,000,000 aggregate principal amount
at maturity of the Private Notes was outstanding, all of which is registered in
the name of Cede & Co., as nominee for The Depository Trust Company (the
"Depository"). Only a registered holder of the Private Notes (or such holder's
legal representative or attorney-in-fact) as reflected on the records of the
Trustee under the Indenture may participate in the Exchange Offer. Solely for
reasons of administration, the Company has fixed the close of business on
, 1998 as the date for purposes of determining the persons to whom
this Prospectus, together with the Letter of Transmittal, will initially be
sent. There will be no fixed record date for determining registered holders of
the Private Notes entitled to participate in the Exchange Offer.
Holders of the Private Notes do not have any appraisal or dissenters' rights
under the Texas Business Corporation Act or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission thereunder.
The Company shall be deemed to have accepted any validly tendered Private
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
Holders for the purpose of receiving the Exchange Notes from the Company.
If any tendered Private Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Private Notes will be returned,
without expense, to the tendering Holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees, or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer. See "--Fees and Expenses."
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EXPIRATION DATE; EXTENSIONS, AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m. New York City time, on
, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Private Notes, to extend the Exchange Offer or, if any of the
conditions set forth below under the caption "--Conditions" shall not have been
satisfied, to terminate the Exchange Offer, by giving oral or written notice of
such delay, extension or termination to the Exchange Agent, or (ii) to amend the
terms of the Exchange Offer in any manner. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by a public announcement thereof. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, the Company will
promptly disclose such amendment by means of a prospectus supplement that will
be distributed to the registered holders, and the Company will extend the
Exchange Offer for a period of at least five to ten business days, depending
upon the significance of the amendment and the manner of disclosure to the
registered Holders, if the Exchange Offer would otherwise expire during such
five to ten business day period.
Without limiting the manner in which the Company may choose to make a public
announcement of any delay, extension, termination or amendment of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service or the PR Newswire Service.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at the rate of 12% per annum which
will be payable in cash semiannually on January 15 and July 15 of each year,
commencing January 15, 1999. Holders of Exchange Notes will receive interest on
January 15, 1999 from the initial issuance of the Exchange Notes, plus an amount
equal to the accrued interest on the Private Notes. Interest on the Private
Notes accepted for exchange will cease to accrue upon issuance of the Exchange
Notes.
PROCEDURES FOR TENDERING
Only a Holder of Private Notes may tender such Private Notes in the Exchange
Offer. A Holder who wishes to tender Private Notes for exchange pursuant to the
Exchange Offer must transmit a properly completed and duly executed Letter of
Transmittal, or a facsimile thereof, including any other required documents, to
the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date. In addition, either (i) certificates for such Private Notes must be
received by the Exchange Agent along with the Letter of Transmittal or (ii) the
Holder must comply with the guaranteed delivery procedures described below. To
be tendered effectively, the Private Notes, the Letter of Transmittal and other
required documents must be received by the Exchange Agent at the address set
forth below under "--Exchange Agent" prior to 5:00 p.m., New York City time, on
the Expiration Date.
The tender by a Holder will constitute an agreement between such Holder and
the Company in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal.
The method of delivery of the Private Notes and the Letter of Transmittal
and all other required documents to the Exchange Agent is at the election and
risk of the Holder. Instead of delivery by mail, it is recommended that Holders
use an overnight or hand delivery service. In all cases, sufficient time should
be allowed to assure delivery to the Exchange Agent before the Expiration Date.
No Letter of Transmittal or Private Notes should be sent to the Company.
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Any beneficial owner whose Private Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf. If such
beneficial owner wished to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering such
owner's Private Notes, either make appropriate arrangements to register
ownership of the Private Notes in such owner's name or obtain a properly
completed bond power from the registered Holder. The transfer of registered
ownership may take considerable time and may not be able to be completed prior
to the Expiration Date.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined herein) unless
the Private Notes tendered pursuant thereto are tendered (i) by a registered
Holder who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantee must be by a member firm of a registered national
securities exchange or of the NASD, a commercial bank or trust company having an
office or correspondent in the United States or an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act (an
"Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
Holder of any Private Notes listed therein, such Private Notes must be endorsed
or accompanied by a properly completed bond power, signed by such registered
Holder as such registered Holder's name appears on such Private Notes.
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Private Notes will be determined
by the Company in its sole and absolute discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Private Notes not properly tendered or any Private Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Private Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Private Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify Holders of
defects or irregularities with respect to tenders of Private Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Private Notes will not be deemed
to have been made until such defects or irregularities have been cured or
waived. Any Private Notes received by the Exchange Agent that are not properly
tendered and as to which the defect or irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering Holders, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Private Notes at the Depository for purposes of the Exchange Offer within
two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depositary's systems may make book-
entry delivery of Private Notes by causing the Depository to transfer such
Private Notes into the Exchange Agent's account at the Depository through the
Automated Tender Offer Program ("ATOP") of the
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Depository and to deliver an "Agent's Message" (as defined below) on or prior to
the Expiration Date in accordance with the Depository's procedure for such
transfer and delivery. However, although delivery of Private Notes may be
effected through book-entry transfer at the Depository and an Agent's Message is
not delivered, the Letter of Transmittal or facsimile thereof, with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at the address set forth below
under "--Exchange Agent" on or prior to the Expiration Date or pursuant to the
guaranteed delivery procedures described below.
The term "Agent's Message" means a message transmitted by the Depository to
and received by the Exchange Agent and forming a part of a confirmation of a
book-entry transfer of Private Notes tendered through ATOP which states that the
Depository has received an express acknowledgment from the tendering
participant, which acknowledgment states that such participant has received and
agrees to be bound by, and makes the representations and warranties contained
in, the Letter of Transmittal and that the Company may enforce the Letter of
Transmittal against such participant.
DELIVERY OF DOCUMENTS TO THE DEPOSITORY IN ACCORDANCE WITH ITS PROCEDURES
DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange Agent
prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of such Private Notes and the principal amount of Private Notes tendered,
stating that the tender is being made thereby and guaranteeing that, within
three New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof) together with the
certificate(s) representing the Private Notes in proper form for transfer,
or a confirmation of a book-entry transfer, as the case may be, and any
other documents required by the Letter of Transmittal will be deposited by
the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all
physically tendered Private Notes in proper form for transfer, or a
confirmation of a book-entry transfer, as the case may be, and all other
documents required by the Letter of Transmittal are received by the Exchange
Agent within three New York Stock Exchange trading days after the Expiration
Date. Upon request to the Exchange Agent, a form of Notice of Guaranteed
Delivery will be sent to Holders who wish to tender their Private Notes
according to the guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
To withdraw a tender of Private Notes in the Exchange Offer, a written or
telegram, telex or facsimile transmission notice of withdrawal must be received
by the Exchange Agent at its address set forth herein prior to 5:00 p.m., New
York City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Private Notes to be
withdrawn (the "Depositor"), (ii) identify the Private Notes to be withdrawn
(including the certificate number or numbers and principal amount of such
Private Notes), and include a statement that such Holder is withdrawing such
Holder's
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election to have such Private Notes exchanged, (iii) be signed by the Holder in
the same manner as the original signature on the Letter of Transmittal by which
such Private Notes were tendered (including any required signature guarantees)
or be accompanied by documents of transfer sufficient to have the Trustee with
respect to the Private Notes register the transfer of such Private Notes into
the name of the person withdrawing the tender and (iv) specify the name in which
any such Private Notes are to be registered, if different from that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company in its sole
discretion, which determination shall be final and binding on all parties.
Any Private Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer and no Exchange Notes will be issued
with respect thereto unless the Private Notes so withdrawn are validly
retendered. Properly withdrawn Private Notes may be retendered by following one
of the procedures described above under "--Procedures for Tendering" at any time
prior to the Expiration Date. Any Private Notes which have been tendered but
which are not accepted for payment due to withdrawal, rejection of tender or
termination of the Exchange Offer will be returned as soon as practicable to the
Holder thereof without cost to such Holder.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange Exchange Notes for, any Private
Notes, and may terminate the Exchange Offer as provided herein before the
acceptance of such Private Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer; or
(b) the Exchange Offer, or the making of any exchange by a holder, would
violate applicable law or any applicable interpretation of the staff of the
Commission.
If the Company determines in its sole and absolute discretion that any of
the conditions are not satisfied, the Company may (i) refuse to accept any
Private Notes and return all tendered Private Notes to the tendering Holders,
(ii) extend the Exchange Offer and retain all Private Notes tendered prior to
the expiration of the Exchange Offer, subject, however, to the rights of Holders
to withdraw such Private Notes (see "--Withdrawal of Tenders" above) or (iii)
waive such unsatisfied conditions with respect to the Exchange Offer and accept
all properly tendered Private Notes which have not been withdrawn. If such
waiver constitutes a material change to the Exchange Offer, the Company will
promptly disclose such waiver by means of a prospectus supplement that will be
distributed to the Registered Holders, and the Company will extend the Exchange
Offer for a period of five to ten business days, depending upon the significance
of the waiver and the manner of disclosure to the registered Holders, if the
Exchange Offer would otherwise expire during such five to ten business day
period.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Private Notes being tendered for exchange.
EXCHANGE AGENT
PNC Bank, National Association has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance, requests for additional
copies of this Prospectus or of the Letter of
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Transmittal and requests for Notices of Guaranteed Delivery should be directed
to the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
BY HAND/OVERNIGHT DELIVERY OR BY (FOR ELIGIBLE INSTITUTIONS ONLY)
REGISTERED OR CERTIFIED MAIL: By Facsimile:
PNC Bank, National Association PNC Bank, National Association
1600 Market Street (215) 585-8872
30th Floor Confirm by telephone:
Philadelphia, PA 19103 (215) 585-3848
Attn: Stephen Schaaf
Corporate Trust Department
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitations
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange of
Private Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or Private Notes for principal amounts not tendered
or accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered Holder of the Private Notes tendered,
or if tendered Private Notes are registered in the name of any person other than
the person signing the Letter of Transmittal, or if a transfer tax is imposed
for any reason other than the exchange of Private Notes pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered Holder or any other persons) will be payable by the tendering Holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering Holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Private Notes, which is face value, as reflected in the Company's accounting
records on the date of the exchange. Accordingly, no gain or loss for accounting
purposes will be recognized. The expenses of the Exchange Offer and the
unamortized expenses related to the issuance of the Private Notes will be
amortized over the term of the Exchange Notes.
OTHER
Participation in the Exchange Offer is voluntary and holders of Private
Notes should carefully consider whether to accept the terms and conditions
thereof. Holders of the Private Notes are urged to consult their financial and
tax advisors in making their own decisions on what action to take with respect
to the Exchange Offer.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Private Notes pursuant to the terms of this Exchange Offer, the
Company will have fulfilled certain obligations under the terms of the Private
Notes and the Registration Rights Agreement. Holders of the Private Notes who do
not tender their Private Notes in the Exchange Offer will continue to hold such
Private Notes and will be entitled to all the rights, and limitations applicable
thereto, under the Indenture, except for any such rights
41
<PAGE>
under the Registration Rights Agreement which by their terms terminate or cease
to have further effect as a result of the making of this Exchange Offer. All
untendered Private Notes will continue to be subject to the restrictions on
transfer set forth in the Indenture. To the extent that Private Notes are
tendered and accepted in the Exchange Offer, the trading market, if any, for any
remaining Private Notes could be adversely affected. See "Risk
Factors--Consequences of Failure to Exchange."
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any proceeds from the issuance of the Exchange Notes in the Exchange
Offer. In consideration for issuing the Exchange Notes as contemplated by this
Prospectus, the Company will receive, in exchange, Private Notes in like
principal amount. The form and terms of the Exchange Notes are identical in all
material respects to the form and terms of the Private Notes, except as
otherwise described herein under "The Exchange Offer--Terms of the Exchange
Offer." The Private Notes surrendered in exchange for the Exchange Notes will be
retired and cancelled and cannot be reissued. Accordingly, the issuance of
Exchange Notes in exchange for the Private Notes will not result in any increase
in the outstanding debt of the Company.
The net proceeds to the Company from the Private Offering were approximately
$145 million, of which approximately $26.8 million has been used to repay the
outstanding indebtedness of Telecommunications, the Partnership and IWL under
their credit facilities (which amounts were paid prior to the date of this
Prospectus as described below). The Company currently intends to use the
remainder of such net proceeds (i) to fund additional capital expenditures for
the construction and operation of its fiber optic network, (ii) to fund the
installation of voice and data switches, (iii) to open sales offices and add
sales support and customer service personnel, in markets throughout Texas and
the Gulf Coast region, and (iv) for potential acquisitions and additional
working capital and other general corporate purposes. Pending such utilization,
the Company has invested the net proceeds in short-term, interest-bearing U.S.
government securities and other short-term, investment grade securities. See
"Risk Factors--Significant Capital Requirements" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations of the
Company--Liquidity and Capital Resources."
In connection with the completion of the Combination in August 1998 (and the
disbursement to the Company of the net proceeds from the Private Offering being
held in escrow), the Company used approximately $26.8 million of the estimated
net proceeds of the Private Offering to repay in full the following
indebtedness: (i) approximately $8.9 million to repay in full the Term
Construction Loan dated July 1, 1996 in the original principal amount of $10
million payable by the Partnership pursuant to the Partnership's bank credit
agreement with Bank One, Texas, N.A. (the Term Note bears interest at prime or a
spread over LIBOR (subject to renewals)); (ii) approximately $4.4 million to
repay in full various Term Notes payable by IWL under its Guidance Facility
dated August 1, 1997 with Bank One, Texas, N.A. in the original amount of
$5,000,000 (the Term Notes bear interest at prime or a spread over LIBOR; (iii)
approximately $4.1 million to repay in full IWL's Revolving Credit Agreement
dated August 1, 1997 with Bank One, Texas, N.A. (the term note under the
Revolving Credit Agreement bears interest at prime or a spread over LIBOR; (iv)
approximately $6.9 million to repay in full Telecommunications' revolving credit
facility dated March 1996 with Bank One, Texas, N.A. (interest at the prime rate
plus 2%; (v) approximately $900,000 to repay in full the Term Note dated August
28, 1997 in the original amount of $1.1 million as executed and delivered by IWL
pursuant to IWL's bank credit agreement with Bank One, Texas, N.A. (the term
note bears interest at prime or a spread over LIBOR; (vi) approximately $800,000
to repay in full the Term Note dated September 20, 1996 in the original amount
of $1,350,000 as executed and delivered by IWL pursuant to IWL's bank credit
agreement with First Bank and Trust; and (vii) approximately $800,000 to repay
in full other indebtedness of the Company, including approximately $37,000 to
pay in full a note due to Caroline Fontenot, sister of Ignatius W. Leonards,
dated June 1, 1992 in the original amount of $75,000. See "Certain
Transactions." See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
42
<PAGE>
CAPITALIZATION
The following table sets forth the cash and the capitalization of the
Company as of June 30, 1998 on a combined basis and as adjusted to reflect the
Private Offering and the application of the net proceeds therefrom and the
writeoff of approximately $100,000 of combined deferred debt issuance costs.
This table should be read in conjunction with the Selected Historical Financial
Data of Telecommunications, the Partnership and IWL, the Summary Supplemental
Consolidated Condensed Financial Data, the Selected Supplemental Consolidated
Financial Data of CapRock and the supplemental consolidated financial statements
and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------
(IN THOUSANDS)
SUPPLEMENTAL
CONSOLIDATED AS ADJUSTED
------------ -----------
<S> <C> <C>
Cash and cash equivalents............................................................. $ 742 $ 123,594
------------ -----------
------------ -----------
Short-term borrowings and current installments of long-term debt...................... $ 21,914 $ --
------------ -----------
------------ -----------
Long-term debt, excluding current installments:
Notes payable, maturing from 1998 to 2015........................................... 1,484 --
12% Senior Notes offered hereby..................................................... -- 150,000
------------ -----------
Total long-term debt, excluding current portion....................................... 1,484 150,000
Stockholders' equity.................................................................. 18,647 18,547
------------ -----------
Total capitalization................................................................ $ 20,131 $ 168,547
------------ -----------
------------ -----------
</TABLE>
43
<PAGE>
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA OF CAPROCK
On August 26, 1998, the Company completed the Combination with
Telecommunications, IWL and the Partnership. The Combination was accounted for
as a pooling-of-interests. All financial data of the Company, including the
Company's previously issued financial statements for the periods presented in
this Prospectus, have been restated to include the historical financial
information of Telecommunications, IWL and the Partnership in accordance with
generally accepted accounting principles and pursuant to Regulation S-X.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling-of interests
methods in financial statements that do not include the date of consummation.
These supplemental consolidated financial statements do not extend through the
date of consummation. However, they will become the historical consolidated
financial statements of CapRock Communications Corp. and its subsidiaries after
financial statements covering the date of consummation of the Combination are
issued. The supplemental consolidated condensed financial data 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 and the supplemental consolidated financial
statements and notes thereto, which are included elsewhere in this Prospectus.
In May 1998, IWL changed its fiscal year end to coincide with the fiscal years
of the Company, Telecommunications and the Partnership. Accordingly, the
supplemental consolidated 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 supplemental consolidated balance sheet data and statement of
operations data at and for the six-month period ended June 30, 1998 also combine
the financial statements of IWL with those of Telecommunications and the
Partnership. The unaudited supplemental consolidated condensed statements of
operations data for the years ended December 31, 1995 and 1996 combine IWL's
consolidated statements of operations data for the years ended June 30, 1995 and
1996 with the Telecommunications and Partnership statements of operations data
for the years ended December 31, 1995 and 1996. The net income of IWL for the
six month period ended December 31, 1996 was excluded from the supplemental
consolidated condensed statement of operations for the year ended December 31,
1996, as a result of the non-conforming year ends for such period in the amount
of approximately $260,000. This amount was included as an adjustment to retained
earnings in the Supplemental Consolidated Statement of Stockholders' Equity.
IWL's cash flow for this period was added to the 1997 beginning balance in the
Supplemental Consolidated Statement of Cash Flows.
The selected 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 Combination had been consummated as presented in the
accompanying Supplemental Consolidated financial statements of CapRock
Communications Corp. and subsidiaries, nor is it necessarily indicative of
future operating results or financial position.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues(1)........................................................ $ 29,407 $ 50,970 $ 75,350 $ 35,671 $ 51,420
Cost of revenues................................................... 21,185 39,357 52,472 25,843 34,035
--------- --------- --------- --------- ---------
Gross profit....................................................... 8,222 11,613 22,878 9,828 17,385
Operating expenses:
Selling, general and administrative.............................. 7,326 8,983 14,074 6,453 9,560
Depreciation and amortization.................................... 1,186 1,536 3,346 1,419 2,250
--------- --------- --------- --------- ---------
Total operating expenses........................................... 8,512 10,519 17,420 7,872 11,810
--------- --------- --------- --------- ---------
Operating income (loss)............................................ (289) 1,094 5,458 1,956 5,575
Other income (expense)............................................. 150 41 220 110 104
Interest expense, net.............................................. (484) (585) (1,603) (839) (919)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and extraordinary item........... (623) 550 4,075 1,227 4,760
Income tax expense (benefit)....................................... 48 226 1,514 391 1,887
--------- --------- --------- --------- ---------
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C>
Income (loss) before extraordinary item............................ 671 324 2,561 836 2,873
Extraordinary item................................................. 645 -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss).................................................. $ (26) $ 324 $ 2,561 $ 836 $ 2,873
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma income taxes:
Income (loss) before income taxes and extraordinary item......... $ (623) $ 551 $ 4,075 $ 1,227 $ 4,760
Pro forma income taxes(2)........................................ (211) 143 1,475 383 1,887
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item.......................... (412) 408 2,600 844 2,873
Extraordinary item, net of pro forma taxes(3).................... 397 -- -- -- --
--------- --------- --------- --------- ---------
Pro forma net income (loss)...................................... $ (15) $ 408 $ 2,600 $ 844 $ 2,873
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Historical and pro forma earnings (loss) per common share(4):......
Income (loss) before extraordinary item.......................... $ (.002) $ 0.01 $ 0.09 $ 0.03 $ 0.10
Extraordinary item, net of tax................................... .002 -- -- -- --
--------- --------- --------- --------- ---------
Basic and Diluted.............................................. $ -- $ 0.01 $ 0.09 $ 0.03 $ 0.10
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares used in per share computation.............. 25,921 27,146 27,984 27,295 28,850
OTHER DATA:
Ratio of earnings to fixed charges(5).............................. 1.0x 1.6x 2.7x 2.1x 4.2x
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------
(IN
THOUSANDS)
-------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................... $ 742
Working capital (deficit)............................................... (15,563)
Property, plant and equipment, net...................................... 33,953
Total assets............................................................ 60,048
Long-term debt and capital lease obligations, net of current portion.... 1,748
Stockholders' equity.................................................... 18,647
</TABLE>
- ------------------------------
(1) Includes the resale of Alcatel products and other equipment and hardware to
a subsidiary of Shell. For the 12 months ended June 30, 1996 and December
31, 1997, the Shell subsidiary purchased from the Company approximately
$10.6 million and $2.9 million of Alcatel products and other equipment and
hardware, respectively. 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) Pro forma income taxes include a pro forma tax benefit adjustment of
$11,000, $84,000, $39,000 and $8,000 for the years ended December 31, 1995,
1996 and 1997 and for the six months ended June 30, 1997, respectively.
These adjustments were made to reflect the tax expenses that would have been
recorded if the Partnership had been taxed as a C Corporation in those
years. The Partnership elected to be taxed as a corporation in January,
1998.
(3) The extraordinary gain of approximately $397,000 relates to the
extinguishment of certain lease obligations in 1995 for the Partnership. The
extraordinary item is shown on a pro forma basis, net of income taxes of
$248,000 (See Note 2).
(4) Pro forma and historical earnings (loss) per common share amounts have been
calculated in accordance with SFAS No. 128, "Earnings Per Share" for all
periods presented.
(5) The ratio of earnings to fixed charges was computed by dividing earnings by
fixed charges. For this purpose, earnings consist of income from continuing
operations, before income taxes and fixed charges of the Company. Fixed
charges consist of interest charges, amortization of debt issuance costs,
capitalized interest and the portion of rent expense under operating leases
representing interest (estimated to be one-third of such expense).
45
<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 six months ended June 30, 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>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenues..................................... $ 526 $ 5,965 $ 13,440 $ 23,174 $ 46,745 $ 20,129 $ 32,416
Cost of revenues................................... 39 4,780 11,043 18,941 35,776 15,770 23,911
--------- --------- --------- --------- --------- --------- ---------
Gross profit....................................... 487 1,185 2,397 4,233 10,969 4,359 8,505
Operating expenses:
Selling, general and administrative.............. 426 1,038 2,601 3,711 7,049 3,217 4,943
Depreciation and amortization.................... 4 10 333 478 694 303 484
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses....................... 430 1,048 2,934 4,189 7,743 3,520 5,427
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)............................ 57 137 (537) 44 3,226 839 3,078
Interest expense................................... -- (9) (240) (315) (311) (168) (159)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes.................. 57 128 (777) (271) 2,915 671 2,919
Income taxes (benefit)............................. 3 36 (245) (88) 1,100 242 1,134
--------- --------- --------- --------- --------- --------- ---------
Net income (loss).................................. $ 54 $ 92 $ (532) $ (183) $ 1,815 $ 429 $ 1,785
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) per common share amounts(1):
Basic............................................ $ 0.01 $ 0.01 $ (0.05) $ (0.02) $ 0.17 $ 0.04 $ 0.17
Diluted.......................................... $ 0.01 $ 0.01 $ (0.05) $ (0.02) $ 0.17 $ 0.04 $ 0.17
Weighted average shares outstanding:
Basic............................................ 5,803 9,671 9,717 10,399 10,399 10,399 10,399
Diluted.......................................... 5,803 9,671 9,717 10,399 10,581 10,399 10,576
OTHER DATA:
Ratio of earnings to
fixed charges(2)................................. -- 15.2x -- -- 10.2x 4.2x 14.0x
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- JUNE 30,
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) $ (292)
Property, plant and equipment, net.......................... 34 118 2,214 2,858 3,693 4,739
Total assets................................................ 111 1,716 4,953 7,356 13,327 17,844
Long-term debt and capital lease obligations, net of current
portion................................................... 3 113 1,114 720 453 265
Stockholders' equity (deficit).............................. (3) 375 593 411 2,247 4,074
</TABLE>
- ------------------------------
(1) Earnings (loss) per common 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.
(2) The ratio of earnings to fixed charges are computed by dividing earnings by
fixed charges. For this purpose, earnings consist of income from continuing
operations, before income taxes and fixed charges of Telecommunications.
Fixed charges consist of Telecommunications' interest expense and the
portion of rent expense representative of an interest factor. For the years
ended December 31, 1995 and 1996, earnings were inadequate to cover fixed
charges. The dollar amounts of the deficiencies were $777,000 and $271,000,
respectively. For the year ended December 31, 1993, there were no fixed
charges.
47
<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 six months ended June 30, 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>
SIX
MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- ---------
1993 1994 1995 1996 1997 1997
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Telecommunications services........................... $ -- $ -- $ -- $ -- $ 1,945 $ 845
Projects and other.................................... 240 334 173 -- -- --
--------- --------- --------- --------- --------- ---------
Total revenues...................................... 240 334 173 -- 1,945 845
Operating costs and expenses:
Cost of revenues...................................... -- 444 503 -- 86 22
Selling, general and administrative................... 245 457 326 174 286 126
Depreciation and amortization......................... 18 50 31 54 902 348
--------- --------- --------- --------- --------- ---------
Total operating costs and expenses.................. 263 951 860 228 1,274 496
--------- --------- --------- --------- --------- ---------
Operating income (loss)................................. (23) (617) (687) (228) 671 349
Interest expense........................................ -- -- -- -- (774) (370)
Other income (expense).................................. 15 4 12 -- (1) --
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes and extraordinary
item.................................................. (8) (613) (675) (228) (104) (21)
Income expense (benefit)(1)............................. -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary item................. (8) (613) (675) (228) (104) (21)
Extraordinary item(2)................................... -- -- 645 -- -- --
--------- --------- --------- --------- --------- ---------
Net income (loss)....................................... $ (8) $ (613) $ (30) $ (228) $ (104) $ (21)
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
OTHER DATA:
Ratio of earnings to fixed charges(3)................... -- -- -- -- -- --
<CAPTION>
1998
---------
<S> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Telecommunications services........................... $ 1,196
Projects and other.................................... 1,355
---------
Total revenues...................................... 2,551
Operating costs and expenses:
Cost of revenues...................................... 127
Selling, general and administrative................... 203
Depreciation and amortization......................... 397
---------
Total operating costs and expenses.................. 727
---------
Operating income (loss)................................. 1,824
Interest expense........................................ (409)
Other income (expense).................................. --
---------
Income (loss) before income taxes and extraordinary
item.................................................. 1,415
Income expense (benefit)(1)............................. 545
---------
Income (loss) before extraordinary item................. 870
Extraordinary item(2)................................... --
---------
Net income (loss)....................................... $ 870
---------
---------
OTHER DATA:
Ratio of earnings to fixed charges(3)................... 2.9x
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficit).................................... $ 497 $ (178) $ 1 $ (2,616) $ (1,059) $ (11,255)
Property and equipment, net.................................. 239 206 -- 8,552 9,300 11,894
Total assets................................................. 788 443 13 8,757 9,779 13,724
Long-term debt and capital lease obligations, net of current
portion.................................................... -- -- -- 6,336 8,665 --
Partners' capital (deficit).................................. 742 34 4 (223) (327) 543
</TABLE>
48
<PAGE>
- ------------------------------
(1) Effective January 1, 1998, the Partnership elected to be taxed as a
corporation and as such has recorded income taxes of $545,000 relating to
the six months ended June 30, 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.
(3) The ratio of earnings to fixed charges was computed by dividing earnings by
fixed charges. For this purpose, earnings consist of income from continuing
operations before fixed charges of the Partnership. Fixed charges consists
of the Partnership's interest expense and the portion of rent expense
representative of an interest factor. For the years ended December 31, 1996
and 1997 and for the six months ended June 30, 1997, earnings were
inadequate to cover fixed charges by $228,000, $104,000 and $21,000,
respectively. For the years ended December 31, 1993, 1994 and 1995, there
were no fixed charges.
49
<PAGE>
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 for the
six months ended June 30, 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 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
SIX MONTHS MONTHS
ENDED ENDED
YEAR ENDED JUNE 30, DECEMBER 31, JUNE 30,
----------------------------------------------------- -------------------- ---------
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................................. $ 12,960 $ 14,860 $ 15,794 $ 27,796 $ 30,342 $ 15,644 $ 11,963 $ 14,697
Cost of revenues......................... 8,641 10,071 9,639 20,416 21,737 11,684 6,557 10,051
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit............................. 4,319 4,789 6,155 7,380 8,605 3,960 5,406 4,646
Operating expenses:
Selling, general and administrative.... 3,132 4,070 4,399 5,099 5,845 2,736 3,631 3,110
Depreciation and amortization.......... 359 571 821 1,003 1,403 635 982 768
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses............. 3,491 4,641 5,220 6,102 7,248 3,371 4,613 3,878
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income......................... 828 148 935 1,278 1,357 589 793 768
Interest expense, net.................... (10) (215) (244) (270) (514) (214) (218) (300)
Other income (loss)...................... (86) 252 139 42 129 19 110 109
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income taxes............... 732 185 830 1,050 972 394 685 577
Income taxes............................. 249 41 294 316 283 134 264 148
--------- --------- --------- --------- --------- --------- --------- ---------
Net income............................... $ 483 $ 144 $ 536 $ 734 $ 689 $ 260 $ 421 $ 429
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Earning per common share amounts(1):
Basic................................ $ 0.24 $ 0.07 $ 0.24 $ 0.33 $ 0.30 $ 0.12 $ 0.11 $ 0.18
Diluted.............................. $ 0.24 $ 0.07 $ 0.24 $ 0.33 $ 0.30 $ 0.11 $ 0.11 $ 0.18
Weighted average shares outstanding:
Basic................................ 2,000 2,001 2,222 2,222 2,298 2,226 3,737 2,372
Diluted.............................. 2,011 2,011 2,233 2,233 2,323 2,261 3,908 2,435
<CAPTION>
SIX
SIX MONTHS MONTHS
ENDED ENDED
YEAR ENDED JUNE 30, DECEMBER 31, JUNE 30,
----------------------------------------------------- -------------------- ---------
1993 1994 1995 1996 1997 1996 1997 1997
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Ratio of earnings to fixed charges(2).... 5.9x 1.5x 3.0x 3.1x 2.1x 2.1x 2.4x 2.1x
<CAPTION>
1998
---------
<S> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues................................. $ 16,646
Cost of revenues......................... 10,014
---------
Gross profit............................. 6,632
Operating expenses:
Selling, general and administrative.... 4,590
Depreciation and amortization.......... 1,369
---------
Total operating expenses............. 5,959
---------
Operating income......................... 673
Interest expense, net.................... (351)
Other income (loss)...................... 104
---------
Income before income taxes............... 426
Income taxes............................. 209
---------
Net income............................... $ 217
---------
---------
Earning per common share amounts(1):
Basic................................ $ 0.06
Diluted.............................. $ 0.05
Weighted average shares outstanding:
Basic................................ 3,926
Diluted.............................. 4,225
1998
---------
<S> <C>
OTHER DATA:
Ratio of earnings to fixed charges(2).... 1.6x
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------------- DECEMBER 31, JUNE 30,
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 $ 359
Working capital (deficit).................. 709 (367) (265) 1,811 9,721 1,330 (4,064)
Total assets............................... 5,748 7,437 8,232 12,409 26,062 26,284 29,728
Long-term debt and capital lease
obligations, net of current portion...... 533 1,108 1,329 2,944 7,692 3,588 1,455
Stockholders' equity....................... 1,511 2,419 2,955 3,698 11,394 12,166 14,028
</TABLE>
- ------------------------------
(1) Earnings (loss) per common 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.
(2) The ratio of earnings to fixed charges was computed by dividing earnings by
fixed charges. For this purpose, earnings consist of income from continuing
operations, before income taxes and fixed charges of IWL and its
subsidiaries. Fixed charges consist of IWL's and its subsidiaries' interest
expense and the portion of rent expense representative of an interest
factor.
51
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CAPROCK
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO OF CAPROCK
CONTAINED ELSEWHERE IN THIS PROSPECTUS. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
PROSCRIBE GIVING EFFECT TO A CONSUMMATED BUSINESS COMBINATION ACCOUNTED FOR BY
THE POOLING OF INTERESTS METHODS IN FINANCIAL STATEMENTS THAT DO NOT INCLUDE THE
DATE OF CONSUMMATION. THESE SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
DESCRIBED HEREIN DO NOT EXTEND THROUGH THE DATE OF CONSUMMATION. HOWEVER, THEY
WILL BECOME THE HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF CAPROCK
COMMUNICATIONS CORP. AND ITS SUBSIDIARIES AFTER FINANCIAL STATEMENTS COVERING
THE DATE OF CONSUMMATION OF THE COMBINATION ARE ISSUED. THE INFORMATION IS NOT
NECESSARILY INDICATIVE OF THE OPERATING RESULTS THAT WOULD HAVE OCCURRED IF THE
COMBINATION HAD BEEN CONSUMMATED AS PRESENTED IN THE SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS, NOR IS IT NECESSARILY INDICATIVE OF FUTURE OPERATING
RESULTS.
OVERVIEW
COMPANY BACKGROUND. CapRock was formed on February 3, 1998 to combine the
businesses of Telecommunications, the Partnership and IWL. On August 26, 1998,
pursuant to the Merger Agreement, the Company completed the Combination with
Telecommunications, the Partnership and IWL.
At the effective time of the Combination, all previously outstanding shares
of IWL common stock ceased to exist and each such share was converted into and
became exchangeable for one share of CapRock Common Stock, all previously
outstanding shares of Telecommunications common stock ceased to exist and each
such share was converted into and became exchangeable for 1.789030878 shares of
CapRock Common Stock and each one percent (1%) of the Partnership interests
issued and outstanding was exchanged for 63,194.54 shares of CapRock Common
Stock. The Company issued 28,911,231 shares of Common Stock in the Combination.
The Mergers and Interest Exchange constituted a tax-free reorganization and were
accounted for as a pooling of interests under Accounting Principles Board
Opinion No. 16.
CapRock believes that the Combination will enable it to significantly
accelerate the implementation of its business plan and to more rapidly achieve
its business objectives by enhancing its revenue opportunities, creating greater
operational depth, providing it with the opportunity to cross-sell its products,
enabling it to capitalize on international opportunities and reducing its
capital expenditures.
REVENUE. CapRock intends to accelerate its revenue growth primarily by (i)
becoming the leading ICP in Texas and the Gulf Coast region, offering local,
long distance, data and private line services to end-user customers, (ii)
establishing 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)
capitalizing on the growing opportunities to provide international long distance
and international project services.
CapRock's carriers' carrier business currently provides domestic and
international long distance terminations as well as private line and dark fiber
services over its own network and the networks of other carriers. CapRock
intends to build out its fiber optic network to approximately 5,500 route miles
throughout Texas and the Gulf Coast region. Caprock's network will also
interconnect with the networks of selected Mexican carriers at multiple border
crossings, creating SONET ring connections between the United States and Mexico.
CapRock believes that its network build out will enable it to significantly
increase its revenues derived from the provision of carrier services.
52
<PAGE>
RESULTS OF OPERATIONS
The following table represents the various sources of revenue:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
------------------------------- ------------------------
1995 1996 1997 1997 1998
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunication Services........................... $ 19,402 $ 29,705 $ 57,892 $ 24,511 $ 40,555
Fiber Services....................................... -- -- -- -- 1,355
Projects and Other................................... 10,005 10,711 14,512 8,215 9,510
--------- --------- --------- ----------- -----------
Total Service Revenue............................ 29,407 40,416 72,404 32,726 51,420
Product Resales...................................... -- 10,554 2,946 2,946 --
--------- --------- --------- ----------- -----------
Total Revenues................................... $ 29,407 $ 50,970 $ 75,350 $ 35,672 $ 51,420
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Gross Margin %:
Gross Margin--Service Revenue........................ 28% 27% 31% 28% 34%
Gross Margin--Product Resales........................ --% 8% 20% 20% --%
--------- --------- --------- ----------- -----------
Gross Margin--Total.................................. 28% 23% 30% 28% 34%
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
TELECOMMUNICATION SERVICES:
Revenues from telecommunication services relate to local, long distance,
data and private line services to end-user customers. Such revenues are
recognized when the services are provided. The cost of revenues associated with
Telecommunication Services 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.
FIBER SERVICES:
Fiber Services revenue relates to the sale of fiber usage rights through
indefeasible right to use contracts ("IRU") and related construction services
associated with building the fiber network specified in the IRU. The Company
accounts for long-term construction contracts relating to the development of
telecommunications networks for customers using the percentage-of-completion
method. Progress under the percentage-of-completion is measured based upon costs
incurred to date compared with total estimated construction costs. Customers are
billed based upon contractual milestones. Although the Company believes that
additional IRU contracts will be entered into throughout the buildout of the
network, there can be no assurance that the Company will enter into additional
IRU contracts.
PROJECTS:
Project revenue relates to communication system contracts involving the
engineering and integration of telecommunications systems and sales, service and
maintenance of telecommunications equipment. These contracts are typically fixed
price and such revenue is recognized based upon the percentage-of-completion
method, primarily based upon contract costs incurred to date compared with total
estimated contract costs.
PRODUCT RESALES:
The Company serves as the exclusive manufacturer's representative of Alcatel
products to the U.S oil and gas industry. In fiscal years 1996 and 1997, the
Company provided services to a subsidiary of Shell, which included the resale of
a significant amount of Alcatel products. The Company sold $10.6 million and
53
<PAGE>
$7.6 million to the Shell subsidiary in 1996 and 1997, respectively, relating to
Alcatel products and other equipment and hardware. Although profitable, the sale
of Alcatel products to the Shell subsidiary reduced the Company's gross margins
in these periods. The Shell project was substantially completed in May 1997 and,
therefore, is not expected to contribute in a material manner to the Company's
total sales in future periods.
The following table sets forth for the periods indicated the Company's
statement of operations as a percentage of its operating revenues:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER ENDED
31, JUNE 30,
--------------------- -------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues................................ 100% 100% 100% 100% 100%
Cost of revenues........................ 72.0 77.2 69.6 72.4 66.2
----- ----- ----- ----- -----
Gross margin............................ 28.0 22.8 30.4 27.6 33.8
Operating expenses:
Selling, general and administrative... 24.9 17.6 18.7 18.1 18.6
Depreciation and amortization......... 4.0 3.0 4.4 4.0 4.4
----- ----- ----- ----- -----
Total operating expenses................ 28.9 20.6 23.1 22.1 23.0
----- ----- ----- ----- -----
Operating income (loss)................. (1.0) 2.1 7.2 5.5 10.8
Interest expense........................ (1.6) (1.1) (2.1) (2.4) (1.8)
Other income (expense).................. 0.5 0.1 0.3 0.3 0.2
----- ----- ----- ----- -----
Income (loss) before income taxes and
extraordinary item.................... (2.1) 1.1 5.4 3.4 9.2
Income taxes............................ 0.2 0.4 2.0 1.1 3.7
----- ----- ----- ----- -----
Income (loss) before extraordinary
item.................................. (2.3) 0.7 3.4 2.3 5.5
Extraordinary item...................... 2.2 -- -- -- --
----- ----- ----- ----- -----
Net income (loss)....................... (0.1) 0.7 3.4 2.3 5.5
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
REVENUE. Total revenues increased $15.7 million from $35.7 million during
the six months ended June 30, 1997 to $51.4 million in 1998. The 44% 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 the Company's
direct and agent sales channels and as a result of revenue associated with Fiber
Services totaling approximately $1.4 million. Product resale revenue was $3.0
for the six months ended June 30, 1997 as compared to no product resales in
1998. The product resales to a single customer were substantially complete in
May 1997 and such revenues are not expected to contribute in a material manner
to sales in future years after 1997.
OPERATING COSTS AND EXPENSES. Principal operating costs and expenses
consist of cost of revenues, selling, general and administrative ("SG&A"), and
depreciation.
Total operating costs and expenses increased $12.1 million from $33.7
million during the six months ended June 30, 1997 to $45.8 million during the
corresponding period in 1998. Cost of revenues increased $8.2 million from $25.8
million for the six months ended June 30, 1997 to $34 million for the same
period in 1998. The growth in cost of revenues was primarily attributable to the
continued growth in switched services and network operations. The 6% increase in
gross margin from 28% to 34% 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 and revenue associated with
the sale of dark fiber.
54
<PAGE>
Additionally, the margin increase was partially attributed to the completion of
the product resales to a single customer in 1997. 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 $3.1
million from $6.5 million for the six months ended June 30, 1997 to $9.6 million
for the six month ended June 30, 1998. The increase resulted from the expanded
administrative and information activities needed to support the Company's
growth, recruitment of additional personnel and additional sales commission
payments.
Depreciation and amortization expense increased $831,000 from $1.4 million
during the six months ended June 30, 1997 to $2.3 million for the same period in
1998. This increase resulted primarily from purchases of additional equipment
and other fixed assets to accommodate CapRock's growth. CapRock expects that
depreciation and amortization expense will continue to increase in subsequent
periods as CapRock continues to expand its facilities.
INTEREST EXPENSE. For the six months ended June 30, 1997, interest expense
was $838,000 as compared to $919,000 for the same period in 1998. The increase
resulted from increased borrowing to fund the Company's infrastructure growth.
INCOME TAXES. Income tax expense increased $1.5 million from $391,000
during the six months ended June 30, 1997 as compared to income tax expense of
$1.9 million for the same period in 1998. This increase was attributable to the
improved profitability of the Company and the Partnership electing to be taxed
as a corporation effective January 1, 1998.
NET INCOME. Net income increased $2 million from $836,000 for the six
months ended June 30, 1997, as compared to net income of $2.9 million in the
corresponding period of 1998 as a result of the factors discussed above.
YEAR ENDED 1996 COMPARED TO 1997
REVENUE. Total revenues increased $24.3 million from $51 million in 1996 to
$75.3 million in 1997. The 48% 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 the Company's direct and agent sales. Product
resale revenue was $10.6 million in 1996, as compared to $3 million in 1997. The
product resales were substantially complete in May 1997 and these revenues are
not expected to contribute in a material manner in future years after 1997.
OPERATING COSTS AND EXPENSES. Total operating costs and expenses increased
$20 million from $49.9 million in 1996 to $69.9 million in 1997. Cost of
revenues increased $13.2 million from $39.3 million in 1996 to $52.5 million in
1997. The growth in cost of revenues was primarily attributable to the continued
growth in switched services and network operations. The 7% increase in gross
margin from 23% to 30% 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 and revenue associated with the sale
of dark fiber. Additionally, the total margin increase was partially attributed
to the completion of the product resales to a single customer in 1997. 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 $5.1
million from $9 million in 1996 to $14.1 million in 1997. The increase resulted
from the expanded administrative and information activities needed to support
the Company's growth, recruitment of additional personnel and additional sales
commission payments and from increases in travel and advertising expenses.
55
<PAGE>
Depreciation and amortization expense increased $1.8 million from $1.5
million in 1996 to $3.3 million in 1997. This increase resulted primarily from
purchases of additional equipment and other fixed assets to accommodate
CapRocks' growth. CapRock expects that depreciation and amortization expense
will continue to increase in subsequent periods as CapRock continues to expand
its facilities.
INTEREST EXPENSE. Interest expense was approximately $585,000 in 1996 as
compared to $1.6 million in 1997.
INCOME TAXES. Income tax expense increased $1.3 million from $227,000 in
1996 as compared to income tax expense of $1.5 million in 1997. This increase
was attributable to the improved profitability of the Company.
NET INCOME. Net income increased $2.2 million from $324,000 in 1996, as
compared to net income of approximately $2.6 million in 1997 as a result of the
factors discussed above.
YEAR ENDED 1995 COMPARED TO 1996
REVENUE. Total revenues increased $21.6 million from $29.4 million in 1995
to approximately $51 million in 1996. The 73% 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 the Company's direct and agent sales. The
revenue increase was partially attributed to product resale revenue of $10.6
million in 1996 and no such revenues in 1995. The product resales to a single
customer were substantially complete in May 1997 and these revenues are not
expected to contribute in a material manner to sales in future years after 1997.
OPERATING COSTS AND EXPENSES. Total operating costs and expenses increased
$20.2 million from $29.7 million in 1995 to $49.9 million in 1996. Cost of
revenues increased $18.2 million from $21.2 million in 1995 to $39.4 million in
1996. The growth in cost of revenues was primarily attributable to the continued
growth in switched services and network operations. The gross margins were 28%
in 1995 and 23% in 1996. The decrease in gross margin is attributed to the
product resale revenue of $10.6 million in 1996 and such revenue provided a
gross margin of 8%.
SG&A includes the cost of salaries, benefits, occupancy costs, commissions,
sales and marketing expenses and administrative expenses. SG&A increased $1.7
million from $7.3 million in 1995 to $9 million in 1996. The increase resulted
from the expanded administrative and information activities needed to support
the Company's growth, recruitment of additional personnel and additional sales
commission payments.
Depreciation and amortization expense increased $350,000 from $1.2 million
in 1995 to $1.5 million in 1996. This increase resulted primarily from purchases
of additional equipment and other fixed assets to accommodate CapRocks' growth.
CapRock expects that depreciation and amortization expense will continue to
increase in subsequent periods as CapRock continues to expand its facilities.
INTEREST EXPENSE. Interest expense was approximately $485,000 in 1995 as
compared to $585,000 million in 1996.
EXTRAORDINARY ITEM. The Company 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 Company.
INCOME TAXES. Income tax expense increased $179,000 from $48,000 in 1995 as
compared to income tax expense of $227,000 in 1996. This increase was
attributable to the improved profitability of the Company.
56
<PAGE>
NET INCOME (LOSS). Net income increased $350,000 from a net loss of $26,000
in 1995 to $324,000 in 1996 as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
In July 1998, the Company issued, through a private placement under Rule
144A under the Securities Act of 1933, as amended, $150 million aggregate
principal amount of their 12% Senior Notes due 2008, which closed on July 16,
1998. Interest on the Private Notes will be payable semi-annually in arrears on
January 15 and July 15 of each year, commencing on January 15, 1999, at the rate
of 12% per annum. The net proceeds from the offering were used to pay off all
existing debt obligations. Such proceeds for debt payoffs totaled $26.8 million.
The remaining proceeds will be used to fund additional capital expenditures for
the construction of its fiber optic network, to expand its sales offices, for
potential acquisitions and for general working capital purposes. The Company has
invested the net proceeds in short-term, interest-bearing U.S. government
securities and other short-term, investment grade securities.
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 provided for borrowings up to $2,500,000. The line of
credit was amended in June 1998 and was increased to $7.0 million. Borrowings
under the amended line of credit agreement were due in December, 1998 and bear
interest at the prime rate plus 2% (10.5% at December 31, 1997.) The line of
credit was subject to certain borrowing base limitations, primarily relating to
the accounts receivable balance. The line of credit was secured by accounts
receivable and certain shareholder guarantees. The balance outstanding as of
December 31, 1996 and 1997 and June 30, 1998 under the line of credit was
$814,422 and $1,152,329 and $2,601,685, 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 and in 1998. The Company
has obtained a waiver for this covenant violation. The line of credit was repaid
in August 1998 with the proceeds from the Private Notes.
The Company also entered into a secured revolving line of credit, which
allowed the Company to borrow up to a maximum of $5.0 million subject to
borrowing base limitations on accounts receivable and inventory. The Company
also secured a guidance line of credit, which allowed the Company to borrow up
to $5.0 million to finance certain purchases and subsequent leases of
communications equipment. The interest rates on both of these lines was 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). Specific underlying accounts
receivable, equipment and inventory secure the lines of credit. The lines of
credit required certain minimum net worth and maximum debt to net worth
requirements. The Company was in violation of a current ratio at December 31,
1997 and in 1998 and obtained a waiver for such covenant violation. The Company
had $5.0 million available under the guidance line of credit at December 31,
1997. These lines of credit were repaid in August 1998 with the proceeds from
the Private Notes.
The Company had a loan agreement with a bank (term construction loan)
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 shareholder, accounts receivable and
guarantees of certain shareholders. The Company was 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. The balance
outstanding under this loan agreement at December 31, 1996, 1997 and June 30,
1998 was $6,842,827, $9,550,892 and $8,877,101, respectively. The Company was in
violation of certain debt covenants as of December 31, 1996, 1997 and in 1998.
The Company obtained a waiver for such covenant violations. The loan was repaid
in August 1998 with the proceeds from the Private Notes.
The Company had cash and cash equivalents of $3.5 million at December 31,
1997, as compared with $742,000 at June 30, 1998. The Company had a working
capital deficit of $305,000 at December 31, 1997 as compared to a working
capital deficit of $15.6 million at June 30, 1998. The increase in the working
capital
57
<PAGE>
deficit is attributed to increases in the revolving lines of credit and
acceleration of certain term notes. All existing debt obligations, other than
the Private Notes, were repaid as of August 31, 1998 with the proceeds from the
Private Notes.
The Company's cash flow from operations was $4.1 million and $3.7 million
for the year ended December 31, 1997 and the six months ended June 30, 1998,
respectively. The cash flow from operations for these periods increased 426% and
157% over the respective periods from the prior year. The increase in cash flow
from operations was primarily attributed to overall growth and synergies and
economies of scale resulting from the internal growth.
Cash used in investing activities for the year ended December 31, 1997 and
for the six months ended June 30, 1998 were $13 million and $9.1 million,
respectively. The investing activities primarily relate to purchases of
telecommunications equipment and costs incurred with the buildout of the fiber
optic network. In January 1998, the Company completed the acquisition of
Integrated Communications and Engineering, Ltd. ("ICEL"), a communications
systems integrator and maintenance provider in Aberdeen, Scotland. CapRock paid
a total purchase price of approximately $2.2 million comprised of approximately
$610,000 in cash and 207,266 shares of the Company's common stock.
CapRock expects to require significant financing for capital expenditure and
working capital requirements. CapRock currently estimates that its aggregate
capital requirements will total approximately $45 million in the second half of
1998 and approximately $150 million in 1999. CapRock expects to make substantial
capital expenditures thereafter. Capital expenditures 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.
CapRock may 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 venture and strategic alliances. Sources of additional
capital may include cash flow from operations and public and private equity and
debt financings, bank debt, vendor financings and IRU's. There can be no
assurance, however, that CapRock will be successful in producing sufficient cash
flow or raising sufficient debt or equity capital to meet its strategic business
objectives or that such funds, if available, will be available on a timely basis
and on terms that are acceptable to CapRock and within limitations contained in
Caprock's financing arrangements. Failure to generate or raise sufficient funds
may require CapRock to delay or abandon some or all of its future expansion
plans or expenditures, which could have a material adverse effect on CapRock's
financial condition, results of operations and cash flow.
NETWORK BUILDOUT AND FINANCING PLAN
By the end of the year 2000, CapRock intends to build out its fiber optic
network to approximately 5,500 route miles throughout Texas and the Gulf Coast
region. CapRock intends to use advanced fiber capable of supporting dense wave
division multiplexing with an OC-48 backbone scalable to OC-192. CapRock intends
to install 96 fiber strands throughout most of its network and intends to retain
on average 48 fiber strands. CapRock estimates total gross capital expenditures
of approximately $340 million to complete its planned network build out,
including fiber, switching equipment, construction costs and network
electronics. CapRock believes that the net proceeds from the Private Offering,
together with cash flow from operations, borrowings under the Credit Facility
and other credit facilities and bank debt, vendor financings, sales of dark
fiber and other sources of financing, will be sufficient to fund its capital
expenditures and working capital requirements for 18 months. Additional capital
will be required after such time to finance Caprock's network buildout. If
CapRock is unable to obtain such capital, the buildout of its network may be
significantly delayed, curtailed or abandoned. CapRock is currently negotiating
with a lender to obtain the Credit Facility. In addition, CapRock may accelerate
the rate of deployment of its
58
<PAGE>
network, which in turn may accelerate CapRock's need for additional capital.
CapRock's actual capital requirements will also be affected, possibly
materially, by various factors, including the timing and actual cost of the
deployment of CapRock's network, the timing of cost of expansion into new
markets, the extent of competition and the pricing of telecommunications
services in its markets.
CREDIT FACILITY
CapRock is currently negotiating with a lender to obtain the Credit Facility
in the amount of $25 million. The final terms and conditions of the Credit
Facility will depend on negotiation of definitive documentation for the Credit
Facility. There can be no assurance, however, as to whether or if CapRock will
enter into the Credit Facility or as to the amount or terms of the Credit
Facility.
NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), effective for
fiscal years beginning after December 15, 1997. SFAS 130 requires classification
of items of other comprehensive income by nature in a financial statement and a
breakout of the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of a
statement of financial position. Reporting comprehensive income provides a
measure of all changes in equity that result from recognized transactions and
other economic events of the period other than transactions with owners in their
capacity as owners. Adoption of this statement did not have a material effect on
the Company's consolidated financial position or results of operation because
there are no material differences between net income and comprehensive income in
the Company's circumstances.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for the manner in which business enterprises are to report information about
operating statements in its annual statements and requires those enterprises to
report selected information regarding operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS 131 is effective for fiscal years beginning after December 15, 1997.
Financial statement disclosures for prior periods are required to be restated.
The Company is in the process of evaluating the disclosure requirements. The
adoption of SFAS 131 will not have an impact on the Company's results of
operation, financial position or cash flows and any effect will be limited to
the presentation of its disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activity" ("SFAS 133") which requires that all
derivatives be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. In addition, all hedging
relationships must be designated, reassessed and documented pursuant to the
provisions of SFAS No. 133. SFAS 133 is effective for fiscal years beginning
after June 15, 1999. The adoption of SFAS 133 will not have an impact on the
Company's results of operations, financial position or cash flow.
CONTINGENCIES
The Company is 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.
YEAR 2000
The Year 2000 problem is the inability of a meaningful proportion of the
world's computers, software applications and embedded semiconductor chips to
cope with the change of the year from 1999 to 2000. This issue can be traced to
the infancy of computing, when computer data and programs were designed to save
memory space by truncating the date field to just six digits (two for the day,
two for the month and two
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for the year). Therefore, information applications automatically assumed that
the two-digit year field represented a year within the 20th century. As a result
of this, systems could fail to operate or fail to produce correct results at the
start of the 21st century.
ASSESSMENT
The Year 2000 problem affects computers, software, and other equipment used,
operated, or maintained by the Company for itself and its customers.
Accordingly, the Company is currently assessing the potential impact of, and the
costs of remediating, the Year 2000 problem for its internal systems and on
facilities systems and equipment.
The Company's business is substantially dependent upon the operation of
computer systems, and as such, the Company has established a Year 2000 committee
made up of leaders from the operational areas of the Company which could be
affected by the Year 2000 problem. The committee was created pursuant to the
direction of the Board of Directors and has the involvement of top management
and its objectives are top priority.
The Company is in the process of identifying the computers, software
applications, and related equipment used in connection with its operations that
must be modified, upgraded, or replaced to minimize the possibility of a
material disruption of its business. The Company has commenced the process of
modifying, upgrading, and replacing systems which have already been assessed as
adversely affected by the Year 2000 problem, and expects to have all other major
systems assessed, and if need be, modified, before the occurrence of any
material disruption of its business. The Company expects to complete this
process by the end of the second quarter of 1999.
In addition to computers and related systems, the operation of office and
facilities equipment, such as fax machines, copiers, telephone switches,
security systems and other common devices may be affected by the Year 2000
problem. The Company is currently assessing the potential effect of, and costs
of remediating, the Year 2000 problem on its office and facilities systems and
equipment.
The Company has initiated communications with third party suppliers of the
major computers, software, and other equipment used, operated or maintained by
the Company to identify and, to the extent possible, to resolve issues involving
the Year 2000 problem. However, the Company has limited or no control over the
actions of these third party suppliers. Thus, while the Company expects that it
will be able to resolve any significant Year 2000 problems with these systems,
there can be no assurance that, these suppliers will resolve any or all Year
2000 problems with these systems before the occurrence of a material disruption
to the business of the Company or any of its customers. Any failure of these
third parties to timely resolve Year 2000 problems with their systems could have
a material adverse effect on the Company's business, financial condition, and
results of operations.
IMPACT OF YEAR 2000 PROBLEMS
Because the Company's assessment is not complete, the Company has not yet
estimated the total cost to the Company of completing any required
modifications, upgrades, or replacements of either the operational systems or
facilities systems and equipment.
The Company expects to identify and resolve all Year 2000 problems that
could materially adversely affect its business operations. However, management
believes that it is not possible to determine with complete certainty that all
Year 2000 problems affecting the Company or its customers and suppliers have
been identified or corrected. The number of devices that could be affected and
the interactions among these devices are simply too numerous. In addition, no
one can accurately predict how many Year 2000 problem-related failures will
occur or the severity, duration, or financial consequences of these perhaps
inevitable failures. As a result, management expects that the Company will
likely suffer the following consequences:
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- A significant number of operational inconveniences and inefficiencies for
the Company and its customers and will divert management's time and
attention and financial and human resources from its ordinary business
activities;
- A lesser number of serious system failures that will require significant
efforts by the Company or its customers to prevent or alleviate material
business disruptions;
- Several routine business disputes and claims for pricing adjustments or
penalties due to Year 2000 problems by customers, which will be resolved
in the ordinary course of business; and
- A few serious business disputes alleging that the Company failed to comply
with the terms of its contracts or industry standards of performance, some
of which could result in litigation or contract termination.
CONTINGENCY PLANS
The Company will develop contingency plans to be implemented if its efforts
to identify and correct Year 2000 problems affecting its operational systems and
facilities systems and equipment are not effective. The Company expects to
complete its contingency plans by the end of the first quarter of 1999.
Depending on the systems affected, any contingency plans developed by the
Company, if implemented, could have a material adverse effect on the Company's
financial condition and results of operations.
DISCLAIMER
The discussion of the Company's efforts, and management's expectations,
relating to Year 2000 compliance are forward-looking statements. The Company's
ability to achieve Year 2000 compliance and the level of incremental costs
associated therewith, could be adversely impacted by, among other things, the
availability and cost of programming and testing resources, vendors' ability to
modify proprietary software, and unanticipated problems identified in the
ongoing compliance review.
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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 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.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
REVENUE. Total revenues increased $12.3 million from approximately $20.1
million during the six months ended June 30, 1997 to approximately $32.4 million
in 1998. The 61% 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. For the six
months ended June 30, 1997, revenues from international operations increased
$5.3 million, or 98%, from $5.4 million and representing 27% of total revenues
to $10.7 million for the same period in 1998, representing 33% of total revenues
for such period. Domestic revenues increased $7 million, or 48% from $14.7
million to $21.7 million for the same period in 1998.
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 from approximately $19.3
million during the six months ended June 30, 1997 to approximately $29.3 million
during the corresponding period in 1998. Cost of revenues increased from
approximately $15.8 million for the six months ended June 30, 1997 to
approximately $23.9 million for the same period in 1998. 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 22% to 26% 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 from
$3.2 million for the six months ended June 30, 1997 to approximately $4.9
million for the six months ended June 30, 1998. The increase resulted from the
expanded administrative and information activities needed to support
Telecommunications' growth, recruitment of additional personnel and additional
sales commission payments.
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Telecommunications' depreciation and amortization expense increased from
approximately $303,000 during the six months ended June 30, 1997 to
approximately $484,000 for the same period in 1998. 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.
INTEREST EXPENSE. For the six months ended June 30, 1997,
Telecommunications' interest expense was approximately $168,000 as compared to
approximately $159,000 for the same period in 1998.
INCOME TAXES. Telecommunications' income tax expense was approximately
$242,000 during the six months ended June 30, 1997 as compared to income tax
expense of approximately $1.1 million for the same period in 1998. This increase
was attributable to the improved profitability of Telecommunications in 1998.
NET INCOME. Telecommunications realized net income of approximately
$429,000 in the six months ended June 30, 1997, as compared to net income of
approximately $1.8 million in the corresponding period of 1998 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.
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.
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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.
LIQUIDITY AND CAPITAL RESOURCES
Total cash expended during the six months ended June 30, 1998 to fund
capital expenditures and repayments of long-term debt was approximately $1.5
million and $50,000, respectively. Total cash generated from operations was
approximately $248,000 for the same period. Total cash provided during this same
period from revolving loans was approximately $1.5 million. 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 matured on August 31, 1998, and the Company used a portion of the
net proceeds from the Private Offering to repay indebtedness owing by
Telecommunications to the bank. The Private Offering was consummated on July 16,
1998. In the Private Offering, the Company sold, through a private placement
under Rule 144A under the Securities Act, $150 million aggregate principal
amount of the Private Notes. Interest on the Notes will be payable semi-annually
in arrears on January 15 and July 15 of each year, commencing on January 15,
1999, at the rate of 12% per annum. Approximately $26.8 million of the net
proceeds from the Private Offering were used to pay off all existing debt
obligations of Telecommunications, Partnership and IWL. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
CapRock--New Accounting Pronouncements," "--Contingencies" and "--Year 2000."
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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 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, a subsidiary of the Company, owns and operates the fiber
optic network being constructed by the Company. The Partnership provides
dedicated line services over the 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
the network to increase its revenue stream and reduce per unit costs, targeting
capacity sales on a segment-by-segment basis as the 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 and June 30, 1998, substantially all of the
Partnership's revenues were derived from two and three customers, respectively.
In 1997, 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.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
REVENUE. Total revenues increased approximately $1.8 million from $845,000,
during the six months ended June 30, 1997, as compared to approximately $2.6
million for the same period in 1998. The increase in revenue for this period is
primarily attributed to Network Construction Services revenue of approximately
$1.4 million. Telecommunications Services revenues represented 100% of the
revenue for the same period in 1997. The Partnership has entered into a contract
for the sale of dark fiber for approximately $3.8 million. In July 1998, the
customer exercised the option to acquire the IRU for the additional fiber
strands for approximately $1.3 million resulting in a total contract of $5.1
million. The agreement requires the purchaser to pay the aggregate contract
price, consisting of installments during the construction period based upon the
achievement of certain milestones, with final payment made at the time of
acceptance.
OPERATING EXPENSES. The Partnership's principal operating expenses consist
of expenses for network construction costs, network access expenses, SG&A, and
depreciation and amortization. Total operating
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expenses increased from approximately $496,000 during the six months ended June
30, 1997 as to approximately $727,000 in the corresponding period in 1998. The
1998 operating expenses include the Costs of Network Construction Services of
approximately $114,000 associated with the contract for the sale of dark fiber.
SG&A includes the cost of salaries, benefits, occupancy costs, commissions,
sales and marketing expenses and administrative expenses. SG&A increased from
approximately $126,000 in the six months ended June 30, 1997 to approximately
$204,000 for the same period in 1998.
The Partnership's depreciation and amortization expense increased from
approximately $348,000 during the six months ended June 30, 1997 to
approximately $396,000 for the same period in 1998. This increase resulted
primarily from activating segments 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. For the six months ended June 30, 1997, the Partnership's
net interest expense increased from approximately $370,000 to approximately
$409,000 for the same period in 1998.
INCOME TAXES. Effective January 1, 1998, the Partnership elected to be
taxed as a corporation and as such has recorded income tax expense of $545,000
relating to the six months ended June 30, 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 realized a net loss of approximately
$21,000 in the six months ended June 30, 1997, as compared to net income of
approximately $870,000 in the corresponding period of 1998 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
revenues 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 line 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.
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LIQUIDITY AND CAPITAL RESOURCES
The Private Offering was consummated on July 16, 1998. In the Private
Offering, the Company sold, through a private placement under Rule 144A under
the Securities Act, $150 million aggregate principal amount of the Private
Notes. Interest on the Notes will be payable semi-annually in arrears on January
15 and July 15 of each year, commencing on January 15, 1999, at the rate of 12%
per annum. Approximately $26.8 million of the net proceeds from the Private
Offering were used to pay off all existing debt obligations of
Telecommunications, Partnership and IWL.
Total cash expended during the six months ended June 30, 1998 to fund
capital expenditures and repayments of long-term debt to third parties was
approximately $3 million and $717,000, respectively. Total cash generated from
operations was approximately $2.9 million for the same period. The Partnership
funded capital expenditures and cash used in operations with the proceeds from a
$10 million long term loan with a bank, which was entered into in July 1996. The
Partnership obtained the loan for the construction, start-up and related
expenses of the Houston to Corpus Christi fiber optic network. The Partnership
was in violation of certain covenants set forth in the loan agreement for such
loan which required the maintenance of debt as a percentage of adjusted net
income as of December 31, 1996, 1997 and April 30, 1998, and was also in
technical default of a covenant requiring the lender's consent to the
Combination. The Partnership obtained a waiver of these covenant violations and
obtained the lender's consent to the Combination and has executed an amendment
revising these covenants. Approximately $8.9 million was outstanding thereunder
at June 30, 1998. The debt matured on August 31, 1998. CapRock used a portion of
the net proceeds from the Private Offering to repay indebtedness owed by the
Partnership to the bank.
Through the seven months ended July 31, 1998, the Partnership had obtained a
contract for approximately $5.1 million for sale of dark fiber, which amounts
will be paid as the Partnership completes certain milestones under the
contracts. The Partnership believes such payments will occur in the fourth
quarter of 1998.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations of CapRock--New Accounting Pronouncements," "--Contingencies" and
"--Year 2000."
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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 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, has filed under the Exchange Act (as
defined below) a December 31, 1997 transition period Form 10-K for the
transition period from June 30, 1997 to December 31, 1997.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 AND 1998
TOTAL REVENUES. Total revenues increased $1.9 million or 12.9% from $14.7
million for the six months ended June 30, 1997 to $16.6 million for the six
months ended June 30, 1998. This increase was comprised of an increase of $3.6
million or 102.9% in the Company's telecommunications services, an increase of
$1.3 million or 15.9% in the Company's projects and other revenues and a
decrease of $2.9 million or 100% in product resales to a single customer. The
increase in telecommunications services was largely attributable to the
continued expansion of the Company's ODDS services and increased traffic on the
Company's network. The growth in project and other revenues resulted from
increased sales of telecommunications equipment and related services. The
product resales were substantially completed in May 1997.
GROSS MARGIN. Gross profit increased $2.0 million or 39.1% from $4.6
million for the six months ended June 30, 1997 to $6.6 million for the six
months ended June 30, 1998, representing gross margins of 31.6% and 39.8%,
respectively. The increase in margin was due in part to the completion of the
product resale to a single customer in May 1997 and from changes in the
Company's revenues mix to higher margin services. Excluding product resales,
gross profit for the six months ended June 30, 1997 would have been
approximately $4.0 million representing a gross margin of 34.4%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.5 million or 48.4% from $3.1 million for
the six months ended June 30, 1997 to $4.6 million for the six months ended June
30, 1998. As a percentage of total revenues, selling, general and administrative
expenses increased from 21.1% for the six months ended June 30, 1997 to 27.6%
for the six months ended June 30, 1997. The increase in the selling, general and
administrative expenses as a percentage of sales and in dollar amount were due
in principal part to the completion of the product resale in May 1997 and to
increased personnel and internal structure to support revenue growth and an
expanded network.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$602,000 or 78.4% from $768,000 for the six months ended June 30, 1997 to $1.4
million for the six months ended June 30, 1998. This increase was the result
primarily from increases in property, plant and equipment for infrastructure and
network expansion.
NET INTEREST EXPENSE. Net interest expense increased $51,000 or 17.0% from
$300,000 for the six months ended June 30, 1997 to $351,000 for the six months
ended June 30, 1998. The increase resulted from increased borrowings to fund the
Company's infrastructure expansion.
OTHER INCOME, NET. Other income decreased $5,000 or 4.5% from $110,000 for
the six months ended June 30, 1997 to $105,000 for the six months ended June 30,
1998. Other income for the six months ended June 30, 1997 included the Company's
50% ownership interest in the earnings of Kenwood System Group as well as
certain other asset dispositions. Other income for the six months ended June 30,
1998 included the Company's 50% ownership interest in the earnings of the Joint
Venture as well as certain other asset dispositions.
INCOME TAX EXPENSE. Provision for income taxes increased $60,000 or 40.3%
from $149,000 for the six months ended June 30, 1997 to $209,000 for the six
months ended June 30, 1998 which represents an effective tax rate of 25.8% and
49.0% for each period, respectively.
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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.
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% 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.
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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 $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.
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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 discussed 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%.
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
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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.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1998, IWL used $431,000 of cash in
operating activities, borrowed an additional net amount of $2.0 million from
credit facilities, and received $60,000 from the sale and issuance of IWL common
stock. IWL invested $4.0 million in property and equipment (net of proceeds of
$201,000 from certain dispositions of assets). IWL also expended $610,000 to
acquire Integrated Communications and Engineering, LTD. in January, 1998. The
increase in property, plant and equipment reflects IWL's work in progress in
relation to the deployment of IWL's ODDS program and the development of its Gulf
Coast network. These activities decreased IWL's cash balance by $3.0 million to
a balance of $359,000 at June 30, 1998.
At June 30, 1998, IWL had 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 had 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 was $5.0 million subject to a borrowing base based on accounts receivables
and inventory. The maximum amount of the Guidance Line was $5.0 million, which
was used to finance IWL's purchase and subsequent lease of telecommunications
equipment. The Term Loan, the Short-Term Facility and the Working Capital Loan
were collateralized by substantially all of the personal property of IWL. The
Guidance Line was reduced by the term loan created as the leased equipment was
deployed. The interest rate on each facility was, at Company's option, Bank One,
Texas, N.A.'s base rate or 30, 60 or 90 day adjusted LIBOR plus 2.40%. The
interest rate was 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 was based upon eligible
accounts receivable and inventory, and a fee equal to 0.25% was charged on any
unused portion of the Working Capital Loan. IWL
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was in violation of the financial covenants requiring maintenance of a current
ratio at December 31, 1997 and March 31, 1998 and a fixed charge ratio at June
30, 1998, and also was in technical default of a covenant requiring the lender's
consent to the Combination. IWL has obtained a waiver of these covenant
violations and obtained the lender's consent to the Combination. On June 17,
1998, the lender extended IWL additional credit under the Short-Term Facility of
up to $4.0 million. At June 30, 1998, IWL had $4.0 million available under the
Short-Term Facility and was fully advanced under the Working Capital Loan. The
Short-Term Facility, the Term Loan and the Working Capital Loan and all other
amounts due the lender matured on August 31, 1998. CapRock used a portion of the
net proceeds from the Private Offering to repay all indebtedness owing by IWL to
Bank One, Texas, N.A. The Private Offering was consummated on July 16, 1998. In
the Private Offering, the Company sold, through a private placement under Rule
144A under the Securities Act, $150 million aggregate principal amount of the
Private Notes. Interest on the Notes will be payable semi-annually in arrears on
January 15 and July 15 of each year, commencing on January 15, 1999, at the rate
of 12% per annum. Approximately $26.8 million of the net proceeds from the
Private Offering were used to pay off all existing debt obligations of
Telecommunications, Partnership and IWL.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations of CapRock--New Accounting Pronouncements," "--Contingencies" and
"--Year 2000."
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THE COMBINATION
The Company is a Texas corporation that was formed on February 3, 1998 to be
a holding company for Telecommunications, the Partnership and IWL and their
respective subsidiaries following the consummation of the Combination. On
February 16, 1998, Telecommunications, the Partnership, IWL, the Company and
certain other parties entered into the Merger Agreement providing for the
Mergers and the Interest Exchange. On August 26, 1998, the Company announced
that it had completed the Mergers and the Interest Exchange pursuant to the
Merger Agreement. At the effective time of the Mergers and the Interest
Exchange, all previously outstanding shares of IWL common stock ceased to exist
and each such share was converted into and became exchangeable for one share of
CapRock Common Stock, all previously outstanding shares of Telecommunications
common stock ceased to exist and each such share was converted into and became
exchangeable for 1.789030878 shares of CapRock Common Stock and each one percent
(1%) of the Partnership Interests issued and outstanding was exchanged for
63,194.54 shares of CapRock Common Stock. In addition, IWL and
Telecommunications stock options and warrants that were outstanding and
unexercised at the Effective Time were assumed by the Company and converted into
options and warrants to purchase shares of CapRock Common Stock. Prior to the
Effective Time, the shares of CapRock Common Stock issuable in connection with
the Combination were registered for issuance under the Securities Act, and the
CapRock Common Stock was approved for listing on the Nasdaq National Market
under the symbol "CPRK."
On July 16, 1998, the Company, Telecommunications and the Partnership (with
IWL as a guarantor of certain obligations with respect to the Private Notes)
sold, through a private placement under Rule 144A under the Securities Act,
Private Notes in the aggregate principal amount of $150 million. The Indenture
provided that the Company, Telecommunications and the Partnership (with IWL as a
guarantor) would be required to make an offer to purchase the Private Notes at
101% of their principal amount, plus accrued and unpaid interest to the date of
repayment, in the event that the consideration was not consummated and certain
other conditions were not satisfied by August 31, 1998, or if it appeared, in
the sole judgment of the Company, Telecommunications, the Partnership and IWL,
that the Combination would not be consummated or such conditions would not be
satisfied by such date. In addition, in connection therewith, prior to a
specified date, approximately $145 million of the net proceeds from the offering
of the Private Notes were held in an escrow account pursuant to the terms of an
escrow and security agreement. In connection with the consummation of the
Combination on August 26, 1998, Telecommunications and the Partnership were
released as (and are no longer) co-obligors under the Private Notes (and IWL was
released from its obligations under such offer to purchase), with the Company
remaining the sole obligor thereunder, and the proceeds from the offering of the
Private Notes held in escrow were disbursed to the Company.
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BUSINESS
The Company is a regional facilities-based ICP offering local, long
distance, Internet, data and private line services to small and medium-sized
businesses. The Company also provides switched and dedicated access, regional
and international long distance, private lines and dark fiber to carrier
customers. The Company currently owns and operates a 260 route mile fiber optic
network along the Texas Gulf Coast, linking Houston, Victoria and Corpus
Christi, Texas, and is in the process of expanding its network to approximately
800 route miles in Texas by the end of 1998. The Company intends to expand its
network to approximately 5,500 route miles throughout Texas and the Gulf Coast
region by the end of 2000. The Company has over 60 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. The Company's volume of monthly long distance minutes of
traffic has grown from approximately 3.0 million minutes in April 1994 to
approximately 82 million minutes in August 1998, which included approximately
10.8 million minutes of traffic terminated in Mexico.
The Company is also a leading provider of communications services to
offshore oil and gas customers in the Gulf of Mexico and the North Sea, where it
provides turnkey communications solutions to multi-site clients such as Amoco
Eurasia Petroleum Company, Chevron Information Technology Company, Polar Lights
Company (a joint venture of Conoco Oil Company), Exxon Computing Services
Company and Shell Offshore Services Company.
The Company has been providing telecommunications services in Texas for more
than 15 years. IWL began providing telecommunications services in Texas and
Louisiana in 1981. IWL's core business initially focused on the provision of
communications solutions to customers in the oil and gas industry. These
business activities included the provision of advanced communications solutions
to customers with operations in remote, difficult-access regions of the world.
In 1992, the Company began providing voice, data and broadband services to
carrier and commercial customers in Texas. As a result of its experience in
providing a wide range of communications services, the Company believes that it
has built significant name recognition and a valuable customer base in Texas and
the Gulf Coast region.
The Company intends to leverage its experience, name recognition and
existing customer base to become the leading facilities-based ICP and the
premier provider of carriers' carrier services in Texas and the Gulf Coast
region. One of the keys to this strategy is completing the build out of its
fiber optic network to approximately 5,500 route miles. The Company completed
construction of the first 260 route miles of its fiber network in January 1997.
The Company is currently expanding its network to approximately 800 route miles
by the end of 1998, linking San Antonio, Austin, Laredo, McAllen, Harlingen, and
Corpus Christi, Texas. The Company intends to expand its network to
approximately 3,000 route miles by the end of 1999 and approximately 5,500 route
miles by the end of 2000. The Company 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 Company to serve nearly every primary, secondary and
tertiary city in the region. The Company's network is designed to be scalable
and will have significant flexibility to meet future demand. The Company intends
to include in its network advanced fiber capable of supporting dense wave
division multiplexing with an OC-48 backbone scalable to OC-192. The Company
intends to install 96 fibers and two spare ducts throughout most of its network
and intends to 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. To reduce the cost of fiber retained for its own use,
the Company has purchased pipelines, sold duct and dark fiber to third parties,
and jointly constructed segments with Teleport Communications Inc., a CLEC, and
with TCI Communications Inc., a cable television company. CapRock believes that
its network, upon completion, will be one of the lowest net cost networks on a
per fiber mile basis in Texas and the Gulf Coast region.
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The Company believes that the Combination will enable it to significantly
accelerate the implementation of its business plan and to more rapidly achieve
its business objectives by:
- ENHANCING ITS REVENUE OPPORTUNITIES. The Company believes it will be able
to enhance its revenue opportunities by leveraging the existing and
planned fiber and switching network infrastructure of Telecommunications,
the Partnership and IWL to offer voice, data and broadband services in
markets geographically clustered near such infrastructure;
- CREATING GREATER ORGANIZATIONAL DEPTH. The Company believes it will be
able to create greater organizational depth through the combination of the
sales, customer service and networking expertise 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;
- PROVIDING IT WITH THE OPPORTUNITY TO CROSS-SELL PRODUCTS. The Company
believes it will be able to cross-sell 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;
- CAPITALIZE ON INTERNATIONAL REVENUE OPPORTUNITIES. The Company believes it
will be able to capitalize 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
- REDUCING CAPITAL EXPENDITURES. The Company believes it will be able to
reduce the combined capital expenditures of the three companies through
the construction of a single communications infrastructure.
MARKET OPPORTUNITY
The Company believes that the geographic market in which it competes offers
significant opportunities for growth. Texas is the second largest state in the
U.S. with a 1997 population of approximately 19.5 million and population growth
of approximately 2% annually. Based on published FCC statistics, in 1998 it is
expected that there will be over 3.7 million business access lines,
approximately 7.7 million residential access lines and a total of approximately
11.5 million access lines in Texas, including those in the public sector. The
Company believes that the growth rate of access lines in Texas will be
approximately 5% annually. Based on published FCC statistics, in 1998 it is
expected that the approximate number of access lines for business users,
residential users and total lines in Texas and the Gulf Coast region will be
approximately 5.4 million, 12.0 million, and 17.4 million, respectively.
The Company believes it is well positioned to capture a significant portion
of the growing international traffic between the United States and Mexico due to
its location, its network buildout in Texas and its intent to interconnect with
several Mexican carriers at multiple border points. In 1996, Mexico was the
second largest destination for U.S. outbound telecommunications traffic,
accounting for approximately 12.5% of the total international traffic
originating in the U.S. The U.S. is the largest destination of outbound traffic
from Mexico, accounting for approximately 86% of its total international
traffic. In 1997, the telecommunications traffic into Mexico was approximately
2.9 billion minutes, while outgoing traffic amounted to approximately 1.2
billion minutes, with approximately 86% of this traffic originating or
terminating in the United States. The Company estimates that over half this
volume passed through gateways along the Texas border. In 1996, approximately
70% of the telecommunications traffic between the two countries originated in
the U.S.
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BUSINESS STRATEGY
The Company's business objectives are to (i) 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) 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) capitalize on the growing opportunities to
provide international long distance and international project services. To
achieve these objectives, the Company intends to:
BECOME A SINGLE SOURCE PROVIDER OF COMMUNICATIONS AND NETWORK INTEGRATION
SERVICES. The Company 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. The Company 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 fiber)
services. By the end of 1998, the Company intends to offer these services to
customers as an integrated suite of products that will be invoiced on a single,
convergent bill. The Company 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.
STRATEGICALLY BUILD OUT ITS REGIONAL FIBER NETWORK. The build-out of the
Company's fiber optic network is a key element of the Company's objective of
becoming the leading ICP and the premier carriers' carrier in its target
markets. The Company's 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 Company intends to expand its
network to cover approximately 5,500 route miles throughout Texas and the Gulf
Coast region by the end of the year 2000, creating the most extensive
alternative fiber network in the region. The Company believes that existing
communications networks are inadequate for future requirements in Texas and the
Gulf Coast region and that the secondary and tertiary markets located between
the major markets in this region are currently underserved, creating a
significant market opportunity for network expansion. The Company's network will
provide other carriers with diverse routing and additional capacity to meet
their future bandwidth demands. The Company's network will also interconnect
with the networks of selected Mexican carriers at multiple border crossings,
creating multiple SONET ring connections between the United States and Mexico.
The completion of the Company's network will allow it to (i) originate and
terminate most of its customers' voice and data traffic within the region
on-net, (ii) dramatically increase its available broadband capacity and (iii)
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 CUSTOMER TURNOVER. Data services represent one of the
fastest growing product segments in the communications industry. The Company
believes it can accelerate new account penetration and minimize potential
customer turnover by offering LAN interconnection, frame relay, Internet
services, ISDN, 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 the Company intends to charge) in conjunction with traditional
local and long distance services. The Company intends to leverage its expertise
in providing multi-point and last mile solutions for data-intensive customers by
offering such services to small and medium-sized business customers, as well as
by targeting data-intensive and multi-point customers, such as banks, financial
institutions and health care providers. In addition, the Company believes that
it can take advantage of opportunities for revenue growth through cross selling
its onshore integrated data services to existing oil and gas customers and
customers with operations in remote, difficult-access regions.
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BUILD MARKET SHARE THROUGH PERSONALIZED SALES AND CUSTOMER SERVICE. The
Company 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.
Management believes that small and medium-sized business customers in its target
markets have been neglected by the ILECs with respect to these approaches. The
Company's sales management team is composed of executives with experience in
managing a large number of direct and agent sales specialists in the
telecommunications industry. As of August 31, 1998, the Company's direct sales
force consisted of 41 account executives, and the Company had 100 sales agents
located throughout Texas. The Company intends to recruit, train and deploy
approximately 60 additional account executives by the end of 1998 and an
additional 100 account executives by the end of 1999. The Company 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 a comprehensive set of products and services and customer care options,
and (iii) participate in the potential economic returns made available through a
results-oriented compensation package emphasizing sales commissions and equity
incentives.
DEVELOP EFFICIENT AUTOMATED BACK OFFICE SYSTEMS. The Company handles 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 the Company 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 the Company's expected future back office requirements. The system, when
fully implemented, will enable the Company 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. The Company 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. The Company believes that it can
leverage its existing international commercial relationships, its regulatory
expertise, its extensive relationships with domestic carriers and its points of
presence in Texas, Russia and Scotland to significantly increase the Company's
international traffic, including traffic to and from Mexico. Based on published
FCC statistics, in 1997 the incoming telecommunications traffic for Mexico was
approximately 2.9 billion minutes, while outgoing traffic amounted to
approximately 1.2 billion minutes, and approximately 86% of this traffic
originated or terminated in the United States. The Company estimates that over
half this volume passed through gateways along the Texas border.
PURSUE ACQUISITIONS AND STRATEGIC ALLIANCES. In the Company's 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 the Company to
acquire industry participants that can provide technical support, management
talent, customers and product extensions and could enable the Company to
accelerate the implementation of its business plan. The Company also intends to
pursue strategic relationships with utilities, state transportation departments
and other governmental authorities. As part of its growth plan, the Company has
been discussing and continues to discuss with other companies in its region
business ventures and combinations, including potential mergers and
acquisitions.
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LEVERAGE ITS EXPERIENCED MANAGEMENT TEAM. The Company's management team
includes individuals with significant experience in the deployment and marketing
of communications services. Jere W. Thompson, Jr., Chief Executive Officer of
the Company, founded the Partnership in 1992. Ignatius W. Leonards, President of
the Company, 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 the Company, 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, an Executive Vice President of the Company,
has five years of experience in the domestic and international
telecommunications industry, and Kevin W. McAleer, the Company's Chief Financial
Officer, has over 16 years of experience as the chief financial officer of
publicly-held companies.
PRODUCTS AND SERVICES
INTEGRATED COMMUNICATIONS SERVICES
The Company's business objective is to become the leading ICP in Texas and
the Gulf Coast region, offering local and long distance, data and private line
services to end-user customers. The Company 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 fiber) services. By the end of 1998, the Company intends to offer these
services to customers as an integrated suite of products that will be invoiced
on a single, convergent bill. The Company 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.
The Company offers (or, where indicated, intends to offer) the following
products:
LOCAL EXCHANGE SERVICES. These services offer customers local switched and
enhanced services. The Company 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 ILEC services in an area economically justifies the
introduction of a local switch, the Company intends to purchase unbundled
network elements from ILECs and to begin utilizing its own value-added switching
facilities. The Company believes this approach will significantly boost its
margins and return on invested capital, and will reduce the time required to
enter new markets.
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 the Company 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 the Company's switch. This eliminates ILEC
originating access fees and reduces per minute rates to the user.
INTERNET. The Company 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. The Company plans to introduce telephony services based
on voice over internet protocols in major Texas markets by the end of 1998.
Service will be expanded to other Texas markets in conjunction with the planned
fiber network build out. The Company plans to offer its Internet customers long
distance services at significant discounts to basic rates offered by most IXCs.
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DATA. The Company's 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. The Company currently resells data products and
intends to migrate those services onto its own network as that network is built
out.
CUSTOMER PREMISE EQUIPMENT. The Company currently sells and installs
telephone and switchboard equipment to its offshore customers. The Company
intends to add office switchboard and private branch exchange equipment for its
small and medium-sized business customers. The Company intends to continue 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 the Company.
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).
CALLING CARD. These traditional, basic telephone calling cards allow the
user to place calls from anywhere in the United States or Canada. The Company
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
The Company's business objective is to establish itself as the premier
carriers' carrier within 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. The Company carrier services consist of
three principal products: the transmission of long distance traffic processed
through the Company's switches ("long distance switched services"), the sale and
leasing of dark fiber over the Company's facilities ("dark fiber"), and the
transmission of voice and data over dedicated circuits ("private lines"). The
Company's carrier customer base includes more than 60 carriers, including AT&T,
IXC, MCI, Qwest and Sprint, and including regional independents such as Century
Telephone and Lufkin Conroe Telephone.
LONG DISTANCE SWITCHED SERVICES. The domestic and international long
distance switched services provided by the Company are processed through the
Company's digital switches and carried over long distance circuits and other
transmission facilities owned or leased by the Company. The Company sells these
services on a per-call basis, charging by minutes of use ("MOU"), with payment
due monthly after services are rendered. The Company's volume of monthly long
distance minutes of traffic has grown from approximately 3.0 million minutes in
April 1994 to approximately 82 million minutes in August 1998, which included
approximately 10.8 million minutes of traffic terminated in Mexico.
PRIVATE LINE SERVICES. The Company's 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, or require additional capacity or
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.
DARK FIBER. The Company has leased and sold excess dark fiber (and spare
conduits) to carrier customers, and expects to continue to lower the Company's
net cost for fiber retained for its own use by selling and swapping excess fiber
in the future.
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PROJECT MANAGEMENT SERVICES
The Company's project management services include system specification,
project engineering, integration, equipment procurement, test, installation and
maintenance and network management. The Company's expertise in planning,
designing and implementing communications solutions for customers with
operations in remote regions or underdeveloped areas allows the Company, from
time to time, to provide communications services for special projects with
critical-timing requirements or other extreme and unusual challenges. The
Company utilizes satellite, microwave and fiber solutions for voice and data
applications to meet its customers' specifications.
OFFSHORE SERVICES
The Company 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. The Company's communications systems are flexible and can be
quickly readjusted as rigs move to new locations. The Company's telecom 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. The Company's Offshore Dedicated Digital
Services program ("ODDS"), which delivers connectivity to offshore locations,
typifies the Company's last-mile connectivity services in the Gulf of Mexico.
ODDS is a fully digital communications system that is flexible enough to be
reconfigured to a new location after the customer's drilling rig changes
locations.
SALES AND MARKETING
INTEGRATED COMMUNICATIONS SERVICES. The Company focuses its retail sales
efforts on small to medium-sized businesses in Texas and the Gulf Coast region.
The Company markets its integrated telecommunications services primarily through
two channels: the Company's direct sales force and its network of independent
sales agents.
As of August 31, 1998, the Company's direct sales force consisted of 35
account executives in Dallas and Houston, and the Company had 100 sales agents
located throughout Texas. The Company intends to recruit, train and deploy
approximately 60 additional account executives by the end of 1998 and an
additional 100 account executives by the end of 1999. The Company's sales
personnel call on prospective and existing business customers, conduct analyses
of business customers' telecommunications usage histories and service needs, and
demonstrate how the Company's 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 associations and local chambers of commerce.
The Company's sales personnel work closely with the Company's engineers and
field support specialists to address customers' network and service delivery
needs and to design new service products and applications for customers.
The Company's agent program, established in 1996, is a network of
independent telephone equipment vendors and other agents authorized by the
Company to market its products and services. As of August 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. The Company has four agent managers who
actively recruit new agents. The Company intends to continually build up its
agency sales force as it expands its operations.
The Company's direct sales force and its authorized agents are trained to
emphasize the Company's customer focused sales and customer service approach.
The Company reinforces this approach by tying a portion of each account
executive's and agent's compensation directly to the longevity of their customer
accounts. The Company's marketing strategy is built upon the belief that
customers prefer to have one
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company serve all of their telecommunications needs. As part of this strategy,
the Company 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. The Company believes that its personalized attention to needs of its
business customers, coupled with its ability to provide a fully integrated bill,
is appealing to both existing and prospective customers.
The Company intends to substantially increase its direct sales force
throughout Texas, Louisiana and Oklahoma over the next two years. The Company
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, the Company 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. The Company established a carrier services sales force in
1992. This group markets carrier services to telecommunications carriers and
other large end-user customers. The Company 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. The Company
markets its carrier services primarily through five direct sales personnel and
four support specialists located in the Company's headquarters in Dallas. In
general, these sales professionals locate potential customers for the Company's
carrier services through customer referrals, trade shows and industry alliances.
When calling on a potential customer, the Company's 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. The Company
also markets its carrier services through trade forums and generally attends
industry trade shows.
PROJECT MANAGEMENT AND OFFSHORE SERVICES. The Company targets domestic and
international customers that require turnkey system solutions and other
telecommunications services. The Company's sales force sells frequency bandwidth
and call completion and system solutions, which allows the Company to further
develop its own telecommunications infrastructure. Current and prospective
customers are assigned to account managers, who are principally responsible for
providing high levels of contact and customer service. In addition, the Company
utilizes business development managers to focus on specific customer
requirements and opportunities. The business development manager typically is
involved in major projects and the installation of infrastructure domestically
or internationally. The Company currently has a sales force of approximately 41
sales representatives, with sales personnel located in Houston, Texas, New
Orleans, Louisiana, Moscow, Russia and Aberdeen, Scotland. The Company's direct
sales approach enables it to provide a high level of customer service. To
complement the Company's direct sales efforts, the Company often participates in
various domestic and international industry trade shows and conducts advertising
campaigns in trade publications.
CUSTOMER CARE AND SUPPORT
The Company 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. The Company intends to significantly increase the number of its
customer service representatives as the number of direct and agent sales
representatives grows.
The Company operates a call center in Dallas, Texas staffed by the Company's
customer service employees, who have completed a certification and training
program provided by the Company. To enhance the effectiveness of its customer
service representatives, in addition to the initial training program, the
Company, provides ongoing training to all customer service representatives. The
Company's
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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 the Company.
Through this proprietary contact management software, the Company is able to
provide a high level of customer care. As the Company's sales force and
operations expand, the Company intends to recruit and train additional sales
personnel to support its operations.
The Company 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 the
Company 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 the Company's expected future back office requirements. The
OSS System, when fully implemented, will enable the Company 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
customer's needs and information requests, and (iv) monitor and analyze traffic,
financial and operating trends. The Company 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 "Certain Transactions."
The Company 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 the Company'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 the Company's engineers can custom design or modify hardware to improve
its performance within a particular system.
NETWORK
The Company completed construction of the first 260 route miles of its fiber
network in January 1997. The Company is currently expanding its network to
approximately 800 route miles by the end of 1998, linking San Antonio, Austin,
Laredo, McAllen, Harlingen, and Corpus Christi, Texas. The Company intends to
expand its network to approximately 3,000 route miles by the end of 1999 and
approximately 5,500 route miles by the end of 2000. The Company 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 Company to serve
nearly every primary, secondary and tertiary city in the region. The Company's
network is designed to be scalable and will have signifcant flexibility to meet
future demand. The Company intends to include in its network advanced fiber
capable of supporting dense wave division multiplexing with an OC-48 backbone
scalable to OC-192. The Company intends to install 96 fibers and two spare ducts
throughout most of its network and intends to 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.
By installing a large fiber count, advanced fiber capable of supporting
dense wave division multiplexing and spare ducts, the network will be scalable
and will have significant flexibility to add capacity to meet
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future demand. The integrity and survivability of the network will be enhanced
through the design of multiple SONET rings and the network will in large part be
diversely located from existing longhaul networks, which will enable other
carriers to utilize the network to obtain survivability through diverse routing.
The expanded network is expected to deliver the following significant
strategic and financial benefits to the Company: (i) substantial savings by
allowing the Company to move into its own network a significant portion of the
traffic that it currently carries on circuits which it leases to other carriers;
(ii) high capacity new routes allowing the Company to increase revenues by
leasing additional circuits to its customers, including high capacity circuits
such as OC-3s, OC-12s, and OC-48s; (iii) lower underlying transmission and
network operating costs; (iv) sufficient capacity to support increasing demand
from Internet, multimedia applications, frame relay and ATM; and (v) reduced
capital costs through sales and exchanges of excess fiber which the Company is
including in its network expansion specifically for that purpose. The Company
intends to install additional long distance and local voice and data switches
throughout the region to support its network expansion. In addition to the
Company's switches in Dallas and Houston, a long distance switch is currently
being installed in Phoenix, Arizona. The Company intends to continue to add
switching capacity on its network as its customer base increases.
The Company also provides services to its oil and gas company customers
through a satellite network consisting of leases for access to multiple
satellites, a microwave network, two-way radio licenses and carrier agreements
for long distance service combined with a switch-based network. The Company's
microwave network includes a system that has been built by the Company onshore
in the Texas and Louisiana Gulf Coast region and extends offshore into the Gulf
of Mexico. The Company-owned digital microwave network in the Gulf of Mexico
consists of five microwave repeaters that cover over 40 drilling sites in a 100
mile radius.
The Company believes that the fiber and microwave network it has created to
support its oil and gas industry customers has excess capacity and can readily
support ICP activities in secondary and tertiary markets along the Texas and
Louisiana Gulf Coast, where the Company expects less competition for customers
than in the larger markets. The Company intends to leverage its project
management skill set and expertise by supplying communications services to
customers outside of the oil and gas industry, particularly customers with
operations located near the Company's existing and planned communications
infrastructure.
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 the
Company expects competition to increase in the future. The Company believes that
existing competitors are likely to continue to expand their service offerings to
appeal to existing or potential customers of the Company. Many of the Company's
existing customers have financial, personnel and other resources, including
brand name recognition, substantially greater than that of the Company.
Moreover, the Company expects that new competitors are likely to enter the
communications market, and some of these new competitors may market
communications services similar to the Company's services. In addition, some of
these new competitors may have financial, personnel and other resources,
including brand name recognition, substantially greater than those of the
Company.
In addition, the regulatory environment in which the Company 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 the Company's 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 the Company, and many communications
companies operate generally in the same long distance and local services
submarkets as the Company. As a service provider in the long distance
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communications industry, the Company competes with several well established
providers, as well as many other long distance providers with less significant
market shares.
DOMESTIC AND INTERNATIONAL LONG DISTANCE. The Company 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 the Company. Moreover, there can be no
assurance that certain of CapRock's competitors will not be better situated to
negotiate contracts with suppliers of telecommunications services which are more
favorable than contracts negotiated by CapRock. Many of the Company's
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 the Company.
The Company 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 the Company will be able to compete effectively in the
domestic or international long distance markets.
LOCAL EXCHANGE SERVICE. CapRock 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 CapRock 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 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 CapRock's competitors will not be better situated to
negotiate contracts with suppliers of telecommunications services which are more
favorable than contracts negotiated by CapRock. CapRock 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 CapRock will be able to compete effectively in the local service markets.
FIBER NETWORKS
CapRock intends to expand the fiber optic network to approximately 5,500
route miles throughout Texas and the Gulf Coast region. CapRock 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
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resources than CapRock. CapRock 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
CapRock's network. In addition to IXCs and LECs, entities potentially capable of
offering broadband services in competition with CapRock's 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 CapRock's existing and planned
network and may be positioned geographically to compete directly with CapRock's
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 the Company plans to introduce IP Telephony by the end of
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 CapRock or the carrier customers of CapRock will not
experience substantial decreases in call volume, pricing and/or margins due to
IP Telephony. There can also be no assurance that CapRock 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
the Company 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 CapRock expects that competition will
continue to intensify. CapRock'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 CapRock.
TECHNOLOGICAL ADVANCES
In the future, CapRock 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
CapRock. 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 CapRock. There can be no assurance that CapRock's
services will satisfy future customer needs, that CapRock's technologies will
not become obsolete in light of future technological developments, or that
CapRock will not have to make significant additional capital investments to
upgrade or replace its system and equipment. The effect on CapRock's operations
of technological changes cannot be predicted and if CapRock 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 CapRock.
OFFSHORE AND REMOTE TELECOMMUNICATIONS SERVICES. Currently, the Company
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, the Company competes directly with
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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. The Company provides private-line
telecommunications services in Russia. In Russia, the major competitors for
networks are SOVAMTEL and AMRUSCOM. Although the Company believes that it
competes successfully in each of its markets today, there can be no assurance
that the Company will be able to continue to compete successfully in the future.
The Company 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 the Company.
EMPLOYEES
As of August 31, 1998, the Company employed approximately 285 people,
including approximately 59 in sales and marketing, approximately 132 in
engineering and technical services and approximately 94 in management,
administration and finance. At that date, the Company also had an agent sales
force numbering approximately 100 independent agents throughout Texas. The
Company uses the services of independent contractors for installation and
maintenance of portions of its fiber network. None of the Company's employees is
represented by a labor union or is subject to a collective bargaining agreement.
The Company believes that it has good relations with its employees.
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PROPERTIES
The Company owns or leases buildings that contain approximately 110,000
square feet of floor space. The Company 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. In addition, the Company owns an office building in Friendswood, Texas
and an office building in Lafayette, Louisiana and leases additional space in
Friendswood and Houston, Texas, New Orleans, Louisiana, Moscow, Russia and
Aberdeen, Scotland under leases that expire at various times in the future. The
principal facilities are located as follows:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FEET DESCRIPTION
- -------------------------------- ------------- ------------------------------------------------------------------
<S> <C> <C>
Dallas, Texas................... 19,200 Corporate headquarters for administration, finance and carrier
sales functions, sales, switching and customer support personnel
Houston, Texas.................. 18,940 Corporate headquarters for administration, finance and sales
functions and IWL Connect
Friendswood, Texas.............. 12,500 Engineering, network operations center, production and warehouse
Phoenix, Arizona................ 10,800 Switching facility
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
Austin, Texas................... 5,000 Administration and Sales
San Antonio, Texas.............. 5,000 Administration and Sales
Houston, Texas.................. 5,500 Administration and Sales
Aberdeen, Scotland.............. 4,200 Administrative, Sales, Shipping/Receiving and Warehouse
Moscow, Russia.................. 1,800 Administrative and Engineering
</TABLE>
The Company considers its current facilities adequate for its current needs
and believes that suitable additional space will be available, as needed, to
accommodate further physical expansion of corporate operations and for
additional sales and service.
LEGAL PROCEEDINGS
The Company 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 the Company.
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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 THE COMPANY, CAN BE PREDICTED AT THIS
TIME. THIS SECTION ALSO SETS FORTH A BRIEF DESCRIPTION OF REGULATORY AND TARIFF
ISSUES PERTAINING TO THE OPERATION OF THE COMPANY.
The Company 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.
The Company 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.
As a telecommunications carrier, the Company is also subject to the Federal
digital wiretapping law administered by the U.S. Department of Justice and the
FCC.
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 CapRock 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 the Company.
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
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services. Entry of such companies into the domestic and international long
distance business and the emergence of other new local competitors could result
in substantial competition to the Company and may have a material adverse effect
on the financial condition, results of operations or cash flow of the Company.
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, the U.S. Court of Appeals for the Fifth Circuit recently
reversed a lower federal court decision declaring the unconstitutionality of the
preconditions to in-region long-distance in the 1996 Telecommunications Act.
Whether the Fifth Circuit's decision will be appealed, whether the United States
Supreme Court would agree to hear such an appeal and whether such an appeal
would eventually be successful cannot be predicted. If, however, the earlier
ruling on unconstitutionality were upheld on appeal it would likely have an
unfavorable effect on the ability of new entrants to compete to the extent that
the decision would remove the incentive for RBOCs to open their local markets to
competition.
On August 7, 1998, the FCC released an Order denying requests by various
ILECs that the FCC use Section 706 of the 1996 Telecommunications Act to forbear
from regulating advanced telecommunications services. Instead, the FCC
determined that advanced services are telecommunications services and that ILECs
providing advanced services are still subject to the unbundling and resale
obligations and the in-region inter-LATA restrictions of the 1996
Telecommunications Act. The FCC also proposed in a rulemaking to allow ILECs to
provide advanced services on an unregulated basis through separate subsidiaries.
The outcome of the FCC's proceeding cannot be predicted. However, if the FCC
were to forbear from regulating advanced telecommunications services, such a
decision would increase the ability of ILECs to compete against less established
carriers.
On August 10, 1998, the Eighth Circuit affirmed an FCC Order that found that
shared transport constitutes a network element that ILECs must make available to
new entrants on an unbundled basis. As
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a result of this decision, CLECs may now order transport service between end
offices, between tandem switches and between end offices and tandem switches on
an aggregated basis as an unbundled network element. As a result of this
decision, CLECs will no longer be required to purchase transport on a dedicated
basis. Whether the Eighth Circuit's decision will be appealed, whether the
United States Supreme Court would agree to hear such an appeal and whether such
an appeal would eventually be successful cannot be predicted.
DOMESTIC INTERSTATE SERVICES. Domestic interstate common carriers without
market power, such as the Company, 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 the Company secure with each of its customers
contractual agreements containing the terms of the services offered. To the
extent that disputes arise over such contacts, carriers such as the Company may
no longer resort to the legal doctrine that the terms of a filed tariff
supersede individual contract language.
INTERNATIONAL SERVICE REGULATION. The Company 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. The Company 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. The Company 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
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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. The FCC
also has recently proposed additional reforms to the ISPY to eliminate or reduce
unnecessary regulatory requirements governing arrangements between U.S. and
foreign carriers in competitive situations. The FCC has also proposed to further
streamline Section 214 license and related requirements. 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. The Company owns and maintains a variety of
telecommunications infrastructures and holds various FCC and international
licenses to transmit voice and data. The Company currently holds numerous FCC
licenses to provide land mobile, microwave and satellite communications
services. The Company holds approximately 35 FCC licenses, with approximately
300 frequency pairs for business radio service. These licenses allow the Company
to provide two-way wireless radio services along the Texas and Louisiana Gulf
Coast region and offshore to oil and gas-related companies. Each frequency pair
allows two way transmission and reception. The Company holds 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.
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
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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. The FCC's access reform order
was recently affirmed on appeal by the U.S. Court of the Appeals for the Eighth
Circuit.
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 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 recently found that the FCC has a reasonable basis for
not requiring ISPs to pay access charges. 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,
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cannot be predicted. Whether the Eighth Circuit's decision will be appealed,
whether the United States Supreme Court would agree to hear such an appeal and
whether such an appeal would eventually be successful also cannot be predicted.
The FCC is expected to address this issue in future rule-making proceedings.
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 the Company 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. The Company 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 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, CapRock could be placed at a competitive
disadvantage over larger long distance carriers. CapRock 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 CapRock cannot
be predicted.
LOCAL GOVERNMENT AUTHORIZATIONS
The Company 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 the
Company's 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.
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The Company 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, the Company has not
obtained a franchise and on May 26, 1998, the Company, 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, particularly with respect to resellers of LEC services. 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 the Company 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 the Company
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 CapRock may also face to obtain initial licensing, operational and
rate requirements in the relevant countries.
LICENSES
The Company 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, the Company 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. As each
license comes due for renewal, the Company will evaluate the need for such
license and elect to either renew the license or let it expire where, for
example, the Company expects no further use of a licensed site. These licenses
allow the Company to provide two-way wireless radio services along the Texas and
Louisiana Gulf Coast region and offshore to oil and gas-related companies. Each
frequency pair allows two-way transmission and reception. The Company holds
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. The Company holds and operates seven Ku band and two C
band fixed earth stations and holds FCC licenses that allow the Company to
locate VSAT earth stations in Texas and other U.S. locations.
The Company operates as a FCC certificated section 214 carrier to provide
resold switched telecommunications services. The Company 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.
The Company currently provides international facilities-based private line
service on a private carrier basis into Bolivia, Bosnia, Croatia, Ecuador,
Hungary and Russia. As part of the Company's plans to increase its service
offerings, the Company has obtained authority to provide dedicated services in
Louisiana and CLEC and long distance services in Arkansas, Kansas, Louisiana,
Oklahoma and Texas. In addition, the Company has been approved to have pole
attachment rights to existing or future facilities of Entergy, BellSouth and the
State of Louisiana. Pole attachment rights allow the Company to attach its own
fiber
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optic cable to such parties' respective utility poles. In addition, the
Company's installed fiber optic cable is laid under various public and private
rights-of-ways.
DIGITAL WIRETAPPING
Telecommunications carriers in the United States are subject to the
Communications Assistance to Law Enforcement Act ("CALEA") enacted in 1994 to
ensure that U.S. law enforcement would continue to be able to intercept
communications involving advanced technologies such as digital and wireless
transmission communications. CALEA imposes certain obligations on carriers to
ensure that their equipment, facilities and services will meet capability and
capacity requirements in order to provide law enforcement agencies the ability
to intercept wireline and wireless communications transmitted over those
carrier's networks. The CALEA statute provides that telecommunications carriers
must meet the required capability functions as determined by industry standards,
or be subject to fines of up to $10,000 per day upon court order. Under
procedures specified in CALEA, the U.S. Department of Justice ("DOJ") recently
filed a petition at the FCC challenging the technical capability standard
developed by the telecommunications industry. In light of the disputed standard,
several carriers sought an FCC extension of the October 25, 1998 capability
compliance deadline. The FCC recently extended the compliance date for the CALEA
capability requirements to June 30, 2000 in order to permit manufacturers
sufficient time to develop CALEA compliant equipment. Telecommunications
carriers are also subject to the CALEA capacity requirement mandating that by
March 12, 2001, carriers enable a specific number of simultaneous interceptions
determined on a geographic basis. The nature and extent of the impact the CALEA
requirements will have on telecommunications carriers cannot currently be
predicted.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides certain information regarding the directors and
executive officers of the Company as of August 31, 1998:
<TABLE>
<S> <C> <C>
Jere W. Thompson, Jr............... 41 Chairman of the Board, Chief Executive Officer
and Director
Ignatius W. Leonards............... 44 Vice Chairman of the Board, President and
Director
Kevin W. McAleer................... 48 Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
Byron M. Allen..................... 50 Executive Vice President and Director
Timothy M. Terrell................. 36 Executive Vice President
Timothy W. Rogers.................. 35 Executive Vice President and Director
Scott L. Roberts................... 37 Executive Vice President
Matthew M. Kingsley................ 33 Corporate Controller
Mark Langdale...................... 44 Director
Christopher J. Amenson............. 48 Director
John R. Harris..................... 49 Director
</TABLE>
Mr. Jere W. Thompson, Jr. has served as Chairman of the Board and Chief
Executive Officer of the Company since its formation in February 1998. Mr.
Thompson also has served as President of Telecommunications since April 1994. In
July 1992, Mr. Thompson founded the Partnership and is President of its general
partner. 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. From 1982 to 1986, Mr. Thompson worked in
commercial real estate as a broker and then with Trammell Crow Community
Development Company. 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.
Mr. Ignatius W. Leonards has served as Vice Chairman of the Board and
President of the Company since its formation in February 1998. Mr. Leonards also
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 has an industrial electronics degree from the T.H. Harris
Technical Institute in Opelousas, Louisiana.
Mr. Kevin W. McAleer has served as Senior Vice President and Chief Financial
Officer of the Company since April 1998 and as Treasurer and Secretary since
August 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
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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. Byron M. Allen has served as Executive Vice President and a Director of
the Company since its formation in February 1998. Mr. Allen also 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. Mr. Allen graduated from the University of Alabama with a
degree in Mathematics.
Mr. Timothy M. Terrell has served as Executive Vice President of the Company
since its formation in February 1998. Mr. Terrell also 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 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. From July 1988 to January 1989, Mr.
Terrell held the same position at Metromedia Long Distance. Mr. Terrell has a
B.B.A. in Marketing from Southwest Texas State University.
Mr. Timothy W. Rogers has served as Executive Vice President and a director
of the Company since its formation in February 1998. Mr. Rogers also has served
as Executive Vice President and a Director of Telecommunications since April
1994. In 1992, Mr. Rogers co-founded 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 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.
Mr. Scott L. Roberts has served as Executive Vice President of the Company
since its formation in February 1998. Mr. Roberts also 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.
Mr. Matthew M. Kingsley has served as Corporate Controller of the Company
since August 1998. From August 1996 to August 1998, Mr. Kingsley was an audit
manager for KPMG Peat Marwick LLP and also held various positions with such firm
from January 1988 until February 1992. From February 1992 until August 1996, Mr.
Kingsley held various positions, including Senior Manager of Financial Planning,
with DSC Communications Corporation, a telecommunications equipment
manufacturer. Mr. Kingsley 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. Kingsley has a B.B.A. in Accounting from the
University of Wisconsin.
Mr. Mark Langdale has served as a director of the Company since its
formation in February 1998. Mr. Langdale also has served as a Director of
Telecommunications since April 1994 and Secretary of the general partner of the
Partnership 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
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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.
Mr. Christopher J. Amenson has served as a director of the Company since
February 16, 1998. Mr. 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 and in May 1997 he became Chairman of the Board of Directors 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. John R. Harris has served as a director of the Company since August
1998. Mr. Harris 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 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.
Each director serves until the next annual meeting of shareholders and until
his successor is duly elected and qualified. The Company's Board of Directors is
currently composed of seven directors. The current directors were elected
pursuant to the Merger Agreement. Officers serve at the discretion of the the
Board of Directors. There are no family relationships among any of the directors
or named executive officers of the Company.
BOARD COMMITTEES
The Board of Directors of the Company has established a Compensation
Committee ("Compensation Committee") consisting of Christopher J. Amenson and
John R. Harris. All members of the Compensation Committee are and will be
"Non-Employee Directors" within the meaning of Rule 16b-3 under the Exchange Act
and "outside directors" within the meaning of Section 162(m) of the Code. The
Compensation Committee is responsible for establishing salaries, bonuses, and
other compensation for the Company's 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 the Company's other
executive compensation plans and programs. In the event that at any time any
member of the Compensation Committee fails to qualify as a "Non-Employee
Director" within the meaning of Rule 16b-3 under the Exchange Act, the entire
Board of Directors will also approve stock option grants and other awards.
The Board of Directors of the Company has established an audit committee
consisting of Christopher J. Amenson and John R. Harris. The audit committee is
responsible for reviewing the Company's annual audit and meeting with the
Company's independent accountants to review the Company's internal controls and
financial management practices.
DIRECTOR COMPENSATION
Directors who are employees of the Company or its subsidiaries will not
receive any compensation for service on the Board of the Directors, but will be
reimbursed by the Company for expenses incurred in attending meetings of the
Board of Directors or any committees thereof. In order to more closely align the
interests of directors and shareholders, non-employee directors of the Company
will be eligible to
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participate in the Director Stock Option Plan, pursuant to which each will be
eligible to receive Nonqualified Options.
LIMITATION OF LIABILITY
As permitted by the Texas Business Corporation Act, the Company's Articles
of Incorporation provide that the directors of the Company shall not be liable
to the Company or its shareholders for monetary damages for an act or omission
in the director's capacity as a director, except that such provision does not
authorize the elimination or limitation of liability of a director to the extent
the director is found liable for (i) a breach of the director's duty of loyalty
to the Company or its shareholders, (ii) any act or omission not in good faith
or that constitutes a breach of duty of the director to the Company or an act or
omission that involves intentional misconduct or a knowing violation of law,
(iii) any transaction from which the director derived any improper personal
benefit, whether or not the benefit resulted from an action taken within the
scope of the director's office or (iv) any act or omission for which the
liability of the director is expressly provided by statute.
As a result of this provision, the Company and its shareholders may be
unable to obtain monetary damages from a director for breach of the duty of
care. Although shareholders may continue to seek injunctive or other equitable
relief for an alleged breach of fiduciary duty by a director, shareholders may
not have any effective remedy against the challenged conduct if equitable
remedies are unavailable.
In addition, the Company's Articles of Incorporation and Bylaws provide
certain rights of indemnification for all officers and directors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth certain
compensation awarded or paid by the Company to its Chairman of the Board and
Chief Executive Officer and the other executive officers of the Company whose
total annual salary and bonus for services to the Company exceeded $100,000 in
the fiscal year ended December 31, 1997 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
1997 ANNUAL COMPENSATION COMPENSATION
AWARDS
------------------------------ ----------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY(1) BONUS OPTIONS (SHARES) COMPENSATION
- ------------------------------ ------------ ------------ ----------------- ------------
<S> <C> <C> <C> <C>
Jere W. Thompson, Jr.
Chief Executive Officer
and Chairman of the Board... $ 146,920(2) $ 100,000(3) -- $ 205,908(4)
Ignatius W. Leonards
President and Vice
Chairman of the Board....... $ 167,617 -- -- $ 19,154(5)
Timothy M. Terrell
Executive Vice President.... $ 125,781 $ 125,000(6) -- --
Timothy W. Rogers
Executive Vice President.... $ 126,814 $ 125,000(6) -- --
Scott L. Roberts
Executive Vice President.... $ 124,521 $ 125,000(6) -- $ 4,937(7)
</TABLE>
- ------------------------
(1) Under the terms of their employment agreements with the Company (which were
entered into on February 16, 1998), the annual base salary for Messrs.
Thompson, Leonards, Terrell, Rogers and Roberts through December 31, 1998
will be $180,000, $168,000, $133,333, $133,333, and $133,333, respectively,
in each case subject to increase upon review annually by the Board of
Directors.
(2) Includes $24,638 salary paid to Mr. Thompson by the Partnership.
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(3) Represents bonus amount earned from Telecommunications in fiscal year 1997
and paid in fiscal year 1998.
(4) 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.
(5) Represents (i) $8,479 earned by Mr. Leonards pursuant to an agreement
between the IWL and Kenwood Americas Corporation ("KAC") whereby Mr.
Leonards is paid 10% of the net profits of Kenwood Systems Group, Inc. (IWL
owned 50% of the outstanding capital stock of Kenwood Systems Group, Inc.,
with the other 50% owned by KAC; (ii) $1,867 of matching payments made by
IWL to Mr. Leonards' account under IWL's Retirement and Savings Plan, (iii)
$1,500 in management fees ($1,500 a month terminating in January 1997) 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.
(6) Includes $125,000 bonus earned from Telecommunications in fiscal year 1997
and paid in fiscal year 1998.
(7) Represents payment by Telecommunications of club dues for Mr. Roberts.
BENEFIT PLANS
THE EQUITY INCENTIVE PLAN
The Equity Incentive Plan was adopted and approved prior to the date hereof
by the Board of Directors (the "Board") and the shareholders of the Company. The
Equity Incentive Plan is intended to provide a means by which selected employees
of and consultants to the Company and its subsidiaries may be given an
opportunity to acquire an equity interest in the Company. The Company, by means
of the Equity Incentive Plan, will seek to retain the services of persons who
are or become employees of or consultants to the Company and its subsidiaries,
and to provide incentives for such persons to exert maximum efforts for the
success of the Company and its subsidiaries.
ADMINISTRATION
The Equity Incentive Plan is administered by a Compensation Committee
("Committee") appointed by the Board whose members serve at the pleasure of the
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 Securities
Exchange Act of 1934, as amended. If no Committee is so designated, then the
Equity Incentive Plan will be administered by the Board. The Committee has 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
determines, 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 Option, 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.
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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 Common Stock to be acquired by
the Participants and provides that a maximum of 2,500,000 shares of Common Stock
may be issued to any one Participant. In order to prevent the dilution or
enlargement of the rights of Participants under the Equity Incentive Plan, the
number of shares of Common Stock authorized by the Equity Incentive Plan is
subject to adjustment by the Board in the event of any increase or decrease in
the number of shares of outstanding Common Stock resulting from a stock
dividend, stock split, reverse stock split, merger, reorganization,
consolidation, recapitalization or other change in corporate structure affecting
the 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, consultants and other persons who
are deemed to have rendered or to be able to render significant services to the
Company or its subsidiaries and are deemed to have contributed or to have the
potential to contribute to the success of the Company. Incentive Stock Options
(as hereinafter defined) may be awarded only to persons who, at the time of such
awards, are employees of the Company or its subsidiaries.
TYPES OF AWARDS
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 the Company or any of its subsidiaries. The exercise
price of Incentive Stock Options must be at least the fair market value of a
share of the Common Stock on the date of grant (and not less than 110% of the
fair market value in the case of an Incentive Stock Option granted to an
optionee owning 10% or more of the Common Stock). The exercise price of
Non-qualified Stock Options may be less than 100% of the fair market value of a
share of the 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 the Common
Stock). However, options may be granted that provide that at any time after the
Effective Time of the Combination, 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 the Company, 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 the Company; (ii) a merger (other than the Combination) or
consolidation of the Company as a result of which the holders of all of the
voting stock of the Company prior to such event do not continue to hold either
directly or indirectly at least a majority of the Company voting stock after
such event, (iii) a sale of all or substantially all of the assets of the
Company or (iv) certain changes in the majority of the Board of Directors of the
Company during any 12 consecutive month period any portion of which is after the
Effective Time of the Combination, the option may be exercised in whole or in
part without regard to any provisions thereof. The accelerated vesting of
outstanding options upon the occurrence of such a "change in control"
transaction could have the effect of delaying, deferring, or preventing a change
in control of the Company.
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 Options, SARs may be
granted
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either at or after the time of the grant of such Non-qualified Options. In
conjunction with Incentive Stock 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 Common Stock, as determined by the
Committee) equal to the fair market value of one share of 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
Participant'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 Participant remain in the physical custody of the Company
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 Participant must remain employed by the Company 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 Stock Options, Stock Reload 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 Participant who exercises an Option by delivering already owned stock
(i.e., the stock-for-stock method) to receive back from the Company 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 the Company, 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.
TERM AND TERMINATION OF THE EQUITY INCENTIVE PLAN
The Equity Incentive Plan became effective upon shareholder approval on
August 24, 1998 of the Equity Incentive Plan ("Effective Date"). 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 Board of Directors 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 Board of Directors will not amend or terminate the Equity Incentive Plan
without shareholder approval.
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THE DIRECTOR STOCK OPTION PLAN
The Director Stock Option Plan was approved prior to the date hereof by the
Board of Directors and the shareholders of the Company. The purpose of the
Director Stock Option Plan is to encourage ownership of Common Stock by eligible
non-employee directors of the Company whose continued services are considered
essential to the Company's future progress and to provide them with a further
incentive to remain as directors of the Company. All options to be granted under
the Director Stock Option Plan will be Non-qualified Options. A total of 400,000
shares of Common Stock have been reserved for issuance under the Director Stock
Option Plan.
The Director Stock Option Plan will be administered by the Board of
Directors. The Board of Directors 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. The Company expects that each new non-employee
director of the Company, upon becoming a director, will receive option grants
under the Director Stock Option Plan. The Board of Directors 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 the Company, each outstanding option will
terminate unless otherwise provided by the Board of Directors. In the event of a
proposed sale of all or substantially all of the assets of the Company or upon
certain mergers in which the shareholders of the Company 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 Board of Directors 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 Board of Directors will not amend or terminate the
Director Stock Option Plan without shareholder approval.
EMPLOYMENT AGREEMENTS
Pursuant to the terms of the Merger Agreement, upon execution thereof, the
Company entered into an employment agreement with, among other persons, each of
Jere W. Thompson, Jr., Ignatius W. Leonards, Byron M. Allen, Scott L. Roberts,
Timothy W. Rogers, and Timothy M. Terrell. In addition, on May 11, 1998, the
Company 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 is 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 the Company,
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.
Pursuant to their Employment Agreements, Mr. McAleer has agreed to serve as
Senior Vice President and Chief Financial Officer of the Company (Mr. McAleer
also serves as Treasurer and Secretary of the Company), and Messrs. Allen,
Roberts, Rogers and Terrell have each agreed to serve as an Executive Vice
President of the Company. Messrs. McAleer, Allen, Roberts, Rogers, and Terrell
will
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receive annual salaries of $200,000, $125,000, $133,333, $133,333, and $133,333,
respectively, in each case subject to increase upon review annually by the Board
of Directors.
Each of the Employment Agreements provides that, at the discretion of the
Board of Directors, as the case may be, 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 the Company. Each of the Employment
Agreements also provides for certain insurance benefits and provides that the
employee be eligible to participate in all retirement and other benefit plans
generally available to employees of the Company and any equity or other employee
benefit plan of the Company 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 the Company, further
provides that, during the period specified therein (generally two years) 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 the Company is engaged in 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 the Company or its affiliates
or (ii) solicit any employee of the Company or its affiliates to terminate any
relationship that person may have with the Company or its affiliates or engage,
employ or compensate any employee of the Company or its affiliates.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of the Company established a Compensation Committee,
consisting of Messrs. Amenson and Harris, effective upon consummation of the
Combination. During the fiscal year ended December 31, 1997, compensation
decisions for executive officers of Telecommunications were made by the Board of
Directors of Telecommunications and compensation decisions for the officers of
the Partnership's general partner were made by its Board of Directors.
Christopher J. Amenson and Myron Goins were the sole members of IWL's
compensation committee during the fiscal year ended June 30, 1997 and during the
transition period from July 1, 1997 to December 31, 1997. The IWL Board of
Directors established its 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 of Directors
performing similar functions, and accordingly, the IWL Board of Directors
determined the compensation for the executive officers and related matters.
During the last fiscal year, no executive officer of IWL served as a member
of the Board of Directors or compensation committee of Telecommunications or the
Partnership's general partner or any entity that has one or more executive
officers serving as a member of IWL's Board of Directors or compensation
committee. During the last fiscal year, no executive officer of
Telecommunications or the Partnership's general partner served as a member of
the Board of Directors or compensation committee of IWL or any entity (other
than Telecommunications or the general partner of the Partnership) that has one
or more executive officers serving as a member of their Board.
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CERTAIN TRANSACTIONS
Caroline Fontenot, the sister of Mr. Leonards, Vice Chairman of the Board
and President of the Company, loaned 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 $33,000 remained
outstanding as of June 30, 1998. In connection with the completion of the
Combination in August 1998 (and the disbursement to the Company of the net
proceeds from the Private Offering being held in escrow), the Company utilized a
portion of the net proceeds from the Private Offering to repay the loan in full.
IWL paid to Mr. Leonards during the year ended December 31, 1996 and the
year ended December 31, 1997, $18,000 and $1,500, respectively, in management
fees for management rights granted by Mr. Leonards to IWL with respect to one of
Mr. Leonards' properties. Such fees were equal to $1,500 a month and terminated
in January 1997.
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, as of the date of
this Prospectus, 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. From January 1998 to August 1998,
Telecommunications contributed a total of $155,000 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.
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, 1995, The Williamsburg Corporation converted $750,000 of
the outstanding principal and interest 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, and $223,088 for the six months ended June 30, 1998. 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. The administrative services agreement
was terminated upon completion of the Combination.
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 and $498,960 for the six months
ended June 30, 1998. Telecommunications believes that the prices charged for
such services do not exceed prices charged by unrelated parties for such
services. Pricing of private line services is a function of the capacity, term
and distance of the circuit involved. Circuits are usually available
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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 the Company and of Telecommunications,
relating to 334 shares of common stock of Telecommunications 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, $128,166 and $78,166 as of December 31, 1996, 1997 and
June 30, 1998, respectively. The unamortized discount was $37,173 at December
31, 1996 and $21,834 as of December 31, 1997 and June 30, 1998, respectively. In
connection with the completion of the Combination in August 1998 (and the
disbursement to the Company of the net proceeds from the Private Offering being
held in escrow), the Company utilized a portion of the net proceeds from the
Private Offering to repay the notes in full.
Telecommunications had a revolving credit facility with Bank One, Texas,
N.A. in the amount of $2,500,000, which was guaranteed by Jere W. Thompson, Jr.
In connection with the completion of the Combination in August 1998 (and the
disbursement to the Company of the net proceeds from the Private Offering being
held in escrow), the Company utilized a portion of the net proceeds from the
Private Offering to repay in full all amounts outstanding under the line of
credit. In connection with such payoff, Mr. Thompson was released from his
guaranty.
Mark Langdale (a director of the Company), 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, which was repaid on August 27, 1998 totaling $439,602. Each
guarantor 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 increased 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, and accrued
interest thereon, as of December 31, 1996 and 1997 and June 30, 1998 were
approximately $208,000 and $406,000 and $431,000, respectively. Additionally, in
exchange for Mark Langdale remaining on his joint and several guaranty, the
Partnership agreed to pay him $20,000 which was paid in 1998. In connection with
the completion of the Combination in August 1998 (and the disbursement to the
Company of the net proceeds from the Private Offering being held in escrow), the
Company utilized a portion of the net proceeds from the Private Offering to pay
in full all of such commitment and guaranty fees.
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PRINCIPAL SHAREHOLDERS
The following table sets forth information concerning the beneficial
ownership of Common Stock of the Company as of August 31, 1998, by (i) each
person or group of persons known by the Company to beneficially own more than
five percent (5%) of the outstanding shares of Common Stock, (ii) each named
executive officer, director or director nominee of the Company and (iii) all of
the current executive officers and directors of the Company as a group. The
information contained in this table with respect to beneficial ownership
reflects "beneficial ownership" as defined in Rule 13d-3 under the Exchange Act,
which means generally any person who, directly or indirectly, has or shares
voting power or investment power with respect to a security. Shares of 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 August 31, 1998
are treated as outstanding only when determining the amount and percentage of
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 the Company 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 Mr. Leonards, is
12000 Aerospace Ave., Suite 200, Houston, Texas 77034. The address for Messrs.
Thompson, Rogers, Roberts, Terrell, 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) ........................................... 10,773,898 37.3%
Ignatius W. Leonards(3) ............................................ 1,897,528 6.6%
Timothy W. Rogers .................................................. 2,883,628 10.0%
Scott L. Roberts ................................................... 2,883,628 10.0%
Timothy M. Terrell ................................................. 2,883,628 10.0%
Mark Langdale(4) ................................................... 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
John R. Harris ..................................................... 7,000 *
c/o Electronic Data Systems Corporation
5400 Legacy Drive
Plano, Texas 75024
Jere W. Thompson, Sr.(5) ........................................... 10,657,170 36.9%
Two Turtle Creek Village
3838 Oak Lawn Ave., Suite 1850
Dallas, TX 75219
Greenway Holdings, L.P.(2) ......................................... 2,014,082 7.0%
CapRock Investors(2) ............................................... 8,650,884 29.9%
All executive officers and directors as a group
(eleven persons) ................................................. 24,020,046 83.1%
</TABLE>
- ------------------------
* Less than 1% of the outstanding shares of the class.
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(1) Based upon 28,911,231 shares of Common Stock issued and outstanding.
(2) Represents 8,650,884 shares held of record by CapRock Investors, 108,932
shares held of record by CapRock Systems, Inc. and 2,014,082 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 12,666 shares held by Ignatius W. Leonards as custodian for minor
children.
(4) 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.
(5) Includes 1,302,283 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 1,302,283 shares held by The Williamsburg
Corporation.
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DESCRIPTION OF THE NOTES
The Private Notes were, and the Exchange Notes will be, issued under the
Indenture, dated as of July 16, 1998, among the Company, Telecommunications, the
Partnership, IWL and PNC Bank, National Association, as trustee under the
Indenture (the "Trustee"). Upon issuance of the Exchange Notes, the Indenture
will be subject to the Trust Indenture Act of 1939, as amended (the "TIA" or the
"Trust Indenture Act"). The following summary contains a description of certain
provisions of the Indenture and the Exchange Notes but does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the provisions of the Exchange Notes and the Indenture, including the
definitions of certain terms contained therein and those terms made part of the
Indenture through the incorporation by reference of the TIA. Capitalized terms
used herein but not otherwise defined have the meanings attributed to them in
the Indenture and the Notes. For definitions of certain capitalized terms used
in the following summary, see "--Certain Definitions." The Indenture has been
filed as an exhibit to the Registration Statement, of which this Prospectus is a
part, and copies of the Indenture are available upon request from the Company.
For purposes of this section, references to the "Issuer" mean the Company only
and not its subsidiaries. As a result of and effective upon the consummation of
the Combination, Telecommunications and the Partnership no longer are
co-obligors under the Private Notes (and IWL has been released from any
obligations thereunder).
GENERAL
The Exchange Notes will be general unsecured unsubordinated obligations of
the Company, limited to $150,000,000 aggregate principal amount, and will mature
on July 15, 2008. Each Exchange Note will bear interest at the rate shown on the
front cover of this Offering Memorandum from the Closing Date or from the most
recent Interest Payment Date to which interest has been paid or provided for,
payable semiannually (to Holders of record at the close of business on the
January 1 or July 1 immediately preceding the Interest Payment Date) on January
15 and July 15 of each year, commencing January 15, 1999. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months. The
circumstances under which the Company may be required to pay additional interest
in cash on the Private Notes are described above under "The Exchange
Offer--Purpose and Effect of the Exchange Offer."
Principal of, premium, if any, and interest on the Exchange Notes will be
payable, and the Exchange Notes may be exchanged or transferred, at the office
or agency of the Issuer in the Borough of Manhattan, The City of New York;
PROVIDED that, at the option of the Issuer, payments of interest may be made by
check mailed to the Holders at their addresses as they appear in the Security
Register.
The Exchange Notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 principal amount and any integral multiple
thereof. See "Book-Entry; Delivery and Form." No service charge will be made for
any registration of transfer or exchange of the Exchange Notes, but the Issuer
may require payment of a sum sufficient to cover any transfer tax or other
similar governmental charge payable in connection therewith.
OPTIONAL REDEMPTION
The Exchange Notes will be redeemable, at the Issuer's option, in whole or
in part, at any time or from time to time, on or after July 15, 2003 and prior
to maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each Holder's last address, as it appears in the Security
Register, at the following Redemption Prices (expressed in percentages of
principal amount), plus accrued and unpaid interest to the Redemption Date
(subject to the right of Holders of record on the relevant
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record date that is prior to the Redemption Date to receive interest due on an
Interest Payment Date), if redeemed during the 12-month period beginning on July
15 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2003............................................................................. 106.000%
2004............................................................................. 104.000%
2005............................................................................. 102.000%
2006 and thereafter.............................................................. 100.000%
</TABLE>
If less than all of the Notes are to be redeemed at any time, the Trustee
will select the Notes, or portions thereof, for redemption in compliance with
the requirements of the principal national securities exchange, if any, on which
the Notes are listed or, if the Notes are not listed on a national securities
exchange, on a pro rata basis, by lot or by such other method as the Trustee in
its sole discretion shall deem to be fair and appropriate; PROVIDED that no Note
of $1,000 in principal amount or less shall be redeemed in part. If any Note is
to be redeemed in part only, the notice of redemption relating to such Note
shall state the portion of the principal amount thereof to be redeemed. A new
Note in principal amount equal to the unredeemed portion thereof will be issued
in the name of the Holder thereof upon cancellation of the original Note.
NOTES CALLED FOR REDEMPTION CEASE TO BE OUTSTANDING
Notes called for redemption in accordance with the terms of the Indenture
will be deemed to be paid and discharged and cease to be outstanding, and
interest on such Notes will cease to accrue, from and after the date set for
redemption if the Issuer has deposited with the Trustee, in trust, money and/or
Temporary Cash Investments that, through the payment of interest and principal
in respect thereof in accordance with their terms, will provide money in an
amount sufficient to pay the principal of, premium, if any, and accrued interest
on the Notes on the Redemption Date in accordance with the terms of the
Indenture and the Notes.
RANKING
The Indebtedness evidenced by the Notes will rank PARI PASSU in right of
payment with all existing and future unsecured senior indebtedness of each
Issuer and senior in right of payment to all existing and future indebtedness of
each Issuer expressly subordinated in right of payment to the Notes. After
giving pro forma effect to the Private Offering, the application of the net
proceeds therefrom and the Combination, as of June 30, 1998, the Company and its
subsidiaries, on a consolidated basis, would have had approximately $19 million
of liabilities (excluding intercompany payables and the Private Notes), all of
which would have been liabilities of subsidiaries of the Company and all of
which would have been structurally senior to the Notes.
The Issuer is permitted to incur additional indebtedness, including
indebtedness under the Credit Facility and indebtedness incurred to finance the
acquisition of certain assets, and is permitted to secure any such Indebtedness
and certain other Indebtedness, including indebtedness under the Credit Facility
and indebtedness incurred to finance the acquisition of certain assets. The
Notes will be effectively subordinated to such security interests to the extent
of such security interests.
The Company is a holding company with no direct operations and no
significant assets other than the stock and other equity interests of its
subsidiaries. The Company's subsidiaries have no direct obligation to pay
amounts due on the Notes and will not guarantee the Notes. As a result, the
Notes will be effectively subordinated to all existing and future indebtedness
and other liabilities (including trade payables) of the Company's subsidiaries.
After giving pro forma effect to the Private Offering, and the application of
the net proceeds therefrom, and the Combination, as of June 30, 1998, the
Company's subsidiaries would have had approximately $19 million of liabilities
(excluding intercompany payables and the Private Notes), all of
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which would have been structurally senior to the Notes. The Company will be
dependent upon access to the cash flow or assets of its subsidiaries to make
payments on the Notes, and the Company's ability to obtain such access may be
limited by law. See "Risk Factors--Holding Company Structure; Structural
Subordination."
The Indenture contains, among others, the following covenants:
LIMITATION ON INDEBTEDNESS. The Indenture provides that the Issuer will
not, and will not permit any of its Restricted Subsidiaries to, Incur any
Indebtedness (including Acquired Indebtedness) other than Permitted
Indebtedness; PROVIDED that the Issuer may Incur Indebtedness, in addition to
Permitted Indebtedness, if, after giving effect to the Incurrence of such
Indebtedness and the receipt and application of the proceeds thereof, (i) the
Consolidated Leverage Ratio would be less than or equal to 7.0 to 1, for
Indebtedness Incurred on or prior to June 30, 2000, or less than or equal to 5.0
to 1, for Indebtedness Incurred thereafter and (ii) no Default or Event of
Default shall have occurred and be continuing or occur as a consequence of the
actions set forth in this covenant.
Notwithstanding any other provision of the foregoing "Limitation on
Indebtedness" covenant, the maximum amount of Indebtedness that the Issuer or a
Restricted Subsidiary may Incur pursuant to this "Limitation on Indebtedness"
covenant shall not be deemed to be exceeded due solely to the result of
fluctuations in the exchange rates of currencies.
For purposes of determining any particular amount of Indebtedness under this
"Limitation on Indebtedness" covenant, (1) Guarantees, Liens or obligations with
respect to letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included and (2) any Liens
granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with the foregoing
"Limitation on Indebtedness" covenant, in the event that an item of Indebtedness
meets the criteria of more than one of the types of Indebtedness described in
the definition of "Indebtedness", the Issuer, in its sole discretion, shall
classify such item of Indebtedness and only be required to include the amount
and type of such Indebtedness in one of such clauses.
LIMITATION ON RESTRICTED PAYMENTS. The Indenture provides that the Issuer
will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, make any Restricted Payment if, at the time of, and after giving
effect to, the proposed Restricted Payment: (A) a Default or Event of Default
shall have occurred and be continuing, (B) the Issuer could not Incur at least
$1.00 of Indebtedness under clause (i) of the first paragraph of the "Limitation
on Indebtedness" covenant or (C) the aggregate amount of all Restricted Payments
(the amount, if other than in cash, to be determined in good faith by the Board
of Directors of the Issuer, whose determination shall be conclusive and
evidenced by a Board Resolution) made after the Closing Date shall exceed the
sum of:
(1) 50% of the aggregate amount of the Adjusted Consolidated Net Income
(or, if the Adjusted Consolidated Net Income is a loss, minus 100% of the
amount of such loss) accrued on a cumulative basis during the period (taken
as one accounting period) beginning on the first day of the fiscal quarter
commencing immediately following the Closing Date and ending on the last day
of the last fiscal quarter preceding the Calculation Date for which reports
have been filed with the Commission or provided to the Trustee pursuant to
the "Commission Reports and Reports to Holders" covenant, plus
(2) the aggregate Net Cash Proceeds received by the Issuer after the
Closing Date (and, in the event the Transaction is consummated, the
aggregate Net Cash Proceeds received by Telecommunications, the Partnership
or IWL during the Transition Period), from a capital contribution from, or
the issuance and sale permitted by the Indenture to, a Person who is not a
Subsidiary of the Issuer (or Telecommunications, the Partnership or IWL, if
applicable) of (a) its Capital Stock (other than Redeemable Stock), (b) any
options, warrants or other rights to acquire its Capital Stock (in each
case, exclusive of any Redeemable Stock or any options, warrants or other
rights that are redeemable
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at the option of the holder, or are required to be redeemed, prior to the
Stated Maturity of the Notes) and (c) Indebtedness of the Issuer (and
Telecommunications, the Partnership or IWL during the Transition Period) or
a Restricted Subsidiary that has been exchanged for or converted into
Capital Stock of the Issuer (or Telecommunications, the Partnership or IWL,
if applicable) (other than Redeemable Stock) or such options, warrants or
other rights, in each case except to the extent such Net Cash Proceeds are
used to Incur Indebtedness permitted under clause (viii) of the definition
of "Permitted Indebtedness", plus
(3) an amount equal to the net reduction in Investments (other than
reductions in Permitted Investments and reductions in Investments made
pursuant to clause (vi) of the second paragraph of this "Limitation on
Restricted Payments" covenant) in any Person resulting from payments of
interest on Indebtedness, dividends, repayments of loans or advances, or
other transfers of assets, in each case to the Issuer (or
Telecommunications, the Partnership or IWL during the Transition Period) or
any Restricted Subsidiary or from the Net Cash Proceeds from the sale of any
such Investment (except, in each case, to the extent any such payment or
proceeds is included in the calculation of Adjusted Consolidated Net
Income), or from redesignations of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed, in each case, the amount of Investments
previously made by the Issuer (or Telecommunications, the Partnership or
IWL, if applicable) or any Restricted Subsidiary in such Person or
Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of:
(i) the payment of any dividend within 60 days after the date of
declaration thereof if, at such date of declaration, such payment would
comply with the foregoing paragraph;
(ii) the purchase, redemption, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of
payment to the Notes, including premium, if any, and accrued and unpaid
interest thereon to the date of payment, with the proceeds of, or in
exchange for, Indebtedness Incurred under clause (iii) of the definition of
"Permitted Indebtedness";
(iii) the purchase, redemption or other acquisition or retirement for
value of Capital Stock of the Issuer (or options, warrants or other rights
to acquire such Capital Stock) in exchange for, or out of the proceeds of a
substantially concurrent offering to a Person who is not a Subsidiary of the
Issuer of, shares of Capital Stock (other than Redeemable Stock) of the
Issuer (or options, warrants or other rights to acquire such Capital Stock
(exclusive of any options, warrants or other rights that are redeemable at
the option of the holder, or are required to be redeemed, prior to the
Stated Maturity of the Notes)) including in connection with a "cashless"
exercise of an option, warrant or right;
(iv) the making of any principal payment or the purchase, redemption,
retirement, defeasance or other acquisition for value of Indebtedness of the
Issuer which is subordinated in right of payment to the Notes, including
premium, if any, and accrued and unpaid interest thereon to the date of
payment, in exchange for, or out of the proceeds of, a substantially
concurrent offering to a Person who is not a Subsidiary of the Issuer of,
shares of the Capital Stock (other than Redeemable Stock) of the Issuer (or
options, warrants or other rights to acquire such Capital Stock (exclusive
of any options, warrants or other rights that are redeemable at the option
of the holder, or are required to be redeemed, prior to the Stated Maturity
of the Notes));
(v) payments or distributions to dissenting stockholders pursuant to
applicable law in connection with the Transaction or the Special Partnership
Transaction or any consolidation, merger or transfer of assets that complies
with the provisions of the Indenture applicable to mergers, consolidations
and transfers of all or substantially all of the property and assets of the
Issuer;
(vi) Investments in any Person that is in the Telecommunications
Business on the date of such Investments; PROVIDED that the aggregate amount
of Investments made pursuant to this clause (vi) does not exceed the sum of
(x) $50 million plus (y) the amount of Net Cash Proceeds received by the
Issuer after the Closing Date (and, in the event the Transaction is
consummated, the aggregate
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Net Cash Proceeds received by Telecommunications, the Partnership or IWL
during the Transition Period) as a capital contribution or from the sale of
Capital Stock (other than Redeemable Stock) of the Issuer (or options,
warrants or other rights to acquire such Capital Stock (exclusive of any
options, warrants or other rights that are redeemable at the option of the
holder, or are required to be redeemed, prior to the Stated Maturity of the
Notes)) to a Person who is not a Subsidiary of the Issuer (or
Telecommunications, the Partnership or IWL, if applicable), except to the
extent such Net Cash Proceeds are used to Incur Indebtedness pursuant to
clause (viii) under the definition of "Permitted Indebtedness" or to make
Restricted Payments pursuant to clause (C)(2) of the first paragraph, or
clauses (iii) or (iv) of this paragraph, of this "Limitation on Restricted
Payments" covenant, plus (z) the net reduction in Investments made pursuant
to this clause (vi) resulting from distributions on or repayments of such
Investments or from the Net Cash Proceeds from the sale of any such
Investment (except in each case to the extent any such payment or proceeds
is included in the calculation of Adjusted Consolidated Net Income) or from
such Person becoming a Restricted Subsidiary (valued in each case as
provided in the definition of "Investments"); PROVIDED that the net
reduction in any Investment shall not exceed the amount of such Investment;
(vii) the purchase, redemption or other retirement or acquisition for
value of shares of Capital Stock of the Issuer to the extent necessary, in
the judgment of the Board of Directors of the Issuer, to prevent the loss or
secure the renewal or reinstatement of any license or franchise held by the
Issuer or any Restricted Subsidiary from any governmental agency;
(viii) the purchase, redemption or other retirement or acquisition for
value of shares of Capital Stock of the Issuer, or options, warrants or
other rights to purchase such shares, held by directors, employees, or
former directors or employees of the Issuer or any Restricted Subsidiary (or
their estates or beneficiaries under their estates) upon their death,
disability, retirement or termination of employment or pursuant to the terms
of any agreement under which such shares of Capital Stock or options were
issued; PROVIDED that the aggregate consideration paid for such purchase,
redemption or other retirement or acquisition for value of such shares of
Capital Stock or options, warrants or rights after the Closing Date does not
exceed $2 million in any calendar year, or $5 million in the aggregate;
(ix) Investments acquired (x) as a capital contribution to the Issuer or
a Restricted Subsidiary or (y) in exchange for Capital Stock (other than
Redeemable Stock) of the Issuer (or options, warrants or other rights to
acquire such Capital Stock (exclusive of any options, warrants or other
rights that are redeemable at the option of the holder, or are required to
be redeemed, prior to the Stated Maturity of the Notes)) so long as
immediately after giving effect to such transaction described in clause (y)
above no Default or Event of Default shall have occurred and be continuing;
(x) the purchase, redemption, defeasance or other acquisition or
retirement for value of Indebtedness of the Issuer which is subordinated in
right of payment to the Notes, including premium, if any, and accrued and
unpaid interest thereon to the date of payment, at a price not greater than
101% of the principal amount thereof plus any accrued and unpaid interest
thereon to the date of repayment in the event of a Change of Control in
accordance with provisions similar to the "Change of Control" covenant;
PROVIDED that prior to such purchase, redemption, defeasance or other
acquisition or retirement, the Issuer has made the Change of Control Offer
as provided in such covenant with respect to the Notes and has purchased all
Notes validly tendered for payment in connection with such Change of Control
Offer; or
(xi) any payment, distribution, repurchase or other transaction that,
but for this provision, would constitute a Restricted Payment but only to
the extent that the aggregate amount of such payments, distributions,
repurchases and other transactions do not exceed $10 million.
The actions described in clauses (i), (v), (vi), (vii), (viii), (x) and (xi)
of the immediately preceding paragraph will be Restricted Payments that will be
permitted in accordance with the immediately preceding paragraph but will reduce
the amount that would otherwise be available for Restricted Payments under
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clause (C) of the first paragraph of this "Limitation on Restricted Payments"
covenant. The actions described in clauses (ii), (iii), (iv) and (ix) of the
immediately preceding paragraph will be Restricted Payments that will be
permitted in accordance with the immediately preceding paragraph and will not
reduce the amount that would otherwise be available for Restricted Payments
under clause (C) of the first paragraph of this "Limitation on Restricted
Payments" covenant.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. The Indenture provides that the Issuer will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any consensual encumbrance or
restriction of any kind on the ability of any Restricted Subsidiary to (i) pay
dividends, in cash or otherwise, or make any other distributions permitted by
applicable law on any Capital Stock or any other interest or participation in,
or measured by, its profits of such Restricted Subsidiary owned by the Issuer or
any other Restricted Subsidiary, (ii) pay any Indebtedness owed to the Issuer or
any other Restricted Subsidiary, (iii) make loans or advances to the Issuer or
any other Restricted Subsidiary or (iv) transfer any of its property or assets
to the Issuer or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions:
(i) existing on the Closing Date in the Indenture or any other
agreements in effect on the Closing Date, and any extensions, refinancings,
renewals or replacements of such agreements; PROVIDED that the encumbrances
and restrictions in any such extensions, refinancings, renewals or
replacements are no less favorable in any material respect to the Holders
than those encumbrances or restrictions that are then in effect and that are
being extended, refinanced, renewed or replaced;
(ii) existing under or by reason of applicable law;
(iii) existing with respect to any Person or the property or assets of
such Person acquired by the Issuer or any Restricted Subsidiary and existing
at the time of such acquisition and not incurred in contemplation thereof,
which encumbrances or restrictions are not applicable to any Person or the
property or assets of any Person other than such Person or the property or
assets of such Person so acquired;
(iv) in the case of clause (iv) of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenants, (A) that restrict in a customary manner the
subletting, assignment or transfer of any property or asset that is a lease,
license, conveyance or contract or similar property or asset, (B) existing
by virtue of any transfer of, agreement to transfer, option or right with
respect to, or Lien on, any property or assets of the Issuer or any
Restricted Subsidiary not otherwise prohibited by the Indenture or (C)
arising or agreed to in the ordinary course of business, not relating to any
Indebtedness, and that do not, individually or in the aggregate, detract
from the value of property or assets of the Issuer or any Restricted
Subsidiary in any manner material to the Issuer or any Restricted
Subsidiary;
(v) with respect to a Restricted Subsidiary and imposed pursuant to an
agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock of, or property and assets of, such
Restricted Subsidiary; or
(vi) pursuant to (x) a Credit Facility, (y) a Vendor Credit Facility or
(z) any agreement which amends, extends, renews, refinances, replaces or
refunds a Credit Facility or Vendor Credit Facility; PROVIDED, HOWEVER, that
in the case of subclauses (x), (y) and (z), the provisions of the Credit
Facility or Vendor Credit Facility (A) permit (whether explicitly or as a
result of the relative maturities of the Credit Facility, the Vendor Credit
Facility and the Notes) distributions to the Issuer for the purposes of, and
in an amount sufficient to fund, the payment of principal due at stated
maturity and interest in respect of the Notes (PROVIDED, in either case,
that such payment is due or to become due within 30 days from the date of
such distribution) at a time when there does not exist an event which after
notice or passage of time or both would permit the lenders under the Credit
Facility or Vendor Credit
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Facility to declare all amounts thereunder due and payable, and (B) provide
that in no event shall any encumbrance or restriction pursuant to the Credit
Facility or Vendor Credit Facility prohibit distributions to the Issuer for
such purposes for more than 180 days in any consecutive 360 day period,
unless (1) there exists a default under the Credit Facility or Vendor Credit
Facility resulting from any payment default under the Credit Facility or
Vendor Credit Facility or (2) the maturity of the Credit Facility or Vendor
Credit Facility has been accelerated.
Nothing contained in this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant shall prevent the
Issuer or any Restricted Subsidiary from (1) creating, incurring, assuming or
suffering to exist any Liens otherwise permitted by the "Limitation on Liens"
covenant described below or (2) restricting the sale or other disposition of
property or assets of the Issuer or any of its Restricted Subsidiaries subject
to such Liens.
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. The Indenture provides that the Issuer will not sell, pledge,
hypothecate or otherwise convey or dispose of any Capital Stock of a Restricted
Subsidiary or permit any Restricted Subsidiary, directly or indirectly, to
issue, sell pledge, hypothecate or otherwise convey or dispose of, any shares of
Capital Stock of a Restricted Subsidiary (including options, warrants or other
rights to purchase shares of such Capital Stock) except:
(i) to the Issuer or a Wholly Owned Restricted Subsidiary,
(ii) issuances of director's qualifying shares or other issuances or
sales to the extent required by applicable law or regulation,
(iii) issuances or sales of 100% of the Capital Stock of a Restricted
Subsidiary, PROVIDED that the Issuer or such Restricted Subsidiary applies
the Net Cash Proceeds, if any, of any such sale pursuant to this clause
(iii) in accordance with clause (A) or (B) of the "Limitation on Asset
Sales" covenant described below,
(iv) issuances or sales in a transaction if, immediately after giving
effect thereto, such Restricted Subsidiary would no longer be a Restricted
Subsidiary if (A) such transaction does not violate the "Limitation on Asset
Sales" covenant and (B) any Investment in such Person remaining after giving
effect to such transaction would not violate the "Limitation on Restricted
Payments" covenant if made at the date of such issuance or sale,
(v) pursuant to a Credit Facility or a Vendor Credit Facility,
(vi) issuances or sales of Redeemable Stock in exchange for, or upon
conversion of, or the proceeds from the issuance or sale of which are used
to refinance, shares of Redeemable Stock of such Restricted Subsidiary if
the amounts payable with respect to the redemption of such newly issued or
sold Redeemable Stock do not exceed the amount payable with respect to the
redemption of the Redeemable Stock being exchanged, converted or refinanced
and such newly issued or sold Redeemable Stock does not require any
redemption earlier than the date on which the Redeemable Stock being
exchanged, converted or refinanced required a redemption,
(vii) issuances or sales of Redeemable Stock (other than Redeemable Stock
convertible into or exchangeable for Common Stock of any Restricted
Subsidiary) that does not otherwise violate the provisions of the Indenture,
or
(viii) in the Transaction or the Special Partnership Transaction.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES. The
Indenture provides that the Issuer will not permit any Restricted Subsidiary,
directly or indirectly, to Guarantee any Indebtedness of the Issuer which is
PARI PASSU in right of payment with, or subordinate in right of payment to, the
Notes ("Guaranteed Indebtedness"), unless:
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(i) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the Indenture providing for a Guarantee (a
"Subsidiary Guarantee") of payment of the Notes by such Restricted
Subsidiary and
(ii) such Restricted Subsidiary waives, and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the
Issuer or any other Restricted Subsidiary as a result of any payment by such
Restricted Subsidiary under its Subsidiary Guarantee;
PROVIDED that this paragraph shall not be applicable to (x) any Guarantee of any
Restricted Subsidiary that existed at the time such Person became a Restricted
Subsidiary and was not Incurred in connection with, or in contemplation of, such
Person becoming a Restricted Subsidiary or (y) any Guarantee of any Restricted
Subsidiary of Indebtedness Incurred under Credit Facilities or Vendor Credit
Facilities pursuant to clause (ix) of the definition of "Permitted
Indebtedness". If the Guaranteed Indebtedness is (A) PARI PASSU in right of
payment with the Notes, then the Guarantee of such Guaranteed Indebtedness shall
be PARI PASSU in right of payment with, or subordinated in right of payment to,
the Subsidiary Guarantee or (B) subordinated in right of payment to the Notes,
then the Guarantee of such Guaranteed Indebtedness shall be subordinated in
right of payment to the Subsidiary Guarantee at least to the extent that the
Guaranteed Indebtedness is subordinated in right of payment to the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Issuer, of all of the Issuer's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
LIMITATION ON TRANSACTIONS WITH STOCKHOLDERS AND AFFILIATES. The Indenture
provides that the Issuer will not, and will not permit any Restricted Subsidiary
to, directly or indirectly, enter into, renew or extend any transaction
(including, without limitation, the purchase, sale, lease or exchange of
property or assets, or the rendering of any service) with any holder (or any
Affiliate of such holder) of 5% or more of any class of Capital Stock of the
Issuer or with any Affiliate of the Issuer or any Restricted Subsidiary, except
(a) in writing (other than the payment of salaries or bonuses to officers of the
Issuer or any Restricted Subsidiary in the ordinary course of business which
need not be in writing) upon fair and reasonable terms no less favorable in any
material respect to the Issuer or such Restricted Subsidiary than could be
obtained, at the time of the execution of the agreement providing therefor, in a
comparable arm's-length transaction with a Person that is not such a holder or
an Affiliate, (b) with respect to any transaction or series of related
transactions involving an aggregate value in excess of $5 million, if the Issuer
delivers an Officers' Certificate to the Trustee certifying that such
transaction or series of related transactions complies with clause (a) above,
and (c) with respect to any transaction or series of related transactions
involving an aggregate value in excess of $10 million, if either (1) such
transaction or series of related transactions has been approved by a majority of
the Disinterested Directors of the Issuer, or in the event there is only one
Disinterested Director, by such Disinterested Director, or (2) the Issuer
delivers to the Trustee a written opinion of an investment banking firm of
national standing or other recognized independent expert with experience
appraising the terms and conditions of the type of transaction or series of
related transactions for which an opinion is required stating that the
transaction or series of related transactions is fair to the Issuer or such
Subsidiary from a financial point of view.
The foregoing limitation does not limit, and shall not apply to:
(i) any transaction solely between the Issuer and any of its Wholly
Owned Restricted Subsidiaries or solely between Wholly Owned Restricted
Subsidiaries;
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(ii) the payment of reasonable and customary regular fees to directors
of the Issuer who are not employees of the Issuer;
(iii) any payments or other transactions pursuant to any tax-sharing
agreement between the Issuer and any other Person with which the Issuer
files a consolidated tax return or with which the Issuer is part of a
consolidated group for tax purposes;
(iv) any Restricted Payments not prohibited by the "Limitation on
Restricted Payments" covenant;
(v) the Transaction or the Special Partnership Transaction; or
(vi) any transaction or agreement as described in this Offering
Memorandum and as in effect as of the date of this Offering Memorandum.
LIMITATION ON LIENS. The Indenture provides that the Issuer will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, create,
incur, assume or suffer to exist any Lien on any of its assets or properties of
any character, or any shares of Capital Stock or Indebtedness of any Restricted
Subsidiary, without making effective provision for all of the Notes and all
other amounts due under the Indenture to be directly secured equally and ratably
with (or, if the obligation or liability to be secured by such Lien is
subordinated in right of payment to the Notes, prior to) the obligation or
liability secured by such Lien. The foregoing limitation does not apply to
Permitted Liens.
LIMITATION ON SALE-LEASEBACK TRANSACTIONS. The Indenture provides that the
Issuer will not, and will not permit any Restricted Subsidiary to, enter into
any sale-leaseback transaction involving any of its assets or properties,
whether now owned or hereafter acquired, whereby the Issuer or a Restricted
Subsidiary sells or transfers such assets or properties and then or thereafter
leases such assets or properties or any part thereof or any other assets or
properties which the Issuer or such Restricted Subsidiary, as the case may be,
intends to use for substantially the same purpose or purposes as the assets or
properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if
(i) the lease is for a period, including renewal rights, of not in
excess of three years;
(ii) the lease secures or relates to industrial revenue or pollution
control bonds;
(iii) the transaction is solely between the Issuer and any Wholly Owned
Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or
(iv) the Issuer or such Restricted Subsidiary, within 12 months after
the sale or transfer of any assets or properties is completed, applies an
amount not less than the net proceeds received from such sale in accordance
with clause (A) or (B) of the first paragraph of the "Limitation on Asset
Sales" covenant described below.
LIMITATION ON ASSET SALES. The Indenture provides that the Issuer will not,
and will not permit any Restricted Subsidiary to, consummate any Asset Sale,
unless (i) the consideration received by the Issuer or such Restricted
Subsidiary is at least equal to the fair market value of the assets sold or
disposed of and (ii) at least 75% of the consideration received consists of cash
or Temporary Cash Investments (with the amount of Indebtedness and liabilities
of the Issuer or a Restricted Subsidiary that are unconditionally assumed by the
transferee being deemed to be cash for purposes of this covenant). In the event
and to the extent that the Net Cash Proceeds received by the Issuer or any of
its Restricted Subsidiaries from one or more Asset Sales occurring on or after
the Closing Date in any period of 12 consecutive months exceed the greater of
$10 million and 10% of Adjusted Consolidated Net Tangible Assets (determined as
of the date closest to the commencement of such 12-month period for which a
consolidated balance sheet of the Issuer and its Subsidiaries has been filed
with the Commission or provided to the Trustee pursuant to the "Commission
Reports and Reports to Holders" covenant (or, if such determination date is
prior to the date of the consummation of the Transaction or Special Partnership
Transaction, then the balance sheet of the Issuer as of such date shall be
adjusted to give PRO FORMA effect to the Transaction or Special
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Partnership Transaction, as the case may be, as if such transaction had occurred
on such determination date, together with an Officers' Certificate certifying
that such balance sheet has been prepared in accordance with GAAP and is true
and correct in all material respects)), then the Issuer shall or shall cause the
relevant Restricted Subsidiary to (i) within 12 months after the date Net Cash
Proceeds so received exceed the greater of $10 million and 10% of Adjusted
Consolidated Net Tangible Assets (A) apply an amount equal to such excess Net
Cash Proceeds to permanently repay unsubordinated Indebtedness of the Issuer or
any Restricted Subsidiary providing a Subsidiary Guarantee pursuant to the
"Limitation on Issuances of Guarantees by Restricted Subsidiaries" covenant
described above or Indebtedness of any other Restricted Subsidiary, in each case
owing to a Person other than the Issuer or any of its Subsidiaries, or (B)
invest an amount equal to such excess Net Cash Proceeds, or the amount of such
Net Cash Proceeds not so applied pursuant to clause (A) (or enter into a
definitive agreement committing to so invest within 12 months after the date of
such agreement), in Telecommunications Assets and (ii) apply (no later than the
end of the 12-month period referred to in clause (i)) such excess Net Cash
Proceeds (to the extent not applied pursuant to clause (i)) as provided in the
following paragraph of this "Limitation on Asset Sales" covenant. The amount of
such excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such 12-month period as set forth in clause (i) of the preceding
sentence and not applied as so required by the end of such period shall
constitute "Excess Proceeds." Pending the final application of any such Net Cash
Proceeds, the Issuer or such Restricted Subsidiary may invest such funds in
Temporary Cash Investments or temporarily reduce revolving Indebtedness under
any Credit Facility or any Vendor Credit Facility.
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $10 million, the Issuer
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate principal amount of Notes equal to the Excess Proceeds on such date,
at a purchase price equal to 100% of the principal amount of the Notes plus, in
each case, accrued interest to the Payment Date. To the extent that the
aggregate purchase price for the Notes tendered pursuant to an Offer to Purchase
is less than the Excess Proceeds, the Issuer or any Restricted Subsidiary may
use such deficiency for general corporate purposes. Upon completion of such
Offer to Purchase, the amount of Excess Proceeds shall be reset to zero.
COMMISSION REPORTS AND REPORTS TO HOLDERS. At all times from and after the
earlier of (i) the date of the commencement of an Exchange Offer or the
effectiveness of a Shelf Registration Statement (the "Registration") and (ii)
the date that is six months after the Closing Date, in either case, whether or
not the Issuer is then required to file reports with the Commission, the Issuer
shall file with the Commission all such reports and other information as it
would be required to file with the Commission by Section 13(a) or 15(d) under
the Exchange Act if it were subject thereto. The Issuer shall supply the Trustee
and each Holder or shall supply to the Trustee for forwarding to each such
Holder, without cost to such Holder, copies of such reports and other
information; PROVIDED, HOWEVER, that the copies of such reports and information
mailed to Holders need not contain the exhibits thereto, but the Issuer agrees
to furnish any such exhibits to any Holder upon written request therefor. In
addition, at all times prior to the earlier of the date of the Registration and
the date that is six months after the Closing Date, the Issuer shall, at its
cost, deliver to each Holder of the Notes quarterly and annual reports
substantially equivalent to those which would be required by the Exchange Act;
it being understood that the financial statements included in such reports shall
be prepared in accordance with generally accepted accounting principles in
effect at such time. The financial information contained in this Offering
Memorandum will be deemed to have been delivered to the Trustee pursuant to this
section. In addition, at all times prior to the Registration, upon the request
of any Holder or any prospective purchaser of the Notes designated by a Holder,
the Issuer shall supply to such Holder or such prospective purchaser the
information required under Rule 144A under the Securities Act.
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REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
If a Change of Control shall occur at any time, each Holder shall have the
right to require that the Issuer purchase all such Holder's Notes in whole or in
part in integral multiples of $1,000, at a purchase price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest to the Payment Date.
The Issuer shall commence such Offer to Purchase within 30 days following the
occurrence of such Change of Control.
There can be no assurance that the Issuer will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of the Issuer which might be outstanding at
the time). The foregoing covenant requiring the Issuer to repurchase the Notes
will, unless consents are obtained, require the Issuer to repay all indebtedness
then outstanding which by its terms would prohibit such Note repurchase, either
prior to or concurrently with such Note repurchase.
EVENTS OF DEFAULT
The following events are defined as "Events of Default" in the Indenture:
(a) defaults in the payment of principal of (or premium, if any, on)
any Note when the same becomes due and payable at maturity, upon
acceleration, redemption or otherwise;
(b) defaults in the payment of interest on any Note when the same
becomes due and payable, which defaults continue for a period of 30 days;
(c) defaults in the performance or breach of the provisions of the
Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the assets of the Issuer or mandatory redemption, or
the failure to make or consummate an Offer to Purchase in accordance with
the "Special Offer to Purchase," the "Limitation on Asset Sales" or the
"Repurchase of Notes upon a Change of Control" covenants described above;
(d) defaults in the performance or breach of any covenant or
agreement of the Issuer in the Indenture or under the Notes (other than a
default specified in clause (a), (b) or (c) above), which default or
breach continues (i) for a period of 30 consecutive days or (ii) in the
event such default or breach cannot be cured in such 30-day period and
the Issuer is diligently and in good faith attempting to cure such
default or breach, for a period of 60 consecutive days in the case of
both clauses (i) and (ii), after written notice by the Trustee or the
Holders of at least 25% in aggregate principal amount of the Notes then
outstanding;
(e) there occurs with respect to any issue or issues of Indebtedness
of the Issuer or any Restricted Subsidiary having an outstanding
principal amount of $7.5 million or more in the aggregate for all such
issues of all such Persons, whether such Indebtedness now exists or shall
hereafter be created, (I) an event of default that has caused the holder
thereof to declare such Indebtedness to be due and payable prior to its
Stated Maturity and such Indebtedness has not been discharged in full or
such acceleration has not been rescinded or annulled within 30 days of
such acceleration and/or (II) the failure to make a principal payment at
the final (but not any interim) fixed maturity and such defaulted payment
shall not have been made, waived or extended within 30 days of such
payment default;
(f) any final judgment or order (not covered by insurance) for the
payment of money in excess of $7.5 million in the aggregate for all such
final judgments or orders against all such Persons (treating any
deductibles, self-insurance or retention as not so covered) shall be
rendered against the Issuer or any Restricted Subsidiary and shall not be
paid or discharged, and there shall be any period of 30 consecutive days
following entry of the final judgment or order that causes the aggregate
amount for all such final judgments or orders outstanding and not paid or
discharged against all such Persons to exceed $7.5 million during which a
stay of enforcement of such final judgment or order, by reason of a
pending appeal or otherwise, shall not be in effect;
(g) a court having jurisdiction in the premises enters a decree or
order for (A) relief in respect of the Issuer or any Restricted
Subsidiary in an involuntary case under any applicable
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bankruptcy, insolvency or other similar law now or hereafter in effect,
(B) appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Issuer or any Restricted
Subsidiary or for all or substantially all of the property and assets of
the Issuer or any Restricted Subsidiary or (C) the winding up or
liquidation of the affairs of the Issuer or any Restricted Subsidiary
and, in each case, such decree or order shall remain unstayed and in
effect for a period of 60 consecutive days;
(h) the Issuer or any Restricted Subsidiary (A) commences a
voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or consents to the entry of an
order for relief in an involuntary case under any such law, (B) consents
to the appointment of or taking possession by a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of the
Issuer or any Restricted Subsidiary or for all or substantially all of
the property and assets of the Issuer or any Restricted Subsidiary or (C)
effects any general assignment for the benefit of creditors; or
(i) there occurs a default by the Issuer or IWL under the Escrow
Agreement or the Escrow Agreement shall cease to be in full force and
effect or enforceable in accordance with its terms, other than in
accordance with its terms or prior to the termination of such agreement,
the lien of the Trustee under such agreement ceases to be a first
priority perfected security interest in any portion of the collateral
purported to be pledged thereunder.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Issuer) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount of the Notes then outstanding, by written notice to
the Issuer (and to the Trustee if such notice is given by the Holders), may, and
the Trustee at the request of such Holders shall, declare the principal of,
premium, if any, and accrued interest on the Notes to be immediately due and
payable. Upon a declaration of acceleration, such principal, premium, if any,
and accrued interest shall be immediately due and payable. In the event of a
declaration of acceleration because an Event of Default set forth in clause (e)
above has occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (e) shall be remedied or cured by the Issuer
or the relevant Restricted Subsidiary or waived by the holders of the relevant
Indebtedness within 60 days after the declaration of acceleration with respect
thereto. If an Event of Default specified in clause (g) or (h) above occurs with
respect to the Issuer, the principal of, premium, if any, and accrued interest
on the Notes then outstanding shall IPSO FACTO become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder. The Holders of at least a majority in principal amount of the
outstanding Notes, by written notice to the Issuer and to the Trustee, may waive
all past defaults and their consequences including the acceleration of the Notes
if (i) all existing Events of Default, other than the nonpayment of the
principal of, premium, if any, and interest on the Notes that have become due
solely by such acceleration, have been cured or waived and (ii) the rescission
would not conflict with any judgment or decree of a court of competent
jurisdiction. For information as to the waiver of defaults, see
"--Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Notes not joining in the giving
of such direction, and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. A Holder
may not pursue any remedy with respect to the Indenture or the Notes unless:
(i) the Holder gives the Trustee written notice of a continuing Event of
Default;
(ii) the Holders of at least 25% in aggregate principal amount of
outstanding Notes make a written request to the Trustee to pursue the
remedy;
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(iii) such Holders offer the Trustee indemnity satisfactory to the
Trustee against any costs, liability or expense;
(iv) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and
(v) during such 60-day period, the Holders of a majority in aggregate
principal amount of the outstanding Notes do not give the Trustee a
direction that is inconsistent with the request. However, such limitations
do not apply to the right of any Holder of a Note to receive payment of the
principal of, premium, if any, or (subject to certain provisions of the
Indenture) interest on, such Note or to bring suit for the enforcement of
any such payment, on or after the due date expressed in the Notes, which
right shall not be impaired without the consent of the Holder.
The Indenture requires certain officers of the Issuer to certify, on or
before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of the Issuer and its Restricted
Subsidiaries and the performance of the Issuer and its Restricted Subsidiaries
under the Indenture and that the Issuer has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. The
Issuer also is obligated to notify the Trustee of any default or defaults in the
performance of any covenants or agreements under the Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Indenture provides that the Issuer shall not consolidate with, merge
with or into, or sell, convey, transfer, lease or otherwise dispose of all or
substantially all of its property and assets (as an entirety or substantially an
entirety in one transaction or a series of related transactions) to, any Person
or permit any Person to merge with or into the Issuer, other than in connection
with the Transaction or the Special Partnership Transaction, unless:
(i) the Issuer shall be the continuing Person, or the Person (if other
than the Issuer) formed by such consolidation or into which the Issuer is
merged or that acquired or leased such property and assets of the Issuer
shall be a corporation organized and validly existing under the laws of the
United States of America or any jurisdiction thereof, and shall expressly
assume, by a supplemental indenture, executed and delivered to the Trustee,
all of the obligations of the Issuer on all of the Notes and under the
Indenture;
(ii) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing;
(iii) immediately after giving effect to such transaction on a PRO FORMA
basis, the Issuer, or any Person becoming the successor obligor of the
Notes, as the case may be, could Incur at least $1.00 of Indebtedness under
clause (i) of the first paragraph of the "Limitation on Indebtedness"
covenant described above; PROVIDED, HOWEVER, that this clause (iii) shall
not apply to a consolidation or merger with or into a Wholly Owned
Restricted Subsidiary with a positive net worth, PROVIDED that in connection
with any such merger or consolidation, no consideration (except Capital
Stock (other than Redeemable Stock) in the surviving Person or the Issuer
(or a Person that owns directly or indirectly all of the Capital Stock of
the surviving Person or the Issuer immediately following such transaction)
or cash paid to satisfy dissenter or appraisal rights; PROVIDED that such
rights are exercised with respect to no more than 5% of the outstanding
Capital Stock of the Issuer or other Person) shall be issued or distributed
to the stockholders of the Issuer; and
(iv) the Issuer delivers to the Trustee an Officers' Certificate
(attaching the arithmetic computations to demonstrate compliance with clause
(iii) above) and an Opinion of Counsel, in each case stating that such
consolidation, merger or transfer and such supplemental indenture comply
with this provision and that all conditions precedent provided for herein
relating to such transaction have been complied with; PROVIDED, HOWEVER,
that clauses (ii) and (iii) above do not apply if, in the good faith
determination of the Board of Directors of the Issuer, whose determination
shall be evidenced by a Board Resolution, the principal purpose of such
transaction is to change the state of incorporation of
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the Issuer; and PROVIDED FURTHER that any such transaction shall not have as
one of its purposes the evasion of the foregoing limitations.
DEFEASANCE
DEFEASANCE AND DISCHARGE. The Indenture provides that the Issuer will be
deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to the
Notes (except for, among other matters, certain obligations to register the
transfer or exchange of the Notes, to replace stolen, lost or mutilated Notes,
to maintain paying agencies and to hold monies for payment in trust) if, among
other things, (A) the Issuer has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Notes on the Stated Maturity of such payments in accordance with
the terms of the Indenture and the Notes, (B) the Issuer has delivered to the
Trustee (i) either (x) an Opinion of Counsel to the effect that Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
the Issuer's exercise of its option under this "Defeasance" provision and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit, defeasance and
discharge had not occurred, which Opinion of Counsel must be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service to the same
effect unless there has been a change in applicable federal income tax law after
the Closing Date such that a ruling is no longer required or (y) a ruling
directed to the Trustee received from the Internal Revenue Service to the same
effect as the aforementioned Opinion of Counsel and (ii) an Opinion of Counsel
to the effect that the creation of the defeasance trust does not violate the
Investment Company Act of 1940 and after the passage of 123 days (or, under
certain circumstances, one year) following the deposit, the trust fund will not
be subject to the effect of Section 547 of the United States Bankruptcy Code or
Section 15 of the New York Debtor and Creditor Law, (C) immediately after giving
effect to such deposit on a PRO FORMA basis, no Event of Default, or event that
after the giving of notice or lapse of time or both would become an Event of
Default, shall have occurred and be continuing on the date of such deposit or
during the period ending on the 123rd day after the date of such deposit, and
such deposit shall not result in a breach or violation of, or constitute a
default under, any other agreement or instrument to which the Issuer or any of
its Subsidiaries is a party or by which the Issuer or any of its Subsidiaries is
bound, and (D) if at such time the Notes are listed on a national securities
exchange, the Issuer has delivered to the Trustee an Opinion of Counsel to the
effect that the Notes will not be delisted as a result of such deposit,
defeasance and discharge.
DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT. The
Indenture further provides that the provisions of the Indenture will no longer
be in effect with respect to clauses (iii) and (iv) under "Consolidation, Merger
and Sale of Assets" and all the covenants described herein under "Certain
Covenants," clause (d) under "Events of Default" with respect to such covenants
and clauses (iii) and (iv) under "Consolidation, Merger and Sale of Assets," and
that clauses (e) and (f) under "Events of Default" shall be deemed not to be
Events of Default, upon, among other things, the deposit with the Trustee, in
trust, of money and/or U.S. Government Obligations that through the payment of
interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of, premium, if any,
and accrued interest on the Notes on the Stated Maturity of such payments in
accordance with the terms of the Indenture and the Notes, the satisfaction of
the provisions described in clauses (B)(ii), (C) and (D) of the preceding
paragraph and the delivery by the Issuer to the Trustee of an Opinion of Counsel
to the effect that, among other things, the Holders will not recognize income,
gain or loss for federal income tax purposes as a result of such deposit and
defeasance of certain covenants and Events of Default and will be subject to
federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred.
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DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT. In the event the Issuer
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated Maturity
but may not be sufficient to pay amounts due on the Notes at the time of the
acceleration resulting from such Event of Default. However, the Issuer will
remain liable for such payments.
MODIFICATION AND WAIVER
From time to time, the Issuer, when authorized by Trustee, without the
consent of the Holders, may amend, waive or supplement the Indenture, the Notes,
the Merger Agreement and the Escrow Agreement for certain specified purposes,
including, among other things, curing ambiguities, defects or inconsistencies,
to provide for the assumption of the Issuer's obligations to Holders in the case
of a merger or consolidation, to make any change that would provide any
additional rights or benefits to the Holders, to add guarantors with respect to
the Notes, to secure the Notes, to maintain the qualification of the Indenture
under the Trust Indenture Act or to make any change that does not adversely
affect the rights of any Holder. Other amendments and modifications of the
Indenture or the Notes issued thereunder, the Merger Agreement or the Escrow
Agreement may be made by the Issuer and the Trustee with the consent of the
Holders of not less than a majority in aggregate principal amount of the
outstanding Notes; PROVIDED, HOWEVER, that no such modification or amendment
may, without the consent of each Holder affected thereby:
(i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note,
(ii) reduce the principal of, or premium, if any, or interest on, any
Note,
(iii) change the place or currency of payment of principal of, or
premium, if any, or interest on, any Note,
(iv) impair the right to institute suit for the enforcement of any
payment on or after the Stated Maturity (or, in the case of a redemption, on
or after the Redemption Date) of any Note,
(v) reduce the above-stated percentage of outstanding Notes the consent
of whose Holders is necessary to modify or amend the Indenture,
(vi) waive a default in the payment of principal of, premium, if any, or
interest on the Notes,
(vii) reduce the percentage or aggregate principal amount of outstanding
Notes the consent of whose Holders is necessary for waiver of compliance
with certain provisions of the Indenture or for waiver of certain defaults,
(viii) release any lien created by the Escrow Agreement, except in
accordance with the terms thereof, or
(ix) amend, change or otherwise modify the obligation of the Issuer to
make and consummate the Special Offer to Purchase contemplated by the
covenant entitled "Special Offer to Purchase."
GOVERNING LAW
The Indenture and the Notes are governed by and will be construed in
accordance with the laws of the State of New York without giving effect to
principles of conflicts of law.
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CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default, the
Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Issuer, to obtain payment of claims in certain cases or
to realize on certain property received by it in respect of any such claims, as
security or otherwise. The Trustee is permitted to engage in other transactions;
PROVIDED, HOWEVER, that if it acquires any conflicting interest, it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the definition of any other capitalized term used herein for which
no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by the Issuer or a Restricted Subsidiary; PROVIDED that
Indebtedness of such Person which is redeemed, defeased, retired or otherwise
repaid at the time of or immediately upon consummation of the transaction by
which such Person becomes a Restricted Subsidiary or such Asset Acquisition
shall not be Acquired Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Issuer and its Restricted Subsidiaries for such period
(which calculation shall include the combined aggregate consolidated net income
(or loss) of Telecommunications, the Partnership and IWL and their respective
Restricted Subsidiaries during the Transition Period in the event the
Transaction is consummated) determined in conformity with GAAP; PROVIDED that
the following items shall be excluded in computing Adjusted Consolidated Net
Income (without duplication):
(i) the net income (or loss) of any Person (other than a Restricted
Subsidiary) in which any Person (other than the Issuer or any of its
Restricted Subsidiaries) has a joint interest and the net income (or loss)
of any Unrestricted Subsidiary, except
(x) with respect to net income, to the extent of the amount of
dividends or other distributions actually paid in cash to the Issuer or
any of its Restricted Subsidiaries by such other Person or such
Unrestricted Subsidiary during such period and
(y) with respect to net losses, to the extent of the amount of cash
contributed by the Issuer or any Restricted Subsidiary to such Person
during such period;
(ii) the net income (or loss) of any Person acquired by the Issuer or
any of its Restricted Subsidiaries in a pooling-of-interests transaction for
any period prior to the date of the related acquisition;
(iii) the net income of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted by the
operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable
to such Restricted Subsidiary;
(iv) any gains or losses (on an after-tax basis) attributable to Asset
Sales;
(v) any net after-tax extraordinary or non-recurring gains or losses;
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(vi) any gain or loss, net of taxes, realized upon the termination of
any employee benefit plan; and
(vii) any compensation or other expense paid or payable solely with
Capital Stock (other than Redeemable Stock) of the Issuer or any options,
warrants or other rights to acquire such Capital Stock.
"Adjusted Consolidated Net Tangible Assets" means the total amount of assets
of the Issuer and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting from
write-ups of capital assets (excluding write-ups in connection with accounting
for acquisitions in conformity with GAAP), minus (i) all current liabilities of
the Issuer and its Restricted Subsidiaries (excluding intercompany items) and
(ii) all goodwill, trade names, trademarks, patents, unamortized debt discount
and expense and other like intangibles, all as set forth on the most recent
quarterly or annual consolidated balance sheet of the Issuer and its Restricted
Subsidiaries, prepared in conformity with GAAP and filed with the Commission or
provided to the Trustee pursuant to the "Commission Reports and Reports to
Holders" covenant described above.
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition,
"control," when used with respect to any specified Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Asset Acquisition" means (i) an investment by the Issuer or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Issuer or any of its Restricted Subsidiaries; PROVIDED that such Person's
primary business is related, ancillary or complementary to the businesses of the
Issuer and its Restricted Subsidiaries on the date of such investment or (ii) an
acquisition by the Issuer or any of its Restricted Subsidiaries of the property
and assets of any Person other than the Issuer or any of its Restricted
Subsidiaries that constitute substantially all of a division or line of business
of such Person; PROVIDED that the property and assets acquired are related,
ancillary or complementary to the businesses of the Issuer and its Restricted
Subsidiaries on the date of such acquisition. The term does not include the
Transaction or the Special Partnership Transaction.
"Asset Disposition" means the sale or other disposition by the Issuer or any
of its Restricted Subsidiaries (other than to the Issuer or another Restricted
Subsidiary) of (i) all or substantially all of the Capital Stock of any
Restricted Subsidiary or (ii) all or substantially all of the assets of a
division or line of business of the Issuer or any of its Restricted
Subsidiaries. The term does not include the Transaction or the Special
Partnership Transaction
"Asset Sale" means any direct or indirect sale, transfer or lease or other
disposition (including by way of merger, consolidation or sale-leaseback
transaction) in one transaction or a series of related transactions by the
Issuer or any of its Restricted Subsidiaries to any Person other than the Issuer
or any of its Restricted Subsidiaries of:
(i) all or any of the Capital Stock of any Restricted Subsidiary,
(ii) all or substantially all of the property and assets of an operating
unit or business of the Issuer or any of its Restricted Subsidiaries or
(iii) any other property and assets of the Issuer or any of its
Restricted Subsidiaries outside the ordinary course of business of the
Issuer or such Restricted Subsidiary other than the Capital Stock of or
Investment in an Unrestricted Subsidiary
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that, with respect to each of (i), (ii) and (iii), is not governed by the
provisions of the Indenture applicable to mergers, consolidations and sales of
all or substantially all of the assets of the Issuer; PROVIDED that "Asset Sale"
shall not include:
(a) sales, transfers or other dispositions of assets, whether in one
transaction or a series of related transactions occurring within one
year, involving assets with a fair market value not in excess of $1.0
million in any transaction or series of related transactions,
(b) contemporaneous exchanges by the Issuer or any Restricted
Subsidiary of Telecommunications Assets for other Telecommunications
Assets in the ordinary course of business, including fiber swaps and
partitioning of switches; PROVIDED that the applicable Telecommunications
Assets received by the Issuer or such Restricted Subsidiary have at least
substantially equal fair market value to the Telecommunications Assets
disposed of,
(c) sales, transfers or other dispositions of assets that have become
uneconomic, obsolete or worn-out, or
(d) the Transaction or the Special Partnership Transaction.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Board of Directors" means, with respect to any Person, its Board of
Directors, general partner(s), manager(s), or similar governing body.
"Calculation Date" means, with respect to the Incurrence of any Indebtedness
by the Issuer or any of its Restricted Subsidiaries, the date such Indebtedness
is to be Incurred and, with respect to any Restricted Payment, the date such
Restricted Payment is to be made.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" shall be deemed to occur if, after the Transaction
occurs:
(i) the sale, conveyance, transfer or lease of all or substantially
all of the assets of the Issuer to any Person or "group" (as such term is
used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act, including any
group acting for the purpose of acquiring, holding or disposing of
securities within the meaning of Rule 13d-5(b)(1) under the Exchange
Act), other than to one or more Permitted Holders and/or one or more
Restricted Subsidiaries, shall have occurred,
(ii) any Person or "group" (as such term is used in Sections
13(d)(3) and 14(d)(2) of the Exchange Act including any group acting for
the purpose of acquiring, holding or disposing of securities within the
meaning of Rule 13d-5(b)(1) under the Exchange Act), other than any
Permitted Holder (or group that includes a Permitted Holder), becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of
more than 50% of the total voting power of
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all classes of the Voting Stock of the Issuer (including any warrants,
options or rights to acquire such Voting Stock), calculated on a fully
diluted basis,
(iii) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors of the
Issuer (together with any directors whose election or appointment by the
Board of Directors of the Issuer or whose nomination for election by the
stockholders of the Issuer was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning
of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of
the Board of Directors of the Issuer then in office or
(iv) the merger, amalgamation or consolidation of the Issuer with or
into another Person or the merger of another Person with or into the
Issuer shall have occurred, and the securities of the Issuer that are
outstanding immediately prior to such transaction and which represent
100% of the aggregate voting power of the Voting Stock of the Issuer are
changed into or exchanged for cash, securities or property, unless
pursuant to such transaction such securities are changed into or
exchanged for, in addition to any other consideration, securities of the
surviving Person that represent, immediately after giving effect to such
transaction, at least a majority of the aggregate voting power of the
Voting Stock of the surviving Person.
"Closing Date" means the date on which the Notes are originally issued under
the Indenture.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's equity, other than Preferred Stock of
such Person, whether outstanding on the Closing Date or issued thereafter,
including, without limitation, all series and classes of such common stock.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income,
(i) Consolidated Interest Expense,
(ii) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary and non-recurring gains or losses
or sales of assets),
(iii) depreciation expense,
(iv) amortization expense,
(v) all other non-cash items reducing Adjusted Consolidated Net
Income (other than items that will require cash payments and for which an
accrual or reserve is, or is required by GAAP to be, made), and
(vi) costs directly related to the Transaction, the Special
Partnership Transaction or the offering of the Notes and expensed by the
Issuer in accordance with GAAP on or prior to December 31, 1998,
less all non-cash items increasing Adjusted Consolidated Net Income, all as
determined on a consolidated basis for the Issuer and its Restricted
Subsidiaries in conformity with GAAP; PROVIDED that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA
shall be reduced (to the extent not otherwise reduced in accordance with GAAP)
by an amount equal to (A) the amount of the Adjusted Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by (B) the quotient of (1)
the number of shares of outstanding Common Stock of such Restricted Subsidiary
not owned on the last day of such period by the Issuer or any of its Restricted
Subsidiaries divided by
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(2) the total number of shares of outstanding Common Stock of such Restricted
Subsidiary on the last day of such period.
"Consolidated Interest Expense" means, for any period, without duplication,
the aggregate amount of interest in respect of Indebtedness, including, without
limitation:
(i) amortization of original issue discount on any Indebtedness and the
interest portion of any deferred payment obligation, calculated in
accordance with the effective interest method of accounting;
(ii) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing;
(iii) the net costs associated with Interest Rate Agreements;
(iv) Preferred Stock dividends of the Issuer's Restricted Subsidiaries
(other than dividends paid in shares of Preferred Stock that are not
Redeemable Stock) declared and paid or payable;
(v) accrued Redeemable Stock dividends of the Issuer and its Restricted
Subsidiaries, whether or not declared or paid; and
(vi) the interest component of rentals in respect of Capitalized Lease
Obligations paid, accrued or scheduled to be paid or to be accrued by the
Issuer and its Restricted Subsidiaries during such period;
EXCLUDING, HOWEVER, (a) any amount of such interest of any Restricted Subsidiary
if the net income of such Restricted Subsidiary is excluded in the calculation
of Adjusted Consolidated Net Income pursuant to clause (iii) of the definition
thereof (but only in the same proportion as the net income of such Restricted
Subsidiary is excluded from the calculation of Adjusted Consolidated Net Income
pursuant to clause (iii) of the definition thereof) and (b) any premiums, fees
and expenses (and any amortization thereof) payable in connection with the
offering of the Notes and the Transaction and the Special Partnership
Transaction, all as determined on a consolidated basis (without taking into
account Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Calculation Date, the ratio of
(i) the aggregate amount of Indebtedness of the Issuer and its Restricted
Subsidiaries on a consolidated basis outstanding on such Calculation Date to
(ii) the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters for which financial statements of the Issuer have been filed
with the Commission or provided to the Trustee pursuant to the "Commission
Reports and Reports to Holders" covenant described above or, if such financial
statements do not cover the most recent four fiscal quarters, then the most
recent four fiscal quarters for (x) the Company (if the Transaction has
occurred) giving pro forma effect to the Transaction as if it occurred at the
beginning of such four fiscal quarter period or (y) Telecommunications and the
Partnership on a combined basis (if the Special Offer to Purchase has occurred),
prepared in accordance with GAAP (such four fiscal quarter period being the
"Four Quarter Period"); PROVIDED that, in making the foregoing calculation, (A)
PRO FORMA effect shall be given to any Indebtedness to be Incurred or repaid on
the Calculation Date; (B) PRO FORMA effect shall be given to Asset Dispositions
and Asset Acquisitions (including giving PRO FORMA effect to the application of
proceeds of any Asset Disposition) that occur from the beginning of the Four
Quarter Period through the Calculation Date (the "Reference Period"), as if they
had occurred and such proceeds had been applied on the first day of such
Reference Period; and (C) PRO FORMA effect shall be given to asset dispositions
and asset acquisitions (including giving PRO FORMA effect to the application of
proceeds of any asset disposition) that have been made by any Person that has
become a Restricted Subsidiary or has been merged with or into the Issuer or any
Restricted Subsidiary during such Reference Period and that would have
constituted Asset Dispositions or Asset Acquisitions had such transactions
occurred when such Person was a Restricted Subsidiary, as if such asset
dispositions or asset acquisitions had occurred on the first day of such
Reference Period;
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PROVIDED that to the extent that clause (B) or (C) of this sentence requires
that PRO FORMA effect be given to an Asset Acquisition or Asset Disposition,
such PRO FORMA calculation shall be based upon the four full fiscal quarters
immediately preceding the Calculation Date of the Person, or division or line of
business of the Person, that is acquired or disposed of for which financial
information is available.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Issuer and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Redeemable Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the outstanding principal amount of any promissory notes receivable from the
sale of the Capital Stock of the Issuer or any of its Restricted Subsidiaries,
each item to be determined in conformity with GAAP (excluding the effects of
foreign currency exchange adjustments under Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 52).
"Credit Facilities" means any senior commercial term loan and/or revolving
credit or working capital facility or any letter of credit facility entered into
principally with commercial banks and/or other financial institutions typically
party to commercial loan agreements.
"Currency Agreement" means any spot or forward foreign exchange contract,
currency swap agreement, currency option or other similar financial agreement or
arrangement entered into by the Issuer or any of its Subsidiaries designed
solely to protect against or manage exposure to fluctuations in currency
exchange rates.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disinterested Director" means, with respect to any matter, a member of the
Board of Directors who does not have any material direct or indirect financial
interest in or with respect to such matter.
"Escrow Account" shall have the meaning set forth in the Escrow Agreement.
"Escrow Agreement" means the Escrow and Security Agreement among the
Company, Telecommunications, the Partnership, IWL and the Trustee, substantially
in the form delivered to the Trustee on the Closing Date.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated thereunder.
"fair market value" means the price that would be paid in an arm's-length
transaction between a willing seller under no compulsion to sell and a willing
buyer under no compulsion to buy, as determined in good faith by the Board of
Directors, whose determination shall be conclusive if evidenced by a Board
Resolution; PROVIDED that for purposes of clause (viii) of the definition of
"Permitted Indebtedness", (x) the fair market value of any security registered
under the Exchange Act shall be the average of the closing prices, regular way,
of such security for the 20 consecutive trading days immediately preceding the
capital contribution or sale of Capital Stock and (y) in the event the aggregate
fair market value of any other property (other than cash or cash equivalents)
received by the Issuer exceeds $10 million, the fair market value of such
property shall be determined by a nationally recognized investment banking firm
(selected by the Board of Directors of the Issuer) and set forth in their
written opinion which shall be delivered to the Trustee.
"GAAP" means generally accepted accounting principles in the United States
of America in effect on the Closing Date, including, without limitation, those
set forth in the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession.
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"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length and are entered into in
the ordinary course of business), to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness of the payment thereof or
to protect such obligee against loss in respect thereof (in whole or in part);
PROVIDED that the term "Guarantee" shall not include endorsements for collection
or deposit in the ordinary course of business. The term "Guarantee" used as a
verb has a corresponding meaning.
"Guaranteed Indebtedness" has the meaning given it under the caption
"Limitation on Issuances of Guarantees by Restricted Subsidiaries."
"Holder" means the registered holder of any Note.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an Incurrence of Acquired Indebtedness; PROVIDED that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness. The terms "Incurrence" and "Incurred"
shall have corresponding meanings.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication):
(i) all indebtedness of such Person for borrowed money,
(ii) all obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments,
(iii) all obligations of such Person in respect of letters of credit,
acceptance facilities or other similar instruments (including reimbursement
obligations with respect thereto),
(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services, which purchase price is due more
than six months after the date of placing such property in service or taking
delivery and title thereto or the completion of such services,
(v) all Capitalized Lease Obligations of such Person,
(vi) all Indebtedness of other Persons secured by a Lien on any asset of
such Person, whether or not such Indebtedness is assumed by such Person;
PROVIDED that the amount of such Indebtedness shall be the lesser of (A) the
fair market value of such asset at such date of determination and (B) the
amount of such Indebtedness,
(vii) all Indebtedness of other Persons and all dividends and
distributions of another Person the payment of which, in either case, such
Person has Guaranteed or is responsible or liable for, directly or
indirectly, as obligor, guarantor or otherwise,
(viii) all Redeemable Stock of such Person valued at its maximum fixed
repurchase price plus (to the extent not otherwise included in such
repurchase price) accrued and unpaid dividends payable prior to the Stated
Maturity of the Notes in connection with a mandatory redemption or in
connection with a redemption at the option of the holder thereof unless such
Redeemable Stock has actually been called for redemption but not yet
redeemed, in which case it shall be valued at the redemption price therefor
plus such accrued and unpaid dividends unless the holder thereof can require
redemption or repurchase at any higher price, and
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(ix) to the extent not otherwise included in this definition,
obligations under Currency Agreements and Interest Rate Agreements.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation.
Notwithstanding anything herein to the contrary:
(A) the amount outstanding at any time of any Indebtedness issued with
original issue discount is the face amount of such Indebtedness less the
remaining unamortized portion of the original issue discount of such
Indebtedness at the time of its issuance, as determined in conformity with
GAAP,
(B) money borrowed and set aside at the time of the Incurrence of any
Indebtedness or thereafter in order to refund the payment of the interest on
such Indebtedness shall not be deemed to be "Indebtedness,"
(C) Indebtedness shall not include any liability for federal, state,
local or other taxes,
(D) Indebtedness shall not include any Trade Payable or amounts due under
leases that are not Capitalized Lease Obligations,
(E) Indebtedness shall not include amounts due with respect to any
customer advance payments and customer deposits in the ordinary course of
business with the Issuer or any Restricted Subsidiary, and
(F) Indebtedness shall not include overdrafts.
For purposes hereof, the "maximum fixed repurchase price" of any Redeemable
Stock which does not have a fixed repurchase price shall be calculated in
accordance with the terms of such Redeemable Stock as if such Redeemable Stock
were purchased on any date on which Indebtedness shall be required to be
determined pursuant to the Indenture, and if such price is based upon, or
measured by, the fair market value of such Redeemable Stock, such fair market
value shall be determined in good faith by the Board of Directors of the issuer
of such Redeemable Stock.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan,
account receivable (other than an account receivable arising in the ordinary
course of business) or other extension of credit (including, without limitation,
by way of Guarantee or similar arrangement) or any capital contribution to (by
means of any transfer of cash or other property to others or any payment for
property or services for the account or use of others), or any purchase or
acquisition of Capital Stock, bonds, notes, debentures or other similar
instruments issued by, such Person and shall include (i) the designation of a
Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair market
value of the Capital Stock (or any other Investment), held by the Issuer or any
of its Restricted Subsidiaries, of (or in) any Person that has ceased to be a
Restricted Subsidiary at the time it so ceases to be a Restricted Subsidiary,
including, without limitation, by reason of any transaction permitted by clause
(iii) of the "Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries" covenant described above. For purposes of the definition of
"Unrestricted Subsidiary" and the "Limitation on Restricted Payments" covenant
described above, (i) "Investment" shall include the fair market value of the
assets (net of liabilities (other than liabilities to the Issuer or any of its
Subsidiaries)) of any Restricted Subsidiary at the time that such Restricted
Subsidiary is designated an Unrestricted Subsidiary, (ii) the fair market value
of the assets (net of liabilities (other than liabilities to the Issuer or any
of its Subsidiaries)) of any Unrestricted Subsidiary at the time that such
Unrestricted
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Subsidiary is designated a Restricted Subsidiary shall be considered a reduction
in outstanding Investments and (iii) any property transferred to or from any
Person shall be valued at its fair market value at the time of such transfer.
"Issuer" shall initially mean, collectively, the Company, Telecommunications
and the Partnership and shall mean (i) the Company after the Transaction is
consummated, or (ii) Telecommunications and the Partnership after the payment of
all Notes tendered in the Special Offer to Purchase, if any Notes remain
outstanding. To the extent financial calculations are made with respect to the
Issuer following the closing of the Transaction for any period or as of any date
prior to the closing of the Transaction, those calculations should include the
transactions, financial results or financial status of Telecommunications, the
Partnership and IWL for such period or as of such date.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien
(statutory or other) or charge of any kind (including, without limitation, any
conditional sale or other title retention agreement or lease in the nature
thereof or any agreement to give any security interest). The term "Lien" does
not include any lease or grant of rights to use any fiber or other asset under
an arrangement that does not qualify as a conditional sale or other title
retention agreement or lease in the nature thereof or a switch partition.
"Merger Agreement" means that certain Agreement and Plan of Merger and Plan
of Exchange dated as of February 16, 1998 among the Company, Telecommunications,
the Partnership, IWL and certain other parties thereto, as amended through the
Closing Date and thereafter in accordance with the terms of the Indenture.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Issuer or any Restricted Subsidiary) and proceeds from
the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of the Issuer and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be provided by the
Issuer or any Restricted Subsidiary as a reserve against any liabilities
associated with such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with GAAP, and (b) with respect
to any capital contribution or issuance or sale of Capital Stock, options,
warrants or other rights to acquire Capital Stock or Indebtedness, the proceeds
of such capital contribution or issuance or sale in the form of cash or cash
equivalents, including payments in respect of deferred payment obligations (to
the extent corresponding to the principal, but not interest, component thereof)
when received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Issuer or any Restricted
Subsidiary) and proceeds from the conversion of other property received when
converted to cash or cash equivalents, net of attorney's fees, accountants'
fees, underwriters' or placement agents' fees, discounts or commissions and
brokerage, consultant and other fees incurred in connection with such issuance
or sale and net of taxes payable as a result thereof.
"Offer to Purchase" means an offer by the Issuer to purchase Notes from the
Holders commenced by mailing a notice to the Trustee and each Holder stating:
(i) the covenant pursuant to which the offer is being made and that all
Notes validly tendered will be accepted for payment on a pro rata basis;
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(ii) the purchase price and the date of purchase (which shall be a
Business Day no earlier than 30 days nor later than 60 days from the date
such notice is mailed);
(iii) that any Note not tendered will continue to accrue interest
pursuant to its terms;
(iv) that, unless the Issuer defaults in the payment of the purchase
price, any Note accepted for payment pursuant to the Offer to Purchase shall
cease to accrue interest on and after the Payment Date;
(v) that Holders electing to have a Note purchased pursuant to the Offer
to Purchase will be required to surrender the Note, together with the form
entitled "Option of the Holder to Elect Purchase" on the reverse side of the
Note completed, to the Paying Agent at the address specified in the notice
prior to the close of business on the Business Day immediately preceding the
Payment Date;
(vi) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such Notes purchased; and
(vii) that Holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion of the
Notes surrendered; PROVIDED that each Note purchased and each new Note
issued shall be in a principal amount of $1,000 or integral multiples
thereof.
On the Payment Date, the Issuer shall (i) accept for payment on a pro rata
basis Notes or portions thereof tendered pursuant to an Offer to Purchase; (ii)
deposit with the Paying Agent money sufficient to pay the purchase price of all
Notes or portions thereof so accepted; and (iii) deliver, or cause to be
delivered, to the Trustee all Notes or portions thereof so accepted together
with an Officers' Certificate specifying the Notes or portions thereof accepted
for payment by the Issuer. The Paying Agent shall promptly mail to the Holders
of Notes so accepted payment in an amount equal to the purchase price, and the
Trustee shall promptly authenticate and mail to such Holders a new Note equal in
principal amount to any unpurchased portion of the Note surrendered; PROVIDED
that each Note purchased and each new Note issued shall be in a principal amount
of $1,000 or integral multiples thereof. The Issuer will publicly announce the
results of an Offer to Purchase as soon as practicable after the Payment Date.
The Trustee shall act as the Paying Agent for an Offer to Purchase. The Issuer
will comply with Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable, in the event that the Issuer is required to repurchase Notes
pursuant to an Offer to Purchase.
"Payment Date" means the date on which any Note is purchased pursuant to an
Offer to Purchase or the Special Offer to Purchase.
"Permitted Holders" means Jere W. Thompson, Sr., Jere W. Thompson, Jr., Mark
Langdale, Timothy W. Rogers, Scott L. Roberts, Timothy M. Terrell and Ignatius
W. Leonards and any corporation, limited liability company, partnership, joint
venture or other entity controlled by any one or more of them.
"Permitted Indebtedness" means any of the following:
(i) Indebtedness of the Issuer pursuant to the Notes;
(ii) Indebtedness owed (A) to the Issuer and evidenced by an
unsubordinated promissory note or (B) to any Restricted Subsidiaries;
PROVIDED that such Indebtedness to any Restricted Subsidiary is subordinated
in right of payment from and after such time as the Notes shall become due
and payable (whether at Stated Maturity, by acceleration or otherwise);
PROVIDED further any event which results in any such Restricted Subsidiary
ceasing to be a Restricted Subsidiary or any subsequent transfer of such
Indebtedness (other than to the Issuer or another Restricted Subsidiary)
shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness not permitted by this clause (ii);
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(iii) Indebtedness issued in exchange for, or the net proceeds of which
are used to refinance or refund, then outstanding Indebtedness (other than
Indebtedness Incurred under clause (ii), (iv), (vi) or (xii) of the
definition of Permitted Indebtedness) and any refinancings of such new
Indebtedness in an amount not to exceed the amount so refinanced or refunded
(plus premiums, accrued interest, fees and expenses); PROVIDED that
Indebtedness the proceeds of which are used to refinance or refund the Notes
or Indebtedness that is PARI PASSU in right of payment with, or subordinated
in right of payment to, the Notes shall only be permitted under this clause
(iii) if (A) in case the Notes are refinanced in part or the Indebtedness to
be refinanced is PARI PASSU in right of payment with the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is outstanding, is expressly made
PARI PASSU in right of payment with, or subordinate in right of payment to,
the remaining Notes, (B) in case the Indebtedness to be refinanced is
subordinated in right of payment to the Notes, such new Indebtedness, by its
terms or by the terms of any agreement or instrument pursuant to which such
new Indebtedness is issued or remains outstanding, is expressly made
subordinate in right of payment to the Notes at least to the extent that the
Indebtedness to be refinanced is subordinated to the Notes and (C) such new
Indebtedness, determined as of the date of Incurrence of such new
Indebtedness, does not mature prior to the Stated Maturity of the
Indebtedness to be refinanced or refunded, and the Average Life of such new
Indebtedness is at least equal to the remaining Average Life of the
Indebtedness to be refinanced or refunded; and PROVIDED FURTHER that in no
event may Indebtedness of the Issuer be refinanced by means of any
Indebtedness of any Restricted Subsidiary pursuant to this clause (iii);
(iv) Indebtedness (A) to reimburse workers' compensation insurance
companies for claims paid by such companies on behalf of the Issuer or any
Restricted Subsidiary in accordance with the policies issued to the Issuer
and the Restricted Subsidiaries, (B) in respect of performance, surety or
appeal bonds or similar obligations provided in the ordinary course of
business, or (C) under Currency Agreements and Interest Rate Agreements;
PROVIDED that such agreements (I) are designed solely to protect the Issuer
or its Subsidiaries against fluctuations in foreign currency exchange rates
or interest rates and (II) do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or by reason of fees, indemnities
and compensation payable thereunder or (D) arising from agreements providing
for indemnification, adjustment of purchase price or similar obligations, or
from Guarantees or letters of credit, surety bonds or performance bonds
securing any obligations of the Issuer or any of its Restricted Subsidiaries
pursuant to such agreements, in each case Incurred in connection with the
disposition of any business, assets or Restricted Subsidiary (other than
Guarantees of Indebtedness Incurred by any Person acquiring all or any
portion of such business, assets or Restricted Subsidiary for the purpose of
financing such acquisition), in a principal amount not to exceed the gross
proceeds actually received by the Issuer or any Restricted Subsidiary in
connection with such disposition;
(v) Indebtedness of the Issuer, to the extent the net proceeds thereof
are promptly used to purchase Notes tendered in the Special Offer to
Purchase or in an Offer to Purchase made as a result of a Change of Control
or Indebtedness of the Issuer or any Restricted Subsidiary to the extent the
net proceeds thereof are promptly deposited to defease all of the Notes as
described above under "-- Defeasance";
(vi) Guarantees of the Notes and Guarantees of Indebtedness of the
Issuer by any Restricted Subsidiary; PROVIDED that the Guarantee of such
Indebtedness is permitted by and made in accordance with the "Limitation on
Issuance of Guarantees by Restricted Subsidiaries" covenant described above;
(vii) Acquired Indebtedness and any Indebtedness issued in exchange for,
or the net proceeds of which are used to refinance or refund, such Acquired
Indebtedness in an amount not to exceed the amount so refinanced or refunded
(plus premium, accrued interest, and reasonable fees and expenses) in an
aggregate amount not to exceed at any one time outstanding $25 million;
(viii) (A) Indebtedness of the Issuer not to exceed, at any one time
outstanding, two times the Net Cash Proceeds received by the Issuer after
the Closing Date (and, in the event the Transaction is
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consummated, the aggregate Net Cash Proceeds received by Telecommunications,
the Partnership and IWL during the Transition Period) as a capital
contribution or from the issuance and sale of its Capital Stock (other than
Redeemable Stock) or options, warrants or other rights to acquire Capital
Stock (other than Redeemable Stock) to a Person that is not a Subsidiary of
the Issuer (or Telecommunications, the Partnership or IWL, if applicable) to
the extent such Net Cash Proceeds have not been used pursuant to clause
(C)(2) of the first paragraph or clause (iii), (iv) or (vi) of the second
paragraph of the "Limitation on Restricted Payments" covenant described
above to make a Restricted Payment less any Indebtedness Incurred pursuant
to clause (B), (B) Indebtedness Incurred by (x) the Issuer and/or (y) any of
the Restricted Subsidiaries in an aggregate amount not to exceed, at any one
time outstanding, the Net Cash Proceeds received by the Issuer after the
Closing Date (and, in the event the Transaction is consummated, the
aggregate Net Cash Proceeds received by Telecommunications, the Partnership
and IWL during the Transition Period) as a capital contribution or from the
issuance and sale of its Capital Stock (other than Redeemable Stock) or
options, warrants or other rights to acquire Capital Stock (other than
Redeemable Stock) to a Person that is not a Subsidiary of the Issuer (or
Telecommunications, the Partnership or IWL, if applicable) to the extent
such Net Cash Proceeds have not been used pursuant to clause (C)(2) of the
first paragraph or clause (iii), (iv) or (vi) of the second paragraph of the
"Limitation on Restricted Payments" covenant described above to make a
Restricted Payment; provided that the Incurrence of Indebtedness pursuant to
this clause (B) will only be permitted to the extent that such Incurrence
does not cause the amount of Indebtedness Incurred pursuant to clause (A) to
exceed the amount permitted thereunder, and (C) Indebtedness of the Issuer
not to exceed, at any one time outstanding, 100% of the fair market value of
property (other than cash and cash equivalents) received by the Issuer after
the Closing Date (and, in the event the Transaction is consummated, by
Telecommunications, the Partnership or IWL during the Transition Period)
from a contribution of capital or the proceeds from the sale of its Capital
Stock (other than Redeemable Stock) or options, warrants or other rights to
acquire Capital Stock (other than Redeemable Stock) to a Person that is not
the Issuer (or Telecommunications, the Partnership or IWL, if applicable) or
a Restricted Subsidiary, to the extent such capital contribution or sale of
Capital Stock or options, warrants or rights have not been used pursuant to
clause (iii), (iv) or (ix) of the second paragraph of the "Limitation on
Restricted Payments" covenant described above to make a Restricted Payment;
PROVIDED that such Indebtedness does not mature prior to the Stated Maturity
of the Notes and has an Average Life longer than the Notes;
(ix) Indebtedness under one or more Credit Facilities or Vendor Credit
Facilities; PROVIDED that the aggregate principal amount of any Indebtedness
incurred pursuant to this clause (ix) (including any amounts refinanced or
refunded under this clause (ix)) does not exceed at any time outstanding the
greater of (x) 85% of eligible accounts receivable and 65% of eligible
inventory of the Issuer and its Restricted Subsidiaries as of the last
fiscal quarter for which financial statements are prepared or (y) $100
million less any amount of such Indebtedness permanently repaid as provided
under the "Limitation on Asset Sales" covenant described above;
(x) Indebtedness existing as of the Closing Date and Indebtedness
existing as of the date of consummation of the Transaction or the Special
Partnership Transaction (to the extent such Indebtedness is incurred without
violation of the Indenture);
(xi) Capitalized Lease Obligations in an aggregate principal amount
outstanding at any time not to exceed $10 million; and
(xii) Indebtedness of the Issuer (in addition to Indebtedness permitted
under clauses (i) through (xi) above) in the aggregate principal amount
outstanding at any time not to exceed $50 million, less any amount of such
Indebtedness permanently repaid as provided under the "Limitation on Asset
Sales" covenant described above.
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"Permitted Investment" means any of the following:
(i) an Investment in the Issuer or a Restricted Subsidiary or a Person
which will, upon the making of such Investment, become a Restricted
Subsidiary or be merged or consolidated with or into or transfer or convey
all or substantially all its assets to, the Issuer or a Restricted
Subsidiary; PROVIDED that such Person's primary business is related,
ancillary or complementary to the businesses of the Issuer and its
Restricted Subsidiaries on the date of such Investment;
(ii) a Temporary Cash Investment;
(iii) commission, payroll, travel, relocation and similar advances to
cover matters that are expected at the time of such advances ultimately to
be treated as expenses in accordance with GAAP;
(iv) stock, obligations or securities received in satisfaction of
judgments or settlement of disputed accounts receivable that arose in the
ordinary course of business;
(v) Investments in prepaid expenses, negotiable instruments held for
collection, and lease, utility and workers' compensation, performance and
other similar deposits;
(vi) Interest Rate Agreements and Currency Agreements to the extent
permitted under clause (iv) of the definition of "Permitted Indebtedness;"
and
(vii) loans and advances to employees of the Issuer or any Subsidiary in
an aggregate amount not to exceed $1 million at any time outstanding.
"Permitted Liens" means any of the following:
(i) Liens for taxes, fees, assessments, governmental charges or claims
that are not yet due and payable, or, if delinquent, are payable without
penalty or are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a
reserve or other appropriate provisions, if any, as shall be required in
conformity with GAAP shall have been made;
(ii) statutory and common law Liens of landlords and carriers,
warehousemen, mechanics, suppliers, material men, repairmen or other similar
Liens arising in the ordinary course of business and with respect to amounts
not yet delinquent, or, if delinquent, are payable without penalty or are or
being contested in good faith by appropriate legal proceedings promptly
instituted and diligently conducted and for which a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made;
(iii) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security;
(iv) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligations, bankers'
acceptances, surety and appeal bonds, government contracts, performance and
return-of money bonds and other obligations of a similar nature incurred in
the ordinary course of business (exclusive of obligations for the payment of
borrowed money);
(v) easements, rights-of-way, restrictions, municipal and zoning
ordinances, reservations, permits and similar charges, encumbrances, title
defects or other irregularities that do not materially interfere with the
ordinary course of business of the Issuer or any of its Restricted
Subsidiaries;
(vi) Liens securing Acquired Indebtedness created prior to (and not in
connection with or in contemplation of) the Incurrence of such Indebtedness
by the Issuer or any Restricted Subsidiary; PROVIDED that such Lien does not
extend to any property or assets of the Issuer or any Restricted Subsidiary
other than the asset acquired in connection with the Incurrence of such
Acquired Indebtedness;
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(vii) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Issuer and its
Restricted Subsidiaries, taken as a whole;
(viii) Liens encumbering property or assets under construction arising
from progress or partial payments by a customer of the Issuer or its
Restricted Subsidiaries relating to such property or assets;
(ix) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease;
(x) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(xi) Liens on property of, or on shares of Capital Stock or Indebtedness
of, any Person existing at the time such Person becomes, or becomes a part
of, any Restricted Subsidiary; PROVIDED that such Liens do not extend to or
cover any property or assets of the Issuer or any Restricted Subsidiary
other than the property or assets acquired and any proceeds thereof;
(xii) Liens in favor of the Issuer or any Restricted Subsidiary;
(xiii) Liens arising from the rendering of a final judgment or order
against the Issuer or any Restricted Subsidiary that does not give rise to
an Event of Default;
(xiv) Liens securing reimbursement obligations with respect to letters of
credit that encumber documents and other property relating to such letters
of credit and the products and proceeds thereof;
(xv) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(xvi) Liens encumbering customary initial deposits and margin deposits,
and other Liens that are either within the general parameters customary in
the industry or incurred in the ordinary course of business, in each case
securing Indebtedness under Interest Rate Agreements and Currency Agreements
and forward contracts, options, future contracts, futures options or similar
agreements or arrangements designed solely to protect the Issuer or any of
its Restricted Subsidiaries from fluctuations in interest rates, currencies
or the price of commodities;
(xvii) Liens arising out of conditional sale, title retention, consignment
or similar arrangements for the sale of goods entered into by the Issuer or
any of its Restricted Subsidiaries in the ordinary course of business in
accordance with the past practices of the Issuer and its Restricted
Subsidiaries prior to the Closing Date;
(xviii) Liens on or sales of receivables, including related intangible
assets and proceeds thereof;
(xix) Liens securing Indebtedness incurred under clauses (iv)(A),
(iv)(B), (vii), (viii)(B), (ix), (x) or (xii) of the definition of
"Permitted Indebtedness";
(xx) Liens arising solely by virtue of any statutory or common law
provision relating to banker's liens, rights of set-off, or similar rights
and remedies as to deposit accounts or other funds maintained with a
creditor depository institution;
(xxi) Liens securing Capitalized Lease Obligations on assets subject to
such Capitalized Leases;
(xxii) Liens of the Issuer (which term shall include Telecommunications,
the Partnership and IWL if the Transaction is consummated) or any Restricted
Subsidiary securing Indebtedness in effect at the Closing Date or at the
date on which the Transaction or the Special Partnership Transaction, as the
case may be, is consummated (to the extent such Indebtedness Incurred after
the Closing Date was incurred without violation of the Indenture);
(xxiii) Liens granted after the Closing Date on any assets or Capital
Stock of the Issuer or its Restricted Subsidiaries created in favor of the
Holders;
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(xxiv) Liens with respect to the assets of a Restricted Subsidiary granted
by such Restricted Subsidiary to the Issuer or a Wholly Owned Restricted
Subsidiary to secure Indebtedness owing to the Issuer or such other
Restricted Subsidiary;
(xxv) Liens securing Indebtedness that is Incurred to refinance secured
Indebtedness permitted to be Incurred under clause (iii) of the definition
of "Permitted Indebtedness"; PROVIDED that such Liens do not extend to or
cover any property or assets of the Issuer or any Restricted Subsidiary
other than the property or assets securing the Indebtedness being
refinanced; or
(xxvi) any extension, renewal or replacement, in whole or in part, of any
Lien described in the foregoing clauses (i) through (xxv); PROVIDED that any
such extension, renewal or replacement shall be no more restricted in any
material respect than the Lien so extended, renewed or replaced and shall
not extend to any additional property or assets.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's preferred or preference equity, whether
outstanding on the Closing Date or issued thereafter, including, without
limitation, all series and classes of such preferred or preference stock.
"pro forma" means, with respect to the preparation of financial statements
to show the effect of any particular transaction, the preparation of such
financial statements in accordance with Article 11 of Regulation S-X.
"Redeemable Stock" means any class or series of Capital Stock of any Person
that by its terms or otherwise is (i) required to be redeemed prior to the
Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; PROVIDED that any Capital
Stock that would not constitute Redeemable Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Redeemable Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable in any material respect
to the holders of such Capital Stock than the provisions contained in
"Limitation on Asset Sales" and "Repurchase of Notes upon a Change of Control"
covenants described above are to the holders of the Notes and such Capital Stock
specifically provides that such Person will not repurchase or redeem any such
stock pursuant to such provision prior to the Issuer's repurchase of such Notes
as are required to be repurchased pursuant to the "Limitation on Asset Sales"
and "Repurchase of Notes upon a Change of Control" covenants described above.
"Restricted Payment" means
(i) a declaration or payment of any dividend or the making of any
distribution on or with respect to the Issuer's Capital Stock (other than
(x) dividends or distributions payable solely in shares of the Issuer's
Capital Stock (other than Redeemable Stock) or in options, warrants or other
rights to acquire shares of such Capital Stock and (y) dividends or
distributions payable to the Issuer or any Wholly Owned Restricted
Subsidiary),
(ii) a payment made by the Issuer or any Restricted Subsidiary used to
purchase, redeem, retire or otherwise acquire for value any shares of
Capital Stock of (A) the Issuer or an Unrestricted Subsidiary (including
options, warrants or other rights to acquire such shares of Capital Stock)
held by any Person or (B) a Restricted Subsidiary (including options,
warrants or other rights to acquire such shares of Capital Stock) held by
any Affiliate of the Issuer (other than a Wholly Owned Restricted
Subsidiary) or any holder (or any Affiliate of such holder) of 5% or more of
any class of Capital Stock of the Issuer (including options, warrants or
other rights to acquire such shares of Capital Stock) (other than (x)
payments payable solely in shares of Capital Stock (other than Redeemable
Stock) of
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the Issuer or in options, warrants or other rights to acquire shares of such
Capital Stock and (y) payments payable to the Issuer or any Wholly-Owned
Restricted Subsidiary),
(iii) any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of Indebtedness of the Issuer that is subordinated in
right of payment to the Notes (other than, in each case, the purchase,
repurchase or acquisition of Indebtedness either in anticipation of
satisfying a sinking fund obligation, principal installment or final
maturity that in any case is due within one year after the date of such
purchase, repurchase or acquisition), or
(iv) any Investment, other than a Permitted Investment, in any Person.
The consummation of the transactions contemplated by the Transaction or the
Special Partnership Transaction shall not constitute "Restricted Payments."
"Restricted Subsidiary" means any Subsidiary of the Issuer other than an
Unrestricted Subsidiary.
"Special Partnership Transaction" means the statutory merger or interest
exchange between Telecommunications and the Partnership that would be required
to be consummated in the event the Special Offer to Purchase is made and any
Notes remain outstanding after the payment of all Notes tendered in such Special
Offer to Purchase.
"Stated Maturity" means (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Subsidiary" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the voting power of the
outstanding Voting Stock is owned, directly or indirectly, by such Person and
one or more other Subsidiaries of such Person.
"Subsidiary Guarantee" has the meaning given it under the caption
"Limitation on Issuances of Guarantees by Restricted Subsidiaries."
"Telecommunications Assets" means, with respect to any Person, assets
(including, without limitation, rights of way, trademarks and licenses) that are
utilized by such Person, directly or indirectly, in the Telecommunications
Business and including any computer systems used in a Telecommunications
Business. Telecommunications Assets shall also include a majority of the Voting
Stock of another Person, if such Voting Stock is acquired by the Issuer or a
Restricted Subsidiary and all or substantially all the assets of such other
Person comprise Telecommunications Assets; and such other Person either is, or
immediately following the relevant transaction shall become, a Restricted
Subsidiary of the Issuer pursuant to the Indenture. The determination of what
constitutes Telecommunications Assets shall be made by the Board of Directors of
the Issuer and evidenced by a Board Resolution delivered to the Trustee.
"Telecommunications Business" means the business of (i) transmitting or
providing services relating to the transmission of voice, video, signals, data
or Internet services; (ii) constructing, creating, developing, owning,
operating, and marketing one or more communications networks, related, ancillary
or complementary network transmission equipment, information systems, software,
and other related, ancillary or complimentary assets and devices; (iii)
planning, designing, and consulting with respect to the matters described in
clauses (i) and (ii); and (iv) evaluating, participating and pursuing any other
activity or opportunity that is related, ancillary, or complementary to those
identified in clauses (i), (ii) and (iii) above, as determined in good faith by
the Board of Directors of the Issuer.
"Temporary Cash Investment" means any of the following:
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(i) direct obligations of the United States of America or any agency
thereof or obligations fully and unconditionally guaranteed by the United
States of America or any agency thereof with a maturity of 365 days or less,
(ii) time deposit accounts, certificates of deposit and money market
deposits maturing within one year of the date of acquisition thereof issued
by a bank or trust company which is organized under the laws of the United
States of America, any state thereof or any foreign country recognized by
the United States of America, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $50 million (or the
foreign currency equivalent thereof) and has outstanding debt which is rated
"A" (or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker
dealer or mutual fund distributor,
(iii) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above,
(iv) commercial paper, maturing not more than one year after the date of
acquisition, issued by a corporation (other than an Affiliate of the Issuer)
organized and in existence under the laws of the United States of America,
any state thereof or any foreign country recognized by the United States of
America with a rating at the time as of which any investment therein is made
of "P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1"
(or higher) according to Standard & Poor's Ratings Service, and
(v) securities with maturities of six months or less from the date of
acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A" by
Standard & Poor's Ratings Service or Moody's Investors Service, Inc.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction" means the transactions contemplated by the Merger Agreement
(also referred to herein from time to time as the Combination).
"Transition Period" means the period between the Closing Date and the
consummation of the Transaction or the payment date for Notes tendered in the
Special Offer to Purchase, as the case may be.
"Unrestricted Subsidiary" means (a) any Subsidiary that at the time of
determination shall be an Unrestricted Subsidiary (as designated by the Board of
Directors of the Issuer, as provided below) and (b) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors of the Issuer may designate any
Subsidiary (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary so long as (i) neither the Issuer nor any other
Subsidiary is directly or indirectly liable for any Indebtedness of such
Subsidiary, (ii) no default with respect to any Indebtedness of such Subsidiary
would permit (upon notice, lapse of time or otherwise) any holder of any other
Indebtedness of the Issuer or any Restricted Subsidiary to declare a default on
such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its Stated Maturity, (iii) any Investment in such Subsidiary
made as a result of designating such Subsidiary an Unrestricted Subsidiary will
not violate the provisions of the "Limitation on Restricted Payments" covenant,
(iv) neither the Issuer nor any Restricted Subsidiary has a contract, agreement,
arrangement, understanding or obligation of any kind, whether written or oral,
with such Subsidiary on terms more favorable to such Subsidiary than those that
might be obtained at the time from persons who are not Affiliates of the Issuer,
and (v) neither the Issuer nor any other Subsidiary has any obligation (1) to
subscribe for additional shares of Capital Stock or other equity interests in
such
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Subsidiary, or (2) to maintain or preserve such Subsidiary's financial condition
or to cause such Subsidiary to achieve certain levels of operating results. Any
such designation by the Board of Directors of the Issuer shall be evidenced to
the Trustee by filing a Board Resolution with the Trustee giving effect to such
designation. The Board of Directors of the Issuer may designate any Unrestricted
Subsidiary as a Restricted Subsidiary if, immediately after giving effect to
such designation, there would be no Default or Event of Default under the
Indenture and the Issuer could incur $1.00 of additional Indebtedness under
clause (i) of the first paragraph of the "Limitation on Indebtedness" covenant
described above pursuant to the "Limitation on Indebtedness" covenant.
"Vendor Credit Facility" means any agreement entered into with one or more
vendors, suppliers or lessors of telecommunications equipment or assets
(including any agreement entered into with any such vendor, supplier or lessor
or any financial institution acting on behalf of any such vendor, supplier or
lessor) in order to finance the acquisition or construction of
telecommunications equipment or assets, as such agreement may be amended,
modified, supplemented, refunded, refinanced, restructured, renewed or replaced
from time to time; PROVIDED that (i) any equipment or other assets acquired or
leased under or pursuant to such Vendor Credit Facility are received by the
Issuer or a Restricted Subsidiary and (ii) all obligations with respect to or
under such Vendor Credit Facility or any amendment, modification, supplement,
refunding, refinancing, restructuring, renewal or replacement thereof are owed,
whether directly or indirectly as the case may be, to a Person who is not an
Affiliate of the Issuer or any of its Subsidiaries and no such Affiliate shall
act as a facilitator or conduit or in a similar capacity with respect thereto.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals or other
shares issued to Persons as mandated by applicable law) by such Person or one or
more Wholly Owned Subsidiaries of such Person.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the Exchange Notes will be issued in fully
registered form without interest coupons. Exchange Notes issued in exchange for
Private Notes sold in offshore transactions in reliance on Regulation S under
the Securities Act will be represented by one or more global Notes in
definitive, fully registered form without interest coupons (each a "Regulation S
Global Note").
Exchange Notes issued in exchange for Private Notes sold in reliance on Rule
144A will be represented by one or more permanent global Notes (each a
"Registered Global Note" and, together with the Regulation S Global Note, the
"Global Notes") in definitive, fully registered form and, without interest
coupons and will be deposited with the Trustee or as custodian for The
Depository Trust Company (the "Depositary"), and registered in the name of the
Depositary or of a nominee of the Depositary.
Upon issuance of the Global Note, the Depositary will credit, on its
internal system, the respective amounts of the individual beneficial interests
in the Global Note as applicable, to persons who have accounts with the
Depositary ("Participants"). Such accounts initially will be designated by or on
behalf of the Initial Purchasers. Ownership of beneficial interests in the
Global Note will be shown on, and the transfer of such beneficial interests will
be effected only through, records maintained by the Depositary or its nominee
(with respect to interests of Participants) and the records of Participants
(with respect to interests of persons other than Participants). Qualified
Institutional Buyers may hold their interests in the Global Note directly
through the Depositary if they are Participants, or indirectly through
organizations which are Participants.
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Investors may hold their interests in a Regulation S Global Note directly
through Cedel Bank or Euroclear, if they are participants in such systems, or
indirectly through organizations that are participants in such system. Investors
may also hold such interests through organizations other than Cedel Bank or
Euroclear that are participants in the DTC system. Cedel Bank and Euroclear will
hold interests in the Regulation S Global Note on behalf of their participants
through DTC.
So long as the Depositary, or its nominee, is the registered owner or holder
of the Global Note, the Depositary or such nominee, as the case may be, will be
considered the sole owner and holder of the Notes represented by such Global
Note for all purposes under the Indenture and the Notes. Accordingly, beneficial
owners of an interest in the Global Note must rely on the procedures of the
Depositary and, if such person is not a Participant, on the procedures of the
Participant through which such person owns its interest, to exercise any rights
and fulfill any obligations of a holder under the Indenture. No beneficial owner
of an interest in the Global Note will be able to transfer such interest except
in accordance with the Depositary's procedures, in addition to those provided
for under the Indenture.
Payments of the principal of or premium, if any, and interest on the Global
Notes will be made to the Depositary or its nominee, as the case may be, as the
registered owner thereof. None of the Company, the Trustee, or any paying agent
under the Indenture will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in the Global Note or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
The Company expects that the Depositary or its nominee, upon receipt of any
payment of the principal of, premium and interest on (or additional interest in
respect of) the Global Note will credit Participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount at maturity of such Global Note as shown on the records of the Depositary
or its nominee. The Company also expects that payments by Participants to owners
of beneficial interests in the Global Note held through such Participants will
be governed by standing instructions and customary practice as is now the case
with securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
Participants.
Transfers between Participants in the Depositary will be effected in the
ordinary way through the Depositary's same-day funds system in accordance with
the Depositary rules and will be settled in federal funds. Transfers between
participants in Euroclear and Cedel Bank will be effected in the ordinary way in
accordance with their respective rules and operating procedures. If a holder
requires physical delivery of a Certificated Security for any reason, including
to sell Notes to persons in states which require physical delivery of the Notes
or to pledge such securities, such holder must transfer its interest in the
Global Note in accordance with the normal procedures of the Depositary and with
the procedures set forth in the Indenture.
The Depositary has advised the Company that the Depositary will take any
action permitted to be taken by a holder of Notes (including the presentation of
Notes for exchange as described below) only at the direction of one or more
Participants to whose account the Depositary interests in the applicable Global
Securities are credited and only in respect of such portion of the aggregate
principal amount at maturity of Notes as to which such Participant or
Participants has or have given such direction. However, if there is an Event of
Default under the Indenture, the Depositary will exchange the Global
Certificates for the applicable Certificated Securities, which it will
distribute to its Participants.
The Depositary has advised the Company that it is a limited-purpose trust
company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Securities Exchange Act of 1934. The Depositary holds
securities that its participants ("Participants") deposit with the Depositary.
The Depositary also facilitates the settlement among Participants of
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securities transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in Participant's accounts,
thereby eliminating the need for physical movement of securities certificates.
Direct Participants include securities brokers and dealers, banks, trust
companies, clearing corporations, and certain other organizations. The
Depositary is owned by a number of its direct Participants and by the New York
Stock Exchange, Inc., the American Stock Exchange, Inc., and the National
Association of Securities Dealers, Inc. Access to the Depositary system is also
available to others such as securities brokers and dealers, banks, and trust
companies that clear through or maintain a custodial relationship with a direct
Participant, either directly or indirectly. The rules applicable to the
Depositary and its Participants are on file with the Commission.
Although DTC and its Participants have agreed to the foregoing procedures in
order to facilitate transfers of interests in the Global Note among Participants
and participants of Euroclear and Cedel Bank, they are under no obligation to
perform such procedures, and such procedures may be discontinued at any time.
Neither the Company nor the Trustee, or any paying agent will have any
responsibility for the performance by the Depositary, Euroclear or Cedel Bank or
their respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
Except as set forth below, each of the Exchange Notes will be issued in the
form of one or more Global Notes. Owners of beneficial interests in the Global
Note will be entitled to receive Notes in definitive form ("Definitive Notes")
if the Depositary is at any time unwilling or unable to continue as, or ceases
to be, a "Clearing Agency" registered under Section 17A of the Exchange Act, and
a successor to the Depositary registered as a "Clearing Agency" under Section
17A of the Exchange Act is not appointed by the Company within 90 days. Any
Definitive Notes issued in exchange for beneficial interests in the Global Note
will be registered in such name or names as the Depositary shall instruct the
Trustee. It is expected that such instructions will be based upon directions
received by the Depositary from Participants with respect to ownership of
beneficial interests in the Global Note.
In addition to the foregoing, on or after the occurrence of an Event of
Default under the Indenture, owners of beneficial interests in the Global Note
will be entitled to request and receive Definitive Notes. Such Definitive Notes
will be registered in such name or names as the Depositary shall instruct the
Trustee.
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REGISTRATION RIGHTS
The Company, Telecommunications, and the Partnership entered into the
Registration Rights Agreement with the Initial Purchasers, a copy of the form of
which will be made available to holders or prospective purchasers of Private
Notes upon request, pursuant to which the Issuer agreed to file with the
Commission the Exchange Offer Registration Statement with respect to the
Exchange Offer. In the event that:
(i) the Company is not permitted to consummate the Exchange Offer because
the Exchange Offer is not permitted by applicable law or Commission policy,
(ii) the Exchange Offer Registration Statement is not for any other reason
declared effective within 180 days following the Original Issue Date or the
Exchange Offer is not consummated within 215 days after the Original Issue Date,
(iii) any holder of Private Notes notifies the Company 120 days after the
Original Issue Date that (a) due to a change in law or policy it is not entitled
to participate in the Exchange Offer, (b) due to a change in law or policy it
may not resell the Exchange Notes acquired by it in the Exchange Offer to the
public without delivering a prospectus and (x) the prospectus contained in the
Exchange Offer Registration Statement is not appropriate or available for such
resales by such holder and (y) such prospectus is not promptly amended or
modified in order to be suitable for use in connection with such resales for
such holder and all similarly situated holders or (c) it is a broker-dealer and
owns Private Notes acquired directly from the Company or an affiliate of the
Company, or
(iv) the holders of a majority of the Private Notes may not resell the
Exchange Notes acquired by them in the Exchange Offer to the public without
restriction under the Securities Act and without restriction under applicable
blue sky or state securities laws, then the Company will file with the
Commission the Shelf Registration Statement at its cost as promptly as
practicable, but in any event prior to the later of (i) 120 days after the
Original Issue Date or (ii) 30 days after the obligation to file the Shelf
Registration Statement arises to cover resales of the Transfer Restricted Notes
(as defined below) by the holders thereof. The Registration Rights Agreement
provides that, in such event, the Company will be required to, within the time
periods specified in the Registration Rights Agreement, file the applicable
registration statement with the Commission and thereafter to (a) use its best
efforts to cause the applicable registration statement to be declared effective
by the Commission as promptly as practicable but no later than the 60th day
after such filing obligation arises and (b) use its best efforts to keep
effective the Shelf Registration Statement until two years after its effective
date or such shorter period which will terminate when all of the Private Notes
covered by the Shelf Registration Statement have been sold pursuant thereto.
For purposes of the foregoing, "Transfer Restricted Notes" means each Private
Note until:
(i) the date on which such Private Note has been exchanged by a person other
than a broker-dealer for an Exchange Note in the Exchange Offer,
(ii) following the exchange by a broker-dealer in the Exchange Offer of a
Private Note for an Exchange Note, the date on which such Exchange Note is sold
to a purchaser who receives from such broker-dealer on or prior to the date of
such sale a copy of the prospectus contained in the Exchange Offer Registration
Statement,
(iii) the date on which such Private Note has been effectively registered
under the Securities Act and disposed of in accordance with the Shelf
Registration Statement,
(iv) the date on which such Private Note is distributed to the public
pursuant to Rule 144 under the Securities Act (or any similar provision then in
force, but not Rule 144A under the Securities Act),
(v) such Private Note shall have been otherwise transferred by the holder
thereof and a new Note not bearing a legend restricting further transfer shall
have been delivered by the Company and subsequent
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disposition of such Note shall not require registration or qualification under
the Securities Act or any similar state law then in force or
(vi) such Private Note ceases to be outstanding.
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that the
Exchange Notes issued pursuant to the Exchange Offer in exchange for Private
Notes may be offered for resale, resold and otherwise transferred by any Holder
thereof (other than any such Holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act), without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of such
Holder's business and such Holder has no arrangement with any person to
participate in the distribution of such Exchange Notes. However, any holder of
Private Notes who is an "affiliate" of the Company or persons who intend to
participate in the Exchange Offer for the purpose of distributing the Exchange
Notes (i) will not be able to rely on the interpretations of the staff of the
Commission, (ii) will not be able to tender its Private Notes in the Exchange
Offer and (iii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or transfer of
the Private Notes.
Each holder of the Private Notes (other than certain specified holders) who
wishes to exchange Private Notes for Exchange Notes in the Exchange Offer will
be required to represent that (i) it is not an affiliate of the Company, (ii)
any Exchange Notes to be received by it will be acquired in the ordinary course
of its business and (iii) it has no arrangement with any person to participate
in the distribution (within the meaning of the Securities Act) of the Exchange
Notes. In addition, each broker-dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that (i) Private Notes
tendered by it in the Exchange Offer were acquired as a result of market-making
or other trading activities and (ii) it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of Exchange
Notes received in the Exchange Offer. The Letter of Transmittal states that by
so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
This Prospectus, as it may be amended or supplemented from time to time, may
be used by a broker-dealer in connection with any resale of the Exchange Notes
received in exchange for Private Notes where such Private Notes were acquired by
such broker-dealer as a result of market-making or other trading activities
(other than Private Notes acquired directly from the Company or an affiliate of
the Company). The Company has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. A broker-dealer which delivers such a
prospectus to purchasers in connection with such resales will be subject to
certain of the civil liability provisions under the Securities Act and will be
bound by the provisions of the Registration Rights Agreement (including certain
indemnification rights and obligations).
The Company has agreed to pay all reasonable expenses incident to the
Exchange Offer and will indemnify the Initial Purchasers, other holders of
Private Notes, and broker-dealers participating in the Exchange Offer against
certain liabilities, including liabilities under the Securities Act.
The Registration Rights Agreement provides that:
(i) unless the Exchange Offer would not be permitted by applicable law or
Commission policy, the Company will file the Exchange Offer Registration
Statement with the Commission on or prior to the 120th day after the Original
Issue Date,
(ii) unless the Exchange Offer would not be permitted by applicable law or
Commission policy, the Company will use its best efforts to have the Exchange
Offer Registration Statement declared effective by the Commission on or prior to
the 180th day after the Original Issue Date (the "Target Effectiveness Date"),
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(iii) unless the Exchange Offer would not be permitted by applicable law or
Commission policy, the Company will commence the Exchange Offer and use its best
efforts to issue, on or prior to the date which is 35 days after the date on
which the Exchange Offer Registration Statement was declared effective by the
Commission, Exchange Notes in exchange for all Private Notes tendered prior
thereto in the Exchange Offer, and
(iv) if obligated to file the Shelf Registration Statement, the Company will
file the Shelf Registration Statement as promptly as practicable, but in any
event prior to the later of (a) the 120th day after the Original Issue Date or
(b) the 30th day after such filing obligation arises, and will thereafter use
its best efforts to cause the Shelf Registration Statement to be declared
effective by the Commission as promptly as practicable, but no later than the
60th day after such obligation arises; PROVIDED that if the Company has not
consummated the Exchange Offer by the date which is 215 days after the Original
Issue Date, then the Company will file the Shelf Registration Statement with the
Commission on or prior to the 30th day after such date. The Company shall use
its best efforts to keep such Shelf Registration Statement continuously
effective, supplemented and amended until the earlier of (i) the second
anniversary of the effective date of the Shelf Registration Statement and (ii)
such time as all of the Transfer Restricted Notes covered by the Shelf
Registration Statement have been sold thereunder or otherwise cease to be
Transfer Restricted Notes.
In the event that:
(i) the Exchange Offer Registration Statement is not filed with the
Commission on or prior to the 120th calendar day after the Original Issue Date
or is not declared effective on or prior to the 180th calendar day following the
Original Issue Date,
(ii) the Exchange Offer is not consummated or, if required, a Shelf
Registration Statement with respect to the Private Notes is not declared
effective on or prior to the 215th calendar day following the Original Issue
Date, or
(iii) the Exchange Offer Registration Statement is declared effective but
thereafter ceases to be effective or usable (each event referred to in clauses
(i) through (iii) above, a "Registration Default"),
then the Company will be required to pay additional interest in cash on each
Interest Payment Date in an amount equal to one-half of one percent (0.50%) per
annum of the principal amount with respect to the first 90-day period following
such Registration Default. The amount of such additional interest will increase
by an additional one-half of one percent (0.50%) to a maximum of one percent
(1.0%) per annum for each subsequent 90-day period until such Registration
Default has been cured. Upon (x) the filing of the Exchange Offer Registration
Statement after the 120-day period described in clause (i) above or the
effectiveness of the Exchange Offer Registration Statement after the 180-day
period described in clause (i) above, (y) the consummation of the Exchange Offer
or the effectiveness of a Shelf Registration Statement, as the case may be,
after the 215-day period described in clause (ii) above, or (z) the cure of any
Registration Default described in clause (iii) above, such additional interest
shall cease to accrue from the date of such filing, effectiveness, consummation
or cure, as the case may be, if the Company is otherwise in compliance with this
paragraph; PROVIDED, HOWEVER, that if, after any such additional interest ceases
to accrue, a different event specified in clause (i), (ii), or (iii) above
occurs, such additional interest will again accrue pursuant to the foregoing
provision. During any 365-day period, the Company will have the ability to
suspend the availability of such Shelf Registration Statement and the use of the
related prospectus for up to two periods of up to 45 consecutive days (except
for the consecutive 45-day period immediately prior to maturity of the Private
Notes), but no more than an aggregate of 60 days during any 365-day period, if
any event shall occur as a result of which it shall be necessary, in the good
faith determination of the Company's Board of Directors, to amend the Shelf
Registration Statement or amend or supplement any prospectus or prospectus
supplement thereunder in order that each such document not include any untrue
statement of material fact or omit to state a material fact necessary to make
the statements therein not misleading in light of the circumstances under which
they were made.
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A Holder of a Private Note that sells such Private Note pursuant to the
Shelf Registration Statement will be required to be named as a selling security
holder in the related prospectus and to deliver a prospectus to purchasers, will
be subject to certain of the civil liability provisions under the Securities Act
in connection with such sales, and will be bound by the provisions of the
Registration Rights Agreement that are applicable to such a Holder (including
certain indemnification obligations). In addition, each such Holder of a Note
will be required to deliver information to be used in connection with the Shelf
Registration Statement and to reasonably cooperate to the extent necessary with
the Company's preparation of the Shelf Registration Statement.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is available upon request to the Company.
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DESCRIPTION OF CAPITAL STOCK
The following summaries of certain provisions of the Company's Articles of
Incorporation (the "Articles") and its By-Laws, as amended, do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Articles and By-Laws, copies of which are
available from the Company upon request, and by the provisions of the Texas
Business Corporation Act (the "TBCA"). See "Additional Information."
AUTHORIZED CAPITAL STOCK
Under the Articles, the total number of shares of all classes of stock that
CapRock has 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 CapRock Common Stock and
20,000,000 are shares of CapRock Preferred Stock. As of August 31, 1998, there
were 28,911,231 shares of CapRock Common Stock issued and outstanding, and no
shares of CapRock Preferred Stock were issued or outstanding.
COMMON STOCK
Each share of CapRock Common Stock has identical rights and privileges in
every respect. The holders of CapRock Common Stock are entitled to vote upon all
matters submitted to a vote of the stockholders of CapRock and are entitled to
one vote for each share of CapRock Common Stock held.
Subject to the prior rights and preferences, if any, applicable to shares of
CapRock Preferred Stock or any series thereof, the holders of CapRock Common
Stock are entitled to receive such dividends (payable in cash, stock or
otherwise) as may be declared thereon by the CapRock Board at any time and from
time to time out of any funds of CapRock legally available therefor.
In the event of any voluntary or involuntary liquidation, dissolution or
winding-up of CapRock, after distribution in full of the preferential amounts,
if any, to be distributed to the holders of CapRock Preferred Stock or any
series thereof, the holders of CapRock Common Stock will be entitled to receive
all of the remaining assets of CapRock available for distribution to its
stockholders, ratably in proportion to the number of shares of CapRock Common
Stock held by them.
Holders of CapRock Common Stock will have no preferences or any preemptive,
conversion or exchange rights.
PREFERRED STOCK
The CapRock Board is authorized at any time and from time to time to provide
for the issuance of shares of CapRock 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 CapRock Board. The CapRock Board could authorize the
issuance of shares of CapRock Preferred Stock with terms and conditions which
could discourage a takeover or other transaction that holders of some or a
majority of shares of CapRock 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 CapRock Preferred Stock are outstanding and the CapRock Board has no
present intention to issue any shares of CapRock Preferred Stock after the
Effective Time.
PREEMPTIVE RIGHTS
No holder of any shares of any class of stock of CapRock 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 CapRock Common Stock is
American Securities Transfer & Trust, Inc.
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CERTAIN ANTI-TAKEOVER EFFECTS
As of August 31, 1998, there were 171,088,769 authorized and unissued shares
of Common Stock and 20,000,000 authorized and unissued shares of Preferred Stock
of CapRock. 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 CapRock by means of a merger, tender
offer, proxy solicitation or otherwise. CapRock is also subject to prior
regulatory approval by the FCC and various state regulatory agencies for a
transfer of control of CapRock or for the assignment of CapRock'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 CapRock (or its subsidiaries) holds FCC authority to provide
international service, the FCC will scrutinize an ownership interest in CapRock
of greater than 25%, or a controlling interest at any level, by a dominant
foreign carrier. International carriers, such as CapRock, 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 telecommunications markets to
competition starting in 1998. Furthermore, the Indenture provides for a
mandatory purchase of the Notes upon a Change of Control and it is currently
expected that the Credit Facility will provide that an event of default or
redemption event thereunder will occur if all or a controlling interest in
CapRock's capital stock is sold, assigned or otherwise transferred. See
"Description of the Notes." Any of the foregoing factors could have the effect
of delaying, deferring or preventing a change of control of CapRock. The
Articles provide that Article 13.03 of the Texas Business Corporation Act, which
includes statutory anti-takeover measures, will not apply to CapRock. See "Risk
Factors-- Certain Anti-Takeover Matters."
WARRANTS
In connection with its initial public offering, IWL issued to Cruttenden
Roth, Incorporated ("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
Combination, the Representative Warrants are exercisable until July 16, 2002 for
such shares of CapRock Common Stock as would have been received had such
warrants been exercised immediately prior to the Combination.
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 certain demand and piggyback
registration rights that expired upon completion of the Combination.
In connection with the issuance of the Notes, registration rights were
granted to the holders of the Private Notes requiring the Issuer to file the
Exchange Offer Registration Statement and the Shelf Registration Statement. See
"The Exchange Offer--Purpose and Effect of the Exchange Offer."
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the principal United States federal
income tax consequences of an exchange of Private Notes for Exchange Notes and
the ownership and disposition of the Exchange Notes to initial purchasers
thereof. This discussion is based on currently existing provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), existing, temporary and
proposed Treasury regulations promulgated thereunder, and administrative and
judicial interpretations thereof, all as in effect or proposed on the date
hereof and all of which are subject to change, possibly with retroactive effect,
or different interpretations. This discussion does not address the tax
consequences to subsequent purchasers of Notes and is limited to purchasers who
acquire the Notes at their issue price and hold such Notes as capital assets,
within the meaning of section 1221 of the Code. Moreover, this discussion is for
general information only and does not address all of the tax consequences that
may be relevant to particular initial purchasers in light of their personal
circumstances or to certain types of initial purchasers, such as certain
financial institutions, insurance companies, tax-exempt entities, dealers in
securities, certain U.S. expatriates, persons who have hedged the risk of owning
a Note or holders whose "functional currency" is not the U.S. dollar.
As used herein, the term "U.S. Holder" means an initial purchaser of a Note
that is, for United States federal income tax purposes, (a) a citizen or
individual resident of the United States, (b) a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any political subdivision thereof (other than any partnership treated as foreign
under U.S. Treasury regulations which may be issued under recently enacted
amendments to the Code), (c) an estate the income of which is subject to United
States federal income taxation regardless of source, or (d) a trust subject to
the primary supervision of a court within the United States and the control of a
United States person, as described in the Code. An individual may, subject to
certain exceptions, be deemed to be a United States resident (as opposed to a
non-resident alien) by virtue of being present in the United States on at least
31 days in the calendar year and for an aggregate of at least 183 days during a
three-year period ending in the current calendar year (counting for such
purposes all of the days present in the current year, one-third of the days
present in the immediately preceding year, and one-sixth of the days present in
the second preceding year). Resident aliens are subject to U.S. federal tax as
if they were U.S. citizens. As used herein, a "Non-U.S. Holder" is a holder that
is not a U.S. Holder.
EXCHANGE OF NOTES
The Company believes that the exchange of Private Notes for Exchange Notes
pursuant to the Exchange Offer will not be treated as an "exchange" for federal
income tax purposes because the Exchange Notes will not be considered to differ
materially in kind or extent from the Private Notes. Rather, the Exchange Notes
received by a holder will be treated as a continuation of the Private Notes in
the hands of such holder. As a result, there will be no federal income tax
consequences to holders exchanging Private Notes for Exchange Notes pursuant to
the Exchange Offer.
ALL PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE NOTES, INCLUDING THE APPLICABILITY OF ANY FEDERAL TAX LAWS OR
ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND ANY CHANGES (OR PROPOSED CHANGES) IN
APPLICABLE TAX LAWS OR INTERPRETATIONS THEREOF.
UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS
STATED INTEREST. Interest paid on a Private Note or an Exchange Note will
be taxable to a U.S. Holder as ordinary interest income as it accrues or is
received, in accordance with such U.S. Holder's method of accounting for United
States federal income tax purposes.
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SALE OR EXCHANGE OF NOTES (OTHER THAN IN THE EXCHANGE OFFER). Upon a sale,
redemption (including pursuant to an offer by the Company), retirement or other
disposition of a Private Note or an Exchange Note, except in the case of an
exchange pursuant to the Exchange Offer (see above discussion), a U.S. Holder
generally will recognize taxable gain or loss equal to the difference between
(i) the amount of cash and the fair market value of property received on such
disposition (other than amounts attributable to accrued and unpaid interest) and
(ii) such U.S. Holder's adjusted tax basis in the Note. A U.S. Holder's adjusted
tax basis in a Note generally will equal the cost of such Note (net of accrued
interest), less any principal payments received by such holder.
Gain or loss recognized on the sale or exchange of a Note will be capital
gain or loss. Under recently enacted legislation, in general, long-term capital
gains recognized by an individual U.S. Holder will be subject to a maximum rate
of 20% in respect of property held for more than one year, effective for taxable
years ending after December 31, 1997. The distinction between capital gain or
loss and ordinary income or loss is also relevant for purposes of, among other
things, limitations with respect to the deductibility of capital losses.
Notwithstanding the foregoing, any amounts realized in connection with any
sale or exchange with respect to accrued interest not previously included in
income will be treated as ordinary interest income.
UNITED STATES FEDERAL TAXATION OF NON-U.S. HOLDERS
Under present United States federal income and estate tax law and subject to
the discussion of backup withholding below:
(i) payments of principal, premium (if any) and interest on a Note by
the Company or any agent of the Company to any Non-U.S. Holder will not be
subject to withholding of United States federal income tax, provided that,
in the case of interest (1) the Non-U.S. Holder does not actually or
constructively own 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote, (2) the Non-U.S. Holder is
not (x) a controlled foreign corporation that is related to the Company
through stock ownership, or (y) a bank receiving interest described in
section 881(c)(3)(A) of the Code, and (3) either (A) the beneficial owner of
the Note certifies to the Company or its agent, under penalties of perjury,
that it is not a "United States person" (as defined in the Code) and
provides its name and address, or (B) a securities clearing organization,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business (a "financial institution") and
holds the Note on behalf of the beneficial owner certifies to the Company or
its agent under penalties of perjury that such statement has been received
from the beneficial owner by it or by the financial institution between it
and the beneficial owner and furnishes the payor with a copy thereof;
(ii) a Non-U.S. Holder will not be subject to United States federal
income tax on gain realized on the sale, exchange, redemption, retirement at
maturity or other disposition of a Note (other than any such gain in respect
of accrued interest) unless (1) such holder is an individual who is present
in the United States for 183 days or more during the taxable year and
certain other conditions are met, or (2) the gain is effectively connected
with a United States trade or business of the holder, and if an income tax
treaty applies, is generally attributable to a United States "permanent
establishment" maintained by the holder;
(iii) a Note held by an individual who at the time of death is not a
citizen or resident of the United States will not be subject to United
States federal estate tax as a result of such individual's death if, at the
time of such death, (1) the individual did not actually or constructively
own 10 percent or more of the total combined voting power of all classes of
stock of the Company entitled to vote, and (2) the income on the Note would
not have been effectively connected with the conduct of a trade or business
by the individual in the United States; and
154
<PAGE>
If a Non-U.S. Holder is engaged in a trade or business in the United States,
and interest on the Note or gain realized on the sale, exchange or other
disposition of the Note is effectively connected with the conduct of such trade
or business (and, if an income tax treaty applies, the Non-U.S. Holder maintains
a U.S. "permanent establishment" to which the interest or gain is generally
attributable), the Non-U.S. Holder, although exempt from the withholding tax
discussed in the preceding paragraph (i) (provided that such holder furnishes a
properly executed Internal Revenue Service ("IRS") Form 4224 or successor form
on or before any payment date to claim such exemption), may be subject to United
States federal income
tax on such interest or gain on a net basis in the same manner as if it were a
U.S. Holder.
In addition, a foreign corporation that is a Non-U.S. Holder of a Note may
be subject to a branch profits tax equal to 30% of its effectively connected
earnings and profits for the taxable year, subject to certain adjustments,
unless it qualifies for a lower rate under an applicable tax treaty. For this
purpose, interest on a Note or gain on the disposition of a Note will be
included in earnings and profits if such interest or gain is effectively
connected with the conduct by the foreign corporation of a trade or business in
the United States.
Recently finalized Treasury regulations pertaining to U.S. federal
withholding tax, generally effective for payments made after December 31, 1999
(the "Final Withholding Tax Regulations"), will provide alternative methods for
satisfying the certification requirement described in paragraph (i)(3) above and
will require a Non-U.S. Holder which provides an IRS Form 4224 or successor form
(as discussed above) to also provide its U.S. taxpayer identification number.
The Final Withholding Tax Regulations generally also will require, in the case
of a Note held by a foreign partnership, that (x) the certification described in
paragraph (i)(3) above be provided by the partners and (y) the partnership
provide certain information, including a United States taxpayer identification
number. A look-through rule will apply in the case of tiered partnerships.
With respect to a Non-U.S. Holder subject to United States federal income
taxation under the circumstances described above in paragraph (ii), exchange of
a Private Note for an Exchange Note should not be subject to U.S. federal income
tax.
Non-U.S. Holders should consult with their tax advisors regarding United
States and foreign tax consequences with respect to the Notes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to certain
payments made in respect of a Note to U.S. Holders other than certain exempt
recipients (such as corporations). A 31% backup withholding tax will apply to
such payments if the U.S. Holder fails to provide a correct taxpayer
identification number or certification of exempt status or, with respect to
certain payments, the U.S. Holder fails to report in full all dividend and
interest income and the IRS notifies the payor of such underreporting.
Under current Treasury Regulations, backup withholding and information
reporting will not apply to payments made by the Company or any agent thereof
(in its capacity as such) to a Non-U.S. Holder of a Note if such holder has
provided the required certification that it is not a United States person as set
forth in paragraph (i) under "United States Federal Taxation of Non-U.S.
Holders," provided that neither the Company nor its agent has actual knowledge
that the holder is a United States person. The Company or its agent may,
however, report (on IRS Form 1042S) payments of interest on the Notes.
Payment of the proceeds from the disposition of a Note made to or through a
foreign office of a broker will not be subject to information reporting or
backup withholding, except that if the broker is a United States person, a
controlled foreign corporation for United States tax purposes or a foreign
person 50% or more of whose gross income from all sources for the three-year
period ending with the close of its taxable year preceding the payment was
effectively connected with a United States trade or business,
155
<PAGE>
information reporting may apply to such payments. Payments of the proceeds from
a disposition of a Note made to or through the United States office of a broker
is subject to information reporting and backup withholding unless the holder or
beneficial owner certifies as to its taxpayer identification number or otherwise
establishes an exemption from information reporting and backup withholding.
In general, the Final Withholding Tax Regulations do not significantly alter
the current substantive backup withholding and information reporting
requirements but unify current certification procedures and clarify reliance
standards. Under the Final Withholding Tax Regulations, special rules apply
which permit the shifting of primary responsibility for withholding to certain
financial intermediaries acting on behalf of beneficial owners. A holder of a
Note should consult with its tax advisor regarding the application of the backup
withholding rules to its particular situation, the availability of an exemption
therefrom, the procedure for obtaining such an exemption, if available, and the
impact of the Final Withholding Tax Regulations on payments made with respect to
Notes after December 31, 1999.
Any amounts withheld under the backup withholding rules from a payment to a
holder would be allowed as a refund or a credit against such holder's United
States federal income tax liability, provided the required information is
furnished to the IRS.
156
<PAGE>
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that the
Exchange Notes issued pursuant to the Exchange Offer in exchange for Private
Notes may be offered for resale, resold and otherwise transferred by any Holder
thereof (other than any such Holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act), without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of such
Holder's business and such Holder has no arrangement with any person to
participate in the distribution of such Exchange Notes. However, any holder of
Private Notes who is an "affiliate" of the Company or persons who intend to
participate in the Exchange Offer for the purpose of distributing the Exchange
Notes (i) will not be able to rely on the interpretations of the staff of the
Commission, (ii) will not be able to tender its Private Notes in the Exchange
Offer and (iii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or transfer of
the Private Notes.
Each holder of the Private Notes (other than certain specified holders) who
wishes to exchange Private Notes for Exchange Notes in the Exchange Offer will
be required to represent that (i) it is not an affiliate of the Company, (ii)
any Exchange Notes to be received by it will be acquired in the ordinary course
of its business and (iii) it has no arrangement with any person to participate
in the distribution (within the meaning of the Securities Act) of the Exchange
Notes. In addition, each broker-dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that (i) Private Notes
tendered by it in the Exchange Offer were acquired as a result of market-making
or other trading activities and (ii) it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of Exchange
Notes received in the Exchange Offer. The Letter of Transmittal states that by
so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
This Prospectus, as it may be amended or supplemented from time to time, may
be used by a broker-dealer in connection with any resale of the Exchange Notes
received in exchange for Private Notes where such Private Notes were acquired by
such broker-dealer as a result of market-making or other trading activities
(other than Private Notes acquired directly from the Company or an affiliate of
the Company). The Company has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. A broker-dealer which delivers such a
prospectus to purchasers in connection with such resales will be subject to
certain of the civil liability provisions under the Securities Act and will be
bound by the provisions of the Registration Rights Agreement (including certain
indemnification rights and obligations).
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealer or others. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will
deliver, and by delivering, a prospectus as required, a broker-dealer will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
157
<PAGE>
For a period of 180 days from the Expiration Date, the Company will send a
reasonable number of additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company will pay all the expenses incident to
the Exchange Offer (which shall not include the expenses of any Holder in
connection with resales of the Exchange Notes). The Company has agreed to
indemnify the Initial Purchasers and any broker-dealers participating in the
Exchange Offer against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the Exchange Notes will be passed upon for the Company by
Munsch Hardt Kopf Harr & Dinan, P.C., Dallas, Texas.
EXPERTS
The consolidated financial statements of IWL at June 30, 1996 and 1997 and
December 31, 1997 and for each of the years in the three year period ended June
30, 1997 and for the six months ended December 31, 1997 included in this
Prospectus 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 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, 1996 and for the years ended December 31, 1995 and 1996, in this
Prospectus have been audited by Burds, Reed & Mercer, P.C., independent
certified public accountants, as set forth in their report 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, in this Prospectus
have been audited by KPMG Peat Marwick LLP, independent certified public
accountants, as set forth in their reports thereon 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 balance sheet of CapRock at June 30, 1998, in this Prospectus have been
audited by KPMG Peat Marwick LLP, independent certified public accountants, as
set forth in their report thereon included elsewhere herein. Such balance sheet
of CapRock is included herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The supplemental consolidated financial statement of CapRock and
subsidiaries at December 31, 1996 and 1997 and for each of the years in the
three year period ended December 31, 1997 included in this Prospectus have been
audited by KPMG Peat Marwick LLP, independent certified public accountants, as
set forth in their report thereon included elsewhere herein. Such financial
statements of CapRock and subsidiaries are included herein in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
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
158
<PAGE>
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.
159
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CAPROCK TELECOMMUNICATIONS CORP. (FORMERLY CAPROCK COMMUNICATIONS CORP.)
Independent Auditors' Report of KPMG Peat Marwick LLP...................................................... F-2
Independent Auditors' Report of Burds, Reed and Mercer, P.C................................................ F-3
Balance Sheets as of December 31, 1996 and 1997 and June 30, 1998.......................................... F-4
Statements of Operations for the years ended December 31, 1995, 1996 and 1997 and for the six months ended
June 30, 1997 and 1998................................................................................... F-5
Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997 and the six months
ended June 30, 1998...................................................................................... F-6
Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and for the six months ended
June 30, 1997 and 1998................................................................................... F-7
Notes to Financial Statements.............................................................................. F-8
CAPROCK FIBER NETWORK, LTD.
Independent Auditors' Report of KPMG Peat Marwick LLP...................................................... F-18
Independent Auditors' Report of Burds, Reed and Mercer, P.C................................................ F-19
Balance Sheets as of December 31, 1996 and 1997 and June 30, 1998.......................................... F-20
Statements of Operations for the years ended December 31, 1995, 1996 and 1997 and for the six months ended
June 30, 1997 and 1998................................................................................... F-21
Statements of Partners' Capital (Deficit) for the years ended December 31, 1995, 1996 and 1997 and the six
months ended June 30, 1998............................................................................... F-22
Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and for the six months ended
June 30, 1997 and 1998................................................................................... F-23
Notes to Financial Statements.............................................................................. F-24
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
Independent Auditors' Report............................................................................... F-31
Consolidated Balance Sheets as of June 30, 1996 and 1997 and December 31, 1997............................. F-32
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-33
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-34
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-35
Notes to Consolidated Financial Statements................................................................. F-37
Consolidated Balance Sheets as of December 31, 1997 and June 30, 1998...................................... F-53
Consolidated Statements of Operations for the six months ended June 30, 1997 and 1998...................... F-54
Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1998...................... F-55
Condensed Notes to Consolidated Financial Statements....................................................... F-56
CAPROCK COMMUNICATIONS CORP. (FORMERLY IWL HOLDINGS CORP.)
Independent Auditors' Report............................................................................... F-58
Balance Sheet as of June 30, 1998.......................................................................... F-59
Notes to Balance Sheet..................................................................................... F-60
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
Independent Auditors' Report............................................................................... F-61
Supplemental Consolidated Balance Sheets as of December 31, 1996 and 1997 and June 30, 1998................ F-62
Supplemental Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997 and
the six months ended June 30, 1998....................................................................... F-63
Supplemental Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1996
and 1997 and the six months ended June 30, 1998.......................................................... F-64
Supplemental Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and
the six months ended June 30, 1998....................................................................... F-65
Notes to Supplemental Consolidated Financial Statements.................................................... F-66
</TABLE>
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, 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 August 26, 1998
F-2
<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-3
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30
--------------------------- -------------
1996 1997 1998
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................................... $ -- $ 2,162 $ 2,439
Accounts receivable and unbilled services, less allowance for
doubtful accounts of $324,703, $1,640,722 and $292,912 at
December 31, 1996 and 1997, and June 30, 1998, respectively...... 3,514,390 8,325,352 10,283,720
Prepaid expenses and other......................................... 225,996 571,650 1,056,400
Due from affiliate................................................. -- -- 1,250,000
Deferred income taxes (note 8)..................................... 735,430 624,095 88,160
------------ ------------- -------------
Total current assets............................................. 4,475,816 9,523,259 12,680,719
Property and equipment, net (note 2)................................. 2,857,622 3,692,670 4,739,115
Other assets......................................................... 22,125 110,741 423,689
------------ ------------- -------------
Total assets..................................................... $ 7,355,563 $ 13,326,670 $ 17,843,523
------------ ------------- -------------
------------ ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 3,786,838 $ 7,320,590 $ 9,431,424
Bank line of credit (note 4)....................................... 814,422 1,152,329 2,601,685
Accrued liabilities (note 6)....................................... 376,350 534,323 531,179
Current installments of obligations under capital lease (note 3)... 212,695 239,672 254,417
Note payable (note 4).............................................. 521,835 -- --
Income taxes payable (note 8)...................................... -- 324,550 --
Unearned revenue................................................... 111,352 527,774 155,661
------------ ------------- -------------
Total current liabilities........................................ 5,823,492 10,099,238 12,974,366
Deferred income taxes (note 8)....................................... 401,270 527,394 530,416
Obligations under capital leases and other long-term debt (notes 3
and 4)............................................................. 719,993 452,938 264,655
------------ ------------- -------------
Total liabilities................................................ 6,944,755 11,079,570 13,769,437
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) (354,532)
Retained earnings (accumulated deficit)............................ (630,365) 1,185,071 2,970,345
------------ ------------- -------------
410,808 2,247,100 4,074,086
Commitments (notes 3 and 9)
------------ ------------- -------------
Total liabilities and stockholder's equity....................... $ 7,355,563 $ 13,326,670 $ 17,843,523
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------- ----------------------------
1995 1996 1997 1997 1998
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Telecommunication services........... $ 13,439,658 $ 23,173,904 $ 46,744,549 $ 20,128,426 $ 32,415,539
Cost of revenues..................... 11,042,775 18,941,122 35,776,468 15,769,595 23,910,786
------------- ------------- ------------- ------------- -------------
Gross profit..................... 2,396,883 4,232,782 10,968,081 4,358,831 8,504,753
Operating expenses:
Selling, general and administrative
expenses......................... 2,600,682 3,710,671 7,047,418 3,216,741 4,942,551
Depreciation and amortization...... 333,282 478,506 694,475 303,254 484,361
------------- ------------- ------------- ------------- -------------
Income (loss) from operations.... (537,081) 43,605 3,226,188 838,836 3,077,841
Interest expense..................... (240,370) (314,833) (310,543) (167,527) (158,997)
------------- ------------- ------------- ------------- -------------
Income (loss) before income
taxes.......................... (777,451) (271,228) 2,915,645 671,309 2,918,844
Income tax expense (benefit) (note
8)................................. (245,600) (88,560) 1,100,209 242,594 1,133,570
------------- ------------- ------------- ------------- -------------
Net income (loss)................ $ (531,851) $ (182,668) $ 1,815,436 $ 428,715 $ 1,785,274
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Net income (loss) per share:
Basic.............................. $ (.05) $ (.02) $ 0.17 $ .04 $ 0.17
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Diluted............................ $ (.05) $ (.02) $ 0.17 $ .04 $ 0.17
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
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 10,576,001
</TABLE>
See accompanying notes to financial statements.
F-5
<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
(unaudited).................................. -- -- 41,712 -- 41,712
Net income (unaudited)......................... -- -- -- 1,785,274 1,785,274
------------ ------------ ------------- ------------ ------------
Balance at June 30, 1998 (unaudited)........... 10,398,954 $ 1,458,273 $ (354,532) $2,970,345 $4,074,086
------------ ------------ ------------- ------------ ------------
------------ ------------ ------------- ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
------------------------------------ -----------------------
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 $ 428,715 $ 1,785,274
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization............... 333,282 478,506 694,475 303,254 484,361
Amortization of discount on notes payable... 6,930 7,338 7,338 -- --
Compensation expense related to stock option
grants.................................... -- -- 20,856 -- 41,712
Deferred income taxes....................... (245,600) (88,560) 237,459 242,594 538,957
Allowance for doubtful accounts............. 67,698 356,223 1,316,019 595,697 337,663
Changes in operating assets and liabilities:
Accounts receivable....................... (1,493,899) (1,481,237) (6,126,981) (3,328,315) (2,296,031)
Due from affiliate........................ -- -- -- -- (1,250,000)
Prepaid expenses and other................ 205,499 (172,231) (463,585) (190,982) (496,862)
Accounts payable and accrued
liabilities............................. 1,937,495 1,528,907 3,849,004 2,112,399 2,100,411
Income taxes payable...................... -- -- 324,550 6,620 (625,387)
Unearned revenue.......................... 16,097 66,375 416,422 404,963 (372,113)
---------- ----------- ----------- ---------- -----------
Net cash provided by operating
activities............................ 295,651 512,653 2,090,993 574,945 247,985
---------- ----------- ----------- ---------- -----------
Cash flows from investing activities--purchases
of property and equipment..................... (696,407) (1,118,357) (1,500,208) (591,648) (1,530,805)
---------- ----------- ----------- ---------- -----------
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) (50,000)
Proceeds from line of credit.................. -- 18,564,432 40,742,755 17,025,696 31,611,788
Principal payments on line of credit.......... -- (17,750,010) (40,404,848) (16,431,483) (30,162,438)
Principal payments under capital lease
obligations................................. -- (128,324) (212,695) (112,636) (116,253)
---------- ----------- ----------- ---------- -----------
Net cash provided by (used in) financing
activities............................ 77,519 580,496 (588,623) 281,577 1,283,097
---------- ----------- ----------- ---------- -----------
Net increase (decrease) in cash................. (323,237) (25,208) 2,162 264,874 277
Cash at beginning of period..................... 348,445 25,208 -- -- 2,162
---------- ----------- ----------- ---------- -----------
Cash at end of period........................... $ 25,208 $ -- $ 2,162 $ 264,874 $ 2,439
---------- ----------- ----------- ---------- -----------
---------- ----------- ----------- ---------- -----------
Supplemental disclosure of cash flow
information:
Cash paid for interest........................ $ 138,535 $ 251,786 $ 338,151 $ 175,623 $ 158,997
---------- ----------- ----------- ---------- -----------
---------- ----------- ----------- ---------- -----------
Cash paid for income taxes.................... $ -- $ -- $ 538,200 $ 121,000 $ 1,220,000
---------- ----------- ----------- ---------- -----------
---------- ----------- ----------- ---------- -----------
Noncash financing activities:
Network equipment acquired under capital
lease....................................... $1,732,000 $ -- $ -- $ -- $ --
---------- ----------- ----------- ---------- -----------
---------- ----------- ----------- ---------- -----------
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 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-8
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) (CONTINUED)
(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.
F-9
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) (CONTINUED)
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 ("SFAS 128"), "EARNINGS PER SHARE". SFAS 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 earnings per share
excludes the dilutive effects of option, warrants, and convertible securities.
Diluted earnings per share is very similar to the previously reported full
diluted earnings per share. All earnings per share amounts for all periods have
been presented, and where necessary, restated to conform to the SFAS 128
requirements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------ ----------------------------
1995 1996 1997 1997 1998
------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss)................... $ (531,851) $ (182,668) $ 1,815,436 $ 428,715 $ 1,785,274
Denominator:
Denominator for basic earnings
(loss) per share weighted average
shares outstanding................ 9,717,030 10,398,954 10,398,954 10,398,954 10,398,954
Effect of dilutive securities:
Employee stock options.............. -- -- 182,481 -- 177,047
------------ ------------- ------------- ------------- -------------
Denominator for diluted earnings
(loss) per share weighted average
shares outstanding................ 9,717,030 10,398,954 10,581,435 10,398,954 10,576,001
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
Basic and diluted earnings (loss)
per common share.................. $ (.05) $ (.02) $ 0.17 $ (.04) $ 0.17
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
</TABLE>
(K) UNAUDITED INTERIM FINANCIAL INFORMATION
Interim information for the six months ended June 30, 1997 and 1998,
including such information in the notes to the financial statements, is
unaudited. This information has been prepared on the same basis
F-10
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) (CONTINUED)
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
(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 June 30, 1998, is comprised of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL --------------------------
LIVES 1996 1997
----------- ------------ ------------ JUNE 30,
1998
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Leasehold improvements..................... 15 $ 134,164 $ 222,903 $ 662,489
Furniture, fixtures and office equipment... 5-7 114,613 194,967 250,085
Computer equipment and purchased
software................................. 5 522,383 896,654 1,036,362
Network equipment.......................... 5 2,912,529 3,869,376 4,795,082
------------ ------------ ------------
Total property and equipment........... 3,683,689 5,183,900 6,744,018
Less accumulated deprecation, including
amounts applicable to assets acquired
under capital leases of $474,238 and
$721,667 and $845,381 as of December 31,
1996 and 1997, and June 30, 1998,
respectively............................. 826,067 1,491,230 2,004,903
------------ ------------ ------------
Net property and equipment............. $ 2,857,622 $ 3,692,670 $ 4,739,115
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-11
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) (CONTINUED)
(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>
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
F-12
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) (CONTINUED)
(4) DEBT (CONTINUED)
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.
(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
F-13
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) (CONTINUED)
(7) STOCKHOLDERS' EQUITY (CONTINUED)
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.
(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>
F-14
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) (CONTINUED)
(8) INCOME TAXES (CONTINUED)
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
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.
F-15
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) (CONTINUED)
(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 (UNAUDITED)
MERGER:
On February 16, 1998, the Company entered into a definitive agreement to
merge with IWL Communications, Inc. ("IWL"), a public company listed on NASDAQ
and CapRock to effect an interest exchange with the partners of CapRock Fiber
Network, Ltd. ("Partnership").
On August 26, 1998, pursuant to the Plan and Agreement of Merger and Plan of
Exchange dated February 16, 1998, as amended, the Company completed the mergers
and the interest exchange with the Partnership and IWL.
F-16
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) (CONTINUED)
(13) SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
SENIOR NOTES:
In July 1998, CapRock Communications Corp. issued, through a private
placement under Rule 144A under the Securities Act of 1933, as amended, $150
million aggregate principal amount of 12% Senior Notes due 2008 (the "Senior
Notes"), which closed on July 16, 1998. Interest on the Notes will be payable
semi-annually in arrears on January 15 and July 15 of each year, commencing on
January 15, 1999, at the rate of 12% per annum. The net proceeds from the
offering were used to repay existing debt obligations of Telecommunications, the
Partnership and IWL. Such proceeds for debt payoffs totaled $26.8 million.
LINE OF CREDIT:
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 was repaid with the proceeds from
the Senior Notes.
F-17
<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 August 26, 1998
F-18
<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-19
<PAGE>
CAPROCK FIBER NETWORK, LTD.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------- -------------
1996 1997 1998
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash................................................................ $ -- $ 172,543 $ 378,028
Restricted cash (note 1(b))......................................... 25,415 -- --
Trade receivables................................................... -- 206,404 39,292
Cost and estimated earnings in excess of billings (note 3).......... -- -- 1,355,000
Prepaid expenses.................................................... 2,733 3,602 3,602
------------ ------------ -------------
Total current assets.............................................. 28,148 382,549 1,775,922
Property, plant and equipment, net (note 2)........................... 8,552,360 9,299,859 11,893,870
Other assets, net..................................................... 176,804 96,797 54,656
------------ ------------ -------------
Total assets...................................................... $ 8,757,312 $ 9,779,205 $ 13,724,448
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Current liabilities:
Bank overdraft...................................................... $ 957,497 $ -- $ --
Due to affiliate.................................................... -- -- 1,250,000
Accounts payable.................................................... 894,977 81,904 1,559,834
Accrued commitment and guarantor fees
(note 7).......................................................... 208,020 406,010 431,131
Accrued liabilities................................................. 77,131 67,337 356,493
Current portion of long-term debt (note 4).......................... 506,981 886,304 8,877,101
Income taxes payable................................................ -- -- 374,862
Unearned revenue.................................................... -- -- 161,700
------------ ------------ -------------
Total current liabilities......................................... 2,644,606 1,441,555 13,011,121
Deferred income taxes................................................. -- -- 169,961
Long-term debt, excluding current portion
(note 4)............................................................ 6,335,846 8,664,588 --
Partners' capital (deficit):
General partner..................................................... (2,231) (3,273) 5,433
Limited partners.................................................... (220,909) (323,665) 537,933
------------ ------------ -------------
(223,140) (326,938) 543,366
Commitments (note 5)
------------ ------------ -------------
Total liabilities and partners' capital (deficit)................. $ 8,757,312 $ 9,779,205 $ 13,724,448
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE>
CAPROCK FIBER NETWORK, LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunication services........................ $ 173,227 $ -- $ 1,944,778 $ 845,013 $ 1,196,337
Fiber services.................................... -- -- -- -- 1,355,000
----------- ----------- ------------ ----------- ------------
Total revenues.................................. 173,227 -- 1,944,778 845,013 2,551,337
Operating costs and expenses:
Cost of revenues.................................. 502,881 -- 86,410 21,526 127,196
Selling, general and administrative (note 7)...... 325,956 173,618 285,219 125,704 203,281
Depreciation and amortization..................... 31,481 54,078 901,990 348,435 396,853
----------- ----------- ------------ ----------- ------------
Total operating costs and expenses.............. 860,318 227,696 1,273,619 495,665 727,330
----------- ----------- ------------ ----------- ------------
Income (loss) from operations................... (687,091) (227,696) 671,159 349,348 1,824,007
Other income (expense):
Interest expense (note 4)......................... -- (422) (775,327) (370,832) (408,880)
Interest income................................... -- 715 1,286 -- --
Other............................................. 12,278 -- (916) -- --
----------- ----------- ------------ ----------- ------------
Income (loss) before income taxes and
extraordinary item............................ (674,813) (227,403) (103,798) (21,484) 1,415,127
Income taxes........................................ -- -- -- -- 544,823
----------- ----------- ------------ ----------- ------------
Income (loss) before extraordinary item......... (674,813) (227,403) (103,798) (21,484) 870,304
Extraordinary item--extinguishment of debt (note
1(a))........................................... 644,652 -- -- -- --
----------- ----------- ------------ ----------- ------------
Net income (loss)............................... $ (30,161) $ (227,403) $ (103,798) $ (21,484) $ 870,304
----------- ----------- ------------ ----------- ------------
----------- ----------- ------------ ----------- ------------
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
CAPROCK FIBER NETWORK, LTD.
STATEMENTS OF PARTNERS' CAPITAL (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)....................................................... 8,706 861,598 870,304
--------- ----------- -----------
Balance at June 30, 1998 (unaudited)......................................... $ 5,433 $ 537,933 $ 543,366
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE>
CAPROCK FIBER NETWORK, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
--------------------------------- ----------------------
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) $ (21,484) $ 870,304
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 54,078 901,990 348,435 396,853
Deferred income taxes........................... -- -- -- -- 169,961
Allowance for doubtful accounts................. 49,183 -- -- --
Changes in operating assets and liabilities:
Restricted cash............................... -- (25,415) 25,415 -- --
Trade receivable.............................. 4,453 -- (206,404) -- 167,112
Due to affiliate.............................. -- -- -- -- 1,250,000
Costs and earning in excess of billings....... -- -- -- -- (1,355,000)
Prepaid expenses.............................. 5,310 (2,087) (869) (128,317) 42,141
Other assets.................................. 4,937 -- (185,131) -- --
Accounts payable and accrued liabilities...... 414,568 128,020 (624,877) (1,549,418) 1,792,206
Income taxes payable.......................... -- -- -- -- 374,862
Unearned revenue.............................. -- -- -- -- 161,700
--------- ---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities................................ (164,881) (72,807) (193,674) (1,350,784) 3,870,139
--------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures.............................. -- (7,601,034) (1,384,351) (1,373,738) (2,947,723)
Proceeds from sale of equipment................... 7,852 -- -- -- --
--------- ---------- ---------- ---------- ----------
Net cash provided by (used in) investing
opportunities............................. 7,852 (7,601,034) (1,384,351) (1,373,738) (2,947,723)
--------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds under long-term note agreement........... -- 6,842,827 3,055,000 2,961,859 --
Principal payments under long-term note
agreement....................................... -- -- -- -- (716,931)
Loan fees paid under long-term note agreement..... -- (135,749) (346,935) -- --
Net change in bank overdraft...................... -- 957,497 (957,497) -- --
--------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities................................ -- 7,664,575 1,750,568 2,961,859 (716,931)
--------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash..................... (157,029) (9,266) 172,543 237,337 205,485
Cash at beginning of period......................... 166,295 9,266 -- 25,415 172,543
--------- ---------- ---------- ---------- ----------
Cash at end of period............................... $ 9,266 $ -- $ 172,543 $ 262,752 $ 378,028
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest............ $ -- $ -- $ 785,121 $ 184,390 $ 389,414
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
CAPROCK FIBER NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 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>
F-24
<PAGE>
CAPROCK FIBER NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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 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.
Fiber Services relate to the sale of fiber usage rights through Indefeasible
Right to Use contracts ("IRU's") and related construction services associated
with building the fiber network specified in the IRU. The Partnership accounts
for long-term construction contracts relating to the development of
telecommunications networks for customers using the percentage-of-completion
method. Progress under the percentage-of-completion method is measured based
upon costs incurred to date compared with total estimated construction costs.
Contract costs are estimated using allocations of the total costs of
constructing the network. Customers are billed based upon contractual
milestones. Costs and estimated earnings in excess of billings are classified as
current assets. If estimates of costs to complete the contract indicate a loss,
provision is made currently for total loss anticipated. Amounts received from
customers in excess of revenues recognized to date are classified as current
liabilities.
(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.
F-25
<PAGE>
CAPROCK FIBER NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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 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 six months ended June 30, 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) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
JUNE 30,
1998
------------
(UNAUDITED)
<S> <C>
Costs incurred on uncompleted contracts......................................... $ 114,339
Estimated earnings.............................................................. 1,240,661
------------
1,355,000
Less: billings to date.......................................................... --
------------
$ 1,355,000
------------
------------
</TABLE>
F-26
<PAGE>
CAPROCK FIBER NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
(2) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS (CONTINUED)
Included in accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
JUNE 30,
1998
------------
(UNAUDITED)
<S> <C>
Costs and estimated earnings in excess of billings on uncompleted contracts..... $ 1,355,000
Billings in excess of costs and earnings on uncompleted contracts............... --
------------
$ 1,355,000
------------
------------
</TABLE>
(3) PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment at are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1996 1997 1998
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Land.............................................. $ 10,243 $ 10,243 $ 117,807
Buildings......................................... -- 186,286 186,287
Leasehold improvements............................ 103,002 107,565 --
Telecommunications network........................ 8,201,258 8,505,917 8,495,304
Equipment......................................... 237,857 1,126,700 1,175,421
Construction in progress.......................... -- -- 2,909,615
------------ ------------ -------------
8,552,360 9,936,711 12,884,434
Accumulated depreciation.......................... -- (636,852) (990,564)
------------ ------------ -------------
$ 8,552,360 $ 9,299,859 $ 11,893,870
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The Partnership has also leased dark fiber included in the
telecommunications network to unrelated long-distance carriers (see note 5).
(4) 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
F-27
<PAGE>
CAPROCK FIBER NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
(4) LONG-TERM DEBT (CONTINUED)
a fixed rate of interest on certain portions of the outstanding balance, subject
to certain restrictions. The 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.
(5) 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.
(6) 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-28
<PAGE>
CAPROCK FIBER NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
(7) 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.
(8) 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.
(9) SUBSEQUENT EVENTS
MERGER
On February 16, 1998, the Partnership entered into a definitive agreement to
merge with CapRock Telecommunications Corp. ("Telecommunications") and IWL
Communications, Inc., ("IWL") a public company listed on NASDAQ.
On August 26, 1998, pursuant to the Plan and Agreement of Merger and Plan of
Exchange dated February 16, 1998, as amended, the Partnership completed the
mergers and interest exchange with Telecommunications and IWL.
F-29
<PAGE>
CAPROCK FIBER NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
(9) SUBSEQUENT EVENTS (CONTINUED)
SENIOR NOTES:
In July 1998, CapRock Communications Corp. issued, through a private
placement under Rule 144A under the Securities Act of 1933, as amended, $150
million aggregate principal amount of 12% Senior Notes due 2008 (the "Senior
Notes"), which closed on July 16, 1998. Interest on the Notes will be payable
semi-annually in arrears on January 15 and July 15 of each year, commencing on
January 15, 1999, at the rate of 12% per annum. The net proceeds from the
offering were used to repay existing debt obligations of Telecommunications, the
Partnership and IWL. Such proceeds for debt payoffs totaled $26.8 million.
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 Partnership is not currently committed to any
vendors for the capital expenditures to build the fiber network.
F-30
<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-31
<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-32
<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 SIX MONTHS
YEARS ENDED JUNE 30, ENDED ENDED
------------------------------------------------- DECEMBER 31, DECEMBER 31,
1995 1996 1997 1996 1997
------------ ------------------- -------------- ------------ ------------
(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-33
<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-34
<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 ENDED
YEARS ENDED JUNE 30, DECEMBER 31, DECEMBER 31,
1995 1996 1997 1996 1997
-------------- -------------- -------------- -------------- --------------
(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 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 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-35
<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 ENDED
YEARS ENDED JUNE 30, DECEMBER 31, DECEMBER 31,
1995 1996 1997 1996 1997
-------------- -------------- -------------- ------------ --------------
(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-36
<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-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
(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-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
(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-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
(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-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
(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-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
(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-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
(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-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
(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-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
(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-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
(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-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
(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-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
(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-48
<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>
WEIGHTED-AVERAGE
NUMBER OF REMAINING NUMBER OF
EXERCISE OPTIONS 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-49
<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 1996 1997
--------- ----- --------------- -----
(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-50
<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-51
<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.
F-52
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------- -------------
<S> <C> <C>
(UNAUDITED)
Current assets:
Cash and cash equivalents........................................................ $ 3,345,312 $ 359,212
Accounts receivable:
Trade, less allowance for doubtful accounts of $140,613 and $171,846,
respectively................................................................. 6,342,127 6,699,844
Affiliate...................................................................... 30,344 31,171
Other.......................................................................... 239,298 221,157
Inventory........................................................................ 1,022,927 1,092,471
Deferred tax asset-current....................................................... 107,750 276,117
Prepaid expenses and deposits.................................................... 447,067 1,059,558
------------- -------------
Total current assets......................................................... 11,534,825 9,739,530
------------- -------------
Property, plant and equipment...................................................... 20,387,102 24,546,442
Accumulated depreciation......................................................... (6,039,032) (7,226,157)
------------- -------------
Net property, plant and equipment............................................ 14,348,070 17,320,285
------------- -------------
Other assets....................................................................... 400,681 2,668,341
------------- -------------
Total assets................................................................. $ 26,283,576 $ 29,728,156
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable-current portion.................................................... $ 6,035,069 $ 10,130,686
Trade accounts payable and accrued expenses...................................... 3,626,519 3,152,521
Customer deposits................................................................ 171,972 23,366
Federal income taxes payable..................................................... 264,964 183,251
Deferred revenue-current portion................................................. 14,667 9,973
Billings in excess of costs and estimated earnings on uncompleted contracts...... 92,022 304,019
------------- -------------
Total current liabilities.................................................... 10,205,213 13,803,816
------------- -------------
Notes payable, noncurrent portion.................................................. 3,588,308 1,455,541
Deferred income taxes.............................................................. 323,913 440,871
------------- -------------
Total liabilities............................................................ 14,117,434 15,700,228
------------- -------------
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 authorized, issued and outstanding
3,754,230 and 3,968,607 shares, respectively................................... 37,542 39,867
Additional paid-in capital....................................................... 7,601,589 9,236,867
Retained earnings................................................................ 4,527,011 4,744,302
Translation adjustment........................................................... -- 6,892
------------- -------------
Total stockholders' equity................................................... 12,166,142 14,027,928
------------- -------------
Commitment and contingencies
Total liabilities and stockholders' equity................................... $ 26,283,576 $ 29,728,156
------------- -------------
------------- -------------
</TABLE>
See condensed notes to consolidated financial statements.
F-53
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1997 1998
------------- ------------
<S> <C> <C>
Sales:
Telecommunication services......................................................... $ 3,537,372 $ 7,135,282
Project/other revenue.............................................................. 8,214,563 9,510,343
Product resales.................................................................... 2,945,563 --
------------- ------------
Total sales...................................................................... 14,697,498 16,645,625
Cost of sales (exclusive of items shown separately below)............................ 7,704,835 10,013,991
Cost of sales--product resales....................................................... 2,347,060 --
------------- ------------
Gross profit..................................................................... 4,645,603 6,631,634
Selling, general and administrative expenses......................................... 3,110,329 4,589,690
Depreciation and amortization........................................................ 767,621 1,369,154
------------- ------------
Income from operations............................................................... 767,653 672,790
------------- ------------
Other income and (expense):
Interest expense, net.............................................................. (300,118) (351,499)
Other, net......................................................................... 109,959 104,924
------------- ------------
Total other income (expense)......................................................... (190,159) (246,575)
------------- ------------
Income before income taxes........................................................... 577,494 426,215
Income tax expense................................................................... 148,852 208,925
------------- ------------
Net income........................................................................... $ 428,642 $ 217,290
------------- ------------
------------- ------------
Net income per share:
Basic.............................................................................. $ 0.18 $ 0.06
------------- ------------
------------- ------------
Diluted............................................................................ $ 0.18 $ 0.05
------------- ------------
------------- ------------
Weighted average shares outstanding:
Basic.............................................................................. 2,372,000 3,926,000
Diluted............................................................................ 2,435,000 4,225,000
</TABLE>
See condensed notes to consolidated financial statements.
F-54
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1997 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................................................... $ 428,642 $ 217,290
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization....................................................... 767,621 1,369,154
Gain from sale of assets............................................................ (29,542) (23,990)
Deferred income taxes............................................................... 66,870 (51,409)
Equity in (earnings) loss of unconsolidated subsidiary.............................. (80,445) (83,750)
Changes in operating assets and liabilities:
Accounts receivable................................................................. (779,984) (340,403)
Inventory........................................................................... 798,239 (69,544)
Costs and estimated earnings in excess of billings.................................. (159,597) --
Prepaid expenses and deposits....................................................... (23,136) (612,491)
Other assets........................................................................ 60,233 (338,467)
Trade accounts payable and accrued expenses......................................... 1,905,935 (473,998)
Customer deposits................................................................... (90,734) (148,606)
Deferred revenue.................................................................... (567,396) (4,694)
Billings in excess of costs and estimated earnings.................................. (49,948) 211,997
Federal income taxes payable........................................................ (35,775) (81,713)
------------- -------------
Net cash provided by operating activities........................................... 2,210,983 (430,624)
------------- -------------
Cash flows from investing activities:
Purchase of property, plant, and equipment.......................................... (4,556,246) (4,176,551)
Proceeds from disposal of property, plant, and equipment............................ 90,434 201,365
Purchase of ICEL.................................................................... -- (609,822)
------------- -------------
Net cash used in investing activities............................................... (4,465,812) (4,585,008)
------------- -------------
Cash flows from financing activities:
Proceeds from debt.................................................................. 3,218,235 9,978,143
Debt payments....................................................................... (581,410) (8,015,293)
Proceeds from issuance of common stock.............................................. 6,996,505 59,790
------------- -------------
Net cash provided by financing activities........................................... 9,633,330 2,022,640
------------- -------------
Effect of foreign exchange rate on cash............................................. -- 6,892
------------- -------------
Net increase (decrease) in cash for period.......................................... 7,378,501 (2,986,100)
Cash and cash equivalents at beginning of period.................................... 281,482 3,345,312
------------- -------------
Cash and cash equivalents at end of period.......................................... $ 7,659,983 $ 359,212
------------- -------------
------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the year for interest.............................................. $ 296,324 $ 394,966
------------- -------------
------------- -------------
Cash paid during the year for income taxes.......................................... $ 43,000 $ 30,000
------------- -------------
------------- -------------
</TABLE>
See condensed notes to consolidated financial statements.
F-55
<PAGE>
IWL COMMUNICATIONS INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 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>
SIX MONTHS ENDED JUNE 30
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
Numerator:
Net income............................................................................ $ 428,642 $ 217,290
------------ ------------
------------ ------------
Denominator:
Denominator for basic earnings per share--weighted-average shares outstanding......... 2,372,000 3,926,000
Effect of dilutive securities:
Employee stock options................................................................ 63,000 299,000
------------ ------------
Denominator for diluted earnings per share............................................ 2,435,000 4,225,000
------------ ------------
------------ ------------
Basic earnings per share.............................................................. .18 0.06
Diluted earnings per share............................................................ .18 0.05
</TABLE>
3. 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
F-56
<PAGE>
IWL COMMUNICATIONS INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(UNAUDITED)
3. COMPREHENSIVE INCOME (CONTINUED)
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.
4. NOTES PAYABLE
The Company was in violation of the financial covenant requiring maintenance
of a current ratio as of March 31, 1998 and was in technical default of a
covenant requiring the lender's consent to the Combination. The Company has
obtained a waiver for these covenant violations and has obtained the lender's
consent to the Combination. 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 the earlier of consummation of the Combination or August
31, 1998.
5. SUBSEQUENT EVENTS
MERGER:
On February 16, 1998, IWL entered into a definitive agreement to merge with
CapRock Telecommunications Corp. ("Telecommunications") and to effect an
interest exchange with the partners of CapRock Fiber Network Ltd.
("Partnership"). On August 26, 1998, pursuant to the Plan and Agreement of
Merger and Plan of Exchange dated February 16, 1998, as amended, the Company
completed the mergers and interest exchange with Telecommunications and the
Partnership.
ACQUISITION:
In January 1998, the Company completed the acquisition of Integrated
Communications and Engineering, Ltd. ("ICEL"), a communications systems
integrator and maintenance provider in Aberdeen, Scotland. The Company paid a
total purchase price of approximately $2.2 million comprised of approximately
$610,000 in cash and 207,266 shares of the Company's common stock.
The acquisition was accounted for as a purchase and was effective as of
January 1, 1998, therefore, the statement of operations for the six months ended
June 30, 1998 reflects the operations of ICEL. The goodwill and other
intangibles resulting from the acquisition is being amortized over 7 and 20
years.
SENIOR NOTES:
In July 1998, CapRock Communications Corp. issued, through a private
placement under rule 144A under the Securities Act of 1933, as amended, $150
million aggregate principal amount of their 12% Senior Notes due 2008 (the
"Senior Notes"), which closed on July 16, 1998. Interest on the Notes will be
payable semi-annually in arrears on January 15 and July 15 of each year,
commencing on January 15, 1999, at the rate of 12% per annum. The net proceeds
from the offering were used to repay existing debt obligations of
Telecommunications, the Partnership and IWL. Such proceeds for debt payoffs
totaled $26.8 million.
F-57
<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 June 30,
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 June 30, 1998, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Dallas, Texas
September 25, 1998
F-58
<PAGE>
CAPROCK COMMUNICATIONS CORP.
(FORMERLY IWL HOLDINGS CORPORATION)
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
1998
-----------
<S> <C>
Cash................................................................................................. $ 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-59
<PAGE>
CAPROCK COMMUNICATIONS CORP.
(FORMERLY IWL HOLDINGS CORPORATION)
NOTES TO BALANCE SHEET
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 named 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 June 30, 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.
(2) SUBSEQUENT EVENTS (UNAUDITED)
MERGER:
On August 26, 1998, pursuant to the Plan and Agreement of Merger and Plan of
Exchange dated February 16, 1998, as amended, the Company completed the mergers
with Telecommunications, the Partnership and IWL.
SENIOR NOTES
In July 1998, CapRock Communications Corp. issued, through a private
placement under Rule 144A under the Securities Act of 1933, as amended, $150
million aggregate principal amount of 12% Senior Notes due 2008 (the "Senior
Notes"), which closed on July 16, 1998. Interest on the Notes will be payable
semiannually in arrears on January 15 and July 15 of each year, commencing on
January 15, 1999, at the rate of 12% per annum. The net proceeds from the
offering were used to repay existing debt obligations of Telecommunications, the
Partnership and IWL. Such proceeds for debt payoffs totaled $26.8 million.
F-60
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CapRock Communications Corp.
(formerly IWL Holdings Corp.):
We have audited the accompanying supplemental consolidated balance sheets of
CapRock Communications Corp. and subsidiaries as of December 31, 1996 and 1997,
and the related supplemental consolidated statements of operations stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. These supplemental consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these supplemental consolidated financial statements based on our
audits. We did not audit the separate 1995 and 1996 financial statements of
CapRock Telecommunications Corp. (formerly CapRock Communications Corp.) and
CapRock Fiber Network, Ltd., which statements reflect total assets constituting
56 percent in 1996, and total revenues constituting 46 percent and 45 percent in
1995 and 1996, respectively, of the related supplemental consolidated totals.
Those separate statements were audited by other auditors whose report has been
furnished to us, and our opinion, in so far as it relates to the amounts
included for CapRock Telecommunications Corp. and CapRock Fiber Network, Ltd.,
is based solely on the reports of the other auditors.
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.
The supplemental consolidated financial statements give retroactive effect to
the merger and interest exchange of CapRock Communications Corp. (formerly IWL
Holdings Corp.), CapRock Telecommunications Corp. (formerly CapRock
Communications Corp.), IWL Communications Incorporated, and CapRock Fiber
Network, Ltd. on June 30, 1998, which has been accounted for as a
pooling-of-interests as described in Note 2 to the supplemental consolidated
financial statements. Generally accepted accounting principles proscribe giving
effect to the consummated business combination accounted for by the pooling-
of-interests method in financial statements that do not include the date of
consummation. These financial statements do not extend through the date of
consummation. However, they will become the historical consolidated financial
statements of CapRock Communications Corp. and subsidiaries after financial
statements covering the date of consummation of the business combination are
issued.
In our opinion, based on our audits and the report of the other auditors, the
supplemental consolidated financial statements referred to above present fairly,
in all material respects, the financial position of CapRock Communications Corp.
and subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles applicable after financial statements are issued for a period which
includes the date of consummation of the business combination.
KPMG Peat Marwick LLP
Dallas, Texas
September 25, 1998
F-61
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
1996 1997 JUNE 30, 1998
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 386,345 $ 3,520,017 $ 741,679
Accounts receivable and unbilled
services, less allowance for
doubtful accounts of $399,216,
$1,781,335 and $464,758 at
December 31, 1996 and 1997, and
June 30, 1998, respectively.... 9,326,542 15,143,525 17,275,184
Costs and estimated earnings in
excess of billings (note 4).... 135,675 -- 1,355,000
Inventory........................ 851,380 1,022,927 1,092,471
Prepaid expenses and other....... 360,995 1,022,319 2,119,560
Deferred income taxes (note
12)............................ 810,089 731,845 364,277
-------------- -------------- --------------
Total current assets........... 11,871,026 21,440,633 22,948,171
Property, plant and equipment, net
(note 3)......................... 15,900,657 27,340,599 33,953,270
Other assets....................... 750,530 608,219 3,146,686
-------------- -------------- --------------
Total assets................... $ 28,522,213 $ 49,389,451 $ 60,048,127
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
(note 7)....................... $ 3,041,142 $ 8,116,424 $ 21,659,472
Accounts payable and accrued
expenses....................... 9,799,978 11,587,951 14,953,286
Accrued commitment and guarantor
fees (note 7).................. 208,020 406,010 431,131
Customer deposits................ 388,993 171,972 23,367
Current installments of
obligations under capital
leases (note 6)................ 212,695 239,672 254,417
Billings in excess of costs and
earnings (note 4).............. 48,892 92,022 304,019
Income taxes payable (note 12)... 37,418 589,514 558,113
Unearned revenue................. 287,329 542,441 327,334
-------------- -------------- --------------
Total current liabilities...... 14,024,467 21,746,006 38,511,139
Long-term debt, excluding current
portion (note 7)................. 9,392,510 12,338,341 1,483,706
Deferred revenue, noncurrent
portion.......................... 66,748 -- --
Deferred income taxes (note 12 )... 545,304 851,307 1,141,248
Obligations under capital lease,
excluding current installments
(note 6)......................... 607,166 367,493 264,655
-------------- -------------- --------------
Total liabilities.............. 24,636,195 35,303,147 41,400,748
Stockholders' equity:
Preferred stock, $.01 par value;
20,000,000 shares authorized;
none issued.................... -- -- --
Common stock, $.01 par value;
200,000,000 shares authorized,
issued and outstanding
27,148,521, 28,677,743 and
28,911,231 shares, respectively
(note 11)...................... 271,485 286,777 289,112
Additional paid-in capital....... 1,051,564 8,810,627 10,447,895
Retained earnings................ 2,562,969 5,385,144 8,258,012
Other comprehensive income....... -- -- 6,892
Unearned compensation............ -- (396,244) (354,532)
-------------- -------------- --------------
Total stockholders' equity..... 3,886,018 14,086,304 18,647,379
Commitments (note 14)
-------------- -------------- --------------
Total liabilities and
stockholders' equity........... $ 28,522,213 $ 49,389,451 $ 60,048,127
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-62
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunication services............... $ 19,402,455 $ 29,704,791 $ 57,892,088 $ 24,510,811 $ 40,554,705
Fiber services........................... -- -- -- -- 1,355,000
Projects and other....................... 10,004,504 10,711,346 14,511,815 8,214,563 9,510,343
Product resales.......................... -- 10,553,846 2,945,563 2,945,563 --
------------ ------------ ------------ ------------ ------------
Total revenues............................. 29,406,959 50,969,983 75,349,466 35,670,937 51,420,048
Cost of product resales and services:
Cost of telecommunication services....... 21,185,003 29,684,388 50,124,257 23,495,956 33,921,024
Cost of fiber services................... -- -- -- -- 114,339
Cost of product resales.................. -- 9,672,078 2,347,060 2,347,060 --
------------ ------------ ------------ ------------ ------------
Gross Profit............................... 8,221,956 11,613,517 22,878,149 9,827,921 17,384,685
Operating expenses:
Selling, general and administrative...... 7,325,825 8,983,394 14,073,691 6,452,774 9,559,679
Depreciation and amortization............ 1,185,720 1,535,880 3,345,819 1,419,310 2,250,368
------------ ------------ ------------ ------------ ------------
Total operating expenses................... 8,511,545 10,519,274 17,419,510 7,872,084 11,810,047
------------ ------------ ------------ ------------ ------------
Operating income (loss).................... (289,589) 1,094,243 5,458,639 1,955,837 5,574,638
Interest expense, net...................... (484,633) (584,652) (1,602,522) (838,477) (919,376)
Other income............................... 151,156 41,148 219,211 109,959 104,924
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes and
extraordinary item....................... (623,066) 550,739 4,075,328 1,227,319 4,760,186
Income taxes............................... 47,957 227,148 1,513,561 391,446 1,887,318
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary item.... (671,023) 323,591 2,561,767 835,873 2,872,868
Extraordinary item-- extinguishment of debt
(note 13)................................ 644,652 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss).......................... $ (26,371) $ 323,591 $ 2,561,767 $ 835,873 $ 2,872,868
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Pro forma income taxes:
Income (loss) before income taxes and
extraordinary item..................... (623,066) 550,739 4,075,328 1,227,319 4,760,186
Pro forma income taxes................... (211,845) 143,148 1,475,561 383,446 1,887,318
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary item.. (411,221) 407,591 2,599,767 843,873 2,872.868
Extraordinary item--extinguishment of
debt (net of income taxes of
$248,190).............................. 396,462 -- -- -- --
------------ ------------ ------------ ------------ ------------
Pro forma net income (loss).............. $ (14,759) 407,591 2,599,767 843,873 2,872,868
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Historical and pro forma earnings per
common share:
Income (loss) before extraordinary item.. $ (0.02) $ 0.01 $ 0.09 $ 0.03 $ 0.10
Extraordinary item....................... 0.02 -- -- -- --
------------ ------------ ------------ ------------ ------------
Basic and Diluted........................ $ -- $ 0.01 $ 0.09 $ 0.03 $ 0.10
------------ ------------ ------------ ------------ ------------
Weighted average shares outstanding:
Basic.................................... 25,925,721 27,145,920 27,983,504 27,295,504 28,849,504
Diluted.................................. 25,936,272 27,156,471 28,480,968 27,358,504 29,465,246
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-63
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SUPPLEMENTAL
COMMON STOCK ADDITIONAL CURRENCY CONSOLIDATED
-------------------- PAID-IN RETAINED TRANSLATION UNEARNED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS COMPENSATION EQUITY
---------- -------- ----------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994........................ 25,843,735 $258,437 $ 304,616 $2,265,749 $ -- $ -- $ 2,828,802
Issuances of common stock upon
conversion of note payable
(note 7).................... 1,301,978 13,020 736,980 -- -- -- 750,000
Net loss...................... -- -- -- (26,371) -- -- (26,371)
---------- -------- ----------- ---------- ----------- ------------ ------------
Balance at December 31,
1995........................ 27,145,713 271,457 1,041,596 2,239,378 -- -- 3,552,431
Issuance of common stock...... 2,808 28 9,968 -- -- -- 9,996
Net income.................... -- -- -- 323,591 -- -- 323,591
---------- -------- ----------- ---------- ----------- ------------ ------------
Balance at December 31,
1996........................ 27,148,521 271,485 1,051,564 2,562,969 -- -- 3,886,018
Issuance of common stock...... 79,222 792 777,058 -- -- -- 777,850
Proceeds from initial public
common stock offering, net
of expenses (note 11)....... 1,450,000 14,500 6,982,005 -- -- -- 6,996,505
Deferred Compensation from
compensatory stock option
grants (note 11)............ -- -- -- -- -- (417,100) (417,100)
Amortization of deferred
compensation................ -- -- -- -- -- 20,856 20,856
Net income.................... -- -- -- 2,561,767 -- -- 2,561,767
Net income excluded from IWL
Communications for the six
months ended December 31,
1996 as a result of
conforming fiscal year end
(note 2).................... -- -- -- 260,408 -- -- 260,408
---------- -------- ----------- ---------- ----------- ------------ ------------
Balance at December 31,
1997........................ 28,677,743 286,777 8,810,627 5,385,144 -- (396,244) 14,086,304
Issuance of common stock
(unaudited)................. 26,222 262 61,527 -- -- -- 61,789
Issuance of stock relating to
acquisition
(unaudited)--note 18........ 207,266 2,073 1,575,741 -- -- -- 1,577,814
Amortization of deferred
compensation (unaudited).... -- -- -- -- -- 41,712 41,712
Other comprehensive income
(unaudited)................. -- -- -- -- 6,892 -- 6,892
Net income (unaudited)........ -- -- -- 2,872,868 -- -- 2,872,868
---------- -------- ----------- ---------- ----------- ------------ ------------
Balance at June 30, 1998
(unaudited)................. 28,911,231 $289,112 $10,447,895 $8,258,012 $6,892 $(354,532) $18,647,379
---------- -------- ----------- ---------- ----------- ------------ ------------
---------- -------- ----------- ---------- ----------- ------------ ------------
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-64
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
------------------------------------ ------------------------
1995 1996 1997 1997 1998
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ (26,371) $ 323,591 $ 2,561,767 $ 835,873 $ 2,872,868
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary gain on extinguishment of
debt....................................... (644,652) -- -- -- --
Depreciation and amortization................ 1,185,720 1,535,880 3,345,819 1,419,310 2,250,368
Amortization of discount on notes payable.... 6,930 7,338 7,338 -- --
Gain on sale of assets....................... (24,926) (67,021) (105,048) (29,542) (23,990)
Deferred income taxes........................ (166,697) (98,088) 384,247 309,464 657,509
Equity earnings of unconsolidated joint
venture.................................... (105,829) 25,873 (115,107) (80,445) (83,750)
Compensation expense related to stock option
grants..................................... -- -- 20,856 -- 41,712
Allowance for doubtful accounts.............. 116,881 356,223 1,316,019 595,697 337,663
Changes in operating assets and liabilities:
Restricted cash............................ -- (25,415) 25,415 -- --
Accounts receivable........................ (1,785,612) (5,384,642) (7,831,700) (4,108,299) (2,469,322)
Inventory.................................. 374,297 (253,022) 1,631,929 798,239 (69,544)
Costs and earnings in excess of billings... (2,881) (132,794) 83,265 (159,597) (1,355,000)
Prepaid expenses and other................. 204,023 (275,987) (911,597) (282,202) (1,405,769)
Accounts payable and accrued liabilities... 1,593,340 4,746,639 3,378,009 2,378,182 3,270,013
Billings in excess of costs and estimated
earnings................................. -- 48,892 (43,479) (49,948) 211,997
Income taxes payable....................... (90,559) 37,418 553,739 (29,155) (332,238)
Unearned revenue........................... 193,393 (63,984) (189,787) (162,433) (215,107)
---------- ----------- ----------- ----------- -----------
Net cash provided by operating
activities............................. 827,057 780,901 4,111,685 1,435,144 3,687,410
Cash flows from investing activities:
Purchases of property and equipment............ (2,281,510) (10,211,878) (13,630,464) (6,521,632) (8,654,989)
Proceeds from note receivable.................. 283,755 659,972 -- -- --
Proceeds from disposal of property and
equipment.................................... 78,377 201,550 643,836 90,434 201,365
Purchase of ICEL (note 18)..................... -- -- -- -- (609,822)
---------- ----------- ----------- ----------- -----------
Net cash used in investing activities.... (1,919,378) (9,350,356) (12,986,628) (6,431,198) (9,063,446)
Cash flows from financing activities:
Proceeds from issuance of long-term debt....... 2,546,774 15,395,225 20,553,869 5,980,094 9,978,143
Principal payments on notes payable............ (1,614,996) (8,307,785) (14,608,429) (581,410) (8,782,224)
Proceeds from line of credit................... -- 18,564,432 40,742,755 17,025,696 31,611,788
Principal payments on line of credit........... -- (17,750,010) (40,404,848) (16,431,483) (30,162,438)
Loan fees paid under long-term note
agreement.................................... -- (135,749) (346,935) -- --
Net change in bank overdraft................... (29,094) 957,497 (957,497) -- --
Proceeds from issuace of common stock.......... -- 9,996 7,347,258 6,996,505 61,790
Principal payments under capital lease
obligations.................................. -- (128,324) (212,695) (112,636) (116,253)
---------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities............................. 902,684 8,605,282 12,113,478 12,876,766 2,590,806
Effect of exchange rate on cash equivalents...... -- -- -- -- 6,892
Net increase (decrease) in cash.................. (189,637) 35,827 3,238,535 7,880,712 (2,778,338)
Cash and cash equivalents at beginning of
period......................................... 514,740 325,103 281,482 306,897 3,520,017
---------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period....... $ 325,103 $ 360,930 $ 3,520,017 $ 8,187,609 $ 741,679
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid for interest......................... $ 455,939 $ 550,332 $ 1,760,777 $ 656,337 $ 943,377
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
Cash paid for income taxes..................... $ 367,267 $ 150,866 $ 801,124 $ 164,000 $ 1,250,000
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-65
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION AND NATURE OF BUSINESS
The supplemental consolidated financial statements include CapRock
Communications Corp. ("CapRock" or the "Company") and its majority owned
subsidiaries. The Company was formed on February 3, 1998, to serve as a holding
company for the operations of CapRock Telecommunications ("Telecommunications"),
CapRock Fiber Network Ltd. ("Partnership") and IWL Communications, Inc. ("IWL")
and its wholly owned subsidiaries. All significant inter-company transactions
are eliminated in consolidation. The supplemental consolidated financial
statements include the accounts of Telecommunications, Partnership, IWL,
Spacelink Systems, Inc., Spacelink Systems, FSC, Inc., and IWL Communications
Ltd. (Russia) and Integrated Communications and Engineering Ltd. ("ICEL") (note
18). The equity method is used to account for unconsolidated investments in
companies in which the Company exercises significant influences over operating
and financial policies, but does not have a controlling interest. On August 26,
1998, pursuant to the Plan of Agreement of Merger and Plan of Exchange dated
February 16, 1998, as amended, the Company completed the mergers and interest
exchange with Telecommunications, Partnership and IWL (note 2). Generally
accepted accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. These supplemental
consolidated financial statements do not extend through the date of
consummation. However, they will become the historical consolidated financial
statements of CapRock Communications Corp. and subsidiaries after financial
statements covering the date of consummation of the business combination are
issued.
The Company is a regional facilities-based integrated communications
provider offering local, long distance, internet, data and private line services
to small and medium-sized businesses. The Company also provides switched and
dedicated access, regional and international long distance, private lines and
dark fiber to carrier customers. The Company is in process of building a 5,500
mile advanced fiber network throughout Texas, Louisiana, Arkansas, New Mexico
and Oklahoma.
The Company, through predecessor entities, was formed in 1981 and has been
performing telecommunication services since such time. 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. Additionally, the Company, through its wholly owned
subsidiary--IWL, provides communications solutions to customers with operations
in remote, difficult-access regions. 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.
(B) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents.
F-66
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(C) 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 cost or specified 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.
(D) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and include certain costs,
which are capitalized during the installation and expansion of the
telecommunications network including interest costs, and payroll related to the
construction. Such capitalized costs were $143,255 in 1996 and were immaterial
for 1997 and for the six months ended June 30, 1998. Depreciation is computed
using the straight line method over the estimated useful 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. Assets under construction are not depreciated until placed in
service.
In the process of building out the 5,500 mile fiber network, the Company may
enter into Indefeasible Right to Use contracts ("IRU's") for the sale of fiber
usage rights and to provide the construction services for such fiber. The
Company may install additional conduits for these segments included in the IRU
for its own use while performing the construction services. This additional
conduit is capitalized proportionately to the number of conduits placed. Costs
of the initial conduit and fiber are allocated to the customer and the Company
based upon the number of fibers retained by the Company relative to the total
fibers installed.
(E) REVENUES AND COST OF REVENUES
The Company recognizes revenue from the following sources: Telecommunication
Services, Fiber Services, Projects and Product Resales.
TELECOMMUNICATION SERVICES:
Revenues from telecommunication services relate to local, long distance,
data and private line services to end-user customers. Such revenues are
recognized when the services are provided. The cost of revenues associated with
Telecommunication Services 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.
FIBER SERVICES:
Fiber Services relate to the sale of fiber usage rights through IRU's and
related construction services associated with building the fiber network
specified in the IRU. The Company accounts for long-term construction contracts
relating to the development of telecommunications networks for customers using
F-67
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the percentage-of-completion method. Progress under the percentage of completion
is measured based upon costs incurred to date compared with total estimated
construction costs.
The contract costs are estimated using allocations of the total costs of
constructing the network. Customers are billed based upon contractual
milestones. Costs and estimated earnings in excess of billed are classified as
current assets. If estimates of costs to complete the contract indicate a loss,
provision is made currently for the total contract loss anticipated. Amounts
received from customers in excess of revenues recognized to date are classified
as current liabilities.
PROJECTS:
Project revenue relates to communication system contracts, which are
typically fixed price and such revenue is recognized based upon the
percentage-of- completion method, primarily based upon contract costs incurred
to date compared with total estimated contract costs. Costs and estimated
earnings in excess of billings are classified as current assets. If estimates of
costs to complete the contract indicate a loss, provision is made currently for
the total contract loss anticipated. 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 customers in
excess of revenues recognized to date are classified as current liabilities.
PRODUCT RESALES:
The Company serves as the exclusive manufacturer's representative of Alcatel
products to the U.S oil and gas industry. In fiscal years 1996 and 1997, the
Company provided services to a subsidiary of Shell, which included the resale of
a significant amount of Alcatel products. The Shell project was substantially
completed in May 1997 and, therefore, is not expected to contribute in a
material manner to the Company's total sales in future periods.
(F) 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, retail and commercial customers.
(G) 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-68
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(H) 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.
(I) FOREIGN CURRENCY TRANSLATION
Results of operations for foreign investments are translated from the
designated functional currency to the U.S. dollar using average exchange rates
during the period, while assets and liabilities are translated at the exchange
rate in effect at the reporting date. Resulting gains and losses from
translating foreign currency financial statements are accumulated in a separate
component of stockholders' equity.
(J) INTANGIBLE ASSETS
The Company recorded approximately $1.6 million of goodwill and $300,000
relating to other intangibles in connection with the acquisition of Integrated
Communications and Engineering Ltd. ("ICEL") (note 18). Goodwill represents the
excess of the purchase price over fair value of identifiable net assets
acquired, is amortized on a straight-line basis over the expected periods to be
benefited. Goodwill in connection with the acquisition of ICEL will be amortized
over 20 years. The Company assesses the recoverability of this intangible asset
by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash
flows. The amount of goodwill impairment, if any, is measured based upon
projected discounted future operating cash flows using a discounted rate
reflecting the Company's average cost of funds.
(K) 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 exceeds 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.
(L) FAIR VALUE OF FINANCIAL INSTRUMENTS
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.
F-69
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(M) 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.
(N) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 ("SFAS 128"), EARNINGS PER SHARE. SFAS 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 SFAS 128
requirements. All data in the table presented below is in thousands, except for
per share data.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss).............................. $ (26) $ 324 $ 2,562 $ 837 $ 2,873
Denominator:
Denominator for basic earnings (loss) per share
weighted average shares outstanding.......... 25,926 27,146 27,984 27,296 28,850
Effect of dilutive securities:
Employee stock options......................... 10 10 497 63 615
--------- --------- --------- --------- ---------
Denominator for diluted earnings (loss) per share
weighted average shares outstanding............ 25,936 27,156 28,481 27,359 29,465
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic and Diluted................................ $ -- $ 0.01 $ 0.09 $ 0.03 $ 0.10
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
(O) UNAUDITED SUPPLEMENTAL INTERIM FINANCIAL INFORMATION
Interim information for the six months ended June 30, 1997 and 1998,
including such information in the notes to the supplemental consolidated
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-70
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(P) MERGER-RELATED EXPENSES
The Company has deferred certain merger-related expenses, such as fees for
investment bankers, attorneys, accountants, financial printing and other related
charges as a component of prepaid expenses. These expenses will be charged to
income at the time of consummation of the merger.
(2) BUSINESS COMBINATION
On August 26, 1998, pursuant to the Plan of Agreement of Merger and Plan of
Exchange dated February 16, 1998, as amended, the Company completed the mergers
and interest exchange with Telecommunications, Partnership and IWL. Accordingly,
the Supplemental Consolidated Balance Sheets as of December 31, 1996 and 1997
and as of June 30, 1998 (unaudited) and the Supplemental Consolidated Statements
of Operations, Stockholders' Equity and Cash Flows for each of the years in the
three year period ended December 31, 1997 and the six months ended June 30, 1998
(unaudited) include Telecommunications, Partnership and IWL as though these
entities had always been a part of CapRock.
All previously outstanding shares of IWL common stock ceased to exist and
each such share was converted into and became exchangeable for one share of
CapRock common stock, and all previously outstanding shares of
Telecommunications common stock ceased to exist, and each such share was
converted into and became exchangeable for 1.789030878 shares of CapRock common
stock and each one percent (1%) of the Partnership interests issued and
outstanding was exchanged for 63,194.54 shares of CapRock common stock. The
Company issued 28,911,231 common shares in exchange for the outstanding common
share of Telecommunications, Partnership and IWL. Additionally, outstanding
employee stock options of IWL and Telecommunications were converted at the above
exchange factors into options to purchase 828,385 shares of CapRock common
stock. The mergers and interest exchange constituted a tax-free reorganization
and was accounted for as a pooling of interests under Accounting Principles
Board Opinion No. 16.
In May 1998, IWL changed its fiscal year end to coincide with the fiscal
years of CapRock, Telecommunications and the Partnership. The Supplemental
Consolidated Statement of Operations for the year ended December 31, 1997 and
for the six months ended June 30, 1998 combine the operating activity for all
three entities for these periods. The Supplemental Consolidated Statement of
Operations for 1995 and 1996 combine IWL's operating activity for the years
ended June 30, 1995 and 1996 with Telecommunications and the Partnership
operating activity for the years ended December 31, 1995 and 1996. The net
income of IWL for the six month period ended December 31, 1996 was excluded from
the Supplemental Consolidated Statement of Operations for the year ended
December 31, 1996 as a result of the non-conforming year ends for such period in
the amount of approximately $260,000. This amount was included as an adjustment
to retained earnings in the Supplemental Consolidated Statement of Stockholders'
Equity. IWL's cash flow for this period was added to the 1997 beginning balance
in the Supplemental Consolidated Statement of Cash Flows.
The transactions between CapRock, IWL and the Partnership have been
eliminated for all respective periods presented. Certain reclassifications were
made to IWL's financial statements to conform to CapRock's presentations.
F-71
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(2) BUSINESS COMBINATION (CONTINUED)
The results of operations for the separate companies and the combined
amounts presented in the Supplemental Consolidated Financial Statements follow:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(IN 000'S) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales:
Telecommunications............................. $ 13,440 $ 23,174 $ 46,744 $ 20,128 $ 32,223
Partnership.................................... 173 -- 1,945 845 2,551
IWL............................................ 15,794 27,796 26,660 14,697 16,646
--------- --------- --------- --------- ---------
Combined......................................... $ 29,407 $ 50,970 $ 75,349 $ 35,670 $ 51,420
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss):
Telecommunications............................. $ (532) $ (183) $ 1,816 $ 429 $ 1,785
Partnership.................................... (30) (227) (104) (21) 871
IWL............................................ 536 734 850 428 217
--------- --------- --------- --------- ---------
Combined......................................... $ (26) $ 324 $ 2,562 $ 836 $ 2,873
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including assets acquired under capital
leases of $1,732,000 as of December 31, 1996 and 1997 and June 30, 1998, is
comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
USEFUL LIVES 1996 1997
------------- ------------- ------------- JUNE 30, 1998
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Land................................................ -- $ 51,289 $ 51,289 $ 158,853
Buildings........................................... 20 - 31 456,355 982,484 926,570
Leasehold improvements.............................. Lease Term 237,166 330,468 789,087
Office equipment, furniture and other............... 5 - 7 2,169,576 4,264,606 8,090,057
Telecommunications network.......................... 5 - 20 11,351,644 13,501,993 14,465,807
Equipment for rent/lease............................ 7 - 10 6,355,557 12,003,374 15,359,403
Construction in progress............................ -- -- 4,373,499 4,385,117
------------- ------------- -------------
Total property and equipment...................... 20,621,587 35,507,713 44,174,894
Less accumulated deprecation, including amounts
applicable to assets acquired under capital leases
of $474,238 and $721,667 and $845,381 as of
December 31, 1996 and 1997, and June 30, 1998,
respectively...................................... 4,720,930 8,167,114 10,221,624
------------- ------------- -------------
Net property, plant and equipment............... $ 15,900,657 $ 27,340,599 $ 33,953,270
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-72
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(4) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
DECEMBER DECEMBER JUNE 30,
31, 1996 31, 1997 1998
----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Costs incurred on uncompleted contracts.......... $ 271,100 $ 381,074 $ 625,353
Estimated earnings............................... 127,332 281,869 1,555,829
----------- ----------- ---------
398,432 662,943 2,181,182
Less: billings to date........................... 311,649 754,965 1,130,201
----------- ----------- ---------
$ 86,783 $ (92,022) $1,050,981
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
Included in accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
DECEMBER DECEMBER JUNE 30,
31, 1996 31, 1997 1998
----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts.............. $ 135,675 $ -- $1,355,000
Billings in excess of costs and earnings on
uncompleted contracts.......................... (48,892) (92,022) (304,019)
----------- ----------- ---------
$ 86,783 $ (92,022) $1,050,981
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
(5) 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 January 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 December 31, 1997. The Company's
proportionate share of KSG's earnings (losses) for the years ended December 31,
1995, 1996 and 1997 were $105,829, $(25,873) and $115,107, respectively.
The Company received a management fee from KSG equal to 2% of gross sales
that was paid quarterly. For the years ended December 31, 1995, 1996 and 1997,
the Company earned a management fee of $59,995, $58,253 and $76,995,
respectively. In addition, worker's compensation, property, medical, dental, and
general liability insurance policies maintained by the Company covered KSG. 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
F-73
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(5) INVESTMENT IN KENWOOD SYSTEMS GROUP (CONTINUED)
KSG for the years ended December 31, 1996 and 1997 for insurance, supplies,
equipment and management fees totaled approximately $128,178 and $174,500,
respectively.
Pertinent financial data (unaudited) of KSG, for the years ended December
31, 1995, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Total assets........................................ $ 1,095,449 $ 1,248,217 $ --
Stockholders' equity................................ 646,053 594,307 --
Revenues............................................ 2,999,745 2,912,637 3,783,927
Net earnings (loss)................................. 211,660 (51,746) 226,887
</TABLE>
(6) LEASES
The Company leases equipment, office space, communication services and land
and buildings (used for transmission sites) under capital and 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 $ 3,094,744
1999............................................................ 299,632 2,110,311
2000............................................................ 99,877 1,545,424
2001............................................................ -- 1,286,093
2002............................................................ -- 827,842
Thereafter...................................................... -- 1,149,856
----------- -------------
Total minimum lease payments.................................. 699,141 $ 10,014,270
-------------
-------------
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>
As operating leases expire, it is expected that they will be replaced with
similar leases. Rent expense under operating leases totaled $553,154, $768,108
and $1,419,812 for each of the years ended December 31, 1995, 1996 and 1997,
respectively.
F-74
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(7) DEBT
A summary of the lines of credit and the notes payable is as follows
(interest rates as of December 31, 1997):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997 JUNE 30, 1998
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Lines of credit, variable rates, 8.12%
to 10.5%, due in 1998................. $ 2,241,020 $ 5,275,608 $ 7,628,141
Notes to banks, variable rates, 8.12%,
due 1999 to 2001...................... 1,485,985 2,274,590 3,888,039
Notes to banks, fixed rates, 8.5% to
9.0%, due 1998 to 2001................ 272,429 1,968,674 1,528,051
Term construction loan, variable rate,
8.5%, due in 2001..................... 6,842,827 9,550,892 8,877,101
Notes to financing companies, variable
rates, 11%, due 2015.................. 185,462 180,328 178,508
Notes to financing companies, fixed
rates, 6.75% to 12.1%, due 1998 to
2007.................................. 660,850 1,026,733 893,663
Shareholder notes, 5.8% imputed rate,
due 2000.............................. 112,827 128,167 78,165
Note to related party, 13%, due 1998.... 521,835 -- --
Other................................... 110,417 49,773 71,510
-------------- -------------- --------------
Total............................... 12,433,652 20,454,765 23,143,178
Less: current portion of long-term
debt................................ 3,041,142 8,116,424 21,659,472
-------------- -------------- --------------
Long-term debt...................... $ 9,392,510 $ 12,338,341 $ 1,483,706
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
In July 1998, the Company issued, through a private placement under Rule
144A under the Securities Act of 1933, as amended, $150 million aggregate
principal amount of their 12% Senior Notes due 2008 (the "Senior Notes") which
closed on July 16, 1998. See subsequent events at note 18.
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 provided for borrowings up to $2,500,000. The line of
credit was amended in June 1998 and was increased to $7.0 million. Borrowings
under the amended line of credit agreement were due in December, 1998 and bear
interest at the prime rate plus 2% (10.5% at December 31, 1997.) The line of
credit was subject to certain borrowing base limitations, primarily relating to
the accounts receivable balance. The line of credit was secured by accounts
receivable and certain shareholder guarantees. The balance outstanding as of
December 31, 1996 and 1997 and June 30, 1998 under the line of credit was
$814,422 and $1,152,329 and $2,601,685, 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 and in 1998. The Company
has obtained a waiver for this covenant violation. The line of credit was repaid
in August 1998 with the proceeds from the Senior Notes (note 18).
F-75
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(7) DEBT (CONTINUED)
The Company also entered into a secured revolving line of credit, which
allowed the Company to borrow up to a maximum of $5.0 million subject to
borrowing base limitations on accounts receivable and inventory. The Company
also secured a guidance line of credit which allowed the Company to borrow up to
$5.0 million to finance the certain purchases and subsequent leases of
communications equipment. The interest rates on both of these lines was 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). Specific underlying accounts
receivable, equipment and inventory secure the lines of credit. The lines of
credit required certain minimum net worth and maximum debt to net worth
requirements. The Company was in violation of a current ratio at December 31,
1997 and in 1998 and obtained a waiver for such covenant violation. The Company
had $5.0 million available under the guidance line of credit at December 31,
1997. These lines of credit were repaid in August 1998 with the proceeds from
the Senior Notes (note 18).
The Company had a loan agreement with a bank (term construction loan)
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 shareholder, accounts receivable and
guarantees of certain shareholders. The Company was 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. The balance
outstanding under this loan agreement at December 31, 1996, 1997 and June 30,
1998 was $6,842,827, $9,550,892 and $8,877,101, respectively. The Company was in
violation of certain debt covenants as of December 31, 1996, 1997 and in 1998.
The Company obtained a waiver for such covenant violations. The loan was repaid
in August 1998 with the proceeds from the Senior Notes (note 18).
Certain shareholders guaranteed the term construction loan. In
consideration, the Company agreed to pay a one-time commitment fee equal to 1%
of each shareholder'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 increased 2% each July 1 thereafter.
The guarantors were also paid a loan guaranty fee by the Company 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 and
June 30, 1998 was approximately $208,000 and $406,000 and $431,131,
respectively. All commitment and guarantee fees were paid in full in August 1998
with the proceeds from the Senior Notes (note 18).
At December 31, 1995, the Company had outstanding a note payable to a
related party (related party note) 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 (shareholder notes) 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
F-76
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(7) DEBT (CONTINUED)
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.
These notes were paid off in August 1998 with the proceeds from the Senior Notes
(note 18).
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, net of the unamortized discount
of $21,834, as of December 31, 1997 is as follows:
<TABLE>
<S> <C>
1998.................................... $ 8,116,424
1999.................................... 2,843,173
2000.................................... 1,996,107
2001.................................... 6,831,342
2002.................................... 84,610
2003 and thereafter..................... 583,109
--------------
$ 20,454,765
--------------
--------------
</TABLE>
(8) RELATED PARTIES
The Company entered into an agreement with a related party to manage the
construction of the fiber optic network buildout for the initial 260 route
miles, which was completed in 1997. Under this agreement, the Company paid 4% of
the costs of constructing this portion of the network, payable monthly at a
minimum of $15,000 per month. The Company paid management fees of $296,576 in
1997 and $461,576, cumulative under the arrangement since construction of this
segment commenced. This arrangement ceased to exist in 1997.
(9) ALLOWANCE FOR DOUBTFUL ACCOUNTS
The activity in the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO WRITE-OFFS
BEGINNING OF COSTS AND NET OF BALANCE AT
YEAR EXPENSES RECOVERIES END OF YEAR
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Year ended December 31, 1995..................... $ 85,000 $ 97,208 $ (141,168) $ 41,040
Year ended December 31, 1996..................... 41,040 402,755 (44,579) 399,216
Year ended December 31, 1997..................... 399,216 1,382,119 -- 1,781,335
</TABLE>
(10) LEASE CONTRACTS
The Company provides telecommunications services to various customers under
operating leases. The services include agreements to lease capacity to customers
over the fiber optic line, 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.
F-77
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(10) LEASE CONTRACTS (CONTINUED)
A significant portion of these services requires that the Company have
access to international communications satellites. The Company has contracted
with a Russian entity for rights to access its portion of an international
communications satellite. The Company has agreed to pay a recurring monthly fee
to the entity based on the amount of satellite space segment utilized by each
lessee. Additionally, the Company has sold communications equipment to the
entity. The Company utilizes those facilities to provide communications services
to various United States energy and oil and gas companies and other customers
doing business in Russia.
The following is a summary of expected revenue to be earned during the next
five years by the Company on lease agreements executed on or before December 31,
1997.
<TABLE>
<S> <C>
Year ended December 31:
1998.................................. $ 6,110,143
1999.................................. 4,709,570
2000.................................. 4,321,937
2001.................................. 3,196,876
2002.................................. 2,536,312
Thereafter............................ 7,533,700
--------------
Total................................. $ 28,408,538
--------------
--------------
</TABLE>
(11) STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
The Company, through its wholly-owned subsidiary--IWL, 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
over-allotment option and purchased an additional 62,496 shares resulting in net
proceeds of $337,473.
COMMON STOCK
CapRock was incorporated as a Texas corporation on February 3, 1998, to
serve as a holding company for the operations of Telecommunications, Partnership
and IWL after completion of their business combination (note 2) in conformance
with the provisions of their Agreement and Plan of Merger dated February 16,
1998, as amended. The Company issued 28,911,231 common shares in exchange for
the outstanding common shares of Telecommunications and IWL and the partnership
interests in the Partnership.
Effective February 3, 1998, IWL purchased 1,000 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. The Company's original stock
issuance consisted of 1,000 shares of $.01 par value common stock. The amount of
shares authorized was 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 to 200,000,000 shares. On June 3, 1998, IWL funded the initial
capital contribution of $2,000.
F-78
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(11) STOCKHOLDERS' EQUITY (CONTINUED)
TELECOMMUNICATIONS EMPLOYEE STOCK OPTION PLAN:
In September 1997, Telecommunications adopted a stock option plan (the
"Telecommunication Plan") pursuant to which the Company's Board of Directors may
grant nonqualified options to employees. The Plan authorized 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. After consummation of the merger, no additional shares
will be granted under the Telecommunications Plan. Upon consummation of the
merger, the outstanding stock options under such plan were converted at the
exchange factors into options to purchase 354,312 shares of CapRock common
stock.
In 1997, Telecommunications granted 381,380 nonqualified stock options under
the Telecommunications Plan 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, 8,278 of the options previously granted were
cancelled and no options were exercised.
IWL INCENTIVE STOCK OPTION PLAN:
In 1996, IWL adopted an Employee Incentive Stock Option Plan ("IWL Incentive
Plan"). The IWL Incentive Plan provided 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 under such plan 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 granted under the
Plan on or prior to the IPO date, June 12, 1997, vested in full on the offering
date. Stock options under the Plan 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 options 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. After
consummation of the merger, no additional shares will be granted under the IWL
Incentive Plan. Upon consummation of the merger, the outstanding stock options
under such plan were converted at the exchange factors into options to purchase
155,473 shares of CapRock common stock.
IWL STOCK OPTION AND DIRECTOR STOCK OPTION PLAN:
In 1997, IWL adopted a Stock Option and Director Stock Option Plan. Options
granted under these plans may be either incentive stock options or non-statutory
stock options under the IRS tax code. Incentive stock options may be granted to
any person who is an officer or other employee of the Company or any of IWL's
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 IRS tax code. A total of 300,000 and 100,000 shares of
common stock were reserved for issuance upon the exercise of options, which may
be granted under the Stock Option Plan and the Director Stock Option Plan,
respectively. As of December 31, 1997, there were options for 197,350 shares
granted under the Stock Option and Director Stock Option plans with option
prices ranging from $6.00 to $9.50. All options granted under these plans were
F-79
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(11) STOCKHOLDERS' EQUITY (CONTINUED)
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.
After consummation of the merger, no additional shares will be granted under
these plans. Upon consummation of the merger, the outstanding stock options
under such plan were converted at the exchange factors into options to purchase
173,600 shares of CapRock common stock.
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.
A summary of options outstanding as of December 31, 1997 is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE NUMBER OF OPTIONS
OPTIONS EXERCISE PRICE EXERCISABLE
----------- ----------------- ------------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995................ 152,836 $ 3.59 --
Options granted........................... 157,678 5.91 --
-----------
BALANCE AT DECEMBER 31, 1996................ 310,514 4.77 160,614
Options granted........................... 429,130 1.57 --
Options exercised......................... (13,919) 3.56 --
Options forfeited......................... (8,578) 1.17 --
-----------
BALANCE AT DECEMBER 31, 1997................ 717,147 $ 2.92 146,695
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE NUMBER OF
EXERCISE OPTIONS REMAINING OPTIONS
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- ----------- ----------- ------------------- -----------
<S> <C> <C> <C>
$ 1.00 373,102 9.75 --
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 --
----------- -----------
717,147 9.3 146,695
----------- -----------
----------- -----------
</TABLE>
The Company applied the intrinsic value method prescribed by APB Opinion No.
25 in accounting for its Plan. SFAS No. 123 requires disclosure of the
compensation cost for stock-based incentives granted
F-80
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(11) STOCKHOLDERS' EQUITY (CONTINUED)
based upon the fair value at grant date for awards. Applying SFAS No. 123 would
result in pro forma net income and earnings per share ("EPS") amounts as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
---------- ------------
<S> <C> <C> <C>
NET INCOME As reported........................................ $ 323,591 $ 2,561,767
Pro forma.......................................... 319,000 2,385,000
BASIC EPS As reported........................................ 0.01 0.09
Pro forma.......................................... 0.01 0.09
DILUTED EPS As reported........................................ 0.01 0.09
Pro forma.......................................... 0.01 0.08
</TABLE>
The fair value of each option grant was estimated using the Black-Scholes
option pricing model with the following weighted-average assumptions: risk free
interest rates of 5.8% in 1996 and 1997; expected option lives of 2.5 years;
expected volatility of 55%, and no expected dividend yield. The weighted-average
fair value of options granted for the year ended December 31, 1996 and 1997 was
$.24 and $1.89, respectively.
(12) INCOME TAXES
The components of the income tax provision (benefit) were as follows:
<TABLE>
<CAPTION>
U.S. FEDERAL FOREIGN STATE TOTAL
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Current............................................. $ 214,654 $ -- $ -- $ 214,654
Deferred............................................ (142,907) -- (23,790) (166,697)
------------ ---------- ---------- ------------
Total............................................. $ 71,747 $ -- $ (23,790) $ 47,957
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
YEAR ENDED DECEMBER 31, 1996
Current............................................. $ 175,404 $ 149,832 $ -- $ 325,236
Deferred............................................ (87,737) -- (10,351) (98,088)
------------ ---------- ---------- ------------
Total............................................. $ 87,667 $ 149,832 $ (10,351) $ 227,148
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
YEAR ENDED DECEMBER 31, 1997
Current............................................. $ 946,703 $ 112,659 $ 69,952 $ 1,129,314
Deferred............................................ 364,993 -- 19,254 384,247
------------ ---------- ---------- ------------
Total............................................. $ 1,311,696 $ 112,659 $ 89,206 $ 1,513,561
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
</TABLE>
Foreign income taxes results from taxes withheld on sales related to Russian
operations. Operating income from such operations for the years ended December
31, 1995, 1996 and 1997 were $190,000, 436,000 and $392,000, respectively.
F-81
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(12) INCOME TAXES (CONTINUED)
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>
Income tax provision at 34%....................................... $ 17,594 $ 187,251 $ 1,385,612
Expenses not deductible for tax purposes.......................... 11,630 11,990 33,094
State income tax expense, net of federal effect................... (23,790) (10,351) 89,206
Effect of foreign operations, including foreign tax credits....... -- (53,071) (49,326)
Exclusion of Partnership income tax benefit....................... 11,000 84,000 39,000
Other............................................................. 31,523 7,329 15,975
---------- ---------- ------------
Total............................................................. $ 47,957 $ 227,148 $ 1,513,561
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
Effective January 1, 1998, the Partnership elected to be taxed as a
corporation. As such deferred taxes and tax provisions have been established in
1998.
The tax effects of temporary differences and carryforwards, which result in
a significant portion of the deferred tax assets and liabilities, are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1996 1997
---------------------- ----------------------
ASSET LIABILITIES ASSETS LIABILITIES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Effect on deferred taxes of carryforwards.............. $ 662,377 $ -- $ 116,958 $ --
Foreign tax credit..................................... -- -- 25,600 --
Allowance for doubtful accounts........................ 149,534 -- 654,875 --
Unearned compensation.................................. -- -- 7,717 --
Deferred revenue....................................... 41,521 -- 7,142 --
Accrued vacation pay................................... 30,497 -- 27,200 --
Equity in losses of affiliates......................... 8,796 -- -- --
Property, plant and equipment.......................... -- 651,712 -- 968,265
Other.................................................. 23,772 -- 9,311 --
---------- ---------- ---------- ----------
Total deferred taxes............................... $ 916,497 $ 651,712 $ 848,803 $ 968,265
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</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 as management has determined that it is more likely than not that
these assets will be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in
which those temporary 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.
F-82
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(13) EXTRAORDINARY ITEM
In 1995, the Company terminated a fiber lease agreement entered into in June
1994 with a vendor to lease fiber capacity. The Company entered into various
agreements to maintain a segment of the fiber network and sublease fiber
capacity. 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
$645,000 in 1995 as a result of the transaction.
(14) 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.
(15) 401(K) PLANS
The Company and a subsidiary offer its qualified employees the opportunity
to participate in one of its defined contribution retirement plans qualifying
under the provisions of Section 401(k) of the Internal Revenue Code. Each
employee may contribute on a tax deferred basis a portion of annual earnings not
to exceed $9,500. The Company matches individual employee contributions in
certain plans, up to a maximum level, which in no case exceeds 6 %. The
Company's matching contributions to the Plan (after forfeitures) for the years
ended December 31, 1995, 1996 and 1997 were $23,367, $30,287 and $58,109,
respectively.
(16) BUSINESS SEGMENT
The Company operates in a single industry segment. The geographic
termination of revenue is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
(IN 000'S)
<S> <C> <C> <C>
United States/North America.................................. $ 25,569 $ 44,285 $ 57,706
International................................................ 576 2,642 9,243
Russia....................................................... 3,262 2,281 1,905
Mexico....................................................... -- 1,762 6,495
--------- --------- ---------
$ 29,407 $ 50,970 $ 75,349
--------- --------- ---------
--------- --------- ---------
</TABLE>
(17) CONCENTRATION OF CUSTOMERS AND SUPPLIERS
All revenue was derived from unaffiliated customers. For the year ended
December 31, 1996, one customer provided $11,688,251 (or 23%) of the Company's
revenue. For the year ended December 31, 1997, one customer provided $9,348,910
(or 12%) of the Company's revenue.
Two suppliers accounted for approximately $8.6 million (or 41%) of the
purchases in 1995 and three suppliers accounted for approximately $9.5 million
(or 24%) of the purchases in 1996. Three suppliers accounted for approximately
$14.4 million (or 27%) of the purchases in 1997.
F-83
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(18) SUBSEQUENT EVENTS--UNAUDITED
SENIOR NOTES:
In July 1998, the Company issued, through a private placement under Rule
144A under the Securities Act of 1933, as amended, $150 million aggregate
principal amount of their 12% Senior Notes due 2008 (the "Senior Notes"), which
closed on July 16, 1998. Interest on the Notes will be payable semi-annually in
arrears on January 15 and July 15 of each year, commencing on January 15, 1999,
at the rate of 12% per annum. The net proceeds from the offering were used to
repay existing debt obligations. Such proceeds for debt payoffs totaled $26.8
million. The Company has expensed approximately $100,000 relating to capitalized
financing costs for the notes paid off in the third quarter 1998. The remaining
proceeds will be used to fund additional capital expenditures for the
construction of its fiber optic network, to expand its sales offices, for
potential acquisitions and for general working capital purposes. The funds will
be invested in high grade liquid securities.
ACQUISITION:
In January 1998, the Company completed the acquisition of Integrated
Communications and Engineering, Ltd. ("ICEL"), a communications systems
integrator and maintenance provider in Aberdeen, Scotland. The Company paid a
total purchase price of approximately $2.2 million comprised of approximately
$610,000 in cash and 207,266 shares of the Company's common stock. The
acquisition was accounted for as a purchase business combination, and
accordingly the purchase price was allocated to assets acquired and liabilities
assumed. Approximately $1.6 million was recorded to goodwill and $300,000 was
allocated to contracts as a result of the transaction. The goodwill and
intangibles are being amortized over the expected periods of benefit of 20 and 3
years, respectively.
The results of operations for ICEL for the six months ended June 30, 1998
have been included since the acquisition date in January 1998. The following
summarizes the unaudited supplemental consolidated data as though the
acquisition of ICEL occurred as of the January 1, 1997:
<TABLE>
<CAPTION>
1997
----------------------------
SUPPLEMENTAL SUPPLEMENTAL
HISTORICAL PRO FORMA
------------- -------------
<S> <C> <C>
Revenue........................................................ $ 75,349,466 $ 78,676,598
Net income..................................................... 2,561,767 2,681,147
Earnings per Share............................................. 0.09 0.10
</TABLE>
CAPROCK EQUITY INCENTIVE PLAN:
On August 26, 1998, in connection with the approval of the merger, the
shareholders of the Company approved an equity incentive plan (the "CapRock
Plan"). The CapRock Plan authorized the granting of awards which would allow up
to an aggregate of 5,000,000 shares of common stock to be acquired by
participants and provides that a maximum of 2,500,000 shares of common stock may
be issued to any one participant. All prospective equity grants will be issued
from the CapRock Plan. The number of shares of common stock authorized by the
Plan is subject to adjustment by the Board of Directors in the event of any
increase or decrease in the number of shares of outstanding common stock
resulting from a stock dividend,
F-84
<PAGE>
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(18) SUBSEQUENT EVENTS--UNAUDITED (CONTINUED)
split, reverse stock split, merger, reorganization, consolidation,
recapitalization or other change in corporate structure affecting the common
stock. Awards under the Plan may be granted to key employees, officers,
directors, consultants and other persons who are deemed to have rendered or to
be able to render significant services to the Company or its subsidiaries and
are deemed to have contributed or to have the potential to contribute to the
success of the Company. The awards under the Plan may take the form of stock
options, stock appreciation rights, restricted stock awards, deferred stock,
stock reload options and other stock based awards.
Stock options granted under the CapRock Plan may be either options that are
intended to qualify for treatment as incentive stock options under Section 422
of the IRS tax code or options that do not so qualify (non-qualified stock
options). Options under the Plan may be granted to any person who is an officer
or other employee or consultants of the Company or any of its subsidiaries. The
exercise price of incentive stock options must be at least equal to the fair
market value of a share of the common stock on the date of grant (and not less
than 110% of the fair market value in the case of incentive stock options
granted to an optionee owning 10% or more of the common stock). The exercise
price of non-qualified stock options may be less than 100% of the fair market
value of a share of the common stock on the date of grant. The term of the
option may not exceed 10 years (5 years in the case of incentive stock options
granted to an optionee owning 10% or more of the common stock).
DIRECTOR STOCK OPTION PLAN:
On August 26, 1998, in connection with the approval of the merger, the
shareholders of the Company approved the Director Stock Option Plan (the
"CapRock Director Plan"). The CapRock Director Plan was established to encourage
ownership of common stock by eligible non-employee directors of the Company
whose continued services are considered essential to the Company's future
progress and to provide future incentive to remain as directors of the Company.
All options to be granted under the CapRock Director Plan will be non-qualified
stock options. A total of 400,000 shares of common stock have been reserved for
issuance under the Plan. 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.
F-85
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL, OR
A SOLICITATION OF AN OFFER TO BUY, SUCH SECURITIES IN ANY JURISDICTION WHERE
SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION CONTAINED IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 5
Risk Factors.............................................................. 19
The Exchange Offer........................................................ 33
Use of Proceeds........................................................... 42
Capitalization............................................................ 43
Selected Supplemental Consolidated Financial Data of CapRock.............. 44
Selected Historical Financial Data of Telecommunications.................. 46
Selected Historical Financial Data of the Partnership..................... 48
Selected Consolidated Historical Financial Data of IWL.................... 50
Management's Discussion and Analysis of Financial Condition and Results of
Operations of CapRock................................................... 52
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Telecommunications........................................ 62
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Partnership........................................... 65
Management's Discussion and Analysis of Financial Condition and Results of
Operations of IWL....................................................... 69
The Combination........................................................... 76
Business.................................................................. 77
Regulation and Licenses................................................... 91
Management................................................................ 99
Certain Transactions...................................................... 108
Principal Shareholders.................................................... 110
Description of the Notes.................................................. 112
Book-Entry; Delivery and Form............................................. 144
Registration Rights....................................................... 147
Description of Capital Stock.............................................. 151
Certain United States Federal Income Tax Considerations................... 153
Plan of Distribution...................................................... 157
Legal Matters............................................................. 158
Experts................................................................... 158
Accountants............................................................... 158
Index to Consolidated Financial Statements................................ F-1
</TABLE>
---------------------------
PROSPECTUS
---------------------------
[LOGO]
CAPROCK
COMMUNICATIONS CORP.
OFFER TO EXCHANGE
12% SENIOR NOTES DUE 2008,
SERIES B FOR ALL OUTSTANDING
12% SENIOR NOTES DUE 2008,
SERIES A
OCTOBER , 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article XII of the Registrant's 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 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 Bylaws provides the following:
"The Corporation shall have the authority to an 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.
The Registration Rights Agreement (Exhibit 4.2 hereto) provides for
indemnification by each of the Initial Purchasers of the Private Notes, their
successors, assigns and direct and indirect transferees, and participating
broker-dealers holding Exchange Notes, in specified circumstances, of the
Company, the other Initial Purchasers, underwriters and the other selling
holders of the Private Notes, and each of their respective directors and
officers and controlling parties, and by the Company of Initial Purchasers of
the Private Notes, their successors, assigns and direct and indirect
transferees, and participating broker-dealers holding Exchange Notes,
underwriters, and each person, if any controlling any such underwriter or
holder, in specified circumstances, for certain liabilities arising under the
Securities Act or otherwise.
The Note Purchase Agreement (Exhibit 10.43 hereto) for the sale of the Notes
provides for indemnification by the initial purchasers specified therein of the
Company and its officers and directors, and by the Company of the initial
purchasers specified therein, for certain liabilities arising under the
Securities Act or otherwise.
II-1
<PAGE>
ITEM 21. EXHIBITS
The following exhibits are filed herewith.
<TABLE>
<C> <C> <S> <C>
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. (Incorporated by reference to Exhibit
2.1 to the Registration Statement on Form S-4, as amended, of CapRock
Communications Corp., File No. 333-57365.)
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. (Incorporated by reference
to Exhibit 2.2 to the Registration Statement on Form S-4, as amended, of
CapRock Communications Corp., File No. 333-57365.)
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. (Incorporated by
reference to Exhibit 2.3 to the Registration Statement on Form S-4, as
amended, of CapRock Communications Corp., File No. 333-57365.)
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. (Incorporated by reference to
Exhibit 2.4 to the Registration Statement on Form S-4, as amended, of
CapRock Communications Corp., File No. 333-57365.)
3.1 -- Articles of Incorporation of the Registrant. (Incorporated by reference to
Exhibit 3.1 to the Registration Statement on Form S-4, as amended, of
CapRock Communications Corp., File No. 333-57365.)
3.2 -- Bylaws of the Registrant.
4.1 -- Indenture dated as of July 16, 1998, among CapRock Communications Corp.,
CapRock Telecommunications Corp., CapRock Fiber Network, Ltd., IWL (defined
below), and PNC Bank, National Association, Trustee.
4.2 -- Registration Rights Agreement dated July 16, 1998, among CapRock
Communications Corp., CapRock Telecommunications Corp., CapRock Fiber
Network, Ltd., and Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation and BancOne Capital
Markets, Inc.
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. (Incorporated by reference to Exhibit 4.5 to the Registration
Statement on Form S-4, as amended, of CapRock Communications Corp., File
No. 333-57365.)
4.6 -- Registration Rights Agreement dated January 22, 1998 by and among IWL,
Thomas Norman Blair and Margaret Helen Blair. (Incorporated by reference to
Exhibit 4.6 to the Registration Statement on Form S-4, as amended, of
CapRock Communications Corp., File No. 333-57365.)
5.1 -- Opinion of Munsch Hardt Kopf Harr & Dinan, P.C. regarding validity of
securities being registered (to be filed by amendment).
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <C> <S> <C>
10.1 -- CapRock Communications Corp. 1998 Equity Incentive Plan. (Incorporated by
reference to Exhibit 10.1 to the Registration Statement on Form S-4, as
amended, of CapRock Communications Corp., File No. 333-57365.)
10.2 -- CapRock Communications Corp. 1998 Director Stock Option Plan. (Incorporated
by reference to Exhibit 10.2 to the Registration Statement on Form S-4, as
amended, of CapRock Communications Corp., File No. 333-57365.)
10.3 -- Employment Agreement between the Registrant and Ignatius W. Leonards.
(Incorporated by reference to Exhibit 10.5 to the Registration Statement on
Form S-4, as amended, of CapRock Communications Corp., File No. 333-57365.)
10.4 -- Employment Agreement between the Registrant and Byron M. Allen.
(Incorporated by reference to Exhibit 10.6 to the Registration Statement on
Form S-4, as amended, of CapRock Communications Corp., File No. 333-57365.)
10.5 -- Employment Agreement between the Registrant and Errol Olivier.
(Incorporated by reference to Exhibit 10.7 to the Registration Statement on
Form S-4, as amended, of CapRock Communications Corp., File No. 333-57365.)
10.6 -- Employment Agreement between the Registrant and Richard H. Roberson.
(Incorporated by reference to Exhibit 10.8 to the Registration Statement on
Form S-4, as amended, of CapRock Communications Corp., File No. 333-57365.)
10.7 -- Employment Agreement between the Registrant and Bryan Olivier.
(Incorporated by reference to Exhibit 10.9 to the Registration Statement on
Form S-4, as amended, of CapRock Communications Corp., File No. 333-57365.)
10.8 -- Employment Agreement between the Registrant and Jere W. Thompson, Jr.
(Incorporated by reference to Exhibit 10.10 to the Registration Statement
on Form S-4, as amended, of CapRock Communications Corp., File No.
333-57365.)
10.9 -- Employment Agreement between the Registrant and Scott L. Roberts.
(Incorporated by reference to Exhibit 10.11 to the Registration Statement
on Form S-4, as amended, of CapRock Communications Corp., File No.
333-57365.)
10.10 -- Employment Agreement between the Registrant and Timothy W. Rogers.
(Incorporated by reference to Exhibit 10.12 to the Registration Statement
on Form S-4, as amended, of CapRock Communications Corp., File No.
333-57365.)
10.11 -- Employment Agreement between the Registrant and Timothy M. Terrell.
(Incorporated by reference to Exhibit 10.13 to the Registration Statement
on Form S-4, as amended, of CapRock Communications Corp., File No.
333-57365.)
10.12 -- Employment Agreement between the Registrant and Kevin W. McAleer.
(Incorporated by reference to Exhibit 10.14 to the Registration Statement
on Form S-4, as amended, of CapRock Communications Corp., File No.
333-57365.)
10.13 -- 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 Registration Statement on Form S-1, as amended,
File No. 333-22801.)
10.14 -- 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.)
10.15 -- 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.)#
10.16 -- 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.)
10.17 -- 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.)
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <C> <S> <C>
10.18 -- 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.)
10.19 -- 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.)
10.20 -- 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.)
10.21 -- 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.)
10.22 -- Credit Agreement, dated August 1, 1997, executed by and between IWL and
Bank One, Texas, N.A. ("Bank One"). (Incorporated by reference to Exhibit
10.22 to IWL's Form 10K for the year ending June 30, 1997, File No.
0-22293.)
10.23 -- Promissory Note, dated August 1, 1997, in the principal amount of
$822,000.00, executed by IWL, and made payable to Bank One. (Incorporated
by reference to Exhibit 10.23 to IWL's Form 10K for the year ending June
30, 1997, File No. 0-22293.)
10.24 -- Promissory Note, dated August 1, 1997, in the principal amount of
$605,000.00, executed by IWL, and made payable to Bank One. (Incorporated
by reference to Exhibit 10.24 to IWL's Form 10K for the year ending June
30, 1997, File No. 0-22293.)
10.25 -- Collateral Assignment and Security Agreement, dated August 1, 1997,
executed by IWL, as assignor, and Bank One, 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.)
10.26 -- Revolving Credit Agreement, dated August 1, 1997, executed by and between
IWL and Bank One. (Incorporated by reference to Exhibit 10.26 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
$5,000,000.00, executed by IWL, and made payable to Bank One. (Incorporated
by reference to Exhibit 10.27 to IWL's Form 10K for the year ending June
30, 1997, File No. 0-22293.)
10.28 -- Security Agreement, dated August 1, 1997, executed by IWL, as debtor, and
Bank One, 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.)
10.29 -- Amended and Restated Credit Agreement, dated August 28, 1997, executed by
and between IWL and Bank One. (Incorporated by reference to Exhibit 10.29
to IWL's Form 10K for the year ending June 30, 1997, File No. 0-22293.)
10.30 -- Promissory Note, dated August 28, 1997, in the principal amount of
$1,055,000.00, executed by IWL, and made payable to Bank One. (Incorporated
by reference to Exhibit 10.30 to IWL's Form 10K for the year ending June
30, 1997, File No. 0-22293.)
10.31 -- 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.)#
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <C> <S> <C>
10.32 -- Sublease dated November 22, 1994 by and between CapRock Communications
Corp. (now known as CapRock Telecommunications Corp. ("CapRock")) and
Arkwright Mutual Insurance Company. (Incorporated by reference to Exhibit
10.35 to the Registration Statement on Form S-4, as amended, of CapRock
Communications Corp., File No. 333-57365.)
10.33 -- Loan and Security Agreement dated March 14, 1996 by and between CapRock and
Bank One, as amended. (Incorporated by reference to Exhibit 10.36 to the
Registration Statement on Form S-4, as amended, of CapRock Communications
Corp., File No. 333-57365.)
10.34 -- Sixth Renewal Extension $2,500,000 Promissory Note dated December 31, 1997
payable by CapRock to Bank One. (Incorporated by reference to Exhibit 10.37
to the Registration Statement on Form S-4, as amended, of CapRock
Communications Corp., File No. 333-57365.)
10.35 -- Form of CapRock Communications Commercial Application. (Incorporated by
reference to Exhibit 10.41 to the Registration Statement on Form S-4, as
amended, of CapRock Communications Corp., File No. 333-57365.)
10.36 -- Form of CapRock Communications Commercial Agent Application. (Incorporated
by reference to Exhibit 10.42 to the Registration Statement on Form S-4, as
amended, of CapRock Communications Corp., File No. 333-57365.)
10.37 -- Unlimited Guaranty dated March 9, 1996 by Jere W. Thompson, Jr. for the
benefit of Bank One. (Incorporated by reference to Exhibit 10.43 to the
Registration Statement on Form S-4, as amended, of CapRock Communications
Corp., File No. 333-57365.)
10.38 -- Loan Agreement dated July 1, 1996 by and between CapRock Fiber Network,
Ltd. (the "Partnership") and Bank One. (Incorporated by reference to
Exhibit 10.44 to the Registration Statement on Form S-4, as amended, of
CapRock Communications Corp., File No. 333-57365.)
10.39 -- $10,000,000 Promissory Note dated July 1, 1996 by and between the
Partnership and Bank One. (Incorporated by reference to Exhibit 10.45 to
the Registration Statement on Form S-4, as amended, of CapRock
Communications Corp., File No. 333-57365.)
10.40 -- Guaranty dated July 1, 1996 by CapRock Systems, Inc. in favor of Bank One.
(Incorporated by reference to Exhibit 10.46 to the Registration Statement
on Form S-4, as amended, of CapRock Communications Corp., File No.
333-57365.)
10.41 -- Guaranty dated July 1, 1996 by Mark Langdale in favor of Bank One.
(Incorporated by reference to Exhibit 10.47 to the Registration Statement
on Form S-4, as amended, of CapRock Communications Corp., File No.
333-57365.)
10.42 -- Guaranty dated July 1, 1996 by Jere W. Thompson, Jr. in favor of Bank One.
(Incorporated by reference to Exhibit 10.48 to the Registration Statement
on Form S-4, as amended, of CapRock Communications Corp., File No.
333-57365.)
10.43 -- Form of Note Purchase Agreement by and among the Registrant and various
initial purchasers. (Incorporated by reference to Exhibit 10.49 to the
Registration Statement on Form S-4, as amended, of CapRock Communications
Corp., File No. 333-57365.)
10.44 -- Form of Contribution Agreement by the General Partner of the Partnership.
(Incorporated by reference to Exhibit 10.50 to the Registration Statement
on Form S-4, as amended, of CapRock Communications Corp., File No.
333-57365.)
10.45 -- First Amendment to Loan Agreement dated July 1, 1996 by and between the
Partnership and Bank One. (Incorporated by reference to Exhibit 10.51 to
the Registration Statement on Form S-4, as amended, of CapRock
Communications Corp., File No. 333-57365.)
</TABLE>
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<PAGE>
<TABLE>
<C> <C> <S> <C>
10.46 -- Second Amendment to Loan Agreement dated April 29, 1998 by and between the
Partnership and Bank One. (Incorporated by reference to Exhibit 10.52 to
the Registration Statement on Form S-4, as amended, of CapRock
Communications Corp., File No. 333-57365.)
10.47 -- License Agreement dated June 16, 1998 by and between Telecommunications and
RiverRock Systems, Ltd. (Incorporated by reference to Exhibit 10.53 to the
Registration Statement on Form S-4, as amended, of CapRock Communications
Corp., File No. 333-57365.)
10.48 -- Modification Agreement dated as of June 17, 1998 by and between IWL and
Bank One. (Incorporated by reference to Exhibit 10.54 to the Registration
Statement on Form S-4, as amended, of CapRock Communications Corp., File
No. 333-57365.)
10.49 -- Promissory Note dated June 17, 1998 executed by IWL payable to the order of
Bank One, in the principal amount of $4,000,000.00. (Incorporated by
reference to Exhibit 10.55 to the Registration Statement on Form S-4, as
amended, of CapRock Communications Corp., File No. 333-57365.)
10.50 -- Eighth Amendment to Loan and Security Agreement dated as of June 18, 1998
by and between CapRock and Bank One. (Incorporated by reference to Exhibit
10.56 to the Registration Statement on Form S-4, as amended, of CapRock
Communications Corp., File No. 333-57365.)
10.51 -- Renewal and Extension Promissory Note dated as June 18, 1998 executed by
CapRock payable to the order of Bank One, in the principal amount of
$7,000,000.00. (Incorporated by reference to Exhibit 10.57 to the
Registration Statement on Form S-4, as amended, of CapRock Communications
Corp., File No. 333-57365.)
10.52 -- Intercompany Promissory Note dated as of June 18, 1998 originally executed
by the Partnership payable to the order of CapRock in the principal amount
of $2,500,000.00 and endorsed by CapRock in favor of Bank One.
(Incorporated by reference to Exhibit 10.58 to the Registration Statement
on Form S-4, as amended, of CapRock Communications Corp., File No.
333-57365.)
10.53 -- Ninth Amendment to Loan and Security Agreement dated as July 9, 1998 by and
between the Partnership and Bank One. (Incorporated by reference to Exhibit
10.59 to the Registration Statement on Form S-4, as amended, of CapRock
Communications Corp., File No. 333-57365.)
10.54 -- Third Amendment to Loan Agreement dated as of June 18, 1998 by and between
the Partnership and Bank One. (Incorporated by reference to Exhibit 10.60
to the Registration Statement on Form S-4, as amended, of CapRock
Communications Corp., File No. 333-57365.)
10.55 -- Fourth Amendment to Loan Agreement dated as of July 9, 1998 by and between
the Partnership and Bank One. (Incorporated by reference to Exhibit 10.61
to the Registration Statement on Form S-4, as amended, of CapRock
Communications Corp., File No. 333-57365.)
10.56 -- Form of Escrow Agreement. (Incorporated by reference to Exhibit 10.62 to
the Registration Statement on Form S-4, as amended, of CapRock
Communications Corp., File No. 333-57365.)
10.57 -- Form of Exchange Agent Agreement by and between the Registrant and PNC
Bank, National Association.
16.1 -- Letter re: Change in Accountants. (Incorporated by reference to Exhibit
16.1 to the Registration Statement on Form S-4, as amended, of CapRock
Communications Corp., File No. 333-57365.)
</TABLE>
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<PAGE>
<TABLE>
<C> <C> <S> <C>
21.1 -- Subsidiaries of the Registrant. (Incorporated by reference to Exhibit 21.1
to the Registration Statement on Form S-4, as amended, of CapRock
Communications Corp., File No. 333-57365.)
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 KPMG Peat Marwick LLP.
23.6 -- Consent of Burds Reed & Mercer, P.C.
23.7 -- Consent of Munsch Hardt Kopf Harr & Dinan, P.C. (Included in the opinion
filed as Exhibit 5.1 to this Registration Statement).
24.1 -- Power of Attorney (included in the signature page hereto).
25.1 -- Statement of Eligibility and Qualification on Form T-1 under the Trust
Indenture Act of 1939 of PNC Bank, National Association, as Trustee of the
Indenture relating to the 12% Senior Notes due 2008, Series B.
27.1 -- Financial Data Schedule.
99.1 -- Form of Letter of Transmittal.
99.2 -- Form of Notice of Guaranteed Delivery.
99.3 -- Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and
other Nominees.
99.4 -- Form of Letter to Clients.
99.5 -- Instruction to Registered Holder and/or Book-Entry Transfer Participant
from Beneficial Owner.
99.6 -- Guidelines for Certification of Taxpayer Indentification Number on
substitute Form W-9.
</TABLE>
- ------------------------
#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.
(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.
II-7
<PAGE>
(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.
(4) That prior to any public reoffering of the securities registered
hereunder through the use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of the Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reoffering by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(5) That every prospectus (i) that is filed pursuant to paragraph (4) above
or (ii) that purports to meet the requirements of Section 10(a)(3) of the
Securities Act of 1933 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.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit of
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling president,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(c) 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.
(d) 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.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas on
the 28th day of September, 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
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears below
in so signing also makes, constitutes and appoints Jere W. Thompson, Jr. and
Ignatius W. Leonards, and each of them acting alone, his true and lawful
attorney-in-fact, with full power of substitution, for him in any and all
capacities, to execute and cause to be filed with the Securities and Exchange
Commission any and all amendments and post-effective amendments to this
Registration Statement, with exhibits thereto and other documents in connection
therewith and hereby ratifies and confirms all that said attorney-in-fact or his
substitute or substitutes may do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chief Executive Officer,
/s/ JERE W. THOMPSON, JR. Chairman of the Board,
- ------------------------------ and Director (Principal September 28, 1998
Jere W. Thompson, Jr. Executive Officer)
Senior Vice President and
/s/ KEVIN W. MCALEER Chief Financial Officer
- ------------------------------ (Principal Accounting September 28, 1998
Kevin W. McAleer Officer)
/s/ IGNATIUS W. LEONARDS President, Vice Chairman
- ------------------------------ of the Board, and September 28, 1998
Ignatius W. Leonards Director
/s/ TIMOTHY W. ROGERS
- ------------------------------ Executive Vice President September 28, 1998
Timothy W. Rogers and Director
/s/ BYRON M. ALLEN
- ------------------------------ Executive Vice President September 28, 1998
Byron M. Allen and Director
/s/ MARK LANGDALE
- ------------------------------ Director September 28, 1998
Mark Langdale
/s/ CHRISTOPHER J. AMENSON
- ------------------------------ Director September 28, 1998
Christopher J. Amenson
/s/ JOHN R. HARRIS
- ------------------------------ Director September 28, 1998
John R. Harris
</TABLE>
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<PAGE>
EXHIBIT 3.2
BYLAWS
OF
IWL HOLDINGS CORP.
<PAGE>
BYLAWS
OF
IWL HOLDINGS CORP.
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I. Offices..................................................................... 1
1.01. Principal Office............................................................. 1
1.02. Other Offices................................................................ 1
ARTICLE II. Meetings of Shareholders................................................... 1
2.01. Place of Meetings............................................................ 1
2.02. Annual Meeting............................................................... 1
2.03. List of Shareholders......................................................... 1
2.04. Special Meetings............................................................. 1
2.05. Notice....................................................................... 1
2.06. Quorum....................................................................... 1
2.07. Voting on Matters Other than the Election of Directors....................... 2
2.08. Voting in the Election of Directors.......................................... 2
2.09. Voting Procedure............................................................. 2
2.10. Action Without a Meeting..................................................... 2
2.11. Telephone Meetings........................................................... 3
ARTICLE III. Directors................................................................. 3
3.01. Management................................................................... 3
3.02. Number; Election............................................................. 3
3.03. Change in Number............................................................. 3
3.04. Election of Directors........................................................ 3
3.05. Place of Meetings............................................................ 3
3.06. First Meetings............................................................... 3
3.07. Regular Meetings............................................................. 3
3.08. Special Meetings............................................................. 4
3.09. Quorum....................................................................... 4
3.10. Removal...................................................................... 4
3.11. Vote of Directors to Fill Vacancy............................................ 4
3.12. Vote of Shareholders to Fill Vacancy......................................... 4
3.13. Action Without Meeting; Telephone Meetings................................... 4
3.14. Chairman of the Board........................................................ 4
3.15. Compensation................................................................. 5
3.16. Committees................................................................... 5
ARTICLE IV. Notices.................................................................... 5
4.01. Method....................................................................... 5
4.02. Waiver....................................................................... 5
ARTICLE V. Officers.................................................................... 5
5.01. Officers..................................................................... 5
5.02. Election..................................................................... 6
5.03. Compensation................................................................. 6
5.04. Removal and Vacancies........................................................ 6
5.05. Chief Executive Officer...................................................... 6
5.06. President.................................................................... 6
5.07. Vice Presidents.............................................................. 6
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<S> <C> <C>
5.08. Secretary.................................................................... 6
5.09. Assistant Secretaries........................................................ 7
5.10. Treasurer.................................................................... 7
5.11. Assistant Treasurers......................................................... 7
ARTICLE VI. Certificates Representing Shares........................................... 7
6.01. Certificates................................................................. 7
6.02. Lost Certificates............................................................ 7
6.03. Transfer of Shares........................................................... 7
6.04. Registered Shareholders...................................................... 8
6.05. Fixing Record Date for Matters Other Than Consents to Action................. 8
6.06. Fixing Record Date for Consents to Action.................................... 8
6.07. Distribution Held in Suspense................................................ 9
6.08. Joint Owners of Shares....................................................... 9
ARTICLE VII. General Provisions........................................................ 9
7.01. Distributions................................................................ 9
7.02. Reserves..................................................................... 9
7.03. Checks....................................................................... 9
7.04. Fiscal Year.................................................................. 9
7.05. Seal......................................................................... 9
7.06. Indemnification.............................................................. 9
7.07. Transactions with Directors and Officers..................................... 10
7.08. Amendments................................................................... 10
7.09. Table of Contents; Headings.................................................. 10
</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
2
<PAGE>
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.
3
<PAGE>
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 share-holders 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.
4
<PAGE>
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.
5
<PAGE>
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 shareholders 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.
6
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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 of the Corporation to issue a
new certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
7
<PAGE>
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 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
8
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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.
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
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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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AMENDMENT TO THE BYLAWS
OF
CAPROCK COMMUNICATIONS CORP.
(THE "CORPORATION")
The following Amendment to the Bylaws was adopted by the Board of Directors
of the Corporation as of August 26, 1998:
RESOLVED, that Section 2.02 of the Bylaws of the Corporation be amended
so as to read in its entirety as follows:
"Section 2.02 ANNUAL MEETING. An annual meeting of the shareholders,
commencing with the year 1999, 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.
/s/ Kevin W. McAleer
--------------------------------------
Kevin W. McAleer, SECRETARY
12
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- -------------------------------------------------------------------------------
CAPROCK COMMUNICATIONS CORP.,
CAPROCK TELECOMMUNICATIONS CORP. AND
CAPROCK FIBER NETWORK, LTD., as Issuer
and
IWL COMMUNICATIONS, INCORPORATED,
as Limited Guarantor
and
PNC BANK, NATIONAL ASSOCIATION, as Trustee
---------------------
INDENTURE
Dated as of July 16, 1998
--------------------
$150,000,000 Aggregate Principal Amount
12% Senior Notes due 2008, Series A
12% Senior Notes due 2008, Series B
- -------------------------------------------------------------------------------
<PAGE>
Reconciliation and tie between Trust Indenture Act of 1939,
as amended, and Indenture, dated as of July 16, 1998
<TABLE>
<CAPTION>
Trust Indenture Indenture
Act Section Section
- ----------------- -----------------
<S> <C> <C>
ss.310 (a)(1) . . . . . . . . . . . . . . . . . 6.09
(a)(2) . . . . . . . . . . . . . . . . . 6.09
(a)(3) . . . . . . . . . . . . . . . . . Not applicable
(a)(4) . . . . . . . . . . . . . . . . . Not applicable
(b). . . . . . . . . . . . . . . . . . . 6.08, 6.10
ss.311 (a). . . . . . . . . . . . . . . . . . . 6.07
(b). . . . . . . . . . . . . . . . . . . 6.07
(c). . . . . . . . . . . . . . . . . . . Not Applicable
ss.312 (a). . . . . . . . . . . . . . . . . . . 3.05, 7.01
(b). . . . . . . . . . . . . . . . . . . 7.02
(c). . . . . . . . . . . . . . . . . . . 7.02
ss.313 (a). . . . . . . . . . . . . . . . . . . 7.03
(b). . . . . . . . . . . . . . . . . . . 7.03
(c). . . . . . . . . . . . . . . . . . . 7.03
(d). . . . . . . . . . . . . . . . . . . 7.03
ss.314 (a). . . . . . . . . . . . . . . . . . . 7.04, 10.09
(b). . . . . . . . . . . . . . . . . . . Not Applicable
(c)(1) . . . . . . . . . . . . . . . . . 1.04, 4.02, 4.03, 11.01(c)
(c)(2) . . . . . . . . . . . . . . . . . 1.04, 4.02, 4.03, 11.01(c)
(c)(3) . . . . . . . . . . . . . . . . . Not Applicable
(d). . . . . . . . . . . . . . . . . . . Not Applicable
(e). . . . . . . . . . . . . . . . . . . 1.04, 10.09
ss.315 (a). . . . . . . . . . . . . . . . . . . 6.01(a)
(b). . . . . . . . . . . . . . . . . . . 6.02
(c). . . . . . . . . . . . . . . . . . . 6.01(b)
(d). . . . . . . . . . . . . . . . . . . 6.01(c)
(e). . . . . . . . . . . . . . . . . . . 5.14
ss.316 (a) (last sentence). . . . . . . . . . . 3.14
(a)(1)(A). . . . . . . . . . . . . . . . 5.12
(a)(1)(B). . . . . . . . . . . . . . . . 5.13
(a)(2). . . . . . . . . . . . . . . . . Not Applicable
(b). . . . . . . . . . . . . . . . . . . 5.08
- -------------------------------------------------------------------------------
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<PAGE>
Trust Indenture Indenture
Act Section Section
- ----------------- -----------------
ss.317 (a)(1). . . . . . . . . . . . . . . . . 5.03
(a)(2). . . . . . . . . . . . . . . . . 5.04
(b). . . . . . . . . . . . . . . . . . . 10.03
ss.318 (a). . . . . . . . . . . . . . . . . . . 1.08
</TABLE>
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TABLE OF CONTENTS
<TABLE>
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<S> <C>
ARTICLE 1 DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION. . . . . . . . . . . . . . . . . . . . . . . .2
Section 1.01. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . .2
Section 1.02. Other Definitions. . . . . . . . . . . . . . . . . . . . . . . 34
Section 1.03. Rules of Construction. . . . . . . . . . . . . . . . . . . . . 35
Section 1.04. Form of Documents Delivered to Trustee.. . . . . . . . . . . . 35
Section 1.05. Acts of Holders. . . . . . . . . . . . . . . . . . . . . . . . 36
Section 1.06. Notices, etc., to the Trustee and the Issuer.. . . . . . . . . 37
Section 1.07. Notice to Holders; Waiver. . . . . . . . . . . . . . . . . . . 37
Section 1.08. Conflict with Trust Indenture Act. . . . . . . . . . . . . . . 38
Section 1.09. Effect of Headings and Table of Contents.. . . . . . . . . . . 38
Section 1.10. Successors and Assigns.. . . . . . . . . . . . . . . . . . . . 38
Section 1.11. Separability Clause. . . . . . . . . . . . . . . . . . . . . . 38
Section 1.12. Benefits of Indenture. . . . . . . . . . . . . . . . . . . . . 38
Section 1.13. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 1.14. No Recourse Against Others.. . . . . . . . . . . . . . . . . . 39
Section 1.15. Independence of Covenants. . . . . . . . . . . . . . . . . . . 39
Section 1.16. Exhibits.. . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 1.17. Counterparts.. . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 1.18. Duplicate Originals. . . . . . . . . . . . . . . . . . . . . . 39
ARTICLE 2 NOTE FORMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 2.01. Form and Dating. . . . . . . . . . . . . . . . . . . . . . . . 40
ARTICLE 3 THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 3.01. Title and Terms. . . . . . . . . . . . . . . . . . . . . . . . 41
Section 3.02. Registrar and Paying Agent.. . . . . . . . . . . . . . . . . . 41
Section 3.03. Execution and Authentication.. . . . . . . . . . . . . . . . . 42
Section 3.04. Temporary Notes. . . . . . . . . . . . . . . . . . . . . . . . 43
Section 3.05. Transfer and Exchange. . . . . . . . . . . . . . . . . . . . . 43
Section 3.06. Mutilated, Destroyed, Lost and Stolen Notes. . . . . . . . . . 45
Section 3.07. Payment of Interest; Interest Rights Preserved.. . . . . . . . 45
Section 3.08. Persons Deemed Owners. . . . . . . . . . . . . . . . . . . . . 46
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Section 3.09. Cancellation.. . . . . . . . . . . . . . . . . . . . . . . . . 47
Section 3.10. Computation of Interest. . . . . . . . . . . . . . . . . . . . 47
Section 3.11. Legal Holidays.. . . . . . . . . . . . . . . . . . . . . . . . 47
Section 3.12. CUSIP and CINS Numbers.. . . . . . . . . . . . . . . . . . . . 48
Section 3.13. Paying Agent To Hold Money in Trust. . . . . . . . . . . . . . 48
Section 3.14. Treasury Notes.. . . . . . . . . . . . . . . . . . . . . . . . 48
Section 3.15. Deposits of Monies.. . . . . . . . . . . . . . . . . . . . . . 48
Section 3.16. Book Entry Provisions for Global Notes.. . . . . . . . . . . . 49
Section 3.17. Special Transfer Provisions. . . . . . . . . . . . . . . . . . 50
ARTICLE 4 DEFEASANCE OR COVENANT DEFEASANCE . . . . . . . . . . . . . . . . . 53
Section 4.01. Termination of Issuer's Obligations. . . . . . . . . . . . . . 54
Section 4.02. Defeasance and Discharge of Indenture. . . . . . . . . . . . 54
Section 4.03. Defeasance and Certain Obligations. . . . . . . . . . . . . . 57
Section 4.04. Application of Trust Money. . . . . . . . . . . . . . . . . . 59
Section 4.05. Repayment to Issuer. . . . . . . . . . . . . . . . . . . . . 59
Section 4.06. Reinstatement. . . . . . . . . . . . . . . . . . . . . . . . 59
ARTICLE 5 REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Section 5.01. Events of Default. . . . . . . . . . . . . . . . . . . . . . . 59
Section 5.02. Acceleration of Maturity, Rescission and Annulment.. . . . . . 61
Section 5.03. Collection of Indebtedness and Suits for Enforcement by
Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Section 5.04. Trustee May File Proofs of Claims. . . . . . . . . . . . . . . 63
Section 5.05. Trustee May Enforce Claims Without Possession of Notes.. . . . 64
Section 5.06. Application of Money Collected.. . . . . . . . . . . . . . . . 64
Section 5.07. Limitation on Suits. . . . . . . . . . . . . . . . . . . . . . 64
Section 5.08. Unconditional Right of Holders To Receive Principal,
Premium and Interest.. . . . . . . . . . . . . . . . . . . . . 65
Section 5.09. Restoration of Rights and Remedies.. . . . . . . . . . . . . . 65
Section 5.10. Rights and Remedies Cumulative.. . . . . . . . . . . . . . . . 66
Section 5.11. Delay or Omission Not Waiver.. . . . . . . . . . . . . . . . . 66
Section 5.12. Control by Majority. . . . . . . . . . . . . . . . . . . . . . 66
Section 5.13. Waiver of Past Defaults. . . . . . . . . . . . . . . . . . . . 67
Section 5.14. Undertaking for Costs. . . . . . . . . . . . . . . . . . . . . 67
Section 5.15. Waiver of Stay, Extension or Usury Laws. . . . . . . . . . . . 67
Section 5.16. Unconditional Right of Holders To Receive Payment. . . . . . . 68
ARTICLE 6 THE TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
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Section 6.01. Certain Duties and Responsibilities. . . . . . . . . . . . . . 68
Section 6.02. Notice of Defaults.. . . . . . . . . . . . . . . . . . . . . . 69
Section 6.03. Certain Rights of Trustee. . . . . . . . . . . . . . . . . . . 69
Section 6.04. Trustee Not Responsible for Recitals, Dispositions of
Notes or Application of Proceeds Thereof.. . . . . . . . . . . 71
Section 6.05. Trustee and Agents May Hold Notes; Collections; Etc. . . . . . 71
Section 6.06. Money Held in Trust. . . . . . . . . . . . . . . . . . . . . . 71
Section 6.07. Compensation and Indemnification of Trustee and Its
Prior Claim. . . . . . . . . . . . . . . . . . . . . . . . . . 71
Section 6.08. Conflicting Interests. . . . . . . . . . . . . . . . . . . . . 72
Section 6.09. Corporate Trustee Required; Eligibility. . . . . . . . . . . . 72
Section 6.10. Resignation and Removal; Appointment of Successor
Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Section 6.11. Acceptance of Appointment by Successor.. . . . . . . . . . . . 74
Section 6.12. Merger, Conversion, Amalgamation, Consolidation or
Succession to Business.. . . . . . . . . . . . . . . . . . . . 75
ARTICLE 7 HOLDERS' LISTS AND REPORTS BY TRUSTEE AND ISSUER. . . . . . . . . . 76
Section 7.01. Preservation of Information; Issuer To Furnish Trustee
Names and Addresses of Holders.. . . . . . . . . . . . . . . . 76
Section 7.02. Communications of Holders. . . . . . . . . . . . . . . . . . . 76
Section 7.03. Reports by Trustee.. . . . . . . . . . . . . . . . . . . . . . 77
Section 7.04. Reports by Issuer. . . . . . . . . . . . . . . . . . . . . . . 77
ARTICLE 8 CONSOLIDATION, MERGER, SALE OF ASSETS, ETC. . . . . . . . . . . . . 78
Section 8.01. Issuer May Consolidate, etc., Only on Certain Terms. . . . . . 78
Section 8.02. Successor Substituted. . . . . . . . . . . . . . . . . . . . . 79
ARTICLE 9 SUPPLEMENTAL INDENTURES AND WAIVERS . . . . . . . . . . . . . . . . 79
Section 9.01. Supplemental Indentures, Agreements and Waivers
Without Consent of Holders.. . . . . . . . . . . . . . . . . . 79
Section 9.02. Supplemental Indentures, Agreements and Waivers With
Consent of Holders.. . . . . . . . . . . . . . . . . . . . . . 80
Section 9.03. Execution of Supplemental Indentures, Agreements and
Waivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Section 9.04. Effect of Supplemental Indentures. . . . . . . . . . . . . . . 82
Section 9.05. Conformity with Trust Indenture Act. . . . . . . . . . . . . . 82
Section 9.06. Reference in Notes to Supplemental Indentures. . . . . . . . . 82
Section 9.07. Record Date. . . . . . . . . . . . . . . . . . . . . . . . . . 83
Section 9.08. Revocation and Effect of Consents. . . . . . . . . . . . . . . 83
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ARTICLE 10 COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Section 10.01. Payment of Principal, Premium and Interest.. . . . . . . . . . 83
Section 10.02. Maintenance of Office or Agency. . . . . . . . . . . . . . . . 83
Section 10.03. Money for Note Payments To Be Held In Trust. . . . . . . . . . 84
Section 10.04. Corporate Existence. . . . . . . . . . . . . . . . . . . . . . 85
Section 10.05. Payment of Taxes and Other Claims. . . . . . . . . . . . . . . 86
Section 10.06. Maintenance of Properties. . . . . . . . . . . . . . . . . . . 86
Section 10.07. Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Section 10.08. Books and Records. . . . . . . . . . . . . . . . . . . . . . . 87
Section 10.09. Compliance Certificates and Opinions.. . . . . . . . . . . . . 87
Section 10.10. Repurchase of Notes Upon a Change of Control . . . . . . . . . 88
Section 10.11. Limitation on Indebtedness . . . . . . . . . . . . . . . . . . 88
Section 10.12. Statement by Officers as to Default. . . . . . . . . . . . . . 88
Section 10.13. Limitation on Restricted Payments. . . . . . . . . . . . . . . 89
Section 10.14. Limitation on Transactions with Stockholders and
Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Section 10.15. Limitation on Asset Sales. . . . . . . . . . . . . . . . . . . 94
Section 10.16. Limitation on Liens. . . . . . . . . . . . . . . . . . . . . . 95
Section 10.17. Business Activities Prior to the Transaction . . . . . . . . . 96
Section 10.18. Limitation on the Issuance and Sale of Capital Stock
of Restricted Subsidiaries . . . . . . . . . . . . . . . . . . 97
Section 10.19. Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries. . . . . . . . . . . . . . . 98
Section 10.20. Limitation on Sale Leaseback Transactions. . . . . . . . . . .100
Section 10.21. Special Offer to Purchase. . . . . . . . . . . . . . . . . . .100
Section 10.22. Commission Reports and Reports to Holders. . . . . . . . . . .101
Section 10.23. Limitation on Issuances of Guarantees by Restricted
Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . .101
ARTICLE 11 SATISFACTION AND DISCHARGE. . . . . . . . . . . . . . . . . . . . .102
Section 11.01. Satisfaction and Discharge of Indenture. . . . . . . . . . . .102
Section 11.02. Application of Trust Money.. . . . . . . . . . . . . . . . . .103
ARTICLE 12 REDEMPTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . .103
Section 12.01. Right of Redemption; Mandatory Redemption. . . . . . . . . . .104
Section 12.02. Notice to the Trustee. . . . . . . . . . . . . . . . . . . . .104
Section 12.03. Selection of Notes to be Redeemed. . . . . . . . . . . . . . .104
Section 12.04. Notice of Redemption.. . . . . . . . . . . . . . . . . . . . .105
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Section 12.05. Effect of Notice of Redemption.. . . . . . . . . . . . . . . .106
Section 12.06. Deposit of Redemption Price. . . . . . . . . . . . . . . . . .106
Section 12.07. Notes Redeemed in Part.. . . . . . . . . . . . . . . . . . . .106
ARTICLE 13 LIMITED GUARANTEE . . . . . . . . . . . . . . . . . . . . . . . . .107
Section 13.01. Limited Guarantee of Notes.. . . . . . . . . . . . . . . . . .107
EXHIBITS
Exhibit A-1 Form of Series A Note
Exhibit A-2 Form of Series B Notes
Exhibit B Form of Legend for Book-Entry Securities
Exhibit C Form of Certificate To Be Delivered in Connection with
Transfers to Non-QIB Accredited Investors
Exhibit D Form of Certificate To Be Delivered in Connection with
Transfers Pursuant to Regulation S
</TABLE>
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<PAGE>
INDENTURE, dated as of July 16, 1998, among CAPROCK COMMUNICATIONS
CORP. ("Communications" or the "Company"), CAPROCK TELECOMMUNICATIONS CORP.
("Telecommunications"), CAPROCK FIBER NETWORK, LTD. (the "Partnership"), IWL
COMMUNICATIONS, INCORPORATED ("IWL" or the "Limited Guarantor") and PNC BANK,
NATIONAL ASSOCIATION, (the "Trustee").
RECITALS
Each of the Company, Telecommunications and the Partnership has
duly authorized the creation of an issue of (i) 12% Senior Notes due 2008,
Series A (the "Initial Notes"), and (ii) 12% Senior Notes due 2008, Series B,
to be issued in exchange for the Initial Notes pursuant to the Registration
Rights Agreement (the "Exchange Notes" and, together with the Initial Notes
and the Private Exchange Notes, the "Notes", treated as a single class of
securities under this Indenture), of substantially the tenor and amount
hereinafter set forth, and to provide therefor each of the Company,
Telecommunications and the Partnership has duly authorized the execution and
delivery of this Indenture.
IWL has duly authorized its limited guarantee of the Company's,
Telecommunications' and the Partnership's obligations in connection with the
Special Offer to Purchase set forth in Section 10.21 of this Indenture and in
connection therewith has duly authorized the execution and delivery of this
Indenture.
All things necessary have been done to make the Notes, when
executed by each of the Company, Telecommunications and the Partnership and
authenticated and delivered hereunder and duly issued by each of the Company,
Telecommunications and the Partnership, the valid obligations of each of the
Company, Telecommunications and the Partnership and to make this Indenture a
valid agreement of each of the Company, Telecommunications, the Partnership,
IWL and the Trustee in accordance with the terms hereof.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Notes by the Holders (as hereinafter defined) thereof, it is mutually
covenanted and agreed, for the equal and proportionate benefit of all Holders
of the Notes, as follows:
<PAGE>
ARTICLE 1
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.01. DEFINITIONS.
"Acquired Indebtedness" means Indebtedness of a Person existing at
the time such Person becomes a Restricted Subsidiary or assumed in connection
with an Asset Acquisition by the Issuer or a Restricted Subsidiary; provided
that Indebtedness of such Person which is redeemed, defeased, retired or
otherwise repaid at the time of or immediately upon consummation of the
transaction by which such Person becomes a Restricted Subsidiary or such
Asset Acquisition shall not be Acquired Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the
aggregate net income (or loss) of the Issuer and its Restricted Subsidiaries
for such period (which calculation shall include the combined aggregate
consolidated net income (or loss) of Telecommunications, the Partnership and
IWL and their respective Restricted Subsidiaries during the Transition Period
in the event the Transaction is consummated) determined in conformity with
GAAP; PROVIDED that the following items shall be excluded in computing
Adjusted Consolidated Net Income (without duplication):
(i) the net income (or loss) of any Person (other than a
Restricted Subsidiary) in which any Person (other than the Issuer or any of
its Restricted Subsidiaries) has a joint interest and the net income (or
loss) of any Unrestricted Subsidiary, except
(x) with respect to net income, to the extent of the amount
of dividends or other distributions actually paid in cash to the
Issuer or any of its Restricted Subsidiaries by such other Person or
such Unrestricted Subsidiary during such period and
(y) with respect to net losses, to the extent of the amount
of cash contributed by the Issuer or any Restricted Subsidiary to such
Person during such period;
(ii) the net income (or loss) of any Person acquired by the
Issuer or any of its Restricted Subsidiaries in a pooling-of-interests
transaction for any period prior to the date of the related acquisition;
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(iii) the net income of any Restricted Subsidiary to the extent
that the declaration or payment of dividends or similar distributions by
such Restricted Subsidiary of such net income is not at the time permitted
by the operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary;
(iv) any gains or losses (on an after-tax basis) attributable to
Asset Sales;
(v) any net after-tax extraordinary or non-recurring gains or
losses;
(vi) any gain or loss, net of taxes, realized upon the
termination of any employee benefit plan; and
(vii) any compensation or other expense paid or payable solely
with Capital Stock (other than Redeemable Stock) of the Issuer or any
options, warrants or other rights to acquire such Capital Stock.
"Adjusted Consolidated Net Tangible Assets" means the total amount
of assets of the Issuer and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the
extent resulting from write-ups of capital assets (excluding write-ups in
connection with accounting for acquisitions in conformity with GAAP), minus
(i) all current liabilities of the Issuer and its Restricted Subsidiaries
(excluding intercompany items) and (ii) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, all as set forth on the most recent quarterly or annual
consolidated balance sheet of the Issuer and its Restricted Subsidiaries,
prepared in conformity with GAAP and filed with the Commission or provided to
the Trustee pursuant to Section 10.22 hereof.
"Affiliate" means, with respect to any specified Person, any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of this
definition, "control," when used with respect to any specified Person, means
the power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract
or otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Acquisition" means (i) an investment by the Issuer or any of
its Restricted Subsidiaries in any other Person pursuant to which such Person
shall become a Restricted Subsidiary or shall be merged into or consolidated
with the Issuer or any of its Restricted Subsidiaries; provided that such
Person's primary business is related, ancillary or
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<PAGE>
complementary to the businesses of the Issuer and its Restricted Subsidiaries
on the date of such investment or (ii) an acquisition by the Issuer or any of
its Restricted Subsidiaries of the property and assets of any Person other
than the Issuer or any of its Restricted Subsidiaries that constitute
substantially all of a division or line of business of such Person; provided
that the property and assets acquired are related, ancillary or complementary
to the businesses of the Issuer and its Restricted Subsidiaries on the date
of such acquisition. The term does not include the Transaction or the
Special Partnership Transaction.
"Asset Disposition" means the sale or other disposition by the
Issuer or any of its Restricted Subsidiaries (other than to the Issuer or
another Restricted Subsidiary) of (i) all or substantially all of the Capital
Stock of any Restricted Subsidiary or (ii) all or substantially all of the
assets of a division or line of business of the Issuer or any of its
Restricted Subsidiaries. The term does not include the Transaction or the
Special Partnership Transaction.
"Asset Sale" means any direct or indirect sale, transfer or lease
or other disposition (including by way of merger, consolidation or
sale-leaseback transaction) in one transaction or a series of related
transactions by the Issuer or any of its Restricted Subsidiaries to any
Person other than the Issuer or any of its Restricted Subsidiaries of:
(i) all or any of the Capital Stock of any Restricted
Subsidiary,
(ii) all or substantially all of the property and assets of an
operating unit or business of the Issuer or any of its Restricted
Subsidiaries, or
(iii) any other property and assets of the Issuer or any of its
Restricted Subsidiaries outside the ordinary course of business of the
Issuer or such Restricted Subsidiary other than the Capital Stock of or
Investment in an Unrestricted Subsidiary
that, with respect to each of (i), (ii) and (iii), is not governed Article
Eight hereof; provided that "Asset Sale" shall not include:
(a) sales, transfers or other dispositions of assets,
whether in one transaction or a series of related transactions
occurring within one year, involving assets with a fair market value
not in excess of $1.0 million in any transaction or series of related
transactions,
(b) contemporaneous exchanges by the Issuer or any
Restricted Subsidiary of Telecommunications Assets for other
Telecommunications
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Assets in the ordinary course of business, including fiber swaps and
partitioning of switches; provided that the applicable
Telecommunications Assets received by the Issuer or such Restricted
Subsidiary have at least substantially equal fair market value to the
Telecommunications Assets disposed of,
(c) sales, transfers or other dispositions of assets that
have become uneconomic, obsolete or worn-out, or
(d) the Transaction or the Special Partnership Transaction.
"Average Life" means, at any date of determination with respect to
any debt security, the quotient obtained by dividing (i) the sum of the
products of (a) the number of years from such date of determination to the
dates of each successive scheduled principal payment of such debt security
and (b) the amount of such principal payment by (ii) the sum of all such
principal payments.
"Bankruptcy Law" means Title 11, United States Code, or any similar
federal or state law relating to bankruptcy, insolvency, receivership, or
relief of debtors or the law of any other jurisdiction relating to
bankruptcy, insolvency, or relief of debtors or any amendment to, succession
to or change in any such law.
"Board of Directors" means, with respect to any Person, its Board
of Directors, general partner(s), manager(s), or similar governing body.
"Board Resolution" means a copy of a resolution delivered to the
Trustee that is certified by the Secretary or an Assistant Secretary of the
Issuer (or the general partner of the Issuer) to have been duly adopted by
the Board of Directors and to be in full force and effect on the date of such
certification.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in The City of New
York, New York or in Philadelphia, Pennsylvania are authorized or obligated
by law, regulation or executive order to close.
"Calculation Date" means, with respect to the Incurrence of any
Indebtedness by the Issuer or any of its Restricted Subsidiaries, the date
such Indebtedness is to be Incurred and, with respect to any Restricted
Payment, the date such Restricted Payment is to be made.
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"Capital Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) in equity of such Person, whether outstanding
on the Closing Date or issued thereafter, including, without limitation, all
Common Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of
any property (whether real, personal or mixed) of which the discounted
present value of the rental obligations of such Person as lessee, in
conformity with GAAP, is required to be capitalized on the balance sheet of
such Person.
"Capitalized Lease Obligations" means the discounted present value
of the rental obligations under a Capitalized Lease.
"Cedel" means Cedel Bank, Societe Anonyme.
"Change of Control" shall be deemed to occur if, after the
Transaction occurs:
(i) the sale, conveyance, transfer or lease of all or
substantially all of the assets of the Issuer to any Person or "group" (as
such term is used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act,
including any group acting for the purpose of acquiring, holding or
disposing of securities within the meaning of Rule 13d-5(b)(1) under the
Exchange Act), other than to one or more Permitted Holders and/or one or
more Restricted Subsidiaries, shall have occurred,
(ii) any Person or "group" (as such term is used in
Sections 13(d)(3) and 14(d)(2) of the Exchange Act including any group
acting for the purpose of acquiring, holding or disposing of securities
within the meaning of Rule 13d-5(b)(1) under the Exchange Act), other than
any Permitted Holder (or group that includes a Permitted Holder), becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of
more than 50% of the total voting power of all classes of the Voting Stock
of the Issuer (including any warrants, options or rights to acquire such
Voting Stock), calculated on a fully diluted basis,
(iii) during any period of two consecutive years, individuals who
at the beginning of such period constituted the Board of Directors of the
Issuer (together with any directors whose election or appointment by the
Board of Directors of the Issuer or whose nomination for election by the
stockholders of the Issuer was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning
of such period or whose election or nomination for election
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was previously so approved) cease for any reason to constitute a majority
of the Board of Directors of the Issuer then in office or
(iv) the merger, amalgamation or consolidation of the Issuer with
or into another Person or the merger of another Person with or into the
Issuer shall have occurred, and the securities of the Issuer that are
outstanding immediately prior to such transaction and which represent 100%
of the aggregate voting power of the Voting Stock of the Issuer are changed
into or exchanged for cash, securities or property, unless pursuant to such
transaction such securities are changed into or exchanged for, in addition
to any other consideration, securities of the surviving Person that
represent, immediately after giving effect to such transaction, at least a
majority of the aggregate voting power of the Voting Stock of the surviving
Person.
"Closing Date" means the date on which the Notes are originally
issued under this Indenture.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's equity, other than Preferred
Stock of such Person, whether outstanding on the Closing Date or issued
thereafter, including, without limitation, all series and classes of such
common stock.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated
Net Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income,
(i) Consolidated Interest Expense,
(ii) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary and non-recurring gains or losses
or sales of assets),
(iii) depreciation expense,
(iv) amortization expense,
(v) all other non-cash items reducing Adjusted Consolidated Net
Income (other than items that will require cash payments and for which an
accrual or reserve is, or is required by GAAP to be, made), and
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(vi) costs directly related to the Transaction, the Special
Partnership Transaction or the offering of the Notes and expensed by the
Issuer in accordance with GAAP on or prior to December 31, 1998,
less all non-cash items increasing Adjusted Consolidated Net Income, all as
determined on a consolidated basis for the Issuer and its Restricted
Subsidiaries in conformity with GAAP; provided that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA
shall be reduced (to the extent not otherwise reduced in accordance with
GAAP) by an amount equal to (A) the amount of the Adjusted Consolidated Net
Income attributable to such Restricted Subsidiary multiplied by (B) the
quotient of (1) the number of shares of outstanding Common Stock of such
Restricted Subsidiary not owned on the last day of such period by the Issuer
or any of its Restricted Subsidiaries divided by (2) the total number of
shares of outstanding Common Stock of such Restricted Subsidiary on the last
day of such period.
"Consolidated Interest Expense" means, for any period, without
duplication, the aggregate amount of interest in respect of Indebtedness,
including, without limitation:
(i) amortization of original issue discount on any Indebtedness
and the interest portion of any deferred payment obligation, calculated in
accordance with the effective interest method of accounting;
(ii) all commissions, discounts and other fees and charges owed
with respect to letters of credit and bankers' acceptance financing;
(iii) the net costs associated with Interest Rate Agreements;
(iv) Preferred Stock dividends of the Issuer's Restricted
Subsidiaries (other than dividends paid in shares of Preferred Stock that
are not Redeemable Stock) declared and paid or payable;
(v) accrued Redeemable Stock dividends of the Issuer and its
Restricted Subsidiaries, whether or not declared or paid; and
(vi) the interest component of rentals in respect of Capitalized
Lease Obligations paid, accrued or scheduled to be paid or to be accrued by
the Issuer and its Restricted Subsidiaries during such period;
EXCLUDING, HOWEVER, (a) any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation of Adjusted Consolidated
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Net Income pursuant to clause (iii) of the definition thereof (but only in
the same proportion as the net income of such Restricted Subsidiary is
excluded from the calculation of Adjusted Consolidated Net Income pursuant to
clause (iii) of the definition thereof) and (b) any premiums, fees and
expenses (and any amortization thereof) payable in connection with the
offering of the Notes and the Transaction and the Special Partnership
Transaction, all as determined on a consolidated basis (without taking into
account Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Calculation Date, the
ratio of (i) the aggregate amount of Indebtedness of the Issuer and its
Restricted Subsidiaries on a consolidated basis outstanding on such
Calculation Date to (ii) the aggregate amount of Consolidated EBITDA for the
then most recent four fiscal quarters for which financial statements of the
Issuer have been filed with the Commission or provided to the Trustee
pursuant to Section 10.22 hereof or, if such financial statements do not
cover the most recent four fiscal quarters, then the most recent four fiscal
quarters for (x) the Company (if the Transaction has occurred) giving pro
forma effect to the Transaction as if it occurred at the beginning of such
four fiscal quarter period or (y) Telecommunications and the Partnership on a
combined basis (if the Special Offer to Purchase has occurred), prepared in
accordance with GAAP, (such four fiscal quarter period being the "Four
Quarter Period"); provided that, in making the foregoing calculation, (A) PRO
FORMA effect shall be given to any Indebtedness to be Incurred or repaid on
the Calculation Date; (B) PRO FORMA effect shall be given to Asset
Dispositions and Asset Acquisitions (including giving PRO FORMA effect to the
application of proceeds of any Asset Disposition) that occur from the
beginning of the Four Quarter Period through the Calculation Date (the
"Reference Period"), as if they had occurred and such proceeds had been
applied on the first day of such Reference Period; and (C) PRO FORMA effect
shall be given to asset dispositions and asset acquisitions (including giving
PRO FORMA effect to the application of proceeds of any asset disposition)
that have been made by any Person that has become a Restricted Subsidiary or
has been merged with or into the Issuer or any Restricted Subsidiary during
such Reference Period and that would have constituted Asset Dispositions or
Asset Acquisitions had such transactions occurred when such Person was a
Restricted Subsidiary as if such asset dispositions or asset acquisitions had
occurred on the first day of such Reference Period; provided that to the
extent that clause (B) or (C) of this sentence requires that PRO FORMA effect
be given to an Asset Acquisition or Asset Disposition, such PRO FORMA
calculation shall be based upon the four full fiscal quarters immediately
preceding the Calculation Date of the Person, or division or line of business
of the Person, that is acquired or disposed of for which financial
information is available.
"Consolidated Net Worth" means, at any date of determination,
stockholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of the Issuer and its Restricted
Subsidiaries (which shall be as of a date not more than
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90 days prior to the date of such computation and which shall not take into
account Unrestricted Subsidiaries), less any amounts attributable to
Redeemable Stock or any equity security convertible into or exchangeable for
Indebtedness, the cost of treasury stock and the outstanding principal amount
of any promissory notes receivable from the sale of the Capital Stock of the
Issuer or any of its Restricted Subsidiaries, each item to be determined in
conformity with GAAP (excluding the effects of foreign currency exchange
adjustments under Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 52).
"Corporate Trust Office" means the principal office of the Trustee
at which at any particular time its corporate trust business shall be
principally administered, which office at the date of execution of this
Indenture is located at 1600 Market Street, 30th Floor, Philadelphia,
Pennsylvania 19103, Attention: Corporate Trust Department, or at any other
time at such other address as the Trustee may designate from time to time by
notice to the Holders.
"Credit Facilities" means any senior commercial term loan and/or
revolving credit or working capital facility or any letter of credit facility
entered into principally with commercial banks and/or other financial
institutions typically party to commercial loan agreements.
"Currency Agreement" means any spot or forward foreign exchange
contract, currency swap agreement, currency option or other similar financial
agreement or arrangement entered into by the Issuer or any of its
Subsidiaries designed solely to protect against or manage exposure to
fluctuations in currency exchange rates.
"Custodian" means any receiver, interim receiver, receiver and
manager, receiver-manager, trustee, assignee, liquidator, sequestrator or
similar official under any Bankruptcy Law or any other law respecting secured
creditors and the enforcement of their security or any other Person with like
powers, whether appointed judicially or out of court and whether pursuant to
an interim or final appointment.
"Default" means any event that is, or after notice or passage of
time or both would be, an Event of Default. The Issuer is in "Default"
during the continuance of such an event.
"Depository" means The Depository Trust Company and its nominees
and successors.
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"Disinterested Director" means, with respect to any matter, a member
of the Board of Directors who does not have any material direct or indirect
financial interest in or with respect to such matter.
"Escrow Account" shall have the meaning set forth in the Escrow
Agreement.
"Escrow Agreement" means the Escrow and Security Agreement, dated as
of the Closing Date, among the Company, Telecommunications, the Partnership, IWL
and the Trustee.
"Euroclear" means Morgan Guaranty Trust Company of New York, Brussels
Office, as operator of the Euroclear System.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated thereunder.
"Exchange Notes" means the 12% Senior Notes due 2008, Series B, to be
issued in exchange for the Initial Notes pursuant to the Registration Rights
Agreement.
"Exchange Offer" shall have the meaning specified in the Registration
Rights Agreement.
"fair market value" means the price that would be paid in an
arm's-length transaction between a willing seller under no compulsion to sell
and a willing buyer under no compulsion to buy, as determined in good faith
by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution; provided that for purposes of clause (viii)
of the definition of "Permitted Indebtedness", (x) the fair market value of
any security registered under the Exchange Act shall be the average of the
closing prices, regular way, of such security for the 20 consecutive trading
days immediately preceding the capital contribution or sale of Capital Stock
and (y) in the event the aggregate fair market value of any other property
(other than cash or cash equivalents) received by the Issuer exceeds $10
million, the fair market value of such property shall be determined by a
nationally recognized investment banking firm (selected by the Board of
Directors of the Issuer) and set forth in their written opinion which shall
be delivered to the Trustee.
"GAAP" means generally accepted accounting principles in the United
States of America in effect on the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial
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Accounting Standards Board or in such other statements by such other entity
as approved by a significant segment of the accounting profession.
"Global Notes" means one or more of the Regulation S Global Notes
and/or the 144A Global Notes.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness of any other Person
and, without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length and are entered into in
the ordinary course of business), to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness of the payment thereof or
to protect such obligee against loss in respect thereof (in whole or in part);
provided that the term "Guarantee" shall not include endorsements for collection
or deposit in the ordinary course of business. The term "Guarantee" used as a
verb has a corresponding meaning.
"Guaranteed Indebtedness" has the meaning given it under Section 10.23
hereof.
"Holder" means the registered holder of any Note.
"Incur" means, with respect to any Indebtedness, to incur, create,
issue, assume, Guarantee or otherwise become liable for or with respect to, or
become responsible for, the payment of, contingently or otherwise, such
Indebtedness, including an Incurrence of Acquired Indebtedness; provided that
neither the accrual of interest nor the accretion of original issue discount
shall be considered an Incurrence of Indebtedness. The terms "Incurrence" and
"Incurred" shall have corresponding meanings.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication):
(i) all indebtedness of such Person for borrowed money,
(ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments,
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(iii) all obligations of such Person in respect of letters of
credit, acceptance facilities or other similar instruments (including
reimbursement obligations with respect thereto),
(iv) all obligations of such Person to pay the deferred and
unpaid purchase price of property or services, which purchase price is due
more than six months after the date of placing such property in service or
taking delivery and title thereto or the completion of such services,
(v) all Capitalized Lease Obligations of such Person,
(vi) all Indebtedness of other Persons secured by a Lien on any
asset of such Person, whether or not such Indebtedness is assumed by such
Person; provided that the amount of such Indebtedness shall be the lesser
of (A) the fair market value of such asset at such date of determination
and (B) the amount of such Indebtedness,
(vii) all Indebtedness of other Persons and all dividends and
distributions of another Person the payment of which, in either case, such
Person has Guaranteed or is responsible or liable for, directly or
indirectly, as obligor, guarantor or otherwise,
(viii) all Redeemable Stock of such Person valued at its maximum fixed
repurchase price plus (to the extent not otherwise included in such
repurchase price) accrued and unpaid dividends payable prior to the Stated
Maturity of the Notes in connection with a mandatory redemption or in
connection with a redemption at the option of the holder thereof unless
such Redeemable Stock has actually been called for redemption but not yet
redeemed, in which case it shall be valued at the redemption price therefor
plus such accrued and unpaid dividends unless the holder thereof can
require redemption or repurchase at any higher price, and
(ix) to the extent not otherwise included in this definition,
obligations under Currency Agreements and Interest Rate Agreements.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation.
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Notwithstanding anything herein to the contrary:
(A) the amount outstanding at any time of any Indebtedness
issued with original issue discount is the face amount of such Indebtedness
less the remaining unamortized portion of the original issue discount of
such Indebtedness at the time of its issuance, as determined in conformity
with GAAP,
(B) money borrowed and set aside at the time of the Incurrence
of any Indebtedness or thereafter in order to refund the payment of the
interest on such Indebtedness shall not be deemed to be "Indebtedness,"
(C) Indebtedness shall not include any liability for federal,
state, local or other taxes,
(D) Indebtedness shall not include any Trade Payable or amounts
due under leases that are not Capitalized Lease Obligations,
(E) Indebtedness shall not include amounts due with respect to
any customer advance payments and customer deposits in the ordinary course
of business with the Issuer or any Restricted Subsidiary, and
(F) Indebtedness shall not include overdrafts.
For purposes hereof, the "maximum fixed repurchase price" of any
Redeemable Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Redeemable Stock as if such
Redeemable Stock were purchased on any date on which Indebtedness shall be
required to be determined pursuant to this Indenture, and if such price is based
upon, or measured by, the fair market value of such Redeemable Stock, such fair
market value shall be determined in good faith by the Board of Directors of the
issuer of such Redeemable Stock.
"Indenture" means this instrument as originally executed (including
all exhibits and schedules hereto) and as it may from time to time be
supplemented or amended by one or more indentures supplemental hereto entered
into pursuant to the applicable provisions hereof.
"Indenture Obligations" means the obligations of the Issuer, under
this Indenture or under the Notes, to pay principal of, premium, if any, and
interest on the Notes when due and payable, whether at maturity, by
acceleration, call for redemption or repurchase or otherwise, and to pay all
other amounts due or to become due under or in
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connection with this Indenture or the Notes and the performance of all other
obligations to the Trustee (including, but not limited to, payment of all
amounts due the Trustee under Section 6.07 hereof) and the Holders of the
Notes under this Indenture and the Notes, according to the terms hereof and
thereof.
"Initial Notes" means the 12% Senior Notes due 2008, Series A, of the
Issuer.
"Initial Purchasers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation and Banc One
Capital Markets, Inc.
"Institutional Accredited Investor" means an institution that is an
"accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7)
under the Securities Act.
"interest," when used with respect to any Note, means the amount of
all interest accruing on such Note, including all additional interest payable on
the Notes pursuant to the Registration Rights Agreement and all interest
accruing subsequent to the occurrence of any events specified in Sections
5.01(g) and (h) hereof or which would have accrued but for any such event,
whether or not claims for such interest are allowable under applicable law.
"Interest Payment Date" means, when used with respect to any Note, the
Stated Maturity of an installment of interest on such Note, as set forth in such
Note.
"Interest Rate Agreement" means any interest rate protection
agreement, interest rate future agreement, interest rate option agreement,
interest rate swap agreement, interest rate cap agreement, interest rate collar
agreement, interest rate hedge agreement, option or future contract or other
similar agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan,
account receivable (other than an account receivable arising in the ordinary
course of business) or other extension of credit (including, without limitation,
by way of Guarantee or similar arrangement) or any capital contribution to (by
means of any transfer of cash or other property to others or any payment for
property or services for the account or use of others), or any purchase or
acquisition of Capital Stock, bonds, notes, debentures or other similar
instruments issued by, such Person and shall include (i) the designation of a
Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair market
value of the Capital Stock (or any other Investment), held by the Issuer or any
of its Restricted Subsidiaries, of (or in) any Person that has ceased to be a
Restricted Subsidiary at the time it so ceases to be a Restricted Subsidiary,
including, without limitation, by reason of any transaction permitted
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by clause (c) of Section 10.18 hereof. For purposes of the definition of
"Unrestricted Subsidiary" and Section 10.13 hereof, (i) "Investment" shall
include the fair market value of the assets (net of liabilities (other than
liabilities to the Issuer or any of its Subsidiaries)) of any Restricted
Subsidiary at the time that such Restricted Subsidiary is designated an
Unrestricted Subsidiary, (ii) the fair market value of the assets (net of
liabilities (other than liabilities to the Issuer or any of its
Subsidiaries)) of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Restricted Subsidiary shall be
considered a reduction in outstanding Investments and (iii) any property
transferred to or from any Person shall be valued at its fair market value at
the time of such transfer.
"Issue Date" means the original date of issuance of the Notes.
"Issuer" shall initially mean, collectively, the Company,
Telecommunications and the Partnership and shall mean (i) the Company after the
Transaction is consummated, or (ii) Telecommunications and the Partnership after
the payment of all Notes tendered in the Special Offer to Purchase pursuant to
Section 10.21 hereof, if any Notes remain outstanding. To the extent financial
calculations are made with respect to the Issuer following the closing of the
Transaction for any period or as of any date prior to the closing of the
Transaction, those calculations should include the transactions, financial
results or financial status of Telecommunications, the Partnership and IWL for
such period or as of such date.
"Issuer Request" or "Issuer Order" means a written request or order
delivered to the Trustee that is signed in the name of the Issuer by its (or its
general partner's) Chairman of the Board, Vice-Chairman, Chief Executive
Officer, President or Vice President, and by its (or its general partner's)
Secretary, Assistant Secretary, Treasurer or Assistant Treasurer.
"Lien" means any mortgage, pledge, security interest, encumbrance,
lien (statutory or other) or charge of any kind (including, without limitation,
any conditional sale or other title retention agreement or lease in the nature
thereof or any agreement to give any security interest). The term "Lien" does
not include any lease or grant of rights to use any fiber or other asset under
an arrangement that does not qualify as a conditional sale or other title
retention agreement or lease in the nature thereof or a switch partition.
"Maturity Date" means, with respect to any Note, the date specified in
such Note as the fixed date on which the principal of such Note is due and
payable.
"Merger Agreement" means that certain Agreement and Plan of Merger and
Plan of Exchange dated as of February 16, 1998 among the Company,
Telecommunications,
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the Partnership, IWL and certain other parties thereto, as amended through
the Closing Date and thereafter as amended in accordance with the terms of
this Indenture.
"Moody's" means Moody's Investors Service.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the
proceeds of such Asset Sale in the form of cash or cash equivalents, including
payments in respect of deferred payment obligations (to the extent corresponding
to the principal, but not interest, component thereof) when received in the form
of cash or cash equivalents (except to the extent such obligations are financed
or sold with recourse to the Issuer or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of the Issuer and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be provided by the
Issuer or any Restricted Subsidiary as a reserve against any liabilities
associated with such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with GAAP, and (b) with respect
to any capital contribution or issuance or sale of Capital Stock, options,
warrants or other rights to acquire Capital Stock or Indebtedness, the proceeds
of such capital contribution or issuance or sale in the form of cash or cash
equivalents, including payments in respect of deferred payment obligations (to
the extent corresponding to the principal, but not interest, component thereof)
when received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Issuer or any Restricted
Subsidiary) and proceeds from the conversion of other property received when
converted to cash or cash equivalents, net of attorney's fees, accountants'
fees, underwriters' or placement agents' fees, discounts or commissions and
brokerage, consultant and other fees incurred in connection with such issuance
or sale and net of taxes payable as a result thereof.
"Non-U.S. Person" has the meaning assigned to such term in Regulation
S.
"Notes" shall have the meaning specified in the recitals of this
Indenture.
"Offer to Purchase" means an offer by the Issuer to purchase Notes
from the Holders commenced by mailing a notice to the Trustee and each Holder
stating:
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(i) the covenant pursuant to which the offer is being made and
that all Notes validly tendered will be accepted for payment on a pro rata
basis;
(ii) the purchase price and the date of purchase (which shall be
a Business Day no earlier than 30 days nor later than 60 days from the date
such notice is mailed);
(iii) that any Note not tendered will continue to accrue interest
pursuant to its terms;
(iv) that, unless the Issuer defaults in the payment of the
purchase price, any Note accepted for payment pursuant to the Offer to
Purchase shall cease to accrue interest on and after the Payment Date;
(v) that Holders electing to have a Note purchased pursuant to
the Offer to Purchase will be required to surrender the Note, together with
the form entitled "Option of the Holder to Elect Purchase" on the reverse
side of the Note completed, to the Paying Agent at the address specified in
the notice prior to the close of business on the Business Day immediately
preceding the Payment Date;
(vi) that Holders will be entitled to withdraw their election if
the Paying Agent receives, not later than the close of business on the
third Business Day immediately preceding the Payment Date, a facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such Notes purchased; and
(vii) that Holders whose Notes are being purchased only in part
will be issued new Notes equal in principal amount to the unpurchased
portion of the Notes surrendered; PROVIDED that each Note purchased and
each new Note issued shall be in a principal amount of $1,000 or integral
multiples thereof.
On the Payment Date, the Issuer shall (i) accept for payment on a pro
rata basis Notes or portions thereof tendered pursuant to an Offer to Purchase;
(ii) deposit with the Paying Agent money sufficient to pay the purchase price of
all Notes or portions thereof so accepted; and (iii) deliver, or cause to be
delivered, to the Trustee all Notes or portions thereof so accepted together
with an Officers' Certificate specifying the Notes or portions thereof accepted
for payment by the Issuer. The Paying Agent shall promptly mail to the Holders
of Notes so accepted payment in an amount equal to the purchase price, and the
Trustee shall promptly authenticate and mail to such Holders a new Note equal in
principal
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amount to any unpurchased portion of the Note surrendered; PROVIDED that each
Note purchased and each new Note issued shall be in a principal amount of
$1,000 or integral multiples thereof. The Issuer will publicly announce the
results of an Offer to Purchase as soon as practicable after the Payment
Date. The Trustee shall act as the Paying Agent for an Offer to Purchase.
The Issuer will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable, in the event that the Issuer is required to
repurchase Notes pursuant to an Offer to Purchase.
"Offering Memorandum" means the Offering Memorandum dated July 10,
1998 pursuant to which the Notes were offered.
"Officer" means, with respect to the Issuer, its (or its general
partner's) Chairman of the Board, Vice Chairman, President, Vice President,
Secretary, Assistant Secretary, Treasurer or Assistant Treasurer.
"Officers' Certificate" means a certificate delivered to the Trustee
that is signed by the Chairman of the Board, a Vice Chairman, the President or a
Vice President, and by the Secretary, an Assistant Secretary, the Treasurer or
an Assistant Treasurer of the Issuer (or its general partner).
"144A Global Note" means a permanent global note in registered form
representing the aggregate principal amount of Notes sold in reliance on Rule
144A under the Securities Act.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Issuer or the Trustee, and who shall be reasonably acceptable to
the Trustee.
"Outstanding" means, as of the date of determination, all Notes
theretofore authenticated and delivered under this Indenture, except:
(a) Notes theretofore canceled by the Trustee or delivered to
the Trustee for cancellation;
(b) Notes, or portions thereof, for whose payment or redemption
money in the necessary amount has been theretofore deposited with the Trustee or
any Paying Agent (other than the Issuer or any Affiliate thereof) in trust or
set aside and segregated in trust by the Issuer or any Affiliate thereof (if the
Issuer or such Affiliate shall act as Paying Agent) for the Holders of such
Notes; provided, however, that if such Notes are to be redeemed,
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notice of such redemption has been duly given pursuant to this Indenture or
provision therefor reasonably satisfactory to the Trustee has been made;
(c) Notes with respect to which the Issuer has effected defeasance
or covenant defeasance as provided in Article Four, to the extent provided in
Sections 4.02 and 4.03 hereof; and
(d) Notes in exchange for or in lieu of which other Notes have
been authenticated and delivered pursuant to this Indenture, other than any
such Notes in respect of which there shall have been presented to the Trustee
proof reasonably satisfactory to it that such Notes are held by a bona fide
purchaser in whose hands the Notes are valid obligations of the Issuer;
provided, however, that in determining whether the Holders of the requisite
principal amount of Outstanding Notes have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Notes owned by
the Issuer or any other obligor upon the Notes or any Affiliate of the Issuer or
such other obligor shall be disregarded and deemed not to be Outstanding, except
that, in determining whether the Trustee shall be protected in relying upon any
such request, demand, authorization, direction, notice, consent or waiver, only
Notes that a Responsible Officer of the Trustee actually knows to be so owned
shall be so disregarded. The Issuer shall notify the Trustee, in writing, when
it repurchases or otherwise acquires Notes, of the aggregate principal amount of
such Notes so repurchased or otherwise acquired. Notes so owned which have been
pledged in good faith may be regarded as Outstanding if the pledgee establishes
to the reasonable satisfaction of the Trustee the pledgee's right so to act with
respect to such Notes and that the pledgee is not the Issuer or any other
obligor upon the Notes or any Affiliate of the Issuer or such other obligor. If
the Paying Agent holds, in its capacity as such, on any Maturity Date or on any
optional redemption date money sufficient to pay all accrued interest and
principal with respect to such Notes payable on that date and is not prohibited
from paying such money to the Holders thereof pursuant to the terms of this
Indenture, then on and after that date such Notes cease to be Outstanding and
interest on them ceases to accrue. Notes may also cease to be Outstanding to the
extent expressly provided in Article Four.
"Payment Date" means the date on which any Note is purchased pursuant
to an Offer to Purchase or the Special Offer to Purchase.
"Permitted Holders" means Jere W. Thompson, Sr., Jere W. Thompson,
Jr., Mark Langdale, Timothy W. Rogers, Scott L. Roberts, Timothy M. Terrell and
Ignatius W. Leonards and any corporation, limited liability company,
partnership, joint venture or other entity controlled by any one or more of
them.
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"Permitted Indebtedness" means any of the following:
(i) Indebtedness of the Issuer pursuant to the Notes;
(ii) Indebtedness owed (A) to the Issuer and evidenced by an
unsubordinated promissory note or (B) to any Restricted Subsidiaries;
provided that such Indebtedness to any Restricted Subsidiary is
subordinated in right of payment from and after such time as the Notes
shall become due and payable (whether at Stated Maturity, by acceleration
or otherwise); provided further any event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any
subsequent transfer of such Indebtedness (other than to the Issuer or
another Restricted Subsidiary) shall be deemed, in each case, to constitute
an Incurrence of such Indebtedness not permitted by this clause (ii);
(iii) Indebtedness issued in exchange for, or the net proceeds of
which are used to refinance or refund, then outstanding Indebtedness (other
than Indebtedness Incurred under clause (ii), (iv), (vi) or (xii) of this
definition of "Permitted Indebtedness") and any refinancings of such new
Indebtedness in an amount not to exceed the amount so refinanced or
refunded (plus premiums, accrued interest, fees and expenses); provided
that Indebtedness the proceeds of which are used to refinance or refund the
Notes or Indebtedness that is PARI PASSU in right of payment with, or
subordinated in right of payment to, the Notes shall only be permitted
under this clause (iii) if (A) in case the Notes are refinanced in part or
the Indebtedness to be refinanced is PARI PASSU in right of payment with
the Notes, such new Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such new Indebtedness is
outstanding, is expressly made PARI PASSU in right of payment with, or
subordinate in right of payment to, the remaining Notes, (B) in case the
Indebtedness to be refinanced is subordinated in right of payment to the
Notes, such new Indebtedness, by its terms or by the terms of any agreement
or instrument pursuant to which such new Indebtedness is issued or remains
outstanding, is expressly made subordinate in right of payment to the Notes
at least to the extent that the Indebtedness to be refinanced is
subordinated to the Notes and (C) such new Indebtedness, determined as of
the date of Incurrence of such new Indebtedness, does not mature prior to
the Stated Maturity of the Indebtedness to be refinanced or refunded, and
the Average Life of such new Indebtedness is at least equal to the
remaining Average Life of the Indebtedness to be refinanced or refunded;
and provided further that in no event may Indebtedness of the Issuer be
refinanced by means of any Indebtedness of any Restricted Subsidiary
pursuant to this clause (iii);
(iv) Indebtedness (A) to reimburse workers' compensation
insurance companies for claims paid by such companies on behalf of the
Issuer or any Restricted
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Subsidiary in accordance with the policies issued to the Issuer and the
Restricted Subsidiaries, (B) in respect of performance, surety or appeal
bonds or similar obligations provided in the ordinary course of
business, or (C) under Currency Agreements and Interest Rate Agreements;
provided that such agreements (I) are designed solely to protect the
Issuer or its Subsidiaries against fluctuations in foreign currency
exchange rates or interest rates and (II) do not increase the
Indebtedness of the obligor outstanding at any time other than as a
result of fluctuations in foreign currency exchange rates or interest
rates or by reason of fees, indemnities and compensation payable
thereunder or (D) arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, or from Guarantees
or letters of credit, surety bonds or performance bonds securing any
obligations of the Issuer or any of its Restricted Subsidiaries pursuant
to such agreements, in each case Incurred in connection with the
disposition of any business, assets or Restricted Subsidiary (other than
Guarantees of Indebtedness Incurred by any Person acquiring all or any
portion of such business, assets or Restricted Subsidiary for the
purpose of financing such acquisition), in a principal amount not to
exceed the gross proceeds actually received by the Issuer or any
Restricted Subsidiary in connection with such disposition;
(v) Indebtedness of the Issuer, to the extent the net proceeds
thereof are promptly used to purchase Notes tendered in the Special Offer
to Purchase or in an Offer to Purchase made as a result of a Change of
Control or Indebtedness of the Issuer or any Restricted Subsidiary to the
extent the net proceeds thereof are promptly deposited to defease all of
the Notes as described in Article Four hereof;
(vi) Guarantees of the Notes and Guarantees of Indebtedness of
the Issuer by any Restricted Subsidiary; provided that the Guarantee of
such Indebtedness is permitted by and made in accordance with Section 10.23
hereof.
(vii) Acquired Indebtedness and any Indebtedness issued in
exchange for, or the net proceeds of which are used to refinance or refund,
such Acquired Indebtedness in an amount not to exceed the amount so
refinanced or refunded (plus premium, accrued interest, and reasonable fees
and expenses) in an aggregate amount not to exceed at any one time
outstanding $25 million;
(viii) (A) Indebtedness of the Issuer not to exceed, at any one time
outstanding, two times the Net Cash Proceeds received by the Issuer after
the Closing Date (and, in the event the Transaction is consummated, the
aggregate Net Cash Proceeds received by Telecommunications, the Partnership
and IWL during the Transition Period) as a capital contribution or from the
issuance and sale of its Capital Stock (other than
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Redeemable Stock) or options, warrants or other rights to acquire
Capital Stock (other than Redeemable Stock) to a Person that is not a
Subsidiary of the Issuer (or Telecommunications, the Partnership or IWL,
if applicable), to the extent such Net Cash Proceeds have not been used
pursuant to Section 10.13(a)(iii)(2) or Sections 10.13(b)(iii), (iv) or
(vi) hereof to make a Restricted Payment less any Indebtedness Incurred
pursuant to clause (B), (B) Indebtedness Incurred by (x) the Issuer
and/or (y) any of the Restricted Subsidiaries in an aggregate amount not
to exceed, at any one time outstanding, the Net Cash Proceeds received
by the Issuer after the Closing Date (and, in the event the Transaction
is consummated, the aggregate Net Cash Proceeds received by
Telecommunications, the Partnership and IWL during the Transition
Period) as a capital contribution or from the issuance and sale of its
Capital Stock (other than Redeemable Stock) or options, warrants or
other rights to acquire Capital Stock (other than Redeemable Stock) to
a Person that is not a Subsidiary of the Issuer (or Telecommunications,
the Partnership or IWL, if applicable), to the extent such Net Cash
Proceeds have not been used pursuant to Section 10.13(a)(iii)(2) or
Sections 10.13(b)(iii), (iv) or (vi) hereof to make a Restricted
Payment; provided that the Incurrence of Indebtedness pursuant to this
clause (B) will only be permitted to the extent that such Incurrence
does not cause the amount of Indebtedness Incurred pursuant to clause
(A) to exceed the amount permitted thereunder, and (C) Indebtedness of
the Issuer not to exceed, at any one time outstanding, 100% of the fair
market value of property (other than cash and cash equivalents) received
by the Issuer after the Closing Date (and, in the event the Transaction
is consummated, by Telecommunications, the Partnership or IWL during the
Transition Period) from a contribution of capital or the proceeds from
the sale of its Capital Stock (other than Redeemable Stock) or options,
warrants or other rights to acquire Capital Stock (other than Redeemable
Stock) to a Person that is not the Issuer (or Telecommunications, the
Partnership or IWL, if applicable) or a Restricted Subsidiary, to the
extent such capital contribution or sale of Capital Stock or options,
warrants or rights have not been used pursuant to Section 10.13(b)(iii),
(iv) or (ix) hereof to make a Restricted Payment; provided that such
Indebtedness does not mature prior to the Stated Maturity of the Notes
and has an Average Life longer than the Notes;
(ix) Indebtedness under one or more Credit Facilities or Vendor
Credit Facilities; provided that the aggregate principal amount of any
Indebtedness incurred pursuant to this clause (ix) (including any amounts
refinanced or refunded under this clause (ix)) does not exceed at any time
outstanding the greater of (x) 85% of eligible accounts receivable and 65%
of eligible inventory of the Issuer and its Restricted Subsidiaries as of
the last fiscal quarter for which financial statements are prepared or (y)
$100 million less any amount of such Indebtedness permanently repaid as
provided under Section 10.15 hereof;
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(x) Indebtedness existing as of the Closing Date and
Indebtedness existing as of the date of consummation of the Transaction or
the Special Partnership Transaction (to the extent such Indebtedness is
incurred without violation of this Indenture);
(xi) Capitalized Lease Obligations in an aggregate principal
amount outstanding at any time not to exceed $10 million; and
(xii) Indebtedness of the Issuer (in addition to Indebtedness
permitted under clauses (i) through (xi) above) in the aggregate principal
amount outstanding at any time not to exceed $50 million, less any amount
of such Indebtedness permanently repaid as provided under Section 10.15
hereof.
"Permitted Investment" means any of the following:
(i) an Investment in the Issuer or a Restricted Subsidiary or a
Person which will, upon the making of such Investment, become a Restricted
Subsidiary or be merged or consolidated with or into or transfer or convey
all or substantially all its assets to, the Issuer or a Restricted
Subsidiary; provided that such Person's primary business is related,
ancillary or complementary to the businesses of the Issuer and its
Restricted Subsidiaries on the date of such Investment;
(ii) a Temporary Cash Investment;
(iii) commission, payroll, travel, relocation and similar advances
to cover matters that are expected at the time of such advances ultimately
to be treated as expenses in accordance with GAAP;
(iv) stock, obligations or securities received in satisfaction of
judgments or settlement of disputed accounts receivable that arose in the
ordinary course of business;
(v) Investments in prepaid expenses, negotiable instruments held
for collection, and lease, utility and workers' compensation, performance
and other similar deposits;
(vi) Interest Rate Agreements and Currency Agreements to the
extent permitted under clause (iv) of the definition of "Permitted
Indebtedness;" and
(vii) loans and advances to employees of the Issuer or any
Subsidiary in an aggregate amount not to exceed $1 million at any time
outstanding.
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"Permitted Liens" means any of the following:
(i) Liens for taxes, fees, assessments, governmental charges or
claims that are not yet due and payable, or, if delinquent, are payable
without penalty or are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a
reserve or other appropriate provisions, if any, as shall be required in
conformity with GAAP shall have been made;
(ii) statutory and common law Liens of landlords and carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen or other similar
Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent, or, if delinquent, are payable without penalty
or are or being contested in good faith by appropriate legal proceedings
promptly instituted and diligently conducted and for which a reserve or
other appropriate provision, if any, as shall be required in conformity
with GAAP shall have been made;
(iii) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security;
(iv) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligations, bankers'
acceptances, surety and appeal bonds, government contracts, performance and
return-of money bonds and other obligations of a similar nature incurred in
the ordinary course of business (exclusive of obligations for the payment
of borrowed money);
(v) easements, rights-of-way, restrictions, municipal and zoning
ordinances, reservations, permits and similar charges, encumbrances, title
defects or other irregularities that do not materially interfere with the
ordinary course of business of the Issuer or any of its Restricted
Subsidiaries;
(vi) Liens securing Acquired Indebtedness created prior to (and
not in connection with or in contemplation of) the Incurrence of such
Indebtedness by the Issuer or any Restricted Subsidiary; provided that such
Lien does not extend to any property or assets of the Issuer or any
Restricted Subsidiary other than the asset acquired in connection with the
Incurrence of such Acquired Indebtedness;
(vii) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Issuer and its
Restricted Subsidiaries, taken as a whole;
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(viii) Liens encumbering property or assets under construction
arising from progress or partial payments by a customer of the Issuer or
its Restricted Subsidiaries relating to such property or assets;
(ix) any interest or title of a lessor in the property subject to
any Capitalized Lease or operating lease;
(x) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(xi) Liens on property of, or on shares of Capital Stock or
Indebtedness of, any Person existing at the time such Person becomes, or
becomes a part of, any Restricted Subsidiary; provided that such Liens do
not extend to or cover any property or assets of the Issuer or any
Restricted Subsidiary other than the property or assets acquired and any
proceeds thereof;
(xii) Liens in favor of the Issuer or any Restricted Subsidiary;
(xiii) Liens arising from the rendering of a final judgment or
order against the Issuer or any Restricted Subsidiary that does not give
rise to an Event of Default;
(xiv) Liens securing reimbursement obligations with respect to
letters of credit that encumber documents and other property relating to
such letters of credit and the products and proceeds thereof;
(xv) Liens in favor of customs and revenue authorities arising as
a matter of law to secure payment of customs duties in connection with the
importation of goods;
(xvi) Liens encumbering customary initial deposits and margin
deposits, and other Liens that are either within the general parameters
customary in the industry or incurred in the ordinary course of business,
in each case securing Indebtedness under Interest Rate Agreements and
Currency Agreements and forward contracts, options, future contracts,
futures options or similar agreements or arrangements designed solely to
protect the Issuer or any of its Restricted Subsidiaries from fluctuations
in interest rates, currencies or the price of commodities;
(xvii) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into by
the Issuer or any of its Restricted Subsidiaries in the ordinary course of
business in accordance with the past practices of the Issuer and its
Restricted Subsidiaries prior to the Closing Date;
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(xviii) Liens on or sales of receivables, including related
intangible assets and proceeds thereof;
(xix) Liens securing Indebtedness incurred under clauses (iv)(A),
(iv)(B), (vii), (viii)(B), (ix), (x) or (xii) of the definition of
"Permitted Indebtedness";
(xx) Liens arising solely by virtue of any statutory or common
law provision relating to banker's liens, rights of set-off, or similar
rights and remedies as to deposit accounts or other funds maintained with a
creditor depository institution;
(xxi) Liens securing Capitalized Lease Obligations on assets
subject to such Capitalized Leases;
(xxii) Liens the Issuer (which term shall include
Telecommunications, the Partnership and IWL if the Transaction is
consummated) or any Restricted Subsidiary securing Indebtedness in effect
at the Closing Date or at the date on which the Transaction or the Special
Partnership Transaction, as the case may be, is consummated (to the extent
such Indebtedness Incurred after the Closing Date was incurred without
violation of this Indenture);
(xxiii) Liens granted after the Closing Date on any assets or
Capital Stock of the Issuer or its Restricted Subsidiaries created in favor
of the Holders;
(xxiv) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to the Issuer or a Wholly Owned
Restricted Subsidiary to secure Indebtedness owing to the Issuer or such
other Restricted Subsidiary;
(xxv) Liens securing Indebtedness that is Incurred to refinance
secured Indebtedness permitted to be Incurred under clause (iii) of the
definition of "Permitted Indebtedness"; provided that such Liens do not
extend to or cover any property or assets of the Issuer or any Restricted
Subsidiary other than the property or assets securing the Indebtedness
being refinanced; or
(xxvi) any extension, renewal or replacement, in whole or in part,
of any Lien described in the foregoing clauses (i) through (xxv), provided
that any such extension, renewal or replacement shall be no more restricted
in any material respect than the Lien so extended, renewed or replaced and
shall not extend to any additional property or assets.
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"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's preferred or preference equity,
whether outstanding on the Closing Date or issued thereafter, including, without
limitation, all series and classes of such preferred or preference stock.
"Private Exchange Notes" shall have the meaning given to "Private
Exchange Securities" in the Registration Rights Agreement.
"Private Placement Legend" shall mean the first paragraph of the
legend initially set forth in the Notes in the form set forth on Exhibit A-1.
"pro forma" means, with respect to the preparation of financial
statements to show the effect of any particular transaction, the preparation of
such financial statements in accordance with Article 11 of Regulation S-X.
"Purchase Agreement" means the Purchase Agreement, dated July 10,
1998, among the Company, Telecommunications, the Partnership, IWL and the
Initial Purchasers.
"Qualified Institutional Buyer" or "QIB" shall have the meaning
specified in Rule 144A under the Securities Act.
"Redeemable Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; provided that any Capital
Stock that would not constitute Redeemable Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Redeemable Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable in any material respect
to the holders of such Capital Stock than the provisions contained in Sections
10.10 and 10.15 hereof are to the holders of the Notes and such Capital Stock
specifically provides that such Person will not repurchase or redeem any such
stock
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pursuant to such provision prior to the Issuer's repurchase of such Notes as
are required to be repurchased pursuant to Sections 10.10 and 10.15 hereof.
"Redemption Date" means, with respect to any Note to be redeemed, the
date fixed by the Issuer for such redemption pursuant to this Indenture and the
Notes.
"Redemption Price" means, with respect to any Note to be redeemed, the
price fixed for such redemption pursuant to the terms of this Indenture and the
Notes.
"Registrable Securities" shall have the meaning specified in the
Registration Rights Agreement.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the Closing Date, by and among the Company,
Telecommunications and the Partnership and the Initial Purchasers, as the same
may be amended, supplemented or otherwise modified from time to time in
accordance with the terms thereof.
"Regular Record Date" means the Regular Record Date specified in the
Notes.
"Regulation S" means Regulation S under the Securities Act.
"Regulation S Global Note" means a permanent global note in registered
form representing the aggregate principal amount of Notes sold in reliance on
Regulation S under the Securities Act.
"Responsible Officer" means, when used with respect to the Trustee,
any officer within the Corporate Trust Office including any Vice President,
Managing Director, Assistant Vice President, Secretary, Assistant Secretary or
Assistant Treasurer or any other officer of the Trustee customarily performing
functions similar to those performed by any of the above designated officers and
also, with respect to a particular matter, any other officer to whom such matter
is referred because of such officer's knowledge and familiarity with the
particular subject.
"Restricted Note" means a Note that constitutes a "restricted
security" within the meaning of Rule 144(a)(3) under the Securities Act;
provided, however, that the Trustee shall be entitled to request and
conclusively rely on an Opinion of Counsel with respect to whether any Note
constitutes a Restricted Note.
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"Restricted Payment" means
(i) a declaration or payment of any dividend or the making of
any distribution on or with respect to the Issuer's Capital Stock (other
than (x) dividends or distributions payable solely in shares of the
Issuer's Capital Stock (other than Redeemable Stock) or in options,
warrants or other rights to acquire shares of such Capital Stock and (y)
dividends or distributions payable to the Issuer or any Wholly Owned
Restricted Subsidiary),
(ii) a payment made by the Issuer or any Restricted Subsidiary
used to purchase, redeem, retire or otherwise acquire for value any shares
of Capital Stock of (A) of the Issuer or an Unrestricted Subsidiary
(including options, warrants or other rights to acquire such shares of
Capital Stock) held by any Person or (B) a Restricted Subsidiary (including
options, warrants or other rights to acquire such shares of Capital Stock)
held by any Affiliate of the Issuer (other than a Wholly Owned Restricted
Subsidiary) or any holder (or any Affiliate of such holder) of 5% or more
of any class of Capital Stock of the Issuer (including options, warrants or
other rights to acquire such shares of Capital Stock) (other than (x)
payments payable solely in shares of Capital Stock) (other than Redeemable
Stock) of the Issuer or in options, warrants or other rights to acquire
shares of such Capital Stock and (y) payments payable to the Issuer or any
Wholly-Owned Restricted Subsidiary),
(iii) any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of Indebtedness of the Issuer that is subordinated in
right of payment to the Notes (other than, in each case, the purchase,
repurchase or acquisition of Indebtedness either in anticipation of
satisfying a sinking fund obligation, principal installment or final
maturity that in any case is due within one year after the date of such
purchase, repurchase or acquisition), or
(iv) any Investment, other than a Permitted Investment, in any
Person.
The consummation of the transactions contemplated by the Transaction
or the Special Partnership Transaction shall not constitute "Restricted
Payments".
"Restricted Subsidiary" means any Subsidiary of the Issuer other than
an Unrestricted Subsidiary.
"Rule 144A" means Rule 144A under the Securities Act.
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"S&P" means Standard & Poor's Rating Services, a division of McGraw
Hill, Inc..
"SEC" means the Securities and Exchange Commission, as from time to
time constituted, or if at any time after the execution of this Indenture such
Commission is not existing and performing the applicable duties now assigned to
it, then the body or bodies performing such duties at such time.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated by the SEC thereunder.
"Special Offer to Purchase" means the Offer to Purchase that the
Company, Telecommunications and the Partnership may be required to consummate in
accordance with Section 10.21 hereof.
"Special Partnership Transaction" means the statutory merger or
interest exchange between Telecommunications and the Partnership that would be
required to be consummated in the event the Special Offer to Purchase is made
and any Notes remain outstanding after the payment of all Notes tendered in such
Special Offer to Purchase.
"Special Record Date" means, with respect to the payment of any
Defaulted Interest, a date fixed by the Trustee pursuant to Section 3.07 hereof.
"Stated Maturity" means (i) with respect to any debt security, the
date specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii) with
respect to any scheduled installment of principal of or interest on any debt
security, the date specified in such debt security as the fixed date on which
such installment is due and payable.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
"Subsidiary Guarantee" has the meaning given it in Section 10.23
hereof.
"Telecommunications Assets" means, with respect to any Person, assets
(including, without limitation, rights of way, trademarks and licenses) that are
utilized by such Person, directly or indirectly, in the Telecommunications
Business and including any computer systems used in a Telecommunications
Business. Telecommunications Assets shall also include a majority of the Voting
Stock of another Person, if such Voting Stock is acquired by the Issuer
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or a Restricted Subsidiary and all or substantially all the assets of such
other Person comprise Telecommunications Assets; and such other Person either
is, or immediately following the relevant transaction shall become, a
Restricted Subsidiary of the Issuer pursuant to this Indenture. The
determination of what constitutes Telecommunications Assets shall be made by
the Board of Directors of the Issuer and evidenced by a Board Resolution
delivered to the Trustee.
"Telecommunications Business" means the business of (i) transmitting
or providing services relating to the transmission of voice, video, signals,
data or Internet services; (ii) constructing, creating, developing, owning,
operating, and marketing one or more communications networks, related, ancillary
or complementary network transmission equipment, information systems, software,
and other related, ancillary or complementary assets and services; (iii)
planning, designing, and consulting with respect to the matters described in
clauses (i) and (ii); and (iv) evaluating, participating and pursuing any other
activity or opportunity that is related, ancillary, or complementary to those
identified in clauses (i), (ii) and (iii) above, as determined in good faith by
the Board of Directors of the Issuer.
"Temporary Cash Investment" means any of the following:
(i) direct obligations of the United States of America or any
agency thereof or obligations fully and unconditionally guaranteed by the
United States of America or any agency thereof with a maturity of 365 days
or less,
(ii) time deposit accounts, certificates of deposit and money
market deposits maturing within one year of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country
recognized by the United States of America, and which bank or trust company
has capital, surplus and undivided profits aggregating in excess of $50
million (or the foreign currency equivalent thereof) and has outstanding
debt which is rated "A" (or such similar equivalent rating) or higher by at
least one nationally recognized statistical rating organization (as defined
in Rule 436 under the Securities Act) or any money-market fund sponsored by
a registered broker dealer or mutual fund distributor,
(iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above
entered into with a bank meeting the qualifications described in clause
(ii) above,
(iv) commercial paper, maturing not more than one year after the
date of acquisition, issued by a corporation (other than an Affiliate of
the Issuer) organized and in existence under the laws of the United States
of America, any state thereof or any
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foreign country recognized by the United States of America with a rating
at the time as of which any investment therein is made of "P-1" (or higher)
according to Moody's or "A-1" (or higher) according to S&P, and
(v) securities with maturities of six months or less from the
date of acquisition issued or fully and unconditionally guaranteed by any
state, commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by S&P or Moody's.
"Trade Payables" means, with respect to any Person, any accounts
payable or any other indebtedness or monetary obligation to trade creditors
created, assumed or Guaranteed by such Person or any of its Subsidiaries arising
in the ordinary course of business in connection with the acquisition of goods
or services.
"Transaction" means the transactions contemplated by the Merger
Agreement.
"Transition Period" means the period between the Closing Date and the
consummation of the Transaction or the payment date for Notes tendered in the
Special Offer to Purchase, as the case may be.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939,
as amended.
"Trustee" means the person named as the "Trustee" in the first
paragraph of this Indenture, until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.
"Unrestricted Notes" means one or more Notes that do not and are not
required to bear the Private Placement Legend in the form set forth in Exhibit
A-1, including, without limitation, the Exchange Notes.
"Unrestricted Subsidiary" means (a) any Subsidiary that at the time of
determination shall be an Unrestricted Subsidiary (as designated by the Board of
Directors of the Issuer, as provided below) and (b) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors of the Issuer may designate any
Subsidiary (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary so long as (i) neither the Issuer nor any other
Subsidiary is directly or indirectly liable for any Indebtedness of such
Subsidiary, (ii) no default with respect to any Indebtedness of such Subsidiary
would permit (upon notice, lapse of time or otherwise) any holder of any other
Indebtedness of the Issuer or any Restricted Subsidiary to declare a default on
such other Indebtedness or cause the payment thereof to be accelerated or
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payable prior to its Stated Maturity, (iii) any Investment in such Subsidiary
made as a result of designating such Subsidiary an Unrestricted Subsidiary will
not violate the provisions of Section 10.13 hereof, (iv) neither the Issuer nor
any Restricted Subsidiary has a contract, agreement, arrangement, understanding
or obligation of any kind, whether written or oral, with such Subsidiary on
terms more favorable to such Subsidiary than those that might be obtained at the
time from persons who are not Affiliates of the Issuer, and (v) neither the
Issuer nor any other Subsidiary has any obligation (1) to subscribe for
additional shares of Capital Stock or other equity interests in such Subsidiary,
or (2) to maintain or preserve such Subsidiary's financial condition or to cause
such Subsidiary to achieve certain levels of operating results. Any such
designation by the Board of Directors of the Issuer shall be evidenced to the
Trustee by filing a Board Resolution with the Trustee giving effect to such
designation. The Board of Directors of the Issuer may designate any
Unrestricted Subsidiary as a Restricted Subsidiary if, immediately after giving
effect to such designation, there would be no Default or Event of Default under
this Indenture and the Issuer could incur $1.00 of additional Indebtedness under
clause (i) of Section 10.11(a) hereof.
"U.S. Government Securities" means securities that are direct
non-callable obligations of the United States of America or securities the
timely payment of whose principal and interest is unconditionally guaranteed by
the full faith and credit of the United States of America.
"Vendor Credit Facility" means any agreement entered into with one or
more vendors, suppliers or lessors of telecommunications equipment or assets
(including any agreement entered into with any such vendor, supplier or lessor
or any financial institution acting on behalf of any such vendor, supplier or
lessor) in order to finance the acquisition or construction of
telecommunications equipment or assets, as such agreement may be amended,
modified, supplemented, refunded, refinanced, restructured, renewed or replaced
from time to time; PROVIDED that (i) any equipment or other assets acquired or
leased under or pursuant to such Vendor Credit Facility are received by the
Issuer or a Restricted Subsidiary and (ii) all obligations with respect to or
under such Vendor Credit Facility or any amendment, modification, supplement,
refunding, refinancing, restructuring, renewal or replacement thereof are owed,
whether directly or indirectly, as the case may be, to a Person who is not an
Affiliate of the Issuer or any of its Subsidiaries and no such Affiliate shall
act as a facilitator or conduit or in a similar capacity with respect thereto.
"Voting Stock" means with respect to any Person, Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
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"Wholly Owned" means, with respect to any Subsidiary of any Person,
the ownership of all of the outstanding Capital Stock of such Subsidiary (other
than any director's qualifying shares or Investments by foreign nationals or
other shares issued to Persons as mandated by applicable law) by such Person or
one or more Wholly Owned Subsidiaries of such Person.
Section 1.02. OTHER DEFINITIONS.
<TABLE>
<CAPTION>
Defined in
Term Section
---- -------
<S> <C>
"Act" 1.05
"Agent Member" 3.16
"Defaulted Interest" 3.07
"Event of Default" 5.01
"Excess Proceeds" 10.15
"Note Register" 3.05
"Paying Agent" or "Agent" 3.02
"Physical Notes" 3.03
"Registrar" 3.02
"Restricted Period" 3.17
----------------------------------------------------------
</TABLE>
Section 1.03. RULES OF CONSTRUCTION.
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to
them in this Article and include the plural as well as the singular;
(b) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein;
(c) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP;
(d) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision;
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(e) all references to "$" or "dollars" refer to the lawful currency
of the United States of America; and
(f) the words "include," "included" and "including" as used herein
are deemed in each case to be followed by the phrase "without limitation."
Section 1.04. FORM OF DOCUMENTS DELIVERED TO TRUSTEE.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
person, or that they be so certified or covered by only one document, but one
such person may certify or give an opinion with respect to some matters and one
or more other persons as to other matters, and any such person may certify or
give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of any Issuer or the Limited
Guarantor may be based, insofar as it relates to legal matters, upon a
certificate or opinion of, or representations by, counsel, unless such officer
knows, or in the exercise of reasonable care should know, that the certificate
or opinion or representations with respect to the matters upon which his
certificate or opinion is based are erroneous. Any such certificate or opinion
may be based, insofar as it relates to factual matters, upon a certificate or
opinion of, or representations by, an officer or officers of an Issuer or the
Limited Guarantor stating that the information with respect to such factual
matters is in the possession of such Issuer or the Limited Guarantor, unless
such counsel knows, or in the exercise of reasonable care should know, that the
certificate or opinion or representations with respect to such matters are
erroneous.
Where any person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated, with
proper identification of each matter covered therein, and form one instrument.
Section 1.05. ACTS OF HOLDERS.
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by an agent duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Issuer. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes
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referred to as the "Act" of the Holders signing such instrument or
instruments. Proof of execution (as provided below in subsection (b) of this
Section 1.05) of any such instrument or of a writing appointing any such
agent shall be sufficient for any purpose of this Indenture and (subject to
Section 6.01 hereof) conclusive in favor of the Trustee and the Issuer, if
made in the manner provided in this Section.
(b) The fact and date of the execution by any person of any such
instrument or writing may be proved in any reasonable manner which the Trustee
deems sufficient.
(c) The ownership of Notes shall be proved by the Note Register.
(d) Any request, demand, authorization, direction, notice, consent,
waiver or other action by the Holder of any Note shall bind every future Holder
of the same Note or the Holder of every Note issued upon the transfer thereof or
in exchange therefor or in lieu thereof to the same extent as the original
Holder, in respect of anything done, suffered or omitted to be done by the
Trustee, any Paying Agent or the Issuer in reliance thereon, whether or not
notation of such action is made upon such Note.
Section 1.06. NOTICES, ETC., TO THE TRUSTEE AND THE ISSUER.
Any request, demand, authorization, direction, notice, consent, waiver
or Act of Holders or other document provided or permitted by this Indenture to
be made upon, given or furnished to, or filed with:
(a) the Trustee by any Holder or by the Issuer or the Limited
Guarantor shall be sufficient for every purpose hereunder if made, given,
furnished or filed, in writing, to or with the Trustee at 1600 Market Street,
30th Floor, Philadelphia, Pennsylvania 19103, Attention: Corporate Trust
Department, or at any other address previously furnished in writing to the
Holders and the Issuer and the Limited Guarantor by the Trustee; or
(b) the Issuer or the Limited Guarantor by the Trustee or by any
Holder shall be sufficient for every purpose (except as otherwise expressly
provided herein) hereunder if in writing and mailed, first-class postage
prepaid, to the Issuer addressed to such Issuer in care of CapRock
Communications Corp., at Two Galleria Towers, Suite 1925, 13455 Noel Road,
Dallas, Texas 75240-6638, Attention: Jere W. Thompson, Jr., or to the Limited
Guarantor at 12000 Aerospace Avenue, Suite 200, Houston, Texas 77034, Attention:
Ignatius W. Leonards, or at any other address previously furnished in writing to
the Trustee by the Issuer or the Limited Guarantor.
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Section 1.07. NOTICE TO HOLDERS; WAIVER.
Where this Indenture provides for notice to Holders of any event, such
notice shall be sufficiently given (unless otherwise expressly provided herein)
if in writing and mailed, first-class postage prepaid, to each Holder affected
by such event, at the address of such Holder as it appears in the Note Register,
not later than the latest date, and not earlier than the earliest date,
prescribed for the giving of such notice. In any case where notice to Holders is
given by mail, neither the failure to mail such notice, nor any defect in any
notice so mailed, to any particular Holder shall affect the sufficiency of such
notice with respect to other Holders. Any notice when mailed to a Holder in the
aforesaid manner shall be conclusively deemed to have been received by such
Holder whether or not actually received by such Holder. Where this Indenture
provides for notice in any manner, such notice may be waived in writing by the
person entitled to receive such notice, either before or after the event, and
such waiver shall be the equivalent of such notice. Waivers of notice by
Holders shall be filed with the Trustee, but such filing shall not be a
condition precedent to the validity of any action taken in reliance upon such
waiver.
In case by reason of the suspension of regular mail service or by
reason of any other cause, it shall be impracticable to mail notice of any event
as required by any provision of this Indenture, then any method of giving such
notice as shall be satisfactory to the Trustee shall be deemed to be a
sufficient giving of such notice.
Section 1.08. CONFLICT WITH TRUST INDENTURE ACT.
If any provision hereof limits, qualifies or conflicts with any
provision of the Trust Indenture Act or another provision which is required or
deemed to be included in this Indenture by any of the provisions of the Trust
Indenture Act, such provision or requirement of the Trust Indenture Act shall
control.
If any provision of this Indenture modifies or excludes any provision
of the Trust Indenture Act that may be so modified or excluded, the foregoing
paragraph shall be deemed to apply to this Indenture as so modified or excluded,
as the case may be.
Section 1.09. EFFECT OF HEADINGS AND TABLE OF CONTENTS.
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
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Section 1.10. SUCCESSORS AND ASSIGNS.
All covenants and agreements in this Indenture by the Issuer and the
Limited Guarantor shall bind their respective successors and assigns, whether so
expressed or not.
Section 1.11. SEPARABILITY CLAUSE.
In case any provision in this Indenture or in the Notes issued
pursuant hereto shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
Section 1.12. BENEFITS OF INDENTURE.
Nothing in this Indenture or in the Notes issued pursuant hereto,
express or implied, shall give to any person (other than the parties hereto and
their successors hereunder, any Paying Agent and the Holders) any benefit or any
legal or equitable right, remedy or claim under this Indenture.
Section 1.13. GOVERNING LAW.
THIS INDENTURE AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO
PRINCIPLES OF CONFLICTS OF LAW.
Section 1.14. NO RECOURSE AGAINST OTHERS.
A director, officer, employee or stockholder, as such, of the Issuer
or the Limited Guarantor shall not have any liability for any obligations of the
Issuer or the Limited Guarantor under the Notes or this Indenture or for any
claim based on, in respect of or by reason of such obligations or their
creation.
Section 1.15. INDEPENDENCE OF COVENANTS.
All covenants and agreements in this Indenture shall be given
independent effect so that if a particular action or condition is not permitted
by any of such covenants, the fact that it would be permitted by an exception
to, or be otherwise within the limitations of, another covenant shall not avoid
the occurrence of a Default if such action is taken or condition exists.
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Section 1.16. EXHIBITS.
All exhibits attached hereto are by this reference made a part hereof
with the same effect as if herein set forth in full.
Section 1.17. COUNTERPARTS.
This Indenture may be executed in any number of counterparts and by
telecopier, each of which shall be an original; but such counterparts shall
together constitute but one and the same instrument.
Section 1.18. DUPLICATE ORIGINALS.
The parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together represent the same
agreement.
Section 1.19. RELEASE OF CERTAIN PARTIES TO THIS INDENTURE.
If the Transaction is consummated on or prior to August 31, 1998,
without any further action by any Person, Telecommunications and the Partnership
shall automatically be released from their respective obligations under the
Notes and this Indenture and the Limited Guarantor shall be released from its
obligations under this Indenture. In the event the Transaction is not
consummated by August 31, 1998 and any Notes remain outstanding after the
payment for Notes tendered pursuant to the Special Offer to Purchase, without
any further action by any Person, the Company shall be released as an obligor
under the Notes and the Company and the Limited Guarantor shall be released from
their obligations under this Indenture.
ARTICLE 2
NOTE FORMS
Section 2.01. FORM AND DATING.
The Notes and the Trustee's certificate of authentication with respect
thereto shall be in substantially the forms set forth, or referenced, in Exhibit
A-1 and Exhibit A-2, respectively, annexed hereto, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture and may have such letters, numbers or other marks of
identification and such legends or endorsements placed thereon as may be
required to comply with any applicable law or with the rules of the Depository,
any clearing agency or any securities
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exchange or as may, consistently herewith, be determined by the officers
executing such Notes, as evidenced by their execution thereof.
The definitive Notes shall be printed, typewritten, lithographed or
engraved or produced by any combination of these methods or may be produced in
any other manner permitted by the rules of any securities exchange on which the
Notes may be listed, all as determined by the officers executing such Notes, as
evidenced by their execution of such Notes.
Each Note shall be dated the date of its issuance and shall show the
date of its authentication. The terms and provisions contained in the Notes
shall constitute, and are expressly made, a part of this Indenture.
ARTICLE 3
THE NOTES
Section 3.01. TITLE AND TERMS.
The aggregate principal amount of the Notes which may be authenticated
and delivered under this Indenture is limited to $150,000,000, except for Notes
authenticated and delivered upon registration of transfer of, or in exchange
for, or in lieu of, other Notes pursuant to Sections 3.03, 3.04, 3.05, 3.06,
9.06, 10.10, 10.15 or 10.21 hereof.
The Notes will mature on July 15, 2008. The Notes shall bear interest
payable in cash at a rate of 12% per annum, semi-annually in arrears from the
most recent Interest Payment Date to which interest has been paid or, if no
interest has been paid from July 16, 1998. Interest on any overdue principal,
interest (to the extent lawful) or premium, if any, shall be payable on demand.
Section 3.02. REGISTRAR AND PAYING AGENT.
The Issuer shall maintain an office or agency (which shall be located
in the Borough of Manhattan in The City of New York, State of New York) where
Notes may be presented for registration of transfer or for exchange (the
"Registrar"), an office or agency (which shall be located in the Borough of
Manhattan in The City of New York, State of New York) where Notes may be
presented for payment (the "Paying Agent" or "Agent") and an office or agency
where notices and demands to or upon the Issuer in respect of the Notes and this
Indenture may be served. The Registrar shall keep a register of the Notes and of
their transfer and exchange. The Issuer may have one or more co-registrars and
one or more additional paying agents. The
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term "Paying Agent" or "Agent" includes any additional paying agent. The
Issuer may act as its own Paying Agent, except for the purposes of payments
on account of principal on the Notes pursuant to Sections 10.10, 10.15 and
10.21 hereof.
The Issuer shall enter into an appropriate agency agreement with any
Agent not a party to this Indenture, which shall incorporate the provisions of
the Trust Indenture Act. The agreement shall implement the provisions of this
Indenture that relate to such Agent. The Issuer shall notify the Trustee of the
name and address of any such Agent. If the Issuer fails to maintain a Registrar
or Paying Agent, or fails to give the foregoing notice, the Trustee shall act as
such and shall be entitled to appropriate compensation in accordance with
Section 6.07 hereof.
The Issuer initially appoints the Trustee as the Registrar and Paying
Agent and agent for service of notices and demands in connection with the Notes.
Section 3.03. EXECUTION AND AUTHENTICATION.
The Initial Notes and the Trustee's certificate of authentication
shall be substantially in the form of Exhibit A-1 hereto. The Exchange Notes
and the Trustee's certificate of authentication relating thereto shall be
substantially in the form of Exhibit A-2 hereto. The Notes may have notations,
legends or endorsements required by law, stock exchange rule or usage. The
Issuer shall approve the form of the Notes and any notation, legend or
endorsement thereon. Each Note shall be dated the date of issuance and shall
show the date of its authentication.
The terms and provisions contained in the Notes annexed hereto as
Exhibits A-1 and A-2 shall constitute, and are hereby expressly made, a part of
this Indenture and, to the extent applicable, the Issuer, the Limited Guarantor
and the Trustee, by their execution and delivery of this Indenture, expressly
agree to such terms and provisions and to be bound thereby.
Notes offered and sold in reliance on Rule 144A and Notes offered and
sold in reliance on Regulation S shall be issued initially in the form of one or
more Global Notes, substantially in the form set forth in Exhibit A-1, deposited
with the Trustee, as custodian for the Depository, duly executed by the Issuer
and authenticated by the Trustee as hereinafter provided and shall bear the
legend set forth in Exhibit B. The aggregate principal amount of the Global
Notes may from time to time be increased or decreased by adjustments made on the
records of the Trustee, as custodian for the Depository, as hereinafter
provided.
Notes issued in exchange for interests in a Global Note pursuant to
Section 3.17 hereof may be issued in the form of permanent certificated Notes in
registered form in substantially the form set forth in Exhibit A-1 (the
"Physical Notes").
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Two Officers shall sign, or one Officer shall sign, and one Officer
(each of whom shall, in each case, have been duly authorized by all requisite
corporate actions) shall attest to, the Notes for the Issuer by manual or
facsimile signature.
If an Officer whose signature is on a Note was an Officer at the time
of such execution but no longer holds that office or position at the time the
Trustee authenticates the Note, the Note shall nevertheless be valid.
The Trustee shall authenticate (i) Initial Notes for aggregate
principal amount of not to exceed $150,000,000 at anytime, (ii) Private Exchange
Notes from time to time only in exchange for a like principal amount of Initial
Notes and (iii) Unrestricted Notes from time to time only in exchange for (A) a
like principal amount of Initial Notes or (B) a like principal amount of Private
Exchange Notes, in each case upon a written order of the Issuer in the form of
an Officers' Certificate of the Issuer. Each such written order shall specify
the amount of Notes to be authenticated and the date on which the Notes are to
be authenticated, whether the Notes are to be Initial Notes, Private Exchange
Notes or Unrestricted Notes and whether (subject to this Section 3.03) the Notes
are to be issued as Physical Notes or Global Notes and such other information as
the Trustee may reasonably request. The aggregate principal amount of the Notes
outstanding at any time may not exceed $150,000,000, except as provided in
Section 3.06 hereof.
Notwithstanding the foregoing, all Notes issued under this Indenture
shall vote and consent together on all matters (as to which any of such Notes
may vote or consent) as one class and no series of Notes will have the right to
vote or consent as a separate class on any matter.
The Trustee may appoint an authenticating agent reasonably acceptable
to the Issuer to authenticate Notes. Unless otherwise provided in the
appointment, an authenticating agent may authenticate Notes whenever the Trustee
may do so. Each reference in this Indenture to authentication by the Trustee
includes authentication by such agent. An authenticating agent has the same
rights as an Agent to deal with the Issuer and Affiliates of the Issuer.
The Notes shall be issuable in fully registered form only, without
coupons, in denominations of $1,000 and any integral multiple thereof.
Section 3.04. TEMPORARY NOTES.
Until definitive Notes are prepared and ready for delivery, the Issuer
may execute and upon an Issuer Order the Trustee shall authenticate and deliver
temporary Notes. Temporary Notes shall be substantially in the form of
definitive Notes, in any authorized denominations, but may have variations that
the Issuer reasonably considers appropriate for temporary Notes as conclusively
evidenced by the Issuer's execution of such temporary Notes.
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If temporary Notes are issued, the Issuer will cause definitive Notes
to be prepared without unreasonable delay but in no event later than the date
that the Exchange Offer is consummated. After the preparation of definitive
Notes, the temporary Notes shall be exchangeable for definitive Notes upon
surrender of the temporary Notes at the office or agency of the Issuer
designated for such purpose pursuant to Section 10.02 hereof, without charge to
the Holder. Upon surrender for cancellation of any one or more temporary Notes,
the Issuer shall execute and the Trustee shall authenticate and deliver in
exchange therefor a like principal amount of definitive Notes of like tenor and
of authorized denominations. Until so exchanged the temporary Notes shall in
all respects be entitled to the same benefits under this Indenture as definitive
Notes.
Section 3.05. TRANSFER AND EXCHANGE.
The Issuer shall cause to be kept at the Corporate Trust Office of the
Trustee a register (the register maintained in such office and in any other
office or agency designated pursuant to Section 10.02 hereof being sometimes
referred to herein as the "Note Register") in which, subject to such reasonable
regulations as the Registrar may prescribe, the Issuer shall provide for the
registration of Notes and of transfers and exchanges of Notes. The Trustee is
hereby initially appointed Registrar for the purpose of registering Notes and
transfers of Notes as herein provided.
When Notes are presented to the Registrar or a co-Registrar with a
request from the Holder of such Notes to register the transfer or exchange for
an equal principal amount of Notes of other authorized denominations, the
Registrar shall register the transfer or make the exchange as requested;
provided, however, that every Note presented or surrendered for registration of
transfer or exchange shall be duly endorsed or be accompanied by a written
instrument of transfer or exchange in form satisfactory to the Issuer and the
Registrar, duly executed by the Holder thereof or his attorney duly authorized
in writing. Whenever any Notes are so presented for exchange, the Issuer shall
execute, and the Trustee shall authenticate and deliver, the Notes which the
Holder making the exchange is entitled to receive. No service charge shall be
made to the Holder for any registration of transfer or exchange. The Issuer may
require from the Holder payment of a sum sufficient to cover any transfer taxes
or other governmental charge that may be imposed in relation to a transfer or
exchange, but this provision shall not apply to any exchange pursuant to Section
10.10, 10.15, 10.21 or 9.06 hereof (in which events the Issuer will be
responsible for the payment of all such taxes which arise solely as a result of
the transfer or exchange and do not depend on the tax status of the Holder). The
Trustee shall not be required to exchange or register the transfer of any Note
for a period of 15 days immediately preceding the first mailing of notice of
redemption of Notes to be redeemed or of any Note selected, called or being
called for redemption except, in the case of any Note where public notice has
been given that such Note is to be redeemed in part, the portion thereof not to
be redeemed.
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All Notes issued upon any registration of transfer or exchange of
Notes shall be the valid obligations of the Issuer, evidencing the same
Indebtedness, and entitled to the same benefits under this Indenture, as the
Notes surrendered upon such registration of transfer or exchange.
Any Holder of a beneficial interest in a Global Note shall, by
acceptance of such Global Note, agree that transfers of beneficial interests in
such Global Notes may be effected only through a book-entry system maintained by
the Holder of such Global Note (or its agent), and that ownership of a
beneficial interest in the Note shall be required to be reflected in a
book-entry system.
Section 3.06. MUTILATED, DESTROYED, LOST AND STOLEN NOTES.
If a mutilated Note is surrendered to the Trustee or if the Holder of
a Note of any series claims that the Note has been lost, destroyed or wrongfully
taken, the Issuer shall execute and upon an Issuer Order, the Trustee shall
authenticate and deliver a replacement Note of like tenor and principal amount,
bearing a number not contemporaneously outstanding if the Holder of such Note
furnishes to the Issuer and to the Trustee evidence reasonably acceptable to
them of the ownership and the destruction, loss or theft of such Note and an
indemnity bond shall be posted by such Holder, sufficient in the judgment of the
Issuer or the Trustee, as the case may be, to protect the Issuer, the Trustee or
any Agent from any loss that any of them may suffer if such Note is replaced.
The Issuer may charge such Holder for the Issuer's expenses in replacing such
Note (including (i) expenses of the Trustee charged to the Issuer and (ii) any
tax or other governmental charge that may be imposed) and the Trustee may charge
the Issuer for the Trustee's expenses in replacing such Note.
Every replacement Note issued pursuant to this Section in lieu of any
destroyed, lost or stolen Note shall constitute an original additional
contractual obligation of the Issuer, whether or not the destroyed, lost or
stolen Note shall be at any time enforceable by anyone, and shall be entitled to
all benefits of this Indenture equally and proportionately with any and all
other Notes duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Notes.
Section 3.07. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED.
Interest on any Note which is payable, and is punctually paid or duly
provided for, on any Interest Payment Date shall be paid to the person in whose
name that Note (or one or more
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predecessor Notes) is registered at the close of business on the Regular
Record Date for such interest.
Any interest on any Note which is payable, but is not punctually paid
or duly provided for, on any Interest Payment Date and interest on such
defaulted interest at the then applicable interest rate borne by the Notes, to
the extent lawful (such defaulted interest and interest thereon herein
collectively called "Defaulted Interest") shall forthwith cease to be payable to
the Holder on the Regular Record Date; and such Defaulted Interest may be paid
by the Issuer, at its election in each case, as provided in subsection (a) or
(b) below:
(a) The Issuer may elect to make payment of any Defaulted Interest to
the persons in whose names the Notes (or their respective predecessor Notes) are
registered at the close of business on a Special Record Date for the payment of
such Defaulted Interest, which shall be fixed in the following manner. The
Issuer shall notify the Trustee in writing of the amount of Defaulted Interest
proposed to be paid on each Note and the date of the proposed payment, and at
the same time the Issuer shall deposit with the Trustee an amount of money equal
to the aggregate amount proposed to be paid in respect of such Defaulted
Interest or shall make arrangements satisfactory to the Trustee for such deposit
on or prior to the date of the proposed payment, such money when deposited to be
held in trust for the benefit of the persons entitled to such Defaulted Interest
as provided in this subsection (a). Not later than the second Business Day
after the Trustee receives the notice from the Issuer referred to in the
preceding sentence, the Trustee shall fix a Special Record Date for the payment
of such Defaulted Interest which shall be not more than 15 days and not less
than 10 days prior to the date of the proposed payment and not less than 10 days
after the receipt by the Trustee of the notice of the proposed payment. The
Trustee shall promptly notify the Issuer in writing of such Special Record Date.
In the name and at the expense of the Issuer, the Trustee shall cause notice of
the proposed payment of such Defaulted Interest and the Special Record Date
therefor to be mailed, first-class postage prepaid, to each Holder at its
address as it appears in the Note Register, not less than 10 days prior to such
Special Record Date. Notice of the proposed payment of such Defaulted Interest
and the Special Record Date therefor having been so mailed, such Defaulted
Interest shall be paid to the persons in whose names the Notes (or their
respective predecessor Notes) are registered on such Special Record Date and
shall no longer be payable pursuant to the following subsection (b).
(b) The Issuer may make payment of any Defaulted Interest in any
other lawful manner not inconsistent with the requirements of any securities
exchange on which the Notes may be listed, and upon such notice as may be
required by such exchange, if, after written notice given by the Issuer to the
Trustee of the proposed payment pursuant to this subsection (b), such payment
shall be deemed practicable by the Trustee.
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Subject to the foregoing provisions of this Section, each Note
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Note shall carry the rights to interest accrued and
unpaid, and to accrue, which were carried by such other Note.
Section 3.08. PERSONS DEEMED OWNERS.
Prior to and at the time of due presentment for registration of
transfer, the Issuer, the Trustee and any agent of the Issuer or the Trustee may
treat the person in whose name any Note is registered in the Note Register as
the owner of such Note for the purpose of receiving payment of principal of,
premium, if any, and (subject to Section 3.07 hereof) interest on such Note and
for all other purposes whatsoever, whether or not such Note shall be overdue,
and neither the Issuer, the Trustee nor any agent of the Issuer or the Trustee
shall be affected by notice to the contrary.
Section 3.09. CANCELLATION.
All Notes surrendered for payment, redemption, registration of
transfer or exchange shall be delivered to the Trustee and, if not already
canceled, shall be promptly canceled by it. The Issuer may at any time deliver
to the Trustee for cancellation any Notes previously authenticated and delivered
hereunder which the Issuer may have acquired in any manner whatsoever, and all
Notes so delivered shall be promptly canceled by the Trustee. The Registrar and
the Paying Agent shall forward to the Trustee any Notes surrendered to them for
registration of transfer or exchange, redemption or payment. The Trustee and no
one else shall cancel all Notes surrendered for registration of transfer,
exchange, payment, replacement or cancellation. No Notes shall be authenticated
in lieu of or in exchange for any Notes canceled as provided in this Section
3.09 hereof, except as expressly permitted by this Indenture. All canceled Notes
held by the Trustee shall be destroyed and certification of their destruction
delivered to the Issuer unless by an Issuer Order the Issuer shall timely direct
that the canceled Notes be returned to it. The Trustee shall provide the Issuer
a list of all Notes that have been canceled from time to time as requested by
the Issuer.
Section 3.10. COMPUTATION OF INTEREST.
Interest on the Notes shall be computed on the basis of a 360-day year
of twelve 30-day months.
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Section 3.11. LEGAL HOLIDAYS.
In any case where any Interest Payment Date, Redemption Date, date
established for the payment of Defaulted Interest or Stated Maturity of any Note
shall not be a Business Day, then (notwithstanding any other provision of this
Indenture or of the Notes) payment of principal, premium, if any, or interest
need not be made on such date, but may be made on the next succeeding Business
Day with the same force and effect as if made on the Interest Payment Date,
Redemption Date, date established for the payment of Defaulted Interest or at
the Stated Maturity, as the case may be. In such event, no interest shall accrue
with respect to such payment for the period from and after such Interest Payment
Date, Redemption Date, date established for the payment of Defaulted Interest or
Stated Maturity, as the case may be, to the next succeeding Business Day and,
with respect to any Interest Payment Date, interest for the period from and
after such Interest Payment Date shall accrue with respect to the next
succeeding Interest Payment Date.
Section 3.12. CUSIP AND CINS NUMBERS.
The Issuer in issuing the Notes may use "CUSIP" and "CINS" numbers
(if then generally in use), and if so, the Trustee shall use the CUSIP or CINS
numbers, as the case may be, in notices of redemption or exchange as a
convenience to Holders; provided, however, that any such notice may state that
no representation is made as to the correctness or accuracy of the CUSIP or CINS
number, as the case may be, printed in the notice or on the Notes, and that
reliance may be placed only on the other identification numbers printed on the
Notes. The Issuer shall promptly notify the Trustee in writing of any change in
the CUSIP or CINS number of any type of Notes.
Section 3.13. PAYING AGENT TO HOLD MONEY IN TRUST.
Each Paying Agent shall hold in trust for the benefit of the Holders
or the Trustee all money held by the Paying Agent for the payment of principal
of, premium, if any, or interest on the Notes, and shall notify the Trustee of
any default by the Issuer in making any such payment. Money held in trust by
the Paying Agent need not be segregated except as required by law and in no
event shall the Paying Agent be liable for any interest on any money received by
it hereunder. The Issuer at any time may require the Paying Agent to pay all
money held by it to the Trustee and account for any funds disbursed and the
Trustee may at any time during the continuance of any Event of Default, upon an
Issuer Order to the Paying Agent, require such Paying Agent to pay forthwith all
money so held by it to the Trustee and to account for any funds disbursed. Upon
making such payment, the Paying Agent shall have no further liability for the
money delivered to the Trustee.
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Section 3.14. TREASURY NOTES.
In determining whether the Holders of the required aggregate principal
amount of Notes have concurred in any direction, waiver, consent or notice,
Notes owned by the Issuer or an Affiliate of the Issuer shall be considered as
though they are not outstanding, except that for the purposes of determining
whether the Trustee shall be protected in relying on any such direction, waiver,
consent or notice, only Notes which a Responsible Officer of the Trustee
actually knows are so owned shall be so considered. The Issuer shall notify the
Trustee, in writing, when it or any of its Affiliates repurchases or otherwise
acquires Notes, of the aggregate principal amount of such Notes so repurchased
or otherwise acquired.
Section 3.15. DEPOSITS OF MONIES.
Prior to 1:00 p.m. New York City time on each Interest Payment Date,
maturity date, the Payment Date made with respect to an Offer to Purchase made
pursuant to Sections 10.10, 10.15 or 10.21 hereof, the Issuer shall have
deposited with the Paying Agent in immediately available funds money sufficient
to make cash payments, if any, due on such Interest Payment Date, maturity date
and Payment Date, as the case may be, in a timely manner which permits the
Paying Agent to remit payment to the Holders on such Interest Payment Date,
maturity date and Payment Date, as the case may be.
Section 3.16. BOOK-ENTRY PROVISIONS FOR GLOBAL NOTES.
(a) The Global Notes initially shall (i) be registered in the name of
the Depository or the nominee of such Depository, (ii) be delivered to the
Trustee as custodian for such Depository and (iii) bear legends as set forth in
Exhibit B.
Members of, or participants in, the Depository ("Agent Members") shall
have no rights under this Indenture with respect to any Global Note held on
their behalf by the Depository, or the Trustee as its custodian, or under the
Global Note, and the Depository may be treated by the Issuer, the Trustee and
any agent of the Issuer or the Trustee as the absolute owner of the Global Note
for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall
prevent the Issuer, the Trustee or any agent of the Issuer or the Trustee from
giving effect to any written certification, proxy or other authorization
furnished by the Depository or nominee of such Depository or impair, as between
the Depository and its Agent Members, the operation of customary practices
governing the exercise of the rights of a Holder of any Note.
(b) Transfers of Global Notes shall be limited to transfers in whole,
but not in part, to the Depository, its successors or their respective nominees.
Interests of beneficial owners in the Global Notes may be transferred or
exchanged for Physical Notes in accordance with the
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rules and procedures of the Depository and the provisions of Sections 3.03
and 3.17 hereof. In addition, Physical Notes shall be transferred to all
beneficial owners, in exchange for their beneficial interests in Global
Notes, if (i) the Depository notifies the Issuer that it is unwilling or
unable to continue as Depository for any Global Note, or that it will cease
to be a "Clearing Agency" under the Exchange Act, and in either case a
successor Depository is not appointed by the Issuer within 90 days of such
notice or (ii) an Event of Default has occurred and is continuing and the
Registrar has received a written request from the Depository to issue
Physical Notes.
(c) In connection with any transfer or exchange of a portion of the
beneficial interest in any Global Note to beneficial owners pursuant to
paragraph (b), the Registrar shall (if one or more Physical Notes are to be
issued) reflect on its books and records the date and a decrease in the
principal amount of the Global Note in an amount equal to the principal amount
of the beneficial interest in the Global Note to be transferred, and the Issuer
shall execute, and the Trustee shall authenticate and deliver, one or more
Physical Notes of like tenor and principal amount of authorized denominations.
(d) In connection with the transfer of Global Notes as an entirety to
beneficial owners pursuant to paragraph (b), the Global Notes shall be deemed to
be surrendered to the Trustee for cancellation, and the Issuer shall execute,
and the Trustee shall authenticate and deliver, to each beneficial owner
identified by the Depository in exchange for its beneficial interest in the
Global Notes, an equal aggregate principal amount of Physical Notes of like
tenor of authorized denominations.
(e) Any Physical Note constituting a Restricted Note delivered in
exchange for an interest in a Global Note pursuant to subparagraph (b), (c) or
(d) of this Section 3.16 shall, except as otherwise provided by Section 3.17
hereof, bear the Private Placement Legend.
(f) The Holder of any Global Note may grant proxies and otherwise
authorize any person, including Agent Members and persons that may hold
interests through Agent Members, to take any action which a Holder is entitled
to take under this Indenture or the Notes.
Section 3.17. SPECIAL TRANSFER PROVISIONS.
(a) Transfers to Non-QIB Institutional Accredited Investors. The
following additional provisions shall apply with respect to the registration of
any proposed transfer of an Initial Note to any Institutional Accredited
Investor which is not a QIB:
(i) the Registrar shall register the transfer of any
Initial Note, whether or not such Note bears the Private Placement Legend,
if (x) the requested transfer is after the second anniversary of the Issue
Date; provided, however, that neither the Issuer nor
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any Affiliate of the Issuer has held any beneficial interest in such
Note, or portion thereof, at any time on or prior to the second anniversary
of the Issue Date and such transfer can otherwise be lawfully made under
the Securities Act without registering such Initial Notes thereunder or
(y) the proposed transferee has delivered to the Registrar a certificate
substantially in the form of Exhibit C hereto and any legal opinions and
certifications required thereby; and
(ii) if the proposed transferor is an Agent Member seeking
to transfer an interest in a Global Note, upon receipt by the Registrar of
(x) written instructions given in accordance with the Depository's and the
Registrar's procedures and (y) the appropriate certificate, if any,
required by clause (y) of paragraph (i) above, together with any required
legal opinions and certifications, the Registrar shall register the
transfer and reflect on its books and records the date and a decrease in
the principal amount of the Global Note from which such interests are to be
transferred in an amount equal to the principal amount of the Notes to be
transferred and the Issuer shall execute and upon an Issuer Order, the
Trustee shall authenticate Physical Notes in a principal amount equal to
the principal amount of the Global Note to be transferred.
(b) Transfers to Non-U.S. Persons. The following additional
provisions shall apply with respect to the registration of any proposed transfer
of an Initial Note to any Non-U.S. Person:
(i) the Registrar shall register the transfer of any
Initial Note, whether or not such Note bears the Private Placement Legend,
if (x) the requested transfer is after the second anniversary of the Issue
Date; provided, however, that neither the Issuer nor any Affiliate of the
Issuer has held any beneficial interest in such Note, or portion thereof,
at any time on or prior to the second anniversary of the Issue Date and
such transfer can otherwise be lawfully made under the Securities Act
without registering such Initial Notes thereunder or (y) the proposed
transferor has delivered to the Registrar a certificate substantially in
the form of Exhibit C hereto;
(ii) if the proposed transferee is an Agent Member and the
Notes to be transferred consist of Physical Notes which after transfer are
to be evidenced by an interest in a Regulation S Global Note upon receipt
by the Registrar of (x) written instructions given in accordance with the
Depository's and the Registrar's procedures and (y) the appropriate
certificate, if any, required by clause (y) of paragraph (i) above,
together with any required legal opinions and certifications, the Registrar
shall register the transfer and reflect on its books and records the date
and an increase in the principal amount of the Regulation S Global Note in
an amount equal to the principal amount of
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Physical Notes to be transferred, and the Trustee shall cancel the
Physical Notes so transferred;
(iii) if the proposed transferor is an Agent Member seeking
to transfer an interest in a Global Note, upon receipt by the Registrar of
(x) written instructions given in accordance with the Depository's and the
Registrar's procedures and (y) the appropriate certificate, if any,
required by clause (y) of paragraph (i) above, together with any required
legal opinions and certifications, the Registrar shall register the
transfer and reflect on its books and records the date and (A) a decrease
in the principal amount of the Global Note from which such interests are to
be transferred in an amount equal to the principal amount of the Notes to
be transferred and (B) an increase in the principal amount of the
Regulation S Global Note in an amount equal to the principal amount of the
Global Note to be transferred; and
(iv) until the 41st day after the Issue Date (the
"Restricted Period"), an owner of a beneficial interest in the Regulation S
Global Note may not transfer such interest to a transferee that is a U.S.
person or for the account or benefit of a U.S. person within the meaning of
Rule 902(o) of the Securities Act. During the Restricted Period, all
beneficial interests in the Regulation S Global Note shall be transferred
only through Cedel or Euroclear, either directly if the transferor and
transferee are participants in such systems, or indirectly through
organizations that are participants.
(c) Transfers to QIBs. The following provisions shall apply with
respect to the registration of any proposed transfer of an Initial Note to a QIB
(excluding Non-U.S. Persons):
(i) the Registrar shall register the transfer of any
Initial Note, whether or not such Note bears the Private Placement Legend,
if (x) the requested transfer is after the second anniversary of the Issue
Date; provided, however, that neither the Issuer nor any Affiliate of the
Issuer has held any beneficial interest in such Note, or portion thereof,
at any time on or prior to the second anniversary of the Issue Date and
such transfer can otherwise be lawfully made under the Securities Act
without registering such Initial Note thereunder or (y) such transfer is
being made by a proposed transferor who has checked the box provided for on
the form of Note stating, or has otherwise advised the Issuer and the
Registrar in writing, that the sale has been made in compliance with the
provisions of Rule 144A to a transferee who has signed the certification
provided for on the form of Note stating, or has otherwise advised the
Issuer and the Registrar in writing, that it is purchasing the Note for its
own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a QIB within the
meaning of Rule 144A, and is aware that the sale to it is being made in
reliance on Rule 144A and acknowledges that it has received such
information regarding the Issuer as it has requested
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pursuant to Rule 144A or has determined not to request such information
and that it is aware that the transferor and the Issuer is relying upon
its foregoing representations in order to claim the exemption from
registration provided by Rule 144A;
(ii) if the proposed transferee is an Agent Member and the
Notes to be transferred consist of Physical Notes which after transfer are
to be evidenced by an interest in the 144A Global Note, upon receipt by the
Registrar of written instructions given in accordance with the Depository's
and the Registrar's procedures, the Registrar shall register the transfer
and reflect on its book and records the date and an increase in the
principal amount of the 144A Global Note in an amount equal to the
principal amount of Physical Notes to be transferred, and the Trustee shall
cancel the Physical Note so transferred; and
(iii) if the proposed transferor is an Agent Member seeking
to transfer an interest in a Global Note, upon receipt by the Registrar of
written instructions given in accordance with the Depository's and the
Registrar's procedures, the Registrar shall register the transfer and
reflect on its books and records the date and (A) a decrease in the
principal amount of the Global Note from which interests are to be
transferred in an amount equal to the principal amount of the Notes to be
transferred and (B) an increase in the principal amount of the 144A Global
Note in an amount equal to the principal amount of the Global Note to be
transferred.
(d) Private Placement Legend. Upon the registration of transfer,
exchange or replacement of Notes not bearing the Private Placement Legend, the
Registrar shall deliver Notes that do not bear the Private Placement Legend.
Upon the registration of transfer, exchange or replacement of Notes bearing the
Private Placement Legend, the Registrar shall deliver only Notes that bear the
Private Placement Legend unless (i) the circumstances contemplated by paragraphs
(a)(i)(x) or (b)(i)(x) of this Section 3.17 exist, (ii) there is delivered to
the Registrar an Opinion of Counsel reasonably satisfactory to the Issuer and
the Trustee to the effect that neither such legend nor the related restrictions
on transfer are required in order to maintain compliance with the provisions of
the Securities Act or (iii) such Note has been sold pursuant to an effective
registration statement under the Securities Act.
(e) Other Transfers. If a Holder proposes to transfer a Note
constituting a Restricted Note pursuant to any exemption from the registration
requirements of the Securities Act other than as provided for by Section 3.17(a)
or (b) hereof, the Registrar shall only register such transfer or exchange if
such transferor delivers an Opinion of Counsel satisfactory to the Issuer and
the Registrar that such transfer is in compliance with the Securities Act and
the terms of this Indenture; provided, however, that the Issuer may, based upon
the opinion of its counsel,
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instruct the Registrar by an Issuer Order not to register such transfer in
any case where the proposed transferee is not a QIB, a Non-U.S. Person or an
Institutional Accredited Investor.
(f) General. By its acceptance of any Note bearing the Private
Placement Legend, each Holder of such a Note acknowledges the restrictions on
transfer of such Note set forth in this Indenture and in the Private Placement
Legend and agrees that it will transfer such Note only as provided in this
Indenture.
The Registrar shall retain copies of all letters, notices and other
written communications received pursuant to Section 3.16 hereof or this Section
3.17. The Issuer shall have the right to inspect and make copies of all such
letters, notices or other written communications at any reasonable time upon the
giving of reasonable prior written notice to the Registrar.
ARTICLE 4
DEFEASANCE OR COVENANT DEFEASANCE
Section 4.01. TERMINATION OF ISSUER'S OBLIGATIONS.
Except as otherwise provided in this Section 4.01, the Issuer may
terminate its obligations under the Notes and this Indenture if:
(a) all Notes previously authenticated and delivered (other than
destroyed, lost or stolen Notes that have been replaced or Notes that are
paid pursuant to Section 10.01 or Notes for whose payment money or
securities have theretofore been held in trust and thereafter repaid to the
Issuer, as provided in Section 4.05) have been delivered to the Trustee for
cancellation and the Issuer has paid all sums payable by it hereunder other
than those that could become payable under Sections 4.06 or 6.07; or
(b) (i) the Notes mature within one year or all of them are to be
called for redemption within one year under arrangements reasonably
satisfactory to the Trustee for giving the notice of redemption, (ii) the
Issuer irrevocably deposits in trust with the Trustee during such one-year
period, under the terms of an irrevocable trust agreement in form and
substance reasonably satisfactory to the Trustee, as trust funds solely for
the benefit of the Holders for that purpose, money or U.S. Government
Securities sufficient (in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee), without consideration of any reinvestment of any
interest thereon, to pay principal, premium, if, any, and interest on the
Notes to maturity or redemption, as the case may be, and to pay all other
sums
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payable by it hereunder other than those that could become payable
under Sections 4.06 or 6.07, (iii) no Default or Event of Default with
respect to the Notes shall have occurred and be continuing on the date of
such deposit, (iv) such deposit will not result in a breach or violation
of, or constitute a default under, this Indenture or any other agreement or
instrument to which the Issuer or any of its Subsidiaries is a party or by
which the Issuer or any of its Subsidiaries is bound and (v) the Issuer has
delivered to the Trustee an Officers' Certificate and an Opinion of
Counsel, in each case stating that all conditions precedent relating to the
satisfaction and discharge of this Indenture set forth herein have been
complied with.
With respect to the foregoing clause (a), the Issuer's obligations
under Section 6.07 shall survive. With respect to the foregoing clause (b), the
Issuer's obligations under Sections 3.02, 3.03, 3.05, 3.06, 3.07, 3.13, 4.04,
4.05, 4.06, 6.10, 10.01 and 10.02 hereof shall survive until the Notes are no
longer Outstanding. Thereafter, only the provisions of Sections 4.05, 4.06 and
6.07 hereof shall survive. After any such irrevocable deposit, the Trustee upon
request shall acknowledge in writing the discharge of the Issuer's obligations
under the Notes and this Indenture except for those surviving obligations
specified above.
4.02. DEFEASANCE AND DISCHARGE OF INDENTURE.
The Issuer will be deemed to have paid and will be discharged from any
and all obligations in respect of the Notes on the 123rd day after the date of
the deposit referred to in clause (a) of this Section 4.02, and the provisions
of this Indenture will no longer be in effect with respect to the Notes, and the
Trustee, except as to (i) rights of registration of transfer and exchange, (ii)
substitution of apparently mutilated, defaced, destroyed, lost or stolen Notes,
(iii) rights of Holders to receive payments of principal thereof and interest
thereon, (iv) the Issuer's obligations under Section 10.02, (v) the rights,
obligations and immunities of the Trustee hereunder and (vi) the rights of the
Holders as beneficiaries of this Indenture with respect to the property so
deposited with the Trustee payable to all or any of them; provided that the
following conditions shall have been satisfied:
(a) with reference to this Section 4.02, the Issuer has irrevocably
deposited or caused to be irrevocably deposited with the Trustee (or
another trustee satisfying the requirements of Section 6.09) and conveyed
all right, title and interest for the benefit of the Holders, under the
terms of an irrevocable trust agreement in form and substance satisfactory
to the Trustee as trust funds in trust, specifically pledged to the Trustee
for the benefit of the Holders as security for payment of the principal of,
premium, if any, and interest, if any, on the Notes, and dedicated solely
to, the benefit of the Holders, in and to (i) money in an amount, (ii) U.S.
Government Securities that, through the payment of interest, premium, if
any, and principal in respect thereof in accordance with their terms,
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will provide, not later than one day before the due date of any payment
referred to in this clause (a), money in an amount, or (iii) a combination
thereof in an amount, sufficient, in the opinion of a nationally recognized
firm of independent public accountants expressed in a written certification
thereof delivered to the Trustee to pay and discharge, without
consideration of the reinvestment of such interest and after payment of
all federal, state and local taxes or other charges and assessments in
respect thereof payable by the Trustee, the principal of, premium, if any,
and accrued interest an the Outstanding Notes at the Stated Maturity of
such principal or interest; provided that the Trustee shall have been
irrevocably instructed to apply such money or the proceeds of such U.S.
Government Securities to the payment of such principal, premium, if any,
and interest with respect to the Notes;
(b) such deposit will not result in a breach or violation of, or
constitute a default under, this Indenture or any other agreement or
instrument to which the Issuer or any of its Subsidiaries is a party or by
which the Issuer or any of its Subsidiaries is bound;
(c) immediately after giving effect to such deposit on a pro forma
basis, no Default or Event of Default shall have occurred and be continuing
on the date of such deposit or during the period ending on the 123rd day
after such date of deposit;
(d) the Issuer shall have delivered to the Trustee (i) either (x) a
ruling directed to the Trustee received from the Internal Revenue Service
to the effect that the Holders will not recognize income, gain or loss for
federal income tax purposes as a result of the Issuer's exercise of its
option under this Section 4.02 and will be subject to federal income tax on
the same amount and in the same manner and at the same times as would have
been the case if such option had not been exercised or (y) an Opinion of
Counsel to the same effect as the ruling described in clause (x) above
accompanied by a ruling to that effect published by the Internal Revenue
Service, unless there has been a change in the applicable federal income
tax law since the date of this Indenture such that a ruling from the
Internal Revenue Service is no longer required and (ii) an Opinion of
Counsel to the effect that the creation of the defeasance trust does not
violate the Investment Company Act of 1940 and (y) after the passage of 123
days following the deposit (except, with respect to any trust funds for the
account of any Holder who may be deemed to be an "insider" for purposes of
the Bankruptcy Law, after one year following the deposit), the trust funds
will not be subject to the effect of Section 547 of the Bankruptcy Law or
Section 15 of the New York Debtor and Creditor Law in a case commenced by
or against the Issuer under either such statute, and either (i) the trust
funds will no longer remain the property of the Issuer (and therefore will
not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors, rights generally) or
(ii) if a court were to rule under any such law in any case or proceeding
that
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the trust funds remained property of the Issuer, (A) assuming such
trust funds remained in the possession of the Trustee prior to such court
ruling to the extent not paid to the Holders, the Trustee will hold, for
the benefit of the Holders, a valid and perfected security interest in such
trust funds that is not avoidable in bankruptcy or otherwise except for the
effect of Section 552(b) of the Bankruptcy Law on interest on the trust
funds accruing after the commencement of a case under such statute and (B)
the Holders will be entitled to receive adequate protection of their
interests in such trust funds if such trust funds are used in such case or
proceeding;
(e) if the Notes are then listed on a national securities exchange,
the Issuer shall have delivered to the Trustee an Opinion of Counsel to the
effect that such deposit, defeasance and discharge will not cause the Notes
to be delisted; and
(f) the Issuer has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, in each case stating that all conditions
precedent provided for herein relating to the defeasance contemplated by
this Section 4.02 have been complied with.
Notwithstanding the foregoing, prior to the end of the 123-day (or one
year) period referred to in clause (d)(ii)(y) of this Section 4.02 none of the
Issuer's obligations under this Indenture shall be discharged. Subsequent to
the end of such 123-day (or one year) period with respect to this Section 4.02,
the Issuer's obligations under Sections 3.02, 3.03, 3.05, 3.06, 3.07, 3.13,
3.16, 3.17, 4.04, 4.05, 4.06, 6.07, 6.10, 10.01 and 10.02 hereof shall survive
until the Notes are no longer Outstanding. Thereafter, only the Issuer's
obligations under Sections 4.05, 4.06 and 6.07 hereof shall survive. If and
when a ruling from the Internal Revenue Service or an Opinion of Counsel
referred to in clause (d)(i) of this Section 4.02 is able to be provided
specifically without regard to, and not in reliance upon, the continuance of the
Issuer's obligations under Section 10.01, the Issuer's obligations under such
Section 10.01 shall cease upon delivery to the Trustee of such ruling or Opinion
of Counsel and compliance with the other conditions precedent provided for
herein relating to the defeasance contemplated by this Section 4.02.
After any such irrevocable deposit, the Trustee upon request shall
acknowledge in writing the discharge of the Issuer's obligations under the Notes
and this Indenture except for those surviving obligations in the immediately
preceding paragraph.
Section 4.03. DEFEASANCE OF CERTAIN OBLIGATIONS.
The Issuer may omit to comply with (i) any term, provision or
condition set forth in clauses (c) and (d) of Section 8.01 and Sections 10.10
through 10.11 and Sections 10.13 through 10.23, (ii) clause (d) of Section 5.01
with respect to defaults or breaches of Sections 10.10 through 10.11 and
Sections 10.13 through 10.23 and (iii) clauses (c) and (d) of Section
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8.01, and clauses (e) and (f) of Section 5.01 shall be deemed not to be
Events of Default, in each case with respect to the outstanding Notes if:
(a) with reference to this Section 4.03, the Issuer has irrevocably
deposited or caused to be irrevocably deposited with the Trustee (or another
trustee satisfying the requirements of Section 6.09) and conveyed all right,
title and interest to the Trustee for the benefit of the Holders, under the
terms of an irrevocable trust agreement in form and substance satisfactory to
the Trustee as trust funds in trust, specifically pledged to the Trustee for the
benefit of the Holders as security for payment of the principal of, premium, if
any, and interest, if any, on the Notes, and dedicated solely to, the benefit of
the Holders, in and to (i) money in an amount, (ii) U.S. Government Securities
that, through the payment of interest and principal in respect thereof in
accordance with their terms, will provide, not later than one day before the due
date of any payment referred to in this clause (a), money in an amount or (iii)
a combination thereof in an amount sufficient, in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Trustee, to pay and discharge, without
consideration of the reinvestment of such interest and after payment of all
federal, state and local taxes or other charges and assessments in respect
thereof payable by the Trustee, the principal of, premium, if any, and interest
on the Notes Outstanding at the Stated Maturity of such principal or interest;
provided that the Trustee shall have been irrevocably instructed to apply such
money or the proceeds of such U.S. Government Securities to the payment of such
principal, premium, if any, and interest with respect to the Notes;
(b) such deposit will not result in a breach or violation of, or
constitute a default under, this Indenture or any other agreement or instrument
to which the Issuer or any of its Subsidiaries is a party or by which the Issuer
or any of its Subsidiaries is bound;
(c) immediately after giving effect to such deposit on a pro forma
basis, no Default or Event of Default shall have occurred and be continuing on
the date of such deposit or during the period ending on the 123rd day after such
date of deposit;
(d) the Issuer has delivered to the Trustee an Opinion of Counsel to
the effect that (i) the creation of the defeasance trust does not violate the
Investment Company Act of 1940, (ii) the Trustee, for the benefit of the
Holders, has a valid first priority security interest in the trust funds, (iii)
the Holders will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit and defeasance of certain covenants and
Events of Default and will be subject to federal income tax on the same amount
and in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred and (iv) after the passage of 123 days
following the deposit (except, with respect to any trust funds for the account
of any Holder who may be deemed to be an "insider" for purposes of the
Bankruptcy Law, after one year following the deposit), the trust funds will not
be subject to the effect of Section 547 of
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the Bankruptcy Law or Section 15 of the New York Debtor and Creditor Law in a
case commenced by or against the Issuer under either such statute, and either
(A) the trust funds will no longer remain the property of the Issuer (and
therefore will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors, rights
generally) or (B) if a court were to rule under any such law in any case or
proceeding that the trust funds remained property of the Issuer, (x) assuming
such trust funds remained in the possession of the Trustee prior to such
court ruling to the extent not paid to the Holders, the Trustee will hold,
for the benefit of the Holders, a valid and perfected security interest in
such trust funds that is not avoidable in bankruptcy or otherwise (except for
the effect of Section 552(b) of the Bankruptcy Law on interest on the trust
funds accruing after the commencement of a case under such statute) and (y)
the Holders will be entitled to receive adequate protection of their
interests in such trust funds if such trust funds are used in such case or
proceeding;
(e) if the Notes are then listed on a national securities exchange,
the Issuer shall have delivered to the Trustee an Opinion of Counsel to the
effect that such deposit, defeasance and discharge will not cause the Notes to
be delisted; and
(f) the Issuer has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, in each case stating that all conditions precedent
provided for herein relating to the defeasance contemplated by this Section 4.03
have been complied with.
Section 4.04. APPLICATION OF TRUST MONEY. Subject to Section 4.06,
the Trustee or Paying Agent shall hold in trust money or U.S. Government
Securities deposited with it pursuant to Section 4.01, 4.02 or 4.03, as the case
may be, and shall apply the deposited money and the money from U.S. Government
Securities in accordance with the Notes and this Indenture to the payment of
principal of, premium, if any, and interest on the Notes; but such money need
not be segregated from other funds except to the extent required by law.
Section 4.05. REPAYMENT TO ISSUER. Subject to Sections 4.01, 4.02,
4.03 and 6.07, the Trustee and the Paying Agent shall promptly pay to the Issuer
upon request set forth in an Officers' Certificate any excess money held by them
at any time and thereupon shall be relieved from all liability with respect to
such money. The Trustee and the Paying Agent shall pay to the Issuer upon
request any money held by them for the payment of principal, premium, if any, or
interest that remains unclaimed for two years. After payment to the Issuer,
Holders entitled to such money must look to the Issuer for payment as general
creditors, unless an applicable law designates another Person, and all liability
of the Trustee and such Paying Agent with respect to such money shall cease.
Section 4.06. REINSTATEMENT. If the Trustee or Paying Agent is
unable to apply any money or U.S. Government Securities in accordance with
Section 4.01, 4.02 or 4.03, as the
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case may be, by reason of any legal proceeding or by reason of any order or
judgment of any court or governmental authority enjoining, restraining or
otherwise prohibiting such application, the Issuer's obligations under this
Indenture and the Notes shall be revived and reinstated as though no deposit
had occurred pursuant to Section 4.01, 4.02 or 4.03, as the case my be, until
such time as the Trustee or Paying Agent is permitted to apply all such money
or U.S. Government Securities in accordance with Section 4.01, 4.02 or 4.03,
as the case may be; provided that, if the Issuer has made any payment of
principal of, premium, if any, or interest on any Notes because of the
reinstatement of its obligations, the Issuer shall be subrogated to the
rights of the Holders of such Notes to receive such payment from the money or
U.S. Government Securities held by the Trustee or Paying Agent.
ARTICLE 5
REMEDIES
Section 5.01. EVENTS OF DEFAULT.
"Event of Default," wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be voluntary or involuntary or be effected by operation of law or pursuant
to any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body):
(a) default in the payment of the principal of, or premium, if any,
on any Note when the same becomes due and payable at maturity, upon
acceleration, redemption or otherwise; or
(b) default in the payment of interest on any Note when the same
becomes due and payable, which default continues for a period of 30 days; or
(c) default in the performance or breach of the provisions of Article
Eight or the failure to make or consummate an Offer to Purchase in accordance
with Section 10.10, Section 10.15 or Section 10.21; or
(d) defaults in the performance or breach of any covenant or
agreement of the Issuer in this Indenture or under the Notes (other than
defaults specified in clause (a), (b) or (c) above), which default or breach
continues (i) for a period of 30 consecutive days or (ii) in the event such
default or breach cannot be cured in such 30-day period and the Issuer is
diligently and in good faith attempting to cure such default or breach, for a
period of 60 consecutive days in the case of both clauses (i) and (ii), after
written notice by the Trustee or the Holders of at least 25% in aggregate
principal amount of the Notes then Outstanding; or
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(e) there occurs with respect to any issue or issues of Indebtedness
of the Issuer or any Restricted Subsidiary having an outstanding principal
amount of $7.5 million or more in the aggregate for such issues of all such
Persons, whether such Indebtedness now exists or shall hereafter be created (i)
an event of default that has caused the holder thereof to declare such
Indebtedness to be due and payable prior to its Stated Maturity and such
Indebtedness has not been discharged in full or such acceleration has not been
rescinded or annulled within 30 days of such acceleration and/or (ii) the
failure to make a principal payment at the final (but not any interim) fixed
maturity and such defaulted payment shall not have been made, waived or extended
within 30 days of such payment default; or
(f) any final judgment or order (not covered by insurance) for the
payment of money in excess of $7.5 million in the aggregate for all such final
judgments or orders against all such Persons (treating any deductibles,
self-insurance or retention as not so covered) shall be rendered against the
Issuer or any Restricted Subsidiary and shall not be paid or discharged, and
there shall be any period of 30 consecutive days following entry of the final
judgment or order that causes the aggregate amount for all such final
judgments or orders outstanding and not paid or discharged against all such
Persons to exceed $7.5 million during which a stay or enforcement of such
final judgement or order, by reason of a pending appeal or otherwise, shall
not be in effect; or
(g) a court having jurisdiction in the premises enters a decree or
order for (i) relief in respect of the Issuer or any Restricted Subsidiary in an
involuntary case under any applicable Bankruptcy Law, (ii) appointment of a
Custodian of the Issuer or any Restricted Subsidiary or for all or substantially
all of the property and assets of the Issuer or any Restricted Subsidiary or (C)
the winding up or liquidation of the affairs of the Issuer or any Restricted
Subsidiary and, in each case, such decree or order shall remain unstayed and in
effect for a period of 60 consecutive days.
(h) the Issuer or any Restricted Subsidiary (i) commences a voluntary
case under any applicable Bankruptcy Law, or consents to the entry of an order
for relief in an involuntary case under any Bankruptcy Law, (ii) consents to the
appointment of or taking possession by a Custodian of the Issuer or any
Restricted Subsidiary or for all or substantially all of the property and assets
of the Issuer or any Restricted Subsidiary or (iii) effects any general
assignment for the benefit of creditors; or
(i) there occurs a default by the Issuer or IWL under the Escrow
Agreement or the Escrow Agreement shall cease to be in full force and effect or
enforceable in accordance with its terms, other than in accordance with its
terms or prior to the termination of such agreement, the lien of the Trustee
under such agreement ceases to be a first priority perfected security interest
in any portion of the collateral purported to be pledged thereunder.
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Section 5.02. ACCELERATION OF MATURITY, RESCISSION AND ANNULMENT.
If an Event of Default (other than an Event of Default specified in
clause (g) or (h) of Section 5.01 hereof with respect to the Issuer) occurs and
is continuing, then the Trustee or the Holders of at least 25% in aggregate
principal amount of the Outstanding Notes may, by written notice to the Issuer
(and to the Trustee, if such notice is given by the Holders) may, and the
Trustee upon the request of the Holders of not less than 25% in aggregate
principal amount of the Outstanding Notes shall, declare the principal of,
premium, if any, and accrued interest on all Outstanding Notes to be immediately
due and payable and upon any such declaration such amounts shall become
immediately due and payable. If an Event of Default specified in clause (g) or
(h) of Section 5.01 hereof with respect to the Issuer occurs and is continuing,
then the principal of, premium, if any, and accrued interest on all Outstanding
Notes shall IPSO FACTO become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder. In the event
of a declaration of acceleration because an Event of Default set forth in clause
(e) of Section 5.01 hereof has occurred and is continuing, such declaration of
acceleration shall be automatically rescinded and annulled if the event of
default triggering such Event of Default pursuant to clause (e) shall be
remedied or cured by the Issuer or the relevant Restricted Subsidiary or waived
by the holders of the relevant Indebtedness within 60 days after the declaration
of acceleration with respect thereto.
After an acceleration, the Holders of at least a majority in aggregate
principal amount of the Outstanding Notes may, by written notice to the Issuer
and the Trustee, waive all past defaults and rescind and annul such acceleration
and its consequences if all existing Events of Default, other than nonpayment of
the principal of and accrued and unpaid interest on, the Notes that has become
due solely as a result of such acceleration, have been cured or waived and if
the rescission of acceleration would not conflict with any judgment or decree of
a court of competent jurisdiction.
Section 5.03. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY
TRUSTEE.
The Issuer covenants that if an Event of Default specified in Section
5.01(a), 5.01(b) or 5.01(c) (to the extent relating to a payment required by
Section 10.10, 10.15 or 10.21) shall have occurred and be continuing, the Issuer
will, upon demand of the Trustee, pay to the Trustee, for the benefit of the
Holders of Notes tendered for payment pursuant to such provisions of this
Indenture, the whole amount then due and payable on Notes tendered for payment
pursuant to such provisions of this Indenture for principal, premium, if any,
and interest, with interest upon the overdue principal, premium, if any, and, to
the extent that payment of such interest shall be legally enforceable, upon
overdue installments of interest, at the rate then borne by the Notes; and, in
addition thereto, such further amount as shall be sufficient to cover the costs
and expenses
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of collection, including the reasonable compensation, expenses, disbursements
and advances of the Trustee, its agents and counsel.
If the Issuer fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name and as trustee of an express trust, may, but is not
obligated under this paragraph to, institute a judicial proceeding for the
collection of the sums so due and unpaid and may, but is not obligated under
this paragraph to, prosecute such proceeding to judgment or final decree, and
may, but is not obligated under this paragraph to, enforce the same against the
Issuer or any other obligor upon the Notes and collect the moneys adjudged or
decreed to be payable in the manner provided by law out of the property of the
Issuer or any other obligor upon the Notes, wherever situated.
If an Event of Default occurs and is continuing, the Trustee may in
its discretion, but is not obligated under this paragraph to, (i) proceed to
protect and enforce its rights and the rights of the Holders under this
Indenture by such appropriate private or judicial proceedings as the Trustee
shall deem most effectual to protect and enforce such rights, whether for the
specific enforcement of any covenant or agreement contained in this Indenture or
in aid of the exercise of any power granted herein, or (ii) proceed to protect
and enforce any other proper remedy. No recovery of any such judgment upon any
property of the Issuer shall affect or impair any rights, powers or remedies of
the Trustee or the Holders.
Section 5.04. TRUSTEE MAY FILE PROOFS OF CLAIMS.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Issuer or any other obligor upon the Notes
or the property of the Issuer or of such other obligor or their creditors, the
Trustee (irrespective of whether the principal of the Notes shall then be due
and payable as therein expressed or by declaration or otherwise and irrespective
of whether the Trustee shall have made any demand on the Issuer for the payment
of overdue principal or interest) shall be entitled and empowered, by
intervention in such proceeding or otherwise:
(a) to file and prove a claim for the whole amount of principal,
premium, if any, and interest owing and unpaid in respect of the Notes and to
file such other papers or documents as may be necessary or advisable in order to
have the claims of the Trustee (including any claim for the reasonable
compensation, fees, expenses, disbursements and advances of the Trustee, its
agents and counsel) and of the Holders allowed in such judicial proceeding, and
(b) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same;
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and any Custodian, in any such judicial proceeding, is hereby authorized by each
Holder to make such payments to the Trustee and, in the event that the Trustee
shall consent to the making of such payments directly to the Holders, to pay the
Trustee as administrative expenses associated with any such proceeding, and in
the event that the Trustee shall consent to the making of such payments directly
to Holders, any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under Section 6.07 hereof.
To the extent that the payment of any such compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under Section 6.07 hereof out of the estate in any such
proceeding, shall be denied for any reason, payment of the same shall be secured
by a Lien on, and shall be paid out of, any and all distributions, dividends,
money, securities and other properties that the Holders may be entitled to
receive in such proceeding whether in liquidation or under any plan of
reorganization or arrangement or otherwise.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Notes or
the rights of any Holder thereof, or to authorize the Trustee to vote in respect
of the claim of any Holder in any such proceeding.
Section 5.05. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF NOTES.
All rights of action and claims under this Indenture or the Notes may
be prosecuted and enforced by the Trustee without the possession of any of the
Notes or the production thereof in any proceeding relating thereto, and any such
proceeding instituted by the Trustee shall be brought in its own name and as
trustee of an express trust, and any recovery of judgment shall, after provision
for the payment of the reasonable compensation, fees, expenses, disbursements
and advances of the Trustee, its agents and counsel, be for the ratable benefit
of the Holders of the Notes in respect of which such judgment has been
recovered.
Section 5.06. APPLICATION OF MONEY COLLECTED.
Any money collected by the Trustee pursuant to this Article shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in case of the distribution of such money on account of principal, premium, if
any, or interest, upon presentation of the Notes and the notation thereon of the
payment if only partially paid and upon surrender thereof if fully paid:
(a) first, to the Trustee for amounts due under Section 6.07;
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(b) second, to Holders for interest accrued on the Notes, ratably,
without preference or priority of any kind, according to the amounts due
and payable on the Notes for interest;
(c) third, to Holders for principal and premium, if any, owing under
the Notes, ratably, without preference or priority of any kind, according
to the aggregate amounts due and payable on the Notes for principal and
premium, if any; and
(d) fourth, the balance, if any, to the Issuer.
The Trustee, upon prior written notice to the Issuer, may fix a record
date and payment date for any payment to Holders pursuant to this Section 5.06.
Section 5.07. LIMITATION ON SUITS.
No Holder of any Note shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder, unless
(a) such Holder has previously given written notice to the Trustee of
a continuing Event of Default;
(b) the Holders of not less than 25% in aggregate principal amount of
the Outstanding Notes shall have made written request to the Trustee to pursue
the remedy;
(c) Holders described in (b) above have offered to the Trustee
indemnity satisfactory to it against the costs, expenses and liabilities to be
incurred in compliance with such request;
(d) the Trustee does not comply with the request within 60 days after
its receipt of the request and offer of indemnity; and
(e) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Holders of a majority in
aggregate principal amount of the Outstanding Notes;
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Indenture or any Note to affect, disturb or prejudice the rights of any
other Holder, or to obtain or to seek to obtain priority or
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preference over any other Holder or to enforce any right under this Indenture
or any Note, except in the manner provided in this Indenture and for the
equal and ratable benefit of all the Holders.
Section 5.08. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL,
PREMIUM AND INTEREST.
Notwithstanding any other provision in this Indenture, the Holder of
any Note shall have the right, which is absolute and unconditional, to receive
cash payment of the principal of, premium, if any, and (subject to Section 3.07
hereof) interest on such Note on the respective Stated Maturities expressed in
such Note (or, in the case of redemption, on the respective Redemption Date) and
to institute suit for the enforcement of any such payment, and such rights shall
not be impaired without the consent of such Holder.
Section 5.09. RESTORATION OF RIGHTS AND REMEDIES.
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture or any Note and such proceeding has
been discontinued or abandoned for any reason, or has been determined adversely
to the Trustee or to such Holder, then and in every such case the Issuer, the
Trustee and the Holders shall, subject to any determination in such proceeding,
be restored severally and respectively to their former positions hereunder, and
thereafter all rights and remedies of the Trustee and the Holders shall continue
as though no such proceeding had been instituted.
Section 5.10. RIGHTS AND REMEDIES CUMULATIVE.
Except as provided in Section 3.06, no right or remedy herein
conferred upon or reserved to the Trustee or to the Holders is intended to be
exclusive of any other right or remedy, and every right and remedy shall, to the
extent permitted by law, be cumulative and in addition to every other right and
remedy given hereunder or now or hereafter existing at law or in equity or
otherwise. The assertion or employment of any right or remedy hereunder, or
otherwise, shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.
Section 5.11. DELAY OR OMISSION NOT WAIVER.
No delay or omission of the Trustee or of any Holder of any Note to
exercise any right or remedy accruing upon any Event of Default shall impair any
such right or remedy or constitute a waiver of any such Event of Default or an
acquiescence therein. Every right and remedy given by this Article Five or by
law to the Trustee or to the Holders may be exercised from time to time, and as
often as may be deemed expedient, by the Trustee or by the Holders, as the case
may be.
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Section 5.12. CONTROL BY MAJORITY.
The Holders of at least a majority in aggregate principal amount of
the Outstanding Notes shall have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee; provided, however, that:
(a) such direction shall not be in conflict with any rule of law or
with this Indenture or any Note or expose the Trustee to personal liability or
be determined by the Trustee in good faith as unduly prejudicial to the rights
of any Holder of Notes not joining in the giving of such direction; and
(b) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
Section 5.13. WAIVER OF PAST DEFAULTS.
The Holders of not less than a majority in aggregate principal amount
of the Outstanding Notes may on behalf of the Holders of all the Notes waive any
past Default hereunder and its consequences, except a Default
(a) in the payment of the principal of, or interest on any
Outstanding Note or
(b) in respect of a covenant or provision hereof which under Article
Nine cannot be modified or amended without the consent of the Holder of each
Outstanding Note affected thereby.
Upon any such waiver, such Default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other Default or Event of Default or impair any right consequent thereon.
Section 5.14. UNDERTAKING FOR COSTS.
All parties to this Indenture agree, and each Holder of any Note by
his acceptance thereof shall be deemed to have agreed, that any court may in its
discretion require, in any suit for the enforcement of any right or remedy under
this Indenture, or in any suit against the Trustee for any action taken,
suffered or omitted by it as Trustee, the filing by any party litigant in such
suit of an undertaking to pay the costs of such suit, and that such court may in
its discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit,
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having due regard to the merits and good faith of the claims or defenses made
by such party litigant; but the provisions of this Section 5.14 shall not
apply to any suit instituted by the Trustee, to any suit instituted by any
Holder, or group of Holders, holding in the aggregate more than 10% in
aggregate principal amount of the Outstanding Notes, or to any suit
instituted by any Holder for the enforcement of the payment of the principal
of, premium, if any, or interest on any Note on or after the respective
Stated Maturities expressed in such Note (or, in the case of redemption, on
or after the respective Redemption Dates).
Section 5.15. WAIVER OF STAY, EXTENSION OR USURY LAWS.
The Issuer covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, or plead, or in any manner whatsoever claim
or take the benefit or advantage of, any stay or extension law or any usury or
other law wherever enacted, now or at any time hereafter in force, which would
prohibit or forgive the Issuer from paying all or any portion of the principal
of, premium, if any, or interest on the Notes contemplated herein or in the
Notes or which may affect the covenants or the performance of this Indenture;
and the Issuer (to the extent that it may lawfully do so) hereby expressly
waives all benefit or advantage of any such law and covenants that it will not
hinder, delay or impede the execution of any power herein granted to the
Trustee, but will suffer and permit the execution of every such power as though
no such law had been enacted.
Section 5.16. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PAYMENT.
Notwithstanding any other provision in this Indenture and any other
provision of any Note, the right of any Holder of any Note to receive payment of
the principal of, premium, if any, and interest on such Note on or after the
respective Stated Maturities (or the respective Redemption Dates, in the case of
redemption) expressed in such Note, or after such respective dates, shall not be
impaired or affected without the consent of such Holder.
ARTICLE 6
THE TRUSTEE
Section 6.01. CERTAIN DUTIES AND RESPONSIBILITIES.
(a) Except during the continuance of an Event of Default,
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(i) the Trustee undertakes to perform such duties and only
such duties as are specifically set forth in this Indenture, and no implied
covenants or obligations shall be read into this Indenture against the
Trustee; and
(ii) in the absence of bad faith on its part, the Trustee
may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture; but in the case of any such certificates or opinions which
by provision hereof are specifically required to be furnished to the
Trustee, the Trustee shall be under a duty to examine the same to determine
whether or not they conform to the requirements of this Indenture.
(b) During the existence of an Event of Default, the Trustee is
required to exercise such rights and powers vested in it under this Indenture
using the same degree of care and skill in its exercise thereof as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
(c) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own willful misconduct, except that no provision of this
Indenture shall require the Trustee to expend or risk its own funds or otherwise
incur any financial liability in the performance of any of its duties hereunder,
or in the exercise of any of its rights or powers, if it shall have reasonable
grounds for believing that repayment of such funds or adequate indemnity against
such risk or liability is not reasonably assured to it.
(d) Whether or not therein expressly so provided, every provision of
this Indenture relating to the conduct or affecting the liability of or
affording protection to the Trustee shall be subject to the provisions of this
Section 6.01.
Section 6.02. NOTICE OF DEFAULTS.
Within 45 days after the occurrence of any Default actually known to a
Responsible Officer of the Trustee, the Trustee shall transmit by mail to all
Holders in the manner and to the extent provided in TIA Section 313(c), as their
names and addresses appear in the Note Register, notice of such Default
hereunder unless such Default shall have been cured or waived; provided,
however, that, except in the case of a Default in the payment of the principal
of, premium, if any, or interest on any Note or in the case of any Default
arising from the occurrence of a Change of Control, the Trustee shall be
protected in withholding such notice if and so long as a trust committee of
Responsible Officers of the Trustee in good faith determines that the
withholding of such notice is in the interest of the Holders.
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Section 6.03. CERTAIN RIGHTS OF TRUSTEE.
Subject to Section 6.01 hereof and the provisions of Section 315 of
the Trust Indenture Act:
(a) the Trustee may conclusively rely and shall be fully protected in
acting or refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other paper or document
believed by it to be genuine and to have been signed or presented by the proper
party or parties;
(b) any request or direction of the Issuer mentioned herein shall be
sufficiently evidenced by an Issuer Request or Issuer Order and any resolution
of the Board of Directors may be sufficiently evidenced by a Board Resolution
thereof;
(c) the Trustee may consult with counsel and any advice of such
counsel or any Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon in accordance with such advice or Opinion
of Counsel;
(d) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction of
any of the Holders pursuant to this Indenture, unless such Holders shall have
offered to the Trustee reasonable security or indemnity satisfactory to it
against the costs, expenses and liabilities which might be incurred by the
Trustee in compliance with such request or direction;
(e) the Trustee shall not be liable for any action taken or omitted
by it in good faith and believed by it to be authorized or within the
discretion, rights or powers conferred upon it by this Indenture other than any
liabilities arising out of its own negligence, bad faith or willful misconduct;
(f) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, approval,
appraisal, bond, debenture, note, coupon, security, other evidence of
indebtedness or other paper or document unless requested in writing so to do by
the Holders of not less than a majority in aggregate principal amount of the
Notes then Outstanding; provided, however, that, if the payment within a
reasonable time to the Trustee of the costs, expenses or liabilities likely to
be incurred by it in the making of such investigation is, in the opinion of the
Trustee, not reasonably assured to the Trustee by the security afforded to it by
the terms of this Indenture, the Trustee may require indemnity satisfactory to
it against such expenses
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or liabilities as a condition to proceeding; the reasonable expenses of every
such investigation shall be paid by the Issuer or, if paid by the Trustee or
any predecessor Trustee, shall be repaid by the Issuer upon demand; provided,
further, the Trustee in its discretion may make such further inquiry or
investigation into such facts or matters as it may deem appropriate, and, if
the Trustee shall determine to make such further inquiry or investigation, it
shall be entitled to examine the books, records and premises of the Issuer,
personally or by agent or attorney;
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents, attorneys,
custodian or nominees and the Trustee shall not be responsible for any
misconduct or negligence on the part of any agent, attorney, custodian or
nominee appointed with due care by it hereunder;
(h) except with respect to Section 10.01, the Trustee shall have no
duty to inquire as to the performance of the Issuer's covenants in Article Ten.
In addition, the Trustee shall not be deemed to have knowledge of any Default or
Event of Default except (i) any Event of Default occurring pursuant to Sections
5.01(a), 5.01(b) and 10.01 or (ii) any Default or Event of Default of which the
Trustee shall have received written notification from the Issuer or the Holders
of at least 10% in aggregate principal amount of the Notes or a Responsible
Officer shall have obtained actual knowledge; and
(i) if the Trustee is acting in the capacity of Registrar and/or
Paying Agent, then the rights afforded to the Trustee under this Section 6.03
shall also be afforded to such Registrar and/or Paying Agent.
Section 6.04. TRUSTEE NOT RESPONSIBLE FOR RECITALS, DISPOSITIONS OF
NOTES OR APPLICATION OF PROCEEDS THEREOF.
The recitals contained herein and in the Notes, except the Trustee's
certificate of authentication, shall be taken as the statements of the Issuer,
and the Trustee assumes no responsibility for their correctness. The Trustee
makes no representations as to the validity or sufficiency of this Indenture or
of the Notes except that the Trustee represents that it is duly authorized to
execute and deliver this Indenture, authenticate the Notes and perform its
obligations hereunder and that the statements made by it in a Statement of
Eligibility and Qualification on Form T-1, if any, to be supplied to the Issuer
are true and accurate subject to the qualifications set forth therein. The
Trustee shall not be accountable for the use or application by the Issuer of
Notes or the proceeds thereof.
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Section 6.05. TRUSTEE AND AGENTS MAY HOLD NOTES; COLLECTIONS; ETC.
The Trustee, any Paying Agent, Registrar or any other agent of the
Issuer, in its individual or any other capacity, may become the owner or pledgee
of Notes, with the same rights it would have if it were not the Trustee, Paying
Agent, Registrar or such other agent and, subject to Section 6.08 hereof and
Sections 310 and 311 of the Trust Indenture Act, may otherwise deal with the
Issuer and receive, collect, hold and retain collections from the Issuer with
the same rights it would have if it were not the Trustee, Paying Agent,
Registrar or such other agent.
Section 6.06. MONEY HELD IN TRUST.
All moneys received by the Trustee shall, until used or applied as
herein provided, be held in trust for the purposes for which they were received,
but need not be segregated from other funds except to the extent required herein
or by law. The Trustee shall not be under any liability for interest on any
moneys received by it hereunder.
Section 6.07. COMPENSATION AND INDEMNIFICATION OF TRUSTEE AND ITS
PRIOR CLAIM.
The Issuer covenants and agrees: (a) to pay to the Trustee from time
to time, and the Trustee shall be entitled to, reasonable compensation for all
services rendered by it hereunder (which shall not be limited by any provision
of law in regard to the compensation of a trustee of an express trust); (b) to
reimburse the Trustee and each predecessor Trustee upon its request for all
reasonable expenses, fees, disbursements and advances incurred or made by or on
behalf of it in accordance with any of the provisions of this Indenture
(including the reasonable compensation, fees, and the expenses and disbursements
of its counsel and of all agents and other persons not regularly in its employ),
except any such expense, disbursement or advance as may arise from its
negligence, bad faith or willful misconduct; and (c) to indemnify the Trustee
and any of its officers, directors, employees and agents and each predecessor
Trustee for, and to hold it harmless against any loss, liability or expense
(including attorneys' fees and expenses incurred in defending themselves)
incurred without negligence, bad faith or willful misconduct on its part,
arising out of or in connection with the acceptance or administration of this
Indenture or the trusts hereunder and its duties hereunder, including
enforcement of this Section 6.07.
To secure the Issuer's payment obligations in this Section 6.07, the
Trustee shall have a Lien prior to the Notes on all money or property held or
collected by the Trustee in such capacity, except that held in trust to pay
principal and interest on particular Notes. Such Lien shall survive the
satisfaction and discharge of this Indenture.
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The obligations of the Issuer under this Section to compensate and
indemnify the Trustee and each predecessor Trustee and to pay or reimburse the
Trustee and each predecessor Trustee for expenses, disbursements and advances
shall constitute an additional obligation hereunder and shall survive the
satisfaction and discharge of this Indenture or the rejection or termination of
this Indenture under bankruptcy law. Such additional indebtedness shall be a
senior claim to that of the Notes upon all property and funds held or collected
by the Trustee as such, except funds held in trust for the benefit of the
Holders of particular Notes, and the Notes are hereby subordinated to such
senior claim. If the Trustee renders services and incurs expenses following an
Event of Default under Section 5.01(g) or (h) hereof, the parties hereto and the
Holders by their acceptance of the Notes hereby agree that such expenses are
intended to constitute expenses of administration under any bankruptcy law.
Section 6.08. CONFLICTING INTERESTS.
The Trustee shall be subject to and comply with the provisions of
Section 310(b) of the Trust Indenture Act.
Section 6.09. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY.
There shall at all times be a Trustee hereunder which shall be a
corporation eligible to act as Trustee under Trust Indenture Act Sections
310(a)(1) and (2) and which shall have a combined capital and surplus of at
least $50,000,000. If such corporation publishes reports of condition at least
annually, pursuant to law or to the requirements of any Federal, state,
territorial or District of Columbia supervising or examining authority, then for
the purposes of this Section, the combined capital and surplus of such
corporation shall be deemed to be its combined capital and surplus as set forth
in its most recent report of condition so published. If at any time the Trustee
shall cease to be eligible in accordance with the provisions of this Section,
the Trustee shall resign immediately in the manner and with the effect
hereinafter specified in this Article.
Section 6.10. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR
TRUSTEE.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee under Section 6.11.
(b) The Trustee may at any time resign by giving written notice
thereof to the Issuer at least 20 Business Days prior to the date of such
proposed resignation. Upon receiving such notice of resignation, the Issuer
shall, after all monies due and owing have been paid to the Trustee, promptly
appoint a successor trustee by written instrument executed by authority of the
Board of Directors, a copy of which shall be delivered to the resigning Trustee
and a copy to the
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successor Trustee. If an instrument of acceptance by a successor Trustee
shall not have been delivered to the Trustee within 20 Business Days after
the giving of such notice of resignation, the resigning Trustee may, or any
Holder who has been a bona fide Holder of a Note for at least six consecutive
months immediately prior to such date may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for
the appointment of a successor Trustee. Such court may thereupon, after such
notice, if any, as it may deem proper, appoint a successor Trustee.
(c) The Trustee may be removed at any time by an Act of the Holders
of a majority in principal amount of the Outstanding Notes, delivered to the
Trustee and to the Issuer.
(d) If at any time:
(i) the Trustee shall fail to comply with the provisions of
Section 310(b) of the Trust Indenture Act in accordance with Section 6.08
hereof after written request therefor by the Issuer or by any Holder who
has been a bona fide Holder of a Note for at least six consecutive months
immediately prior to such date, or
(ii) the Trustee shall cease to be eligible under Section
6.09 hereof and shall fail to resign after written request therefor by the
Issuer or by any Holder who has been a bona fide Holder of a Note for at
least six consecutive months immediately prior to such date, or
(iii) the Trustee shall become incapable of acting or shall
be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its
property shall be appointed or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose or
rehabilitation, conservation or liquidation,
then, in any case, (x) the Issuer by a Board Resolution may remove the Trustee,
or (y) subject to Section 5.14, the Holder of any Note who has been a bona fide
Holder of a Note for at least six consecutive months immediately prior to such
date may, on behalf of himself and all others similarly situated, petition any
court of competent jurisdiction for the removal of the Trustee and the
appointment of a successor Trustee. Such court may thereupon, after such notice,
if any, as it may deem proper and prescribe, remove the Trustee and appoint a
successor Trustee.
(e) If the Trustee shall resign, be removed or become disqualified
from or incapable of acting, or if a vacancy shall occur in the office of
Trustee for any cause, the Issuer, by a Board Resolution, shall promptly appoint
a successor Trustee. If, within one year after such resignation, removal or
incapability, or the occurrence of such vacancy, a successor Trustee shall be
appointed by Act of the Holders of a majority in principal amount of the
Outstanding Notes
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delivered to the Issuer and the retiring Trustee, the successor Trustee so
appointed shall, forthwith upon its acceptance of such appointment, become
the successor Trustee and supersede the successor Trustee appointed by the
Issuer. If no successor Trustee shall have been so appointed by the Issuer
or the Holders of the Notes and accepted appointment in the manner
hereinafter provided, the Holder of any Note who has been a bona fide Holder
for at least six consecutive months immediately prior to such date may,
subject to Section 5.14, on behalf of himself and all others similarly
situated, petition any court of competent jurisdiction for the appointment of
a successor Trustee.
(f) The Issuer shall give notice of each resignation and each removal
of the Trustee and each appointment of a successor Trustee by mailing written
notice of such event by first-class mail, postage prepaid, to the Holders of
Notes as their names and addresses appear in the Note Register. Each notice
shall include the name of the successor Trustee and the address of its Corporate
Trust Office.
Section 6.11. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR.
Every successor Trustee appointed hereunder shall execute, acknowledge
and deliver to the Issuer and to the retiring (which term includes any Trustee
who resigns, is removed, becomes disqualified or incapable of acting or
otherwise ceases to be a Trustee hereunder) Trustee an instrument accepting such
appointment, and thereupon the resignation or removal of the retiring Trustee
shall become effective and such successor Trustee, without any further act, deed
or conveyance, shall become vested with all the rights, powers, trusts and
duties of the retiring Trustee as if originally named as Trustee hereunder; but,
nevertheless, on the written request of the Issuer or the successor Trustee,
upon payment of amounts due to it pursuant to Section 6.07, such retiring
Trustee shall duly assign, transfer and deliver to the successor Trustee all
moneys and property at the time held by it hereunder and shall execute and
deliver an instrument transferring to such successor Trustee all the rights,
powers, duties and obligations of the retiring Trustee. Upon request of any
such successor Trustee, the Issuer shall execute any and all instruments for
more fully and certainly vesting in and confirming to such successor Trustee all
such rights and powers. Any Trustee ceasing to act shall, nevertheless, retain a
prior claim upon all property or funds held or collected by such Trustee to
secure any amounts then due it pursuant to the provisions of Section 6.07.
No successor Trustee with respect to the Notes shall accept
appointment as provided in this Section 6.11 unless at the time of such
acceptance such successor Trustee shall be eligible to act as Trustee under this
Article.
Upon acceptance of appointment by any successor Trustee as provided in
this Section 6.11, the Issuer shall give notice thereof to the Holders, by
mailing a notice to such
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Holders at their addresses as they shall appear on the Note Register. If the
acceptance of appointment is substantially contemporaneous with the
resignation, removal, disqualification or incapacity to act, then the notice
called for by the preceding sentence may be combined with the notice called
for by Section 6.10 hereof. If the Issuer fails to give such notice within
10 days after acceptance of appointment by the successor Trustee, the
successor Trustee shall cause such notice to be given at the expense of the
Issuer.
Section 6.12. MERGER, CONVERSION, AMALGAMATION, CONSOLIDATION OR
SUCCESSION TO BUSINESS.
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated or amalgamated, or any corporation resulting
from any merger, conversion, amalgamation or consolidation to which the Trustee
shall be a party, or any corporation succeeding to all or substantially all of
the corporate trust business of the Trustee, shall be the successor of the
Trustee hereunder without the execution or filing of any paper or any further
act on the part of any of the parties hereto, provided such corporation shall be
eligible under this Article Six to serve as Trustee hereunder.
In case at the time such successor to the Trustee under this Section
6.12 shall succeed to the trusts created by this Indenture, any of the Notes
shall have been authenticated but not delivered by the Trustee then in office,
any such successor to the Trustee may adopt such authentication of any
predecessor Trustee and deliver such Notes so authenticated with the same effect
as if such successor Trustee had itself authenticated such Notes. In case at
that time any of the Notes shall not have been authenticated, any successor
Trustee under this Section 6.12 may authenticate such Notes either in the name
of any predecessor hereunder or in the name of the successor Trustee. In all
such cases, such certificate of authentication shall be of full force and effect
and shall be deemed to have been duly authenticated in accordance with this
Indenture.
ARTICLE 7
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND ISSUER
Section 7.01. PRESERVATION OF INFORMATION; ISSUER TO FURNISH TRUSTEE
NAMES AND ADDRESSES OF HOLDERS.
(a) The Trustee shall preserve the names and addresses of the Holders
and otherwise comply with TIA Section 312(a). If the Trustee is not the
Registrar, the Issuer shall furnish or cause the Registrar to furnish to the
Trustee before each Interest Payment Date, and at such other times as the
Trustee may request in writing, a list in such form and as of such date as
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the Trustee may reasonably require of the names and addresses of the Holders.
Neither the Issuer nor the Trustee shall be under any responsibility with
regard to the accuracy of such list.
(b) The Issuer will furnish or cause to be furnished to the Trustee
(i) semi-annually, not more than 15 days after each Regular
Record Date, a list, in such form as the Trustee may reasonably require, of
the names and addresses of the Holders as of such Regular Record Date; and
(ii) at such other times as the Trustee may reasonably
request in writing, within 30 days after receipt by the Issuer of any such
request, a list of similar form and content as of a date not more than 15
days prior to the time such list is furnished;
provided, however, that if and so long as the Trustee shall be the Registrar, no
such list need be furnished pursuant to this Subsection 7.01(b).
Section 7.02. COMMUNICATIONS OF HOLDERS.
Holders may communicate with other Holders with respect to their
rights under this Indenture or under the Notes pursuant to Section 312(b) of the
Trust Indenture Act. The Issuer and the Trustee and any and all other persons
intended to be beneficiaries of this Indenture shall have the protection
afforded by Section 312(c) of the Trust Indenture Act.
Section 7.03. REPORTS BY TRUSTEE.
Within 60 days after May 15 of each year commencing with the first May
15 following the date of this Indenture, the Trustee shall mail to all Holders,
as their names and addresses appear in the Note Register, a brief report dated
as of such May 15, in accordance with, and to the extent required under Section
313 of the Trust Indenture Act. At the time of its mailing to Holders, a copy
of each such report shall be filed by the Trustee with the Issuer, the SEC and
with each stock exchange on which the Notes are listed, if any. The Issuer shall
notify the Trustee when the Notes are listed on any stock exchange, if ever.
Section 7.04. REPORTS BY ISSUER.
The Issuer shall:
(a) file with the SEC the copies of annual reports and of the
information, documents and other reports (or copies of such portions of any of
the foregoing as the SEC may from time to time by rules and regulations
prescribe) that would be required to be filed with the
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SEC pursuant to Section 13 or Section 15 of the Exchange Act if the Issuer
had a class of securities registered under the Exchange Act, whether or not
the Issuer has a class of securities registered under the Exchange Act;
(b) file with the Trustee within 15 days after it files or would be
required to file the information specified in subsection (a) of this Section
7.04 reports and documents with the SEC copies of such information;
(c) file with the Trustee and the SEC, in accordance with rules and
regulations prescribed from time to time by the SEC, such additional
information, documents and reports with respect to compliance by the Issuer with
the conditions and covenants of this Indenture as may be required from time to
time by such rules and regulations; and
(d) transmit by mail to all Holders, as their names and addresses
appear in the Note Register, within 30 days after the filing thereof with the
Trustee, such summaries of any information, documents and reports required to be
filed by the Issuer pursuant to subsections (a) and (c) of this Section as may
be required by rules and regulations prescribed from time to time by the SEC.
Notwithstanding anything to the contrary herein, the Trustee shall
have no duty to review information provided pursuant to subsection (b) of this
Section 7.04 for purposes of determining compliance with any provisions of this
Indenture.
ARTICLE 8
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
Section 8.01. ISSUER MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS.
The Issuer will not consolidate with, or merge with or into or sell,
convey, transfer, lease or otherwise dispose of all or substantially all of its
property and assets (as an entirety or substantially an entirety in one
transaction or a series of related transactions) to any Person or permit any
Person to merge with or into the Issuer, other than in connection with the
Transaction or the Special Partnership Transactions, unless:
(a) the Issuer shall be the continuing Person, or the Person (if
other than the Issuer) formed by such consolidation or into which the Issuer is
merged or that acquired or leased such property and assets of the Issuer shall
be a corporation organized and validly existing under the laws of the United
States of America or any jurisdiction thereof, and shall expressly assume,
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by a supplemental indenture, executed and delivered to the Trustee, all of
the obligations of the Issuer on all of the Notes and under the Indenture;
(b) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing;
(c) immediately after giving effect to such transaction on a PRO
FORMA basis, the Issuer, or any Person becoming the successor obligor of the
Notes, as the case may be, could Incur at least $1.00 of Indebtedness under
clause (i) of Section 10.11(a) hereof; PROVIDED, HOWEVER, that this clause (c)
shall not apply to a consolidation or merger with or into a Wholly Owned
Restricted Subsidiary with a positive net worth, PROVIDED that in connection
with any such merger or consolidation, no consideration (except Capital Stock
(other than Redeemable Stock) in the surviving Person or the Issuer (or a Person
that owns directly or indirectly all of the Capital Stock of the surviving
Person or the Issuer immediately following such transaction) or cash paid to
satisfy dissenter or appraisal rights; PROVIDED that such rights are exercised
with respect to no more than 5% of the outstanding Capital Stock of the Issuer
or other Person) shall be issued or distributed to the stockholders of the
Issuer; and
(d) the Issuer delivers to the Trustee an Officers' Certificate
(attaching the arithmetic computations to demonstrate compliance with clause (c)
above) and an Opinion of Counsel, in each case stating that such consolidation,
merger or transfer and such supplemental indenture comply with this provision
and that all conditions precedent provided for herein relating to such
transaction have been complied with; PROVIDED, HOWEVER, that clauses (b) and (c)
above do not apply if, in the good faith determination of the Board of Directors
of the Issuer, whose determination shall be evidenced by a Board Resolution, the
principal purpose of such transaction is to change the state of incorporation of
the Issuer; and PROVIDED FURTHER that any such transaction shall not have as one
of its purposes the evasion of the foregoing limitations.
Section 8.02. SUCCESSOR SUBSTITUTED.
Upon any consolidation or merger or any sale, conveyance, lease,
transfer or other disposition of all or substantially all of the assets of the
Issuer in accordance with the foregoing in which the Issuer is not the
continuing corporation, the successor corporation formed by such a consolidation
or into which the Issuer is merged or to which such transfer is made will
succeed to, and be substituted for, and may exercise every right and power of,
the Issuer under this Indenture and the Notes with the same effect as if such
successor corporation had been named as the Issuer herein and therein; and
thereafter, except in the case of (i) any consolidation or merger with, or (ii)
any sale, conveyance, transfer, lease or other disposition to a Restricted
Subsidiary, the Issuer shall be discharged from all obligations and covenants
under this Indenture and the Notes.
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For all purposes of this Indenture and the Notes (including the
provision of this Article Eight and Section 10.11, Section 10.13 and Section
10.16), Subsidiaries of any successor entity will, upon such transaction or
series of related transactions, become Restricted Subsidiaries unless designated
an Unrestricted Subsidiary in accordance with the provisions of this Indenture
and all Indebtedness, and all Liens on property or assets, of the Issuer and the
Restricted Subsidiaries in existence immediately prior to such transaction or
series of related transactions will be deemed to have been Incurred upon such
transaction or series of related transactions.
ARTICLE 9
SUPPLEMENTAL INDENTURES AND WAIVERS
Section 9.01. SUPPLEMENTAL INDENTURES, AGREEMENTS AND WAIVERS
WITHOUT CONSENT OF HOLDERS.
Without the consent of any Holder, the Issuer, when authorized by a
Resolution of the Board of Directors, and the Trustee, at any time and from time
to time, may amend, waive, modify or supplement this Indenture, the Notes, the
Merger Agreement or the Escrow Agreement for the following specified purposes:
(a) to evidence the succession of another person to the Issuer, and
the assumption by any such successor of the covenants of the Issuer in the
Notes;
(b) to add to the covenants of the Issuer for the benefit of the
Holders, or to surrender any right or power herein conferred upon the Issuer,
herein, in the Notes;
(c) to cure any ambiguity, to correct or supplement any provision
herein, in the Notes which may be defective or inconsistent with any other
provision herein or to make any other provisions with respect to matters or
questions arising under this Indenture or the Notes; provided, however, that, in
each case, such provisions shall not materially adversely affect the legal
rights of the Holders;
(d) to comply with the requirements of the SEC in order to effect or
maintain the qualification of this Indenture under the Trust Indenture Act, as
contemplated by Section 9.05 hereof or otherwise;
(e) to mortgage, pledge, hypothecate or grant a security interest in
any property or assets in favor of the Trustee for the benefit of the Holders as
security for the payment and performance of the Indenture Obligations;
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(f) to make any other change that does not materially adversely
affect the legal rights of any Holder; or
(g) to add Guarantors with respect to the Notes;
provided, however, that the Issuer has delivered to the Trustee an Opinion of
Counsel stating that such amendment, waiver, modification or supplement does not
materially adversely affect the legal rights of any Holder.
Section 9.02. SUPPLEMENTAL INDENTURES, AGREEMENTS AND WAIVERS WITH
CONSENT OF HOLDERS.
With the written consent of the Holders of not less than a majority of
the aggregate principal amount of the Outstanding Notes delivered to the Issuer
and the Trustee, the Issuer when authorized by a Board Resolution, together with
the Trustee, may amend, waive, modify or supplement any other provision of this
Indenture, the Notes, the Merger Agreement or the Escrow Agreement; PROVIDED,
HOWEVER, that no such amendment, waiver, modification or supplement may, without
the written consent of the Holder of each Outstanding Note affected thereby:
(a) change the Stated Maturity of the principal of, or any
installment of interest on, any Note,
(b) reduce the principal of, or premium, if any, or interest on, any
Note,
(c) change the place or currency of payment of principal of, or
premium, if any, or interest on, any Note,
(d) impair the right to institute suit for the enforcement of any
payment on or after the Stated Maturity (or, in the case of a redemption, on or
after the Redemption Date) of any Note,
(e) reduce the above-stated percentage of outstanding Notes the
consent of whose Holders is necessary to modify or amend this Indenture,
(f) waive a default in the payment of principal of, premium, if any,
or interest on the Notes,
(g) reduce the percentage or aggregate principal amount of
outstanding Notes the consent of whose Holders is necessary for waiver of
compliance with certain provisions of this Indenture or for waiver of certain
defaults,
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(h) release any lien created by the Escrow Agreement, except in
accordance with the terms thereof, or
(i) amend, change or otherwise modify the obligation of the Issuer to
make and consummate the Special Offer to Purchase contemplated by Section 10.21
hereof.
Upon the written request of the Issuer accompanied by a copy of a Board
Resolution of the Board of Directors authorizing the execution of any such
supplemental indenture or other instrument effecting an amendment, waiver,
modification or supplement authorized by this Section 9.02, and an Officers'
Certificate and an Opinion of Counsel upon which the Trustee shall be fully
protected in relying as conclusive evidence that such amendment, waiver,
modification or supplement is permitted by this Indenture and upon the filing
with the Trustee of evidence of the consent of Holders as aforesaid, the Trustee
shall join with the Issuer in the execution of such supplemental indenture or
other instrument.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture or other
instrument or amendment, modification, waiver or supplement, but it shall be
sufficient if such Act shall approve the substance thereof.
Section 9.03. EXECUTION OF SUPPLEMENTAL INDENTURES, AGREEMENTS AND
WAIVERS.
In executing, or accepting the additional trusts created by, any
supplemental indenture, instrument or amendment, modification, waiver or
supplement permitted by this Article Nine or the modifications thereby of the
trusts created by this Indenture, the Trustee shall be entitled to receive, and
shall be fully protected in relying upon, an Opinion of Counsel and an Officers'
Certificate from each obligor under the Notes entering into such supplemental
indenture, instrument or amendment, modification, waiver or supplement, each
stating that the execution of such supplemental indenture, instrument or
amendment, modification, waiver or supplement (a) is authorized or permitted by
this Indenture and (b) does not violate the provisions of any agreement or
instrument evidencing any other Indebtedness of the Issuer or any other
Subsidiary of the Issuer. The Trustee may, but shall not be obligated to, enter
into any such supplemental indenture, instrument or amendment modification,
waiver or supplement which affects the Trustee's own rights, duties or
immunities under this Indenture, the Notes, the Escrow Agreement or otherwise.
Section 9.04. EFFECT OF SUPPLEMENTAL INDENTURES.
Upon the execution of any supplemental indenture, instrument or
amendment, modification, waiver or supplement under this Article Nine, this
Indenture, the Notes and/or the
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Escrow Agreement, if applicable, shall be modified in accordance therewith,
and such supplemental indenture, instrument, amendment, waiver or supplement
shall form a part of this Indenture, the Notes, the Merger Agreement and/or
the Escrow Agreement, if applicable, as the case may be, for all purposes;
and every Holder of Notes theretofore or thereafter authenticated and
delivered hereunder shall be bound thereby.
Section 9.05. CONFORMITY WITH TRUST INDENTURE ACT.
Every supplemental indenture executed pursuant to this Article Nine
shall conform to the requirements of the Trust Indenture Act as then in effect.
Section 9.06. REFERENCE IN NOTES TO SUPPLEMENTAL INDENTURES.
Notes authenticated and delivered after the execution of any
supplemental indenture, instrument, amendment, modification, waiver or
supplement pursuant to this Article may, and shall if required by the Trustee,
bear a notation in form approved by the Trustee as to any matter provided for in
such supplemental indenture, instrument, amendment, modification, waiver or
supplement. If the Issuer shall so determine, new Notes so modified as to
conform, in the opinion of the Trustee and the Board of Directors, to any such
supplemental indenture, instrument, amendment, modification, waiver or
supplement may be prepared and executed by the Issuer and authenticated and
delivered by the Trustee upon an Issuer Order in exchange for Outstanding Notes.
Section 9.07. RECORD DATE.
The Issuer may, but shall not be obligated to, fix, a record date for
the purpose of determining the Holders entitled to consent to any supplemental
indenture, instrument, amendment, modification, waiver or supplement, and shall
promptly notify the Trustee of any such record date. If a record date is fixed
those Persons who were Holders at such record date (or their duly designated
proxies), and only those Persons, shall be entitled to consent to such
supplemental indenture, instrument, amendment, modification, waiver or
supplement or to revoke any consent previously given, whether or not such
persons continue to be Holders after such record date. No such consent shall be
valid or effective for more than 90 days after such record date.
Section 9.08. REVOCATION AND EFFECT OF CONSENTS.
Until a supplemental indenture, instrument, amendment, modification,
waiver or supplement becomes effective, a consent to it by a Holder of a Note is
a continuing consent by the Holder and every subsequent Holder of a Note or
portion of a Note that evidences the same
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debt as the consenting Holder's Note, even if a notation of the consent is
not made on any Note. However, any such Holder, or subsequent Holder, may
revoke the consent as to his Note or portion of a Note if the Trustee
receives the notice of revocation before the date a supplement indenture
becomes effective. A supplemental Indenture, instrument, amendment,
modification, waiver or supplement shall become effective in accordance with
its terms and thereafter bind every Holder.
ARTICLE 10
COVENANTS
Section 10.01. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST.
The Issuer shall duly and punctually pay the principal of, premium, if
any, and interest on the Notes in accordance with the terms of the Notes and
this Indenture.
Section 10.02. MAINTENANCE OF OFFICE OR AGENCY.
The Issuer shall maintain in the Borough of Manhattan in The City of
New York, State of New York, an office or agency where Notes may be presented or
surrendered for payment, where Notes may be surrendered for registration of
transfer or exchange and where notices and demands to or upon the Issuer in
respect of the Notes and this Indenture may be served. The Depository Trust
Company, 55 Water Street, New York, New York 10041, Transfer Agent Drop, 1st
Floor, Attention: Vinnie Brown will be such office or agency of the Issuer,
unless the Issuer shall designate and maintain some other office or agency for
one or more of such purposes. The Issuer will give prompt written notice to the
Trustee of any change in the location of any such office or agency. If at any
time the Issuer shall fail to maintain any such required office or agency or
shall fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the Corporate Trust
Office of the Trustee, and the Issuer hereby appoints the Trustee as its agent
to receive all such presentations, surrenders, notices and demands.
The Issuer may also from time to time designate one or more other
offices or agencies (in or outside of The City of New York, State of New York)
where the Notes may be presented or surrendered for any or all such purposes and
may from time to time rescind such designation; provided, however, that no such
designation or rescission shall in any manner relieve the Issuer of its
obligation to maintain an office or agency in The City of New York, State of New
York for such purposes. The Issuer will give prompt written notice to the
Trustee of any such designation or rescission and any change in the location of
any such other office or agency.
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Section 10.03. MONEY FOR NOTE PAYMENTS TO BE HELD IN TRUST.
If the Issuer shall at any time act as its own Paying Agent, it will,
on or before each due date of the principal of, premium, if any, or interest on
any of the Notes, segregate and hold in trust for the benefit of the Trustee or
the Holders entitled thereto a sum sufficient to pay the principal, premium, if
any, or interest so becoming due until such sums shall be paid to such persons
or otherwise disposed of as herein provided and will promptly notify the Trustee
of its action or failure so to act and of any Default by the Issuer (or any
other obligor upon the Notes) in the making of any payment of principal,
premium, if any, or interest on the Notes.
If the Issuer is not acting as Paying Agent, the Issuer will, on or
before each due date of the principal of, premium, if any, or interest on, any
Notes, deposit with a Paying Agent a sum in same day funds sufficient to pay the
principal, premium, if any, or interest so becoming due, such sum to be held in
trust for the benefit of the Holders entitled to such principal, premium or
interest, and (unless such Paying Agent is the Trustee) the Issuer will promptly
notify the Trustee of such action or any failure so to act.
If the Issuer is not acting as Paying Agent, the Issuer will cause
each Paying Agent other than the Trustee to execute and deliver to the Trustee
an instrument in which such Paying Agent will agree with the Trustee, subject to
the provisions of this Section 10.03, that such Paying Agent will:
(a) hold all sums held by it for the payment of the principal of,
premium, if any, or interest on Notes in trust for the benefit of the Holders
entitled thereto until such sums shall be paid to such Holders or otherwise
disposed of as herein provided;
(b) give the Trustee notice of any Default by the Issuer (or any
other obligor upon the Notes) in the making of any payment of principal of,
premium, if any, or interest on the Notes;
(c) at any time during the continuance of any such Default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so held in
trust by such Paying Agent; and
(d) acknowledge, accept and agree to comply in all aspects with the
provisions of this Indenture relating to the duties, rights and liabilities of
such Paying Agent.
The Issuer may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Issuer Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Issuer or such Paying Agent, such sums
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to be held by the Trustee upon the same trusts as those upon which such sums
were held by the Issuer or such Paying Agent; and, upon such payment by any
Paying Agent to the Trustee, such Paying Agent will be released from all
further liability with respect to such money.
Any money deposited with the Trustee or any Paying Agent, or then held
by the Issuer, in trust for the payment of the principal of, premium, if any, or
interest on any Note and remaining unclaimed for two years after such principal,
premium, if any, or interest has become due and payable shall be paid to the
Issuer upon receipt of an Issuer Request therefor or (if then held by the
Issuer) will be discharged from such trust; and the Holder of such Note will
thereafter, as an unsecured general creditor, look only to the Issuer for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Issuer as trustee thereof,
will thereupon cease; provided, however, that the Trustee or such Paying Agent,
before being required to make any such repayment, may at the expense of the
Issuer cause to be published once, at the option of the Issuer in the New York
Times or the Wall Street Journal (national edition), notice that such money
remains unclaimed and that, after a date specified therein, which shall not be
less than 30 days from the date of such publication, any unclaimed balance of
such money then remaining shall be repaid to the Issuer.
Section 10.04. CORPORATE EXISTENCE.
Subject to Article Eight, the Issuer shall do or cause to be done all
things necessary to preserve and keep in full force and effect the corporate or
partnership existence, rights (charter and statutory), licenses and franchises
of the Issuer and each of the Restricted Subsidiaries; provided, however, that
the Issuer will not be required to preserve any such right, license or franchise
if the Board of Directors shall determine that the preservation thereof is no
longer desirable in the conduct of the business of the Issuer and the Restricted
Subsidiaries as a whole and that the loss thereof is not adverse in any material
respect to the Holders; provided, further, that the foregoing will not prohibit
a sale, transfer or conveyance of a Subsidiary of the Issuer or any of its
assets in compliance with the terms of this Indenture.
Section 10.05. PAYMENT OF TAXES AND OTHER CLAIMS.
The Issuer shall pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (a) all material taxes, assessments and
governmental charges levied or imposed (i) upon the Issuer or any of its
Restricted Subsidiaries or (ii) upon the income, profits or property of the
Issuer or any of the Restricted Subsidiaries and (b) all material lawful claims
for labor, materials and supplies, which, if unpaid, could reasonably be
expected to become a Lien upon the property of the Issuer or any of the
Restricted Subsidiaries; provided, however, that the Issuer will not be required
to pay or discharge or cause to be paid or discharged any such tax, assessment,
charge or claim (x) whose amount, applicability or validity is being
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contested in good faith by appropriate proceedings properly instituted and
diligently conducted or (y) if the failure to so pay, discharge or cause to
be paid or discharged could not reasonably be expected to have a Material
Adverse Effect (as defined in the Purchase Agreement).
Section 10.06. MAINTENANCE OF PROPERTIES.
The Issuer shall cause all material properties owned by the Issuer or
any of the Restricted Subsidiaries or used or held for use in the conduct of
their respective businesses to be maintained and kept in good condition, repair
and working order and supplied with all necessary equipment and will cause to be
made all necessary repairs, renewals, replacements, betterments and improvements
thereof, all as in the judgment of the Issuer may be necessary so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times; provided, however, that nothing in this Section 10.06
will prevent the Issuer from discontinuing the maintenance of any of such
properties if such discontinuance is, in the judgment of the Issuer, desirable
in the conduct of its business or the business of any of the Restricted
Subsidiaries and is not disadvantageous in any material respect to the Holders.
Section 10.07. INSURANCE.
The Issuer shall at all times keep all of its and the Restricted
Subsidiaries' properties which are of an insurable nature insured with insurers,
believed by the Issuer in good faith to be financially sound and responsible,
against loss or damage to the extent that property of similar character is
usually and customarily so insured by corporations and partnerships similarly
situated and owning like properties.
Section 10.08. BOOKS AND RECORDS.
The Issuer shall keep proper books of record and account, in which
full and correct entries will be made of all financial transactions and the
assets and business of the Issuer and each Restricted Subsidiary (including
Acquired Indebtedness) in material compliance with GAAP.
Section 10.09. COMPLIANCE CERTIFICATES AND OPINIONS.
Upon any application or request by the Issuer to the Trustee to take
any action under any provision of this Indenture and, in any event on at least
an annual basis, the Issuer will furnish to the Trustee an Officers' Certificate
stating that all conditions precedent, if any, provided for in this Indenture
(including any covenants compliance with which constitutes a condition
precedent) relating to the proposed action have been complied with and an
Opinion of Counsel stating that in the opinion of such counsel all such
conditions precedent, if any, have been complied with, except that, in the case
of any such application or request as to which the
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furnishing of such documents, certificates and/or opinions is specifically
required by any provision of this Indenture relating to such particular
application or request, no additional certificate or opinion need be
furnished.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture will include:
(i) a statement that each individual signing such
certificate or opinion has read such covenant or condition and the
definitions herein relating thereto;
(ii) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(iii) a statement that, in the opinion of each such
individual, he has made such examination or investigation as is necessary
to enable him to express an informed opinion as to whether such covenant or
condition has been complied with; and
(iv) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
Section 10.10. REPURCHASE OF NOTES UPON A CHANGE OF CONTROL.
The Issuer shall commence, within 30 days after the occurrence of a
Change of Control, an Offer to Purchase for all Notes then Outstanding in whole
or in part in integral multiples of $1,000, at a purchase price equal to 101% of
the principal amount thereof, plus accrued and unpaid interest to the Payment
Date.
Section 10.11. LIMITATION ON INDEBTEDNESS.
(a) The Issuer will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (including Acquired Indebtedness) other
than Permitted Indebtedness; provided that the Issuer may Incur Indebtedness, in
addition to Permitted Indebtedness, if, after giving effect to the Incurrence of
such Indebtedness and the receipt and application of the proceeds thereof, (i)
the Consolidated Leverage Ratio would be less than or equal to 7.0 to 1, for
Indebtedness Incurred on or prior to June 30, 2000, or less than or equal to 5.0
to 1, for Indebtedness Incurred thereafter and (ii) no Default or Event of
Default shall have occurred and be continuing or occur as a consequence of the
actions set forth in this Section 10.11.
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(b) Notwithstanding any other provision of this Section 10.11, the
maximum amount of Indebtedness that the Issuer or a Restricted Subsidiary may
Incur pursuant to this Section 10.11 shall not be deemed to be exceeded due
solely to the result of fluctuations in the exchange rates of currencies.
(c) For purposes of determining any particular amount of
Indebtedness under this Section 10.11, (i) Guarantees, Liens or obligations with
respect to letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included and (ii) any Liens
granted pursuant to the equal and ratable provisions referred to in Section
10.16 shall not be treated as Indebtedness. For purposes of determining
compliance with this Section 10.11, in the event that an item of Indebtedness
meets the criteria of more than one of the types of Indebtedness described in
the definition of "Indebtedness", the Issuer, in its sole discretion, shall
classify such item of Indebtedness and only be required to include the amount
and type of such Indebtedness in one of such clauses.
Section 10.12. STATEMENT BY OFFICERS AS TO DEFAULT.
The Issuer will deliver to the Trustee, within 90 days after the end
of each fiscal year of the Issuer ending after the date hereof, a written
statement signed by the chairman or a chief executive officer, the principal
financial officer or principal accounting officer of the Issuer (or its general
partner), stating (i) that a review of the activities of the Issuer and its
Restricted Subsidiaries during the preceding fiscal year has been made under the
supervision of the signing officers with a view to determining whether the
Issuer has kept, observed, performed and fulfilled its obligations under this
Indenture, and (ii) that, to the knowledge of each officer signing such
certificate, the Issuer has kept, observed, performed and fulfilled each and
every covenant and condition contained in this Indenture and is not in Default
in the performance or observance of any of the terms, provisions, conditions and
covenants hereof (or, if a Default shall have occurred, describing all such
Defaults of which such officers may have knowledge, their status and what action
the Issuer is taking or proposes to take with respect thereto). When any Default
under this Indenture has occurred and is continuing, or if the Trustee or any
Holder or the trustee for or the holder of any other evidence of Indebtedness of
the Issuer or any Restricted Subsidiary gives any notice or takes any other
action with respect to a claimed Default (other than with respect to
Indebtedness (other than Indebtedness evidenced by the Notes) in the principal
amount of less than $7.5 million), the Issuer will promptly notify the Trustee
of such Default, notice or action and will deliver to the Trustee by registered
or certified mail or by telegram, or facsimile transmission followed by hard
copy by registered or certified mail an Officers' Certificate specifying such
event, notice or other action within five Business Days after the Issuer becomes
aware of such occurrence and what action the Issuer is taking or proposes to
take with respect thereto.
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Section 10.13. LIMITATION ON RESTRICTED PAYMENTS.
(a) The Issuer will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, make any Restricted Payment if, at the
time of, and after giving effect to, the proposed Restricted Payment: (i) a
Default or Event of Default shall have occurred and be continuing, (ii) the
Issuer could not Incur at least $1.00 of Indebtedness under Section 10.11(a)(i)
or (iii) the aggregate amount of all Restricted Payments (the amount, if other
than in cash, to be determined in good faith by the Board of Directors of the
Issuer, whose determination shall be conclusive and evidenced by a Board
Resolution) made after the Closing Date shall exceed the sum of:
(1) 50% of the aggregate amount of the Adjusted
Consolidated Net Income (or, if the Adjusted Consolidated Net Income is a
loss, minus 100% of the amount of such loss) accrued on a cumulative basis
during the period (taken as one accounting period) beginning on the first
day of the fiscal quarter commencing immediately following the Closing Date
and ending on the last day of the last fiscal quarter preceding the
Calculation Date for which reports have been filed with the Commission or
provided to the Trustee pursuant to Section 10.22, plus
(2) the aggregate Net Cash Proceeds received by the Issuer
after the Closing Date (and, in event the Transaction is consummated, the
aggregate Net Cash Proceeds received by Telecommunications, the Partnership
or IWL during the Transition Period), from a capital contribution from, or
the issuance and sale permitted by this Indenture to, a Person who is not a
Subsidiary of the Issuer (or Telecommunications, the Partnership or IWL, if
applicable) of (a) its Capital Stock (other than Redeemable Stock), (b) any
options, warrants or other rights to acquire its Capital Stock (in each
case, exclusive of any Redeemable Stock or any options, warrants or other
rights that are redeemable at the option of the holder, or are required to
be redeemed, prior to the Stated Maturity of the Notes) and (c)
Indebtedness of the Issuer (and Telecommunications, the Partnership or IWL
during the Transition Period) or a Restricted Subsidiary that has been
exchanged for or converted into Capital Stock of the Issuer (or
Telecommunications, the Partnership or IWL, if applicable) (other than
Redeemable Stock) or such options, warrants or other rights, in each case
except to the extent such Net Cash Proceeds are used to Incur Indebtedness
permitted under clause (viii) of the definition of "Permitted
Indebtedness," plus
(3) an amount equal to the net reduction in Investments
(other than reductions in Permitted Investments and reductions in
Investments made pursuant to clause (vi) of subsection (b) of this Section
10.13) in any Person resulting from payments of interest on Indebtedness,
dividends, repayments of loans or advances, or other transfers
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of assets, in each case to the Issuer (or Telecommunications, the
Partnership or IWL during the Transition Period) or any Restricted
Subsidiary or from the Net Cash Proceeds from the sale of any such
Investment (except, in each case, to the extent any such payment or
proceeds is included in the calculation of Adjusted Consolidated Net
Income), or from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in the
definition of "Investments"), not to exceed, in each case, the amount of
Investments previously made by the Issuer (or Telecommunications, the
Partnership or IWL, if applicable) or any Restricted Subsidiary in such
Person or Unrestricted Subsidiary.
(b) The foregoing provision shall not be violated by reason of:
(i) the payment of any dividend within 60 days after the
date of declaration thereof if, at such date of declaration, such payment
would comply with the foregoing paragraph;
(ii) the purchase, redemption, defeasance or other
acquisition or retirement for value of Indebtedness that is subordinated in
right of payment to the Notes, including premium, if any, and accrued and
unpaid interest thereon to the date of payment, with the proceeds of, or in
exchange for, Indebtedness Incurred under clause (iii) of the definition of
"Permitted Indebtedness";
(iii) the purchase, redemption or other acquisition or
retirement for value of Capital Stock of the Issuer (or options, warrants
or other rights to acquire such Capital Stock) in exchange for, or out of
the proceeds of a substantially concurrent offering to a Person who is not
a Subsidiary of the Issuer of, shares of Capital Stock (other than
Redeemable Stock) of the Issuer (or options, warrants or other rights to
acquire such Capital Stock (exclusive of any options, warrants or other
rights that are redeemable at the option of the holder, or are required to
be redeemed, prior to the Stated Maturity of the Notes)) including in
connection with a "cashless" exercise of an option, warrant or right;
(iv) the making of any principal payment or the purchase,
redemption, retirement, defeasance or other acquisition for value of
Indebtedness of the Issuer which is subordinated in right of payment to the
Notes, including premium, if any, and accrued and unpaid interest thereon
to the date of payment, in exchange for, or out of the proceeds of, a
substantially concurrent offering to a Person who is not a Subsidiary of
the Issuer of, shares of the Capital Stock (other than Redeemable Stock) of
the Issuer (or options, warrants or other rights to acquire such Capital
Stock (exclusive of any options, warrants or other rights that are
redeemable at the option of the holder, or are required to be redeemed,
prior to the Stated Maturity of the Notes));
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(v) payments or distributions to dissenting stockholders
pursuant to applicable law in connection with the Transaction or the
Special Partnership Transaction or any consolidation, merger or transfer of
assets that complies with the provisions of this Indenture applicable to
mergers, consolidations and transfers of all or substantially all of the
property and assets of the Issuer;
(vi) Investments in any Person that is in the
Telecommunications Business on the date of such Investments; PROVIDED that
the aggregate amount of Investments made pursuant to this clause (vi) does
not exceed the sum of (x) $50 million plus (y) the amount of Net Cash
Proceeds received by the Issuer after the Closing Date (and, in the event
the Transaction is consummated, the aggregate Net Cash Proceeds received by
Telecommunications, the Partnership or IWL during the Transition Period)as
a capital contribution or from the sale of Capital Stock (other than
Redeemable Stock) of the Issuer (or options, warrants or other rights to
acquire such Capital Stock (exclusive of any options, warrants or other
rights that are redeemable at the option of the holder, or are required to
be redeemed, prior to the Stated Maturity of the Notes)) to a Person who is
not a Subsidiary of the Issuer (or Telecommunications, the Partnership or
IWL, if applicable), except to the extent such Net Cash Proceeds are used
to Incur Indebtedness pursuant to clause (viii) under the definition of
"Permitted Indebtedness" or to make Restricted Payments pursuant to
subsection (a)(iii)(2) of this Section 10.13, or clauses (iii) or (iv) of
Section 10.13(b), plus (z) the net reduction in Investments made pursuant
to this clause (vi) resulting from distributions on or repayments of such
Investments or from the Net Cash Proceeds from the sale of any such
Investment (except in each case to the extent any such payment or proceeds
is included in the calculation of Adjusted Consolidated Net Income) or from
such Person becoming a Restricted Subsidiary (valued in each case as
provided in the definition of "Investments"); PROVIDED that the net
reduction in any Investment shall not exceed the amount of such Investment;
(vii) the purchase, redemption or other retirement or
acquisition for value of shares of Capital Stock of the Issuer to the
extent necessary, in the judgment of the Board of Directors of the Issuer,
to prevent the loss or secure the renewal or reinstatement of any license
or franchise held by the Issuer or any Restricted Subsidiary from any
governmental agency;
(viii) the purchase, redemption or other retirement or
acquisition for value of shares of Capital Stock of the Issuer, or options,
warrants or other rights to purchase such shares, held by directors,
employees, or former directors or employees of the Issuer or any Restricted
Subsidiary (or their estates or beneficiaries under their estates) upon
their death, disability, retirement or termination of employment or
pursuant to the terms of any agreement under which such shares of Capital
Stock or options were issued;
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PROVIDED that the aggregate consideration paid for such purchase,
redemption or other retirement or acquisition for value of such shares
of Capital Stock or options, warrants or rights after the Closing Date
does not exceed $2 million in any calendar year, or $5 million in the
aggregate;
(ix) Investments acquired (x) as a capital contribution to
the Issuer or a Restricted Subsidiary or (y) in exchange for Capital Stock
(other than Redeemable Stock) of the Issuer (or options, warrants or other
rights to acquire such Capital Stock (exclusive of any options, warrants or
other rights that are redeemable at the option of the holder, or are
required to be redeemed, prior to the Stated Maturity of the Notes)) so
long as immediately after giving effect to such transaction described in
clause (y) above no Default or Event of Default shall have occurred and be
continuing;
(x) the purchase, redemption, defeasance or other
acquisition or retirement for value of Indebtedness of the Issuer which is
subordinated in right of payment to the Notes, including premium, if any,
and accrued and unpaid interest thereon to the date of payment, at a price
not greater than 101% of the principal amount thereof plus any accrued and
unpaid interest thereon to the date of repayment in the event of a Change
of Control in accordance with provisions similar to Section 10.10 hereof;
PROVIDED that prior to such purchase, redemption, defeasance or other
acquisition or retirement, the Issuer has made the Change of Control Offer
as provided in such covenant with respect to the Notes and has purchased
all Notes validly tendered for payment in connection with such Change of
Control Offer; or
(xi) any payment, distribution, repurchase or other
transaction that, but for this provision, would constitute a Restricted
Payment but only to the extent that the aggregate amount of such payments,
distributions, repurchases and other transactions do not exceed $10
million.
(c) The actions described in clauses (i), (v), (vi), (vii), (viii),
(x) and (xi) of subsection (b) above will be Restricted Payments that will be
permitted in accordance with the immediately preceding paragraph but will reduce
the amount that would otherwise be available for Restricted Payments under
Section 10.13(a)(iii). The actions described in clauses (ii), (iii), (iv) and
(ix) of subsection (b) above will be Restricted Payments that will be permitted
in accordance with the immediately preceding paragraph and will not reduce the
amount that would otherwise be available for Restricted Payments under Section
10.13(a)(iii).
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Section 10.14. LIMITATION ON TRANSACTIONS WITH STOCKHOLDERS AND
AFFILIATES.
The Issuer will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock, of the Issuer or with any
Affiliate of the Issuer or any Restricted Subsidiary except (a) in writing
(other than the payment of salaries and bonuses to officers of the Issuer or any
Restricted Subsidiary in the ordinary course of business which need not be in
writing) upon fair and reasonable terms no less favorable in any material
respect to the Issuer or such Restricted Subsidiary than could be obtained, at
the time of the execution of the agreement providing therefor, in a comparable
arm's-length transaction with a Person that is not such a holder or an
Affiliate, (b) with respect to any transaction or series of related transactions
involving an aggregate value in excess of $5 million, if the Issuer delivers an
Officers' Certificate to the Trustee certifying that such transaction or series
of related transactions complies with clause (a) above, and (c) with respect to
any transaction or series of related transactions involving an aggregate value
in excess of $10 million, if either (1) such transaction or series of related
transactions has been approved by a majority of the Disinterested Directors of
the Issuer, or in the event there is only one Disinterested Director, by such
Disinterested Director, or (2) the Issuer delivers to the Trustee a written
opinion of an investment banking firm of national standing or other recognized
independent expert with experience appraising the terms and conditions of the
type of transaction or series of related transactions for which an opinion is
required stating that the transaction or series of related transactions is fair
to the Issuer or such Subsidiary from a financial point of view.
The foregoing limitation does not limit, and shall not apply to:
(i) any transaction solely between the Issuer and any of
its Wholly Owned Restricted Subsidiaries or solely between Wholly Owned
Restricted Subsidiaries;
(ii) the payment of reasonable and customary regular fees to
directors of the Issuer who are not employees of the Issuer;
(iii) any payments or other transactions pursuant to any
tax-sharing agreement between the Issuer and any other Person with which
the Issuer files a consolidated tax return or with which the Issuer is part
of a consolidated group for tax purposes;
(iv) any Restricted Payments not prohibited by Section 10.13
hereof;
(v) the Transaction or the Special Partnership Transaction;
or
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(vi) any transaction or agreement as described in the
Offering Memorandum and as in effect as of the date of the Offering
Memorandum
Section 10.15. LIMITATION ON ASSET SALES.
The Issuer will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sate, unless (i) the consideration received by the Issuer
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (ii) at least 75% of the consideration received
consists of cash or Temporary Cash Investments (with the amount of Indebtedness
and liabilities of the Issuer or a Restricted Subsidiary that are
unconditionally assumed by the transferee being deemed to be cash for the
purposes of this Section 10.15). In the event and to the extent that the Net
Cash Proceeds received by the Issuer or any of its Restricted Subsidiaries from
one or more Asset Sales occurring on or after the Closing Date in any period of
12 consecutive months exceed the greater of $10 million and 10% of Adjusted
Consolidated Net Tangible Assets (determined as of the date closest to the
commencement of such 12-month period for which a consolidated balance sheet of
the Issuer and its Subsidiaries has been filed with the Commission or provided
to the Trustee pursuant to Section 10.22 hereof (or, if such determination date
is prior to the date of the consummation of the Transaction or Special
Partnership Transaction, then the balance sheet of the Issuer as of such date
shall be adjusted to give PRO FORMA effect to the Transaction or Special
Partnership Transaction, as the case may be, as if such transaction had occurred
on such determination date, together with an Officers' Certificate certifying
that such balance sheet has been prepared in accordance with GAAP and is true
and correct in all material respects), then the Issuer shall or shall cause the
relevant Restricted Subsidiary to (i) within 12 months after the date Net Cash
Proceeds so received exceed the greater of $10 million and 10% of Adjusted
Consolidated Net Tangible Assets (A) apply an amount equal to such excess Net
Cash Proceeds to permanently repay unsubordinated Indebtedness of the Issuer or
any Restricted Subsidiary providing a Subsidiary Guarantee pursuant to Section
10.23 hereof or Indebtedness of any other Restricted Subsidiary, in each case
owing to a Person other than the Issuer or any of its Subsidiaries, or (B)
invest an amount equal to such excess Net Cash Proceeds, or the amount of such
Net Cash Proceeds not so applied pursuant to clause (A) (or enter into a
definitive agreement committing to so invest within 12 months after the date of
such agreement), in Telecommunications Assets and (ii) apply (no later than the
end of the 12-month period referred to in clause (i)) such excess Net Cash
Proceeds (to the extent not applied pursuant to clause (i)) as provided in the
following paragraph of this Section 10.15. The amount of such excess Net Cash
Proceeds required to be applied (or to be committed to be applied) during such
12-month period as set forth in clause (i) of the preceding sentence and not
applied as so required by the end of such period shall constitute "Excess
Proceeds." Pending the final application of any such Net Cash Proceeds, the
Issuer or such
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Restricted Subsidiary may invest such funds in Temporary Cash Investments or
temporarily reduce revolving Indebtedness under any Credit Facility or any
Vendor Credit Facility.
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
Section 10.15 totals at least $10 million, the Issuer shall commence, not later
than the fifteenth Business Day of such month, and consummate an Offer to
Purchase from the Holders on a pro rata basis an aggregate principal amount of
Notes equal to the Excess Proceeds on such date, at a purchase price equal to
100% of the principal amount of the Notes plus, in each case, accrued interest
to the Payment Date. To the extent that the aggregate purchase price for the
Notes tendered pursuant to an Offer to Purchase is less than the Excess
Proceeds, the Issuer or any Restricted Subsidiary may use such deficiency for
general corporate purposes. Upon completion of such Offer to Purchase, the
amount of Excess Proceeds shall be reset to zero.
Section 10.16. LIMITATION ON LIENS.
The Issuer will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create, incur, assume or suffer to exist any Lien on any
of its assets or properties of any character, or any shares of Capital Stock or
Indebtedness of any Restricted Subsidiary, without making effective provision
for all of the Notes and all other amounts due under this Indenture to be
directly secured equally and ratably with (or, if the obligation or liability to
be secured by such Lien is subordinated in right of payment to the Notes, prior
to) the obligation or liability secured by such Lien. The foregoing limitation
does not apply to Permitted Liens.
Section 10.17. BUSINESS ACTIVITIES PRIOR TO THE TRANSACTION.
(a) The Company will not engage in any business or other activities
prior to the consummation of the Transaction other than activities related to
(i) the consummation of the Transaction and (ii) the offering contemplated by
the Offering Memorandum, including the execution and delivery of this Indenture,
the Notes, the Registration Rights Agreement, the Escrow Agreement and related
instruments and the performance of its obligations under such agreements and
instruments.
(b) Prior to the consummation of the Transaction or the payment of
all Notes tendered in the Special Offer to Purchase, each of Telecommunications,
the Partnership and IWL will not be permitted to, and will not permit any of
their respective Subsidiaries to, directly or indirectly:
(i) Incur any Indebtedness other than (a) Indebtedness that
constitutes Permitted Indebtedness pursuant to clause (iv) of the
definition of "Permitted
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Indebtedness" contained herein, (b) Indebtedness Incurred under one or
more Credit Facilities not to exceed, in addition to amounts outstanding
on the Closing Date, $15 million in the aggregate and (c) intercompany
Indebtedness owed by the Partnership to Telecommunications;
(ii) make any Restricted Payment outside the ordinary course
of business, other than loans by Telecommunications to the Partnership;
(iii) enter into any agreement or engage in any transaction
that would violate Sections 10.14, 10.18, 10.19 or 10.20.
(iv) create, incur, assume or suffer to exist any Lien on
its assets or properties of any character other than Liens that constitute
Permitted Liens pursuant to clauses (i) through (v), (vii) through (x),
(xii), (xiii), (xiv) through (xx), (xxii), (xxiii) or (xxiv) of the
definition of "Permitted Liens";
(v) enter into any agreement or engage in any transaction
that would constitute an Asset Sale;
(vi) merge with or into, or sell, convey, transfer, lease or
otherwise dispose of all or substantially all of its property and assets
(as an entirety in one transaction or a series of related transactions) to,
any Person, other than in connection with the Transaction or the Special
Partnership Transaction; or
(vii) amend, waive or otherwise modify the terms and
provisions of the Merger Agreement in any material respect.
(c) Approximately $145.0 million of the net proceeds from the
offering of the Notes will be deposited into the Escrow Account and held by the
Trustee for the benefit of the Holders pursuant to the terms of the Escrow
Agreement. Each of the Company, Telecommunications and the Partnership agrees
that all funds in the Escrow Account shall be invested in Temporary Cash
Investments.
(d) In the event any Notes remain outstanding after the payment of
all Notes tendered in the Special Offer to Purchase made pursuant to Section
10.21 hereof, the Partnership and Telecommunications shall effect either a
statutory merger or interest exchange within 60 days after completion of the
Special Offer to Purchase.
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Section 10.18. LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK
OF RESTRICTED SUBSIDIARIES.
The Issuer will not sell, pledge, hypothecate or otherwise convey or
dispose of any Capital Stock of a Restricted Subsidiary or permit any Restricted
Subsidiary, directly or indirectly, to issue, sell pledge, hypothecate or
otherwise convey or dispose of, any shares of Capital Stock of a Restricted
Subsidiary (including options, warrants or other rights to purchase shares of
such Capital Stock) except:
(a) to the Issuer or a Wholly Owned Restricted Subsidiary,
(b) issuances of director's qualifying shares or other issuances or
sales to the extent required by applicable law or regulation,
(c) issuances or sales of 100% of the Capital Stock of a Restricted
Subsidiary; PROVIDED that the Issuer or such Restricted Subsidiary applies the
Net Cash Proceeds, if any, of any such sale pursuant to this clause (c) in
accordance with clause (A) or (B) of the first paragraph of Section 10.15
hereof;
(d) issuances or sales in a transaction if, immediately after giving
effect thereto, such Restricted Subsidiary would no longer be a Restricted
Subsidiary if (i) such transaction does not violate Section 10.15 hereof and
(ii) any Investment in such Person remaining after giving effect to such
transaction would not violate Section 10.13 hereof if made at the date of such
issuance or sale,
(e) pursuant to a Credit Facility or a Vendor Credit Facility,
(f) issuances or sales of Redeemable Stock in exchange for, or upon
conversion of, or the proceeds from the issuance or sale of which are used to
refinance, shares of Redeemable Stock of such Restricted Subsidiary if the
amounts payable with respect to the redemption of such newly issued or sold
Redeemable Stock do not exceed the amount payable with respect to the redemption
of the Redeemable Stock being exchanged, converted or refinanced and such newly
issued or sold Redeemable Stock does not require any redemption earlier than the
date on which the Redeemable Stock being exchanged, converted or refinanced
required a redemption,
(g) issuances or sales of Redeemable Stock (other than Redeemable
Stock convertible into or exchangeable for Common Stock of any Restricted
Subsidiary) that does not otherwise violate the provisions of this Indenture, or
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(h) in the Transaction or the Special Partnership Transaction.
Section 10.19. LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS
AFFECTING RESTRICTED SUBSIDIARIES.
(a) The Issuer will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction of any kind
on the ability of any Restricted Subsidiary to (i) pay dividends, in cash or
otherwise, or make any other distributions permitted by applicable law, on any
Capital Stock or any other interest or participation in, or measured by, its
profits of such Restricted Subsidiary owned by the Issuer or any other
Restricted Subsidiary, (ii) pay any Indebtedness owed to the Issuer or any other
Restricted Subsidiary, (iii) make loans or advances to the Issuer or any other
Restricted Subsidiary or (iv) transfer any of its property or assets to the
Issuer or any other Restricted Subsidiary.
(b) The provisions of subsection (a) above shall not restrict any
encumbrances or restrictions:
(i) existing on the Closing Date in this Indenture or any
other agreements in effect on the Closing Date, and any extensions,
refinancings, renewals or replacements of such agreements; provided that
the encumbrances and restrictions in any such extensions, refinancings,
renewals or replacements are no less favorable in any material respect to
the Holders than those encumbrances or restrictions that are then in effect
and that are being extended, refinanced, renewed or replaced;
(ii) existing under or by reason of applicable law;
(iii) existing with respect to any Person or the property or
assets of such Person acquired by the Issuer or any Restricted Subsidiary
and existing at the time of such acquisition and not incurred in
contemplation thereof, which encumbrances or restrictions are not
applicable to any Person or the property or assets of any Person other than
such Person or the property or assets of such Person so acquired;
(iv) in the case of Section 10.19(a)(iv) above, (A) that
restrict in a customary manner the subletting, assignment or transfer of
any property or asset that is a lease, license, conveyance or contract or
similar property or asset, (B) existing by virtue of any transfer of,
agreement to transfer, option or right with respect to, or Lien on, any
property or assets of the Issuer or any Restricted Subsidiary not otherwise
prohibited by this Indenture or (C) arising or agreed to in the ordinary
course of business, not relating to any Indebtedness, and that do not,
individually or in the aggregate, detract from the
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value of property or assets of the Issuer or any Restricted Subsidiary
in any manner material to the Issuer or any Restricted Subsidiary;
(v) with respect to a Restricted Subsidiary and imposed
pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock of, or
property and assets of, such Restricted Subsidiary; or
(vi) pursuant to (x) a Credit Facility, (y) a Vendor Credit
Facility or (z) any agreement which amends, extends, renews, refinances,
replaces or refunds a Credit Facility or Vendor Credit Facility PROVIDED,
HOWEVER, that in the case of subclauses (x), (y) and (z), the provisions of
the Credit Facility or Vendor Credit Facility (A) permit (whether
explicitly or as a result of the relative maturities of the Credit
Facility, the Vendor Credit Facility and the Notes) distributions to the
Issuer for the purposes of, and in an amount sufficient to fund, the
payment of principal due at stated maturity and interest in respect of the
Notes (PROVIDED, in either case, that such payment is due or to become due
within 30 days from the date of such distribution) at a time when there
does not exist an event which after notice or passage of time or both would
permit the lenders under the Credit Facility or Vendor Credit Facility to
declare all amounts thereunder due and payable, and (B) provide that in no
event shall any encumbrance or restriction pursuant to the Credit Facility
or Vendor Credit Facility prohibit distributions to the Issuer for such
purposes for more than 180 days in any consecutive 360 day period, unless
(1) there exists a default under the Credit Facility or Vendor Credit
Facility resulting from any payment default under the Credit Facility or
Vendor Credit Facility or (2) the maturity of the Credit Facility or Vendor
Credit Facility has been accelerated.
(c) Nothing contained in this Section 10.19 shall prevent the Issuer
or any Restricted Subsidiary from (i) creating, incurring, assuming or suffering
to exist any Liens otherwise permitted in Section 10.16 hereof or (ii)
restricting the sale or other disposition of property or assets of the Issuer or
any of its Restricted Subsidiaries subject to such Liens.
Section 10.20. LIMITATION ON SALE-LEASEBACK TRANSACTIONS.
(a) The Issuer will not, and will not permit any Restricted
Subsidiary to, enter into any sale-leaseback transaction involving any of its
assets or properties whether now owned or hereafter acquired, whereby the Issuer
or a Restricted Subsidiary sells or transfers such assets or properties and then
or thereafter leases such assets or properties or any part thereof or any other
assets or properties which the Issuer or such Restricted Subsidiary, as the case
may be, intends to use for substantially the same purpose or purposes as the
assets or properties sold or transferred.
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(b) The foregoing restriction in subsection (a) above does not apply
to any sale-leaseback transaction if (i) the lease is for a period, including
renewal rights, of not in excess of three years; (ii) the lease secures or
relates to industrial revenue or pollution control bonds; (iii) the transaction
is solely between the Issuer and any Wholly Owned Restricted Subsidiary or
solely between Wholly Owned Restricted Subsidiaries; or (iv) the Issuer or such
Restricted Subsidiary, within 12 months after the sale or transfer of any assets
or properties is completed, applies an amount not less than the net proceeds
received from such sale in accordance with clause (A) or (B) of the first
paragraph of Section 10.15 hereof.
Section 10.21. SPECIAL OFFER TO PURCHASE.
In the event that (i) by August 31, 1998 the Trustee has not received
an Officers' Certificate from each of the Company, Telecommunications, the
Partnership and IWL and an Opinion of Counsel to the Company that (x) the
Transaction has been consummated, (y) all regulatory approvals required by the
Merger Agreement have been received and are in effect except for such approvals
the failure of which to receive or have in effect will not have a material
adverse effect on the Company's financial condition, results of operations or
cash flow and (z) consummation of the Transaction has not violated or conflicted
with or given rise to a right to terminate any agreement or instrument that
would have a material adverse effect on the Company's financial condition,
results of operations and cash flow to which the Company, IWL,
Telecommunications or the Partnership is a party (which, in the case of such
Opinion of Counsel, shall be given to the best of such counsel's knowledge) or
(ii) the Trustee receives an Officers' Certificate from each of the Company,
Telecommunications, the Partnership and IWL stating that the Transaction will
not be consummated and such conditions will not be satisfied by August 31, 1998,
the Company, Telecommunications and the Partnership shall commence, within 30
days after the occurrence of an event described in clause (i) or (ii) above, and
consummate an Offer to Purchase for all Notes, in whole or in part in whole or
in part in integral multiples of $1,000, at a purchase price equal to 101% of
the principal amount thereof, plus accrued and unpaid interest to the Payment
Date.
Section 10.22. COMMISSION REPORTS AND REPORTS TO HOLDERS.
At all times from and after the earlier of (i) the date of the
commencement of an Exchange Offer or the effectiveness of a Shelf Registration
Statement (the "Registration") and (ii) the date that is six months after the
Closing Date, in either case, whether or not the Issuer is then required to file
reports with the Commission, the Issuer shall file with the Commission all such
reports and other information as it would be required to file with the
Commission by Section 13(a) or 15(d) under the Exchange Act if it were subject
thereto. The Issuer shall supply the Trustee and each Holder or shall supply to
the Trustee for forwarding to each such Holder, without cost to such Holder,
copies of such reports and other information; PROVIDED HOWEVER, that
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the copies of such reports and information mailed to Holders need not contain
the exhibits thereto, but the Issuer agrees to furnish any such exhibits to
any Holder upon written request therefor. In addition, at all times prior to
the earlier of the date of the Registration and the date that is six months
after the Closing Date, the Issuer shall, at its cost, deliver to each Holder
of the Notes quarterly and annual reports substantially equivalent to those
which would be required by the Exchange Act; it being understood that the
financial statements included in such reports shall be prepared in accordance
with generally accepted accounting principles in effect at such time. The
financial information contained in the Offering Memorandum will be deemed to
have been delivered to the Trustee pursuant to this section. In addition, at
all times prior to the Registration, upon the request of any Holder or any
prospective purchaser of the Notes designated by a Holder, the Issuer shall
supply to such Holder or such prospective purchaser the information required
under Rule 144A under the Securities Act.
Section 10.23. LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED
SUBSIDIARIES.
The Issuer will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Issuer which is PARI PASSU in
right of payment with, or subordinate in right of payment to, the Notes
("Guaranteed Indebtedness"), unless:
(i) such Restricted Subsidiary simultaneously executes and
delivers a supplemental indenture to this Indenture providing for a
Guarantee (a "Subsidiary Guarantee") of payment of the Notes by such
Restricted Subsidiary and
(ii) such Restricted Subsidiary waives, and will not in any
manner whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the
Issuer or any other Restricted Subsidiary as a result of any payment by
such Restricted Subsidiary under its Subsidiary Guarantee;
PROVIDED that this paragraph shall not be applicable to (x) any Guarantee of any
Restricted Subsidiary that existed at the time such Person became a Restricted
Subsidiary and was not Incurred in connection with, or in contemplation of, such
Person becoming a Restricted Subsidiary or (y) any Guarantee of any Restricted
Subsidiary of Indebtedness Incurred under Credit Facilities or Vender Credit
Facilities pursuant to clause (ix) of the definition of "Permitted
Indebtedness". If the Guaranteed Indebtedness is (A) PARI PASSU in right of
payment with the Notes, then the Guarantee of such Guaranteed Indebtedness shall
be PARI PASSU in right of payment with, or subordinated in right of payment to,
the Subsidiary Guarantee or (B) subordinated in right of payment to the Notes,
then the Guarantee of such Guaranteed Indebtedness shall be subordinated in
right of payment to the Subsidiary Guarantee at least to the extent that the
Guaranteed Indebtedness is subordinated in right of payment to the Notes.
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Notwithstanding the foregoing, any Subsidiary Guarantee by a
Restricted Subsidiary may provide by its terms that it shall be automatically
and unconditionally released and discharged upon (i) any sale, exchange or
transfer, to any Person not an Affiliate of the Issuer, of all of the Issuer's
and each Restricted Subsidiary's Capital Stock in, or all or substantially all
the assets of, such Restricted Subsidiary (which sale, exchange or transfer is
not prohibited by this Indenture) or (ii) the release or discharge of the
Guarantee which resulted in the creation of such Subsidiary Guarantee, except a
discharge or release by or as a result of payment under such Guarantee.
ARTICLE 11
SATISFACTION AND DISCHARGE
Section 11.01. SATISFACTION AND DISCHARGE OF INDENTURE.
This Indenture shall cease to be of further effect (except as to
surviving rights or registration of transfer or exchange of Notes herein
expressly provided for) and the Trustee, on written demand of and at the expense
of the Issuer, shall execute proper instruments acknowledging satisfaction and
discharge of this Indenture, when:
(a) either (i) all Notes theretofore authenticated and delivered
(other than (x) Notes which have been destroyed, lost or stolen and which have
been replaced or paid as provided in Section 3.06 hereof and (y) Notes for whose
payment money has theretofore been irrevocably deposited or caused to be
deposited in trust or segregated and held in trust by the Issuer and thereafter
repaid to the Issuer or discharged from such trust, as provided in Section
10.03) have been delivered to the Trustee for cancellation; or (ii) all such
Notes not theretofore delivered to the Trustee for cancellation have become due
and payable and the Issuer has irrevocably deposited or caused to be deposited
with the Trustee in trust an amount of money in dollars sufficient to pay and
discharge the entire Indebtedness on such issue of Notes not theretofore
delivered to the Trustee for cancellation, for the principal of, premium, if
any, and interest to the date of such deposit or maturity date of redemption;
and
(b) the Issuer has paid or caused to be paid all other sums payable
hereunder by the Issuer (other than amounts that could become payable under
Sections 4.06 or 6.07); and
(c) the Issuer has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel each stating that all conditions precedent herein
provided for relating to the satisfaction and discharge of this Indenture have
been complied with; provided, that such Opinion of Counsel may rely, as to
matters of fact, upon an Officers' Certificate.
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Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Issuer to the Trustee under Sections 4.06 and 6.07 and, if
money shall have been deposited with the Trustee pursuant to subclause (a)(ii)
of this Section 11.01, the obligations of the Trustee under Section 11.02 and
the last paragraph of Section 10.03 shall survive.
Section 11.02. APPLICATION OF TRUST MONEY.
Subject to the provisions of the last paragraph of Section 10.03, all
money deposited with the Trustee pursuant to Section 11.01 shall be held in
trust and applied by it, in accordance with the provisions of the Notes and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Issuer acting as its own Paying Agent) as the Trustee may
determine, to the persons entitled thereto, of the principal of, premium, if
any, and interest on the Notes for whose payment such money has been deposited
with the Trustee.
ARTICLE 12
REDEMPTION
Section 12.01. RIGHT OF REDEMPTION; MANDATORY REDEMPTION. The Notes
will be redeemable, at the Issuer's option, in whole or in part, at any time or
from time to time, on or after July 15, 2003 and prior to maturity, upon not
less than 30 nor more than 60 days' prior notice mailed by first-class mail to
each Holder's last address, as it appears in the Note Register, at the following
Redemption Prices (expressed in percentages of principal amount), plus accrued
and unpaid interest to the Redemption Date (subject to the right of Holders of
record on the relevant Regular Record Date that is prior to the Redemption Date
to receive interest due on an Interest Payment Date), if redeemed during the 12
month period commencing July 15 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- -----
<S> <C>
2003 ........................ 106.000%
2004 ........................ 104.000%
2005 ........................ 102.000%
2006 and thereafter ......... 100.000%
</TABLE>
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Section 12.02. NOTICE TO THE TRUSTEE.
If the Issuer elects to redeem Notes pursuant to Paragraph 3 of the
Initial Notes or Paragraph 2 of the Exchange Notes, it shall notify the Trustee
of the Redemption Date and principal amount of Notes to be redeemed.
The Issuer shall notify the Trustee of any redemption at least 45 days
before the Redemption Date by an Officers' Certificate, stating that such
redemption will comply with the provisions hereof and of the Notes.
Section 12.03. SELECTION OF NOTES TO BE REDEEMED.
In the event that less than all of the Notes are to be redeemed at any
time, selection of such Notes for redemption will be made by the Trustee in
compliance with any applicable requirements of the principal national securities
exchange, if any, on which the Notes are listed or, if the Notes are not then
listed on a national securities exchange (or if the Notes are so listed but the
exchange does not impose requirements with respect to the selection of debt
securities for redemption), on a pro rata basis, by lot or by such method as the
Trustee in its sole discretion shall deem fair and appropriate; provided,
however, that no Notes of a principal amount of $1,000 or less shall be redeemed
in part.
The Trustee shall promptly notify the Issuer and the Registrar in
writing of the Notes selected for redemption and, in the case of any Notes
selected for partial redemption, the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to redemption of Notes shall relate, in the
case of any Note redeemed or to be redeemed only in part, to the portion of the
principal amount of such Note which has been or is to be redeemed.
Section 12.04. NOTICE OF REDEMPTION.
Notice of redemption shall be given by first-class mail, postage
prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption
Date, to each Holder of Notes to be redeemed, at the address of such Holder
appearing in the Note Register maintained by the Registrar.
All notices of redemption shall identify the Notes to be redeemed and
shall state:
(a) the Redemption Date;
-105-
<PAGE>
(b) the Redemption Price and the amount of accrued interest, if any,
to be paid;
(c) that, unless the Issuer defaults in making the redemption
payment, interest on Notes called for redemption ceases to accrue on and after
the Redemption Date, and the only remaining right of the Holders of such Notes
is to receive payment of the Redemption Price plus unpaid interest on the Notes
through the Redemption Date, upon surrender to the Paying Agent of the Notes
redeemed;
(d) if any Note is to be redeemed in part, the portion of the
principal amount at maturity (equal to $1,000 or any integral multiple thereof)
of such Note to be redeemed and that on and after the Redemption Date, upon
surrender for cancellation of such Note to the Paying Agent, a new Note or Notes
in the aggregate principal amount at maturity equal to the unredeemed portion
thereof will be issued without charge to the Holder of such Note;
(e) that Notes called for redemption must be surrendered to the
Paying Agent to collect the Redemption Price and the name and address of the
Paying Agent; and
(f) the CUSIP or CINS number, if any, relating to such Notes.
Notice of redemption of Notes to be redeemed at the election of the
Issuer shall be given by the Issuer or, at the Issuer's written request, by the
Trustee in the name and at the expense of the Issuer.
Section 12.05. EFFECT OF NOTICE OF REDEMPTION.
Once notice of redemption is mailed, Notes called for redemption
become due and payable on the Redemption Date and at the Redemption Price. Upon
surrender to the Paying Agent, such Notes called for redemption shall be paid at
the Redemption Price plus accrued interest, if any, to the Redemption Date, but
interest installments whose maturity is on or prior to such Redemption Date will
be payable on the relevant Interest Payment Dates to the Holders of record at
the close of business on the relevant Record Dates referred to in the Notes.
Section 12.06. DEPOSIT OF REDEMPTION PRICE.
On or prior to any Redemption Date, the Issuer shall deposit with the
Paying Agent an amount of money in same day funds sufficient to pay the
Redemption Price of, and any accrued interest on, all the Notes or portions
thereof which are to be redeemed on that date, other than Notes or portions
thereof called for redemption on that date which have been delivered by the
Issuer to the Trustee for cancellation.
-106-
<PAGE>
If the Issuer complies with the preceding paragraph, then, unless the
Issuer defaults in the payment of such Redemption Price, interest on the Notes
to be redeemed will cease to accrue on and after the applicable Redemption Date,
whether or not such Notes are presented for payment, and the Holders of such
Notes shall have no further rights with respect to such Notes except for the
right to receive the Redemption Price plus unpaid interest on the Notes through
the Redemption Date, upon surrender of such Notes. If any Note called for
redemption shall not be so paid upon surrender thereof for redemption, the
principal, premium, if any, and, to the extent lawful, accrued interest thereon
shall, until paid, bear interest from the Redemption Date at the rate provided
in the Notes.
Section 12.07. NOTES REDEEMED IN PART.
Upon surrender to the Paying Agent of a Note which is to be redeemed
in part, the Issuer shall execute and the Trustee shall authenticate and deliver
to the Holder of such Note without service charge, a new Note or Notes, of any
authorized denomination as requested by such Holder in aggregate principal
amount equal to, and in exchange for, the unredeemed portion of the principal of
the Note so surrendered that is not redeemed.
ARTICLE 13
LIMITED GUARANTEE
Section 13.01. LIMITED GUARANTEE OF NOTES.
Subject to the provisions of this Article Thirteen, the Limited
Guarantor hereby, on a joint and several basis with the Company,
Telecommunications and the Partnership, unconditionally guarantees to each
Holder of a Note authenticated and delivered by the Trustee and to the Trustee
and its successors and assigns, irrespective of the validity and enforceability
of this Indenture, the Notes or the obligations of the Company,
Telecommunications or the Partnership to the Holders or the Trustee, the
obligations of the Company, Telecommunications and the Partnership in connection
with the Special Offer to Purchase, if required, made in accordance with the
provisions of Section 10.21 hereof.
The Limited Guarantor hereby agrees that its obligations hereunder
shall be unconditional, irrespective of the validity, regularity or
enforceability of the Notes or this Indenture, the absence of any action to
enforce the same, any waiver or consent by any Holder with respect to any
provisions hereof or thereof, the recovery of any judgment against the Company,
Telecommunications or the Partnership, any action to enforce the same, or any
other circumstance which might otherwise constitute a legal or equitable
discharge or defense of the
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<PAGE>
Limited Guarantor except by complete performance of the obligations
guaranteed hereunder. The Limited Guarantor hereby waives the benefit of
diligence, presentment, demand of payment, filing of claims with a court in
the event of insolvency or bankruptcy of the Company, Telecommunications or
the Partnership, any right to require a proceeding first against the Company,
Telecommunications or the Partnership, protest, notice and all demands
whatsoever and covenants that the Limited Guarantee will not be discharged
except by complete performance of the obligations guaranteed hereunder. If
any Holder or the Trustee is required by any court or otherwise to return to
the Company, Telecommunications or the Partnership or to the Limited
Guarantor, or any custodian, trustee, liquidator or other similar official
acting in relation to the Company, Telecommunications or the Partnership or
the Limited Guarantor, any amount paid by the Company, Telecommunications or
the Partnership or the Limited Guarantor to the Trustee or such Holder, this
Limited Guarantee, to the extent theretofore discharged, shall be reinstated
in full force and effect.
This Limited Guarantee shall remain in full force and effect and
continue to be effective should any petition be filed by or against the Company,
Telecommunications and/or the Partnership for liquidation or reorganization,
should the Company, Telecommunications and/or the Partnership become insolvent
or make an assignment for the benefit of creditors or should a receiver or
trustee be appointed for all or any significant part of the Company's,
Telecommunications' and/or the Partnership's assets, and shall, to the fullest
extent permitted by law, continue to be effective or be reinstated, as the case
may be, if at any time payment and performance of the Notes are, pursuant to
applicable law, rescinded or reduced in amount, or must otherwise be restored or
returned by any obligee on the Notes, whether as a "voidable preference,"
"fraudulent transfer" or otherwise, all as though such payment or performance
had not been made. In the event that any payment, or any part thereof, is
rescinded, reduced, restored or returned, the Limited Guarantee shall, to the
fullest extent permitted by law, be reinstated and deemed reduced only by such
amount paid and not so rescinded, reduced, restored or returned.
The Limited Guarantor, and by its acceptance hereof each Holder,
hereby confirms that it is the intention of all such parties that the guarantee
by the Limited Guarantor pursuant to this Article Thirteen not constitute a
fraudulent transfer or conveyance for purposes of the Bankruptcy Law, the
Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any
similar Federal or state law. To effectuate the foregoing intention, the
Holders and the Limited Guarantor hereby irrevocably agree that the obligations
of the Limited Guarantor hereunder shall be limited to the maximum amount as
will, after giving effect to all other contingent and fixed liabilities of the
Limited Guarantor, result in the obligations of the Limited Guarantor hereunder
not constituting such fraudulent transfer or conveyance.
-108-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed as of the day and year first written above.
ISSUER:
CAPROCK COMMUNICATIONS CORP.
By: /s/ Ignatius W. Leonards
-----------------------------------------
Name: Ignatius W. Leonards
Title: President
CAPROCK TELECOMMUNICATIONS CORP.
By: /s/ Timothy M. Terrell
-----------------------------------------
Name: Timothy M. Terrell
Title: Executive Vice President
CAPROCK FIBER NETWORK, LTD.
By: CapRock Systems, Inc., its General Partner
By: /s/ Jere W. Thompson, Jr.
-----------------------------------------
Name: Jere W. Thompson, Jr.
Title: President
LIMITED GUARANTOR:
IWL COMMUNICATIONS, INCORPORATED
(executing for the limited purposes set forth
in Article Thirteen)
By: /s/ Ignatius W. Leonards
-----------------------------------------
Name: Ignatius W. Leonards
Title: Chief Executive Officer
-109-
<PAGE>
TRUSTEE:
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Stephen R. Schaaf
-----------------------------------------
Name: Stephen R. Schaaf
Title: Vice President
-110-
<PAGE>
EXHIBIT A-1
FORM OF NOTE
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN
MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1)REPRESENTS THAT (A)
IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN
AN "OFFSHORE TRANSACTION" PURSUANT TO RULE 904 OF REGULATION S, (2) AGREES THAT
IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS (OR SUCH SHORTER PERIOD OF
TIME AS PERMITTED BY RULE 144(k) UNDER THE SECURITIES ACT OR ANY SUCCESSOR
PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF
ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DATE ON WHICH THE ISSUER OR ANY
AFFILIATE OF THE ISSUER WAS THE OWNER OF THIS SECURITY AND (Y) SUCH LATER DATE,
IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE RESTRICTION
TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A)
TO THE ISSUER, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED
EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE
ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS
A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES
ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN
RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT
OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE
SECURITIES ACT, OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE
TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO
THE EFFECT OF THIS LEGEND; PROVIDED THAT THE ISSUER AND THE TRUSTEE, SHALL HAVE
THE RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (I) PURSUANT TO CLAUSE (D)
OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR
<PAGE>
OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (II) IN EACH OF THE
FOREGOING CASES, TO REQUIRE THAT A CERTIFICATION OF TRANSFER IN THE FORM
APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE
TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE
HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS
"OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE
MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
<PAGE>
CAPROCK COMMUNICATIONS CORP.
CAPROCK TELECOMMUNICATIONS CORP.
CAPROCK FIBER NETWORK, LTD.
12% SENIOR NOTES DUE 2008, SERIES A
CUSIP No.
No. 140667 AA 4 $
CAPROCK COMMUNICATIONS CORP., a corporation incorporated under the
laws of the State of Texas ("Communications" or the "Company"), CAPROCK
TELECOMMUNICATIONS CORP., a corporation incorporated under the laws of the State
of Texas ("Telecommunications"), and CAPROCK FIBER NETWORK, LTD., a limited
partnership organized under the laws of the State of Texas (the "Partnership";
together with Communications and Telecommunications, the "Issuer," which term
includes any successor Person under the Indenture hereinafter referred to), for
value received, hereby, jointly and severally, promise to pay to _______________
or registered assigns, the principal sum of _______________ Dollars on July 15,
2008, at the office or agency of the Issuer referred to below, and to pay
interest thereon on January 15 and July 15 (each an "Interest Payment Date"), of
each year, commencing on January 15, 1999, accruing from July 16, 1998 or from
the most recent Interest Payment Date to which interest has been paid or duly
provided for, at the rate of 12% per annum, until the principal hereof is paid
or duly provided for. Interest shall be computed on the basis of a 360-day year
of twelve 30-day months.
The interest so payable, and punctually paid or duly provided for, on
any Interest Payment Date will, as provided in the Indenture referred to on the
reverse hereof, be paid to the person in whose name this Note (or one or more
predecessor Notes) is registered at the close of business on the January 1 and
July 1 (each a "Regular Record Date"), whether or not a Business Day, as the
case may be, next preceding such Interest Payment Date. Any such interest not so
punctually paid, or duly provided for, and interest on such defaulted interest
at the then applicable interest rate borne by the Notes, to the extent lawful,
shall forthwith cease to be payable to the Holder on such Regular Record Date
and may be paid to the Person in whose name this Note (or one or more
predecessor Notes) is registered at the close of business on a Special Record
Date for the payment of such defaulted interest to be fixed by the Trustee,
notice of which shall be given to Holders of Notes not less than 10 days prior
to such Special Record Date, or may be paid at any time in any other lawful
manner not inconsistent with the requirements of any securities exchange on
which the Notes may be listed, and upon such notice as may be required by such
exchange, all as more fully provided in the Indenture.
<PAGE>
Payment of the principal of, premium, if any, and interest on this
Note will be made at the office or agency of the Issuer maintained for that
purpose in the Borough of Manhattan in The City of New York, State of New York,
or at such other office or agency of the Issuer as may be maintained for such
purpose, in such coin or currency of the United States of America as at the time
of payment is legal tender for payment of public and private debts; provided,
however, that payment of interest may be made at the option of the Issuer by
check mailed to the address of the person entitled thereto as such address shall
appear on the Note Register.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof.
Unless the certificate of authentication hereon has been duly executed
by the Trustee referred to on the reverse hereof by manual signature, this Note
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
[Remainder of Page Intentionally Left Blank]
<PAGE>
IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly
executed.
Dated: CAPROCK COMMUNICATIONS CORP.
By:
-----------------------------------
Name:
Title:
By:
-----------------------------------
Name:
Title:
CAPROCK TELECOMMUNICATIONS CORP.
By:
-----------------------------------
Name:
Title:
By:
-----------------------------------
Name:
Title:
CAPROCK FIBER NETWORK, LTD.
By: CapRock Systems, Inc.,
its General Partner
By:
-----------------------------------
Name:
Title:
By:
-----------------------------------
Name:
Title:
<PAGE>
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 12% Senior Notes due 2008, Series A, referred to in
the within-mentioned Indenture.
PNC Bank, National Association, as Trustee
By:
-----------------------------------
Authorized Signatory
<PAGE>
REVERSE OF NOTE
1. Indenture. This Note is one of a duly authorized issue of
Notes of the Issuer designated as the 12% Senior Notes due 2008, Series A
(herein called the "Initial Notes"). The Notes are limited (except as
otherwise provided in the Indenture referred to below) in aggregate principal
amount to $150,000,000, which may be issued under an indenture (herein called
the "Indenture") dated as of July 16, 1998, by and among the Company,
Telecommunications, the Partnership and IWL Communications, Incorporated and
PNC Bank, National Association, as trustee (herein called the "Trustee," which
term includes any successor Trustee under the Indenture), to which Indenture
and all indentures supplemental thereto reference is hereby made for a
statement of the respective rights, limitations of rights, duties,
obligations and immunities thereunder of the Issuer, the Trustee and the
Holders of the Notes, and of the terms upon which the Notes are, and are to
be, authenticated and delivered. The Notes include the Initial Notes, the
Private Exchange Notes and the Unrestricted Notes (including the Exchange
Notes referred to below),issued in exchange for the Initial Notes pursuant to
the Registration Rights Agreement. The Initial Notes, the Private Exchange
Notes and the Exchange Notes are treated as a single class of securities
under the Indenture.
All capitalized terms used in this Note which are defined in the
Indenture and not otherwise defined herein shall have the meanings assigned
to them in the Indenture.
The terms of the Notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939 (15 U.S.C. Sections 77aaa-77bbb) (the "TIA"), as in effect on the date
of the Indenture. Notwithstanding anything to the contrary herein, the Notes
are subject to all such terms, and Holders of Notes are referred to the
Indenture and the TIA for a statement of such terms.
No reference herein to the Indenture and no provisions of this Note
or of the Indenture shall alter or impair the obligation of the Issuer, which
is absolute and unconditional, to pay the principal of, premium, if any, and
interest on this Note at the times, place, and rate, and in the coin or
currency, herein prescribed.
2. Registration Rights. Pursuant to the Registration Rights
Agreement by and among the Company, Telecommunications and the Partnership
and the Initial Purchasers, each of the Company, Telecommunications and the
Partnership will be obligated to consummate an exchange offer pursuant to
which the Holder of this Note shall have the right to exchange this Note for
12% Senior Notes due 2008, Series B, of the Issuer (herein called the
"Exchange Notes"),which have been registered under the Securities Act, in
like principal amount and having identical terms as the Notes (other than as
set forth in this paragraph). The Holders of Notes shall be entitled to
receive certain additional interest payments in the event such exchange offer
is not
<PAGE>
consummated and upon certain other conditions, all pursuant to and in
accordance with the terms of the Registration Rights Agreement.
3. Redemption. The Notes will be redeemable, at the option of the
Issuer, in whole or in part, on or after July 15, 2003 upon not less than 30
nor more than 60 days' written notice at the redemption prices (expressed as
percentages of principal amount at maturity) set forth below, plus accrued
and unpaid interest thereon, if any, to the applicable redemption date, if
redeemed during the twelve-month period beginning on July 15 of each of the
years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2003 . . . . . . . . . . . . . . . . . . . . . . . 106.000%
2004 . . . . . . . . . . . . . . . . . . . . . . . 104.000%
2005 . . . . . . . . . . . . . . . . . . . . . . . 102.000%
2006 and thereafter . . . . . . . . . . . . . . . . 100.000%
</TABLE>
4. Offers to Purchase. Sections 10.10 and 10.15 of the Indenture
provide that upon the occurrence of a Change of Control and following certain
Asset Sales, and subject to certain conditions and limitations contained
therein, the Issuer shall make an offer to purchase all or a portion of the
Notes in accordance with the procedures set forth in the Indenture.
5. Special Offer to Purchase. Section 10.21 of the Indenture
provides that upon the circumstances described therein, the Company,
Telecommunications and the Partnership shall make an offer to purchase all of
the Notes in accordance with the procedures set forth in the Indenture. The
Limited Guarantor shall be liable, on a joint and several basis, to repay all
amounts owed to Holders who tender Notes pursuant to the Special Offer to
Purchase as provided in Article Thirteen of the Indenture.
6. Defaults and Remedies. If an Event of Default occurs and is
continuing, the principal of all of the Outstanding Notes, plus all accrued
and unpaid interest, if any, to and including the date the Notes are paid,
may be declared due and payable in the manner and with the effect provided in
the Indenture.
7. Defeasance. The Indenture contains provisions (which
provisions apply to this Note) for defeasance at any time of (a) the entire
indebtedness of the Issuer on this Note and (b) certain restrictive covenants
and related Defaults and Events of Default, in each case upon compliance by
the Issuer with certain conditions set forth therein.
-2-
<PAGE>
8. Amendments and Waivers. The Indenture permits, with certain
exceptions as provided therein, the amendment thereof and the modification of
the rights and obligations of the Issuer and the rights of the Holders under
the Indenture at any time by the Issuer and the Trustee with the consent of
the Holders of not less than a majority of the aggregate principal amount of
the Notes at the time Outstanding. The Indenture also contains provisions
permitting the Holders of specified percentages of aggregate principal amount
of the Notes at the time Outstanding, on behalf of the Holders of all the
Notes, to waive compliance by the Issuer with certain provisions of the
Indenture and certain past Defaults under the Indenture and this Note and
their consequences. Any such consent or waiver by or on behalf of the Holder
of this Note shall be conclusive and binding upon such Holder and upon all
future Holders of this Note and of any Note issued upon the registration of
transfer hereof or in exchange herefor or in lieu hereof whether or not
notation of such consent or waiver is made upon this Note.
9. Denominations, Transfer and Exchange. The Notes are issuable
only in registered form without coupons in denominations of $1,000 principal
amount at maturity and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, the Notes are
exchangeable for a like aggregate principal amount of Notes of a different
authorized denomination, as requested by the Holder surrendering the same.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Note is registrable on the Note
Register of the Issuer, upon surrender of this Note for registration of
transfer at the office or agency of the Issuer maintained for such purpose in
the Borough of Manhattan in The City of New York, State of New York, or at
such other office or agency of the Issuer as may be maintained for such
purpose, duly endorsed by, or accompanied by a written instrument of transfer
in form satisfactory to the Issuer and the Registrar duly executed by, the
Holder hereof or his attorney duly authorized in writing, and thereupon one
or more new Notes, of authorized denominations and for the same aggregate
principal amount, will be issued to the designated transferee or transferees.
No service charge shall be made for any registration of transfer or
exchange or redemption of Notes, but the Issuer may require payment of a sum
sufficient to cover any tax or other governmental charge payable in
connection therewith.
10. Persons Deemed Owners. Prior to and at the time of due
presentment of this Note for registration of transfer, the Issuer, the
Trustee and any agent of the Issuer or the Trustee may treat the person in
whose name this Note is registered as the owner hereof for all purposes,
whether or not this Note shall be overdue, and neither the Issuer, the
Trustee nor any agent shall be affected by notice to the contrary.
-3-
<PAGE>
11. If the Transaction is consummated on or prior to August 31,
1998, without any further action by any Person, Telecommunications and the
Partnership shall automatically be released from their respective obligations
under this Note and the Indenture and the Limited Guarantor shall be released
from its obligations under the Indenture. In the event the Transaction is
not consummated by August 31, 1998 and any Notes remain outstanding after the
payment for Notes tendered pursuant to the Special Offer to Purchase, without
any further action by any Person, the Company shall be released as an obligor
under this Note and the Company and the Limited Guarantor shall be released
from their obligations under the Indenture.
12. GOVERNING LAW. THE INDENTURE AND THIS NOTE SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
The Issuer will furnish to any Holder of a Note upon written
request and without charge a copy of the Indenture. Requests may be made to:
CapRock Communications Corp., Two Galleria Tower, 13455 Noel Road, Suite
1925, Dallas, Texas 75240.
-4-
<PAGE>
ASSIGNMENT FORM
I or we assign and transfer this Note to:
(Insert assignee's social security or tax I.D. number)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Print or type name, address and zip code of assignee)
and irrevocably appoint:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Agent to transfer this Note on the books of the Issuer. The Agent may
substitute another to act for him.
In connection with any transfer of this Note occurring prior to the
date which is the earlier of (i) the date of the declaration by the SEC of
the effectiveness of a registration statement under the Securities Act of
1933, as amended (the "Securities Act"), covering resales of this Note (which
effectiveness shall not have been suspended or terminated at the date of the
transfer) and (ii) the date two years (or such shorter period of time as
permitted by Rule 144 under the Securities Act or any successor provision
thereunder) after the later of the original issuance date appearing on the
face of this Note (or any predecessor Note) or the last date on which the
Issuer or any Affiliate of the Issuer was the owner of this Note (or any
predecessor Note), the undersigned confirms that it has not utilized any
general solicitation or general advertising in connection with the transfer
and that:
Check One
[ ] (a) this Note is being transferred in compliance with the exemption
from registration under the Securities Act provided by Rule 144A
thereunder.
or
[ ] (b) this Note is being transferred other than in accordance with (a)
above and documents, including (i) a transferee certificate
substantially in the form of Exhibit C to the Indenture in the case of
a transfer to a non-QIB Accredited Investor or (ii) a transfer
certificate substantially in the form of Exhibit D to the
<PAGE>
Indenture in the case of a transfer pursuant to Regulation S, are
being furnished which comply with the conditions of transfer set
forth in this Note and the Indenture.
If none of the foregoing boxes is checked and, in the case of (b) above, if
the appropriate document is not attached or otherwise furnished to the
Trustee, the Trustee or Registrar shall not be obligated to register this
Note in the name of any person other than the Holder hereof unless and until
the conditions to any such transfer of registration set forth herein and in
Section 3.16 and Section 3.17 of the Indenture shall have been satisfied.
Date: Your signature:
(Sign exactly as your name appears
on the other side of this note)
By:
---------------------------------
NOTICE: To be executed by
an executive officer
-2-
<PAGE>
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED
The undersigned represents and warrants that it is purchasing this
Note for its own account or an account with respect to which it exercises
sole investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act
and is aware that the sale to it is being made in reliance on Rule 144A and
acknowledges that it has received such information regarding the Issuer as
the undersigned has requested pursuant to Rule 144A (including the
information specified in Rule 144A(d)(4)) or has determined not to request
such information and that it is aware that the transferor and Issuer are
relying upon the undersigned's foregoing representations in order to claim
the exemption from registration provided by Rule 144A.
Date: By:
------------------------------
NOTICE: To be executed by
an executive officer
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Issuer pursuant to
Section 10.10, 10.15 or 10.21 of the Indenture, check the appropriate box:
Section 10.10 [ ] Section 10.15 [ ] Section 10.21 [ ]
If you wish to have a portion of this Note purchased by the Issuer
pursuant to Section 10.10, 10.15 or 10.21 of the Indenture, state the amount:
$
Date: Your signature:
(Sign exactly as your name appears
on the other side of this note)
By:
-------------------------------
NOTICE: To be executed by
an executive officer
<PAGE>
EXHIBIT A-2
[NAME OF ISSUER]
12% SENIOR NOTES DUE 2008, SERIES B
CUSIP No. 140667 AB 2
No. $
[INSERT NAME OF ISSUER] the "Issuer," which term includes any
successor person under the Indenture hereinafter referred to), for value
received, hereby, jointly and severally, promise to pay to _______________ or
registered assigns, the principal sum of _______________ Dollars on July 15,
2008, at the office or agency of the Issuer referred to below, and to pay
interest thereon on January 15 and July 15 (each an "Interest Payment Date"),
of each year, commencing on January 15, 1999, accruing from July 16, 1998 or
from the most recent Interest Payment Date to which interest has been paid or
duly provided for, at the rate of 12% per annum, until the principal hereof
is paid or duly provided for. Interest shall be computed on the basis of a
360-day year of twelve 30-day months.
The interest so payable, and punctually paid or duly provided for,
on any Interest Payment Date will, as provided in the Indenture referred to
on the reverse hereof, be paid to the person in whose name this Note (or one
or more predecessor Notes) is registered at the close of business on the
January 1 and July 1 (each a "Regular Record Date"), whether or not a
Business Day, as the case may be, next preceding such Interest Payment Date.
Any such interest not so punctually paid, or duly provided for, and interest
on such defaulted interest at the then applicable interest rate borne by the
Notes, to the extent lawful, shall forthwith cease to be payable to the
Holder on such Regular Record Date, and may be paid to the Person in whose
name this Note (or one or more predecessor Notes) is registered at the close
of business on a Special Record Date for the payment of such defaulted
interest to be fixed by the Trustee, notice of which shall be given to
Holders of Notes not less than 10 days prior to such Special Record Date, or
may be paid at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the Notes may be listed, and
upon such notice as may be required by such exchange, all as more fully
provided in the Indenture.
Payment of the principal of, premium, if any, and interest on this
Note will be made at the office or agency of the Issuer maintained for that
purpose in the Borough of Manhattan in The City of New York, State of New
York, or at such other office or agency of the Issuer as may be maintained
for such purpose, in such coin or currency of the United States of America as
at the time of payment is legal tender for payment of public and private
debts;
<PAGE>
provided, however, that payment of interest may be made at the option of the
Issuer by check mailed to the address of the person entitled thereto as such
address shall appear on the Note Register.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof.
Unless the certificate of authentication hereon has been duly
executed by the Trustee referred to on the reverse hereof by manual
signature, this Note shall not be entitled to any benefit under the Indenture
or be valid or obligatory for any purpose.
[Remainder of Page Intentionally Left Blank]
-2-
<PAGE>
IN WITNESS WHEREOF, the Issuer has caused this instrument to be
duly executed.
[NAME OF ISSUER]
By:
------------------------------
Name:
Title:
By:
------------------------------
Name:
Title:
-3-
<PAGE>
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 12% Senior Notes due 2008, Series B, referred to
in the within-mentioned Indenture.
PNC Bank, National Association, as Trustee
By:
-----------------------------------
Authorized Signatory
<PAGE>
[REVERSE OF NOTE]
1. Indenture. This Note is one of a duly authorized issue of
Notes of the Issuer designated as its 12% Senior Notes due 2008, Series B
(herein called the "Exchange Notes"). The Notes are limited (except as
otherwise provided in the Indenture referred to below) in aggregate principal
amount to $150,000,000, which may be issued under an indenture (herein called
the "Indenture") dated as of July 16, 1998, by and among the Company,
Telecommunications, the Partnership and IWL Communications, Incorporated and
PNC Bank, National Association, as trustee (herein called the "Trustee," which
term includes any successor Trustee under the Indenture), to which Indenture
and all indentures supplemental thereto reference is hereby made for a
statement of the respective rights, limitations of rights, duties,
obligations and immunities thereunder of the Issuer, the Trustee, and the
Holders of the Notes, and of the terms upon which the Notes are, and are to
be, authenticated and delivered. The Notes include the Initial Notes, the
Private Exchange Notes and the Unrestricted Notes (including the Exchange
Notes), issued in exchange for the Initial Notes pursuant to the Registration
Rights Agreement. The Initial Notes, the Private Exchange Notes and the
Exchange Notes are treated as a single class of securities under the
Indenture.
All capitalized terms used in this Note which are defined in the
Indenture and not otherwise defined herein shall have the meanings assigned
to them in the Indenture.
The terms of the Notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939 (15 U.S.C. Sections 77aaa-77bbb) (the "TIA"), as in effect on the date
of the Indenture. Notwithstanding anything to the contrary herein, the Notes
are subject to all such terms, and Holders of Notes are referred to the
Indenture and the TIA for a statement of such terms.
No reference herein to the Indenture and no provisions of this Note
or of the Indenture shall alter or impair the obligation of the Issuer, which
is absolute and unconditional, to pay the principal of, premium, if any, and
interest on this Note at the times, place, and rate, and in the coin or
currency, herein prescribed.
2. Redemption. The Notes will be redeemable, at the option of the
Issuer, in whole or in part, on or after July 15, 2003 upon not less than 30
nor more than 60 days' written notice at the redemption prices (expressed as
percentages of principal amount at maturity) set forth below, plus accrued
and unpaid interest thereon, if any, to the applicable redemption date, if
redeemed during the twelve-month period beginning on July 15 of each of the
years indicated below:
<PAGE>
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2003 . . . . . . . . . . . . . . . . . . . . . 106.000%
2004 . . . . . . . . . . . . . . . . . . . . . 104.000%
2005 . . . . . . . . . . . . . . . . . . . . . 102.000%
2006 and thereafter . . . . . . . . . . . . . . 100.000%
</TABLE>
3. Offers to Purchase. Sections 10.10 and 10.15 of the Indenture
provide that upon the occurrence of a Change of Control and following certain
Asset Sales, and subject to certain conditions and limitations contained
therein, the Issuer shall make an offer to purchase all or a portion of the
Notes in accordance with the procedures set forth in the Indenture.
4. Defaults and Remedies. If an Event of Default occurs and is
continuing, the principal of all of the Outstanding Notes, plus all accrued
and unpaid interest, if any, to and including the date the Notes are paid,
may be declared due and payable in the manner and with the effect provided in
the Indenture.
5. Defeasance. The Indenture contains provisions (which
provisions apply to this Note) for defeasance at any time of (a) the entire
indebtedness of the Issuer on this Note and (b) certain restrictive covenants
and related Defaults and Events of Default, in each case upon compliance by
the Issuer with certain conditions set forth therein.
6. Amendments and Waivers. The Indenture permits, with certain
exceptions as provided therein, the amendment thereof and the modification of
the rights and obligations of the Issuer and the rights of the Holders under
the Indenture at any time by the Issuer and the Trustee with the consent of
the Holders of not less than a majority of the aggregate principal amount of
the Notes at the time Outstanding. The Indenture also contains provisions
permitting the Holders of specified percentages of aggregate principal amount
of the Notes at the time Outstanding, on behalf of the Holders of all the
Notes, to waive compliance by the Issuer with certain provisions of the
Indenture and certain past Defaults under the Indenture and this Note and
their consequences. Any such consent or waiver by or on behalf of the Holder
of this Note shall be conclusive and binding upon such Holder and upon all
future Holders of this Note and of any Note issued upon the registration of
transfer hereof or in exchange herefor or in lieu hereof whether or not
notation of such consent or waiver is made upon this Note.
7. Denominations, Transfer and Exchange. The Notes are issuable
only in registered form without coupons in denominations of $1,000 principal
amount at maturity and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein
-2-
<PAGE>
set forth, the Notes are exchangeable for a like aggregate principal amount
of Notes of a different authorized denomination, as requested by the Holder
surrendering the same.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Note is registrable on the Note
Register of the Issuer, upon surrender of this Note for registration of
transfer at the office or agency of the Issuer maintained for such purpose in
the Borough of Manhattan in The City of New York, State of New York, or at
such other office or agency of the Issuer as may be maintained for such
purpose, duly endorsed by, or accompanied by a written instrument of transfer
in form satisfactory to the Issuer and the Registrar duly executed by, the
Holder hereof or his attorney duly authorized in writing, and thereupon one
or more new Notes, of authorized denominations and for the same aggregate
principal amount, will be issued to the designated transferee or transferees.
No service charge shall be made for any registration of transfer or
exchange or redemption of Notes, but the Issuer may require payment of a sum
sufficient to cover any tax or other governmental charge payable in
connection therewith.
8. Persons Deemed Owners. Prior to and at the time of due
presentment of this Note for registration of transfer, the Issuer, the
Trustee and any agent of the Issuer or the Trustee may treat the Person in
whose name this Note is registered as the owner hereof for all purposes,
whether or not this Note shall be overdue, and neither the Issuer, the
Trustee nor any agent shall be affected by notice to the contrary.
9. GOVERNING LAW. THE INDENTURE AND THIS NOTE SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
The Issuer will furnish to any Holder of a Note upon written
request and without charge a copy of the Indenture. Requests may be made to:
CapRock Communications Corp., Two Galleria Tower, 13455 Noel Road, Suite
1925, Dallas, Texas 75240.
-3-
<PAGE>
ASSIGNMENT FORM
If you the holder want to assign this Note, fill in the form below and have
your signature guaranteed:
I or we assign and transfer this Note to:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Print or type name, address and zip code of assignee)
and irrevocably appoint:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Agent to transfer this Note on the books of the Issuer. The Agent may
substitute another to act for him.
Date: Your signature:
(Sign exactly as your name appears
on the other side of this note)
By:
------------------------------
NOTICE: To be executed by
an executive officer
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Issuer pursuant to
Section 10.10 or 10.15 of the Indenture, check the appropriate box:
Section 10.10 [ ] Section 10.15 [ ]
If you wish to have a portion of this Note purchased by the Issuer
pursuant to Section 10.10 or 10.15 of the Indenture, state the amount:
$
Date: Your signature:
(Sign exactly as your name appears
on the other side of this note)
By:
------------------------------
NOTICE: To be executed by
an executive officer
Signature Guarantee:
<PAGE>
EXHIBIT B
FORM OF LEGEND FOR BOOK-ENTRY SECURITIES
Any Global Note authenticated and delivered hereunder shall bear a
legend (which would be in addition to any other legends required in the case
of a Restricted Note) in substantially the following form:
THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THIS INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A
NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS NOTE IS NOT
EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE
DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN
THE INDENTURE, AND NO TRANSFER OF THIS NOTE (OTHER THAN A TRANSFER OF THIS
NOTE AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A
NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE
DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED
IN THE INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION
("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE,
OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE &
CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF
DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR
OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL
INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
<PAGE>
EXHIBIT C
FORM OF CERTIFICATE TO BE
DELIVERED IN CONNECTION WITH
TRANSFERS TO NON-QIB ACCREDITED INVESTORS
Ladies and Gentlemen:
In connection with the proposed purchase of $__________ aggregate
principal amount of the 12% Senior Notes due 2008 (the "Notes") of CapRock
Communications Corp., CapRock Telecommunications Corp. and CapRock Fiber
Network, Ltd. (collectively, the "Issuer"), the undersigned confirms that:
1. It understands and acknowledges that the Notes have not been
registered under the Securities Act or any other applicable securities laws,
are being offered for resale in transactions not requiring registration under
the Securities Act or any other securities laws, including sales pursuant to
Rule 144A under the Securities Act, and may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of
Securities Act or any other applicable securities law, pursuant to an
exemption therefrom or in a transaction not subject thereto and in each case
in compliance with the conditions for transfer set forth in paragraph (4)
below.
2. It is not an "affiliate" (as defined in Rule 144 under the
Securities Act) of Issuer or acting on behalf of the Issuer and it is either:
(a) a QIB and is aware that any sale of Notes to it will be
made in reliance on Rule 144A. Such acquisition will be for its own
account or for the account of another QIB; or
(b) an institution that, at the time the buy order for the
Notes was originated, was outside the United States and was not a U.S.
person (and was not purchasing for the account or benefit of a U.S. person)
within the meaning of Regulation S under the Securities Act.
3. It acknowledges that none of the Issuer, the Initial
Purchasers or any person representing the Issuer or the Initial Purchasers
has made any representation to it with respect to the Issuer or the offering
or sale of any Notes, other than the information contained in the Offering
Memorandum, which Offering Memorandum has been delivered to it and upon which
it is relying in making its investment decision with respect to the Notes.
Accordingly, it acknowledges that no representation or warranty is made by
the Initial Purchasers as to the
<PAGE>
accuracy or completeness of such materials. It has had access to such
financial and other information concerning the Issuer and the Notes as it has
deemed necessary in connection with its decision to purchase any of the
Notes, including an opportunity to ask questions of and request information
from the Issuer and the Initial Purchasers.
4. It is purchasing the Notes for its own account, or for one or
more investor accounts for which it is acting as a fiduciary or agent, in
each case for investment, and not with a view to, or for offer or sale in
connection with, any distribution thereof in violation of the Securities Act,
subject to any requirement of law that the disposition of its property or the
property of such investor account or accounts be at all times within its or
their control and subject to its or their ability to resell Notes pursuant to
Rule 144A, Regulation S or any exemption from registration available under
the Securities Act. It agrees on its own behalf and on behalf of any
investor account for which it is purchasing the Notes, and each subsequent
holder of the Notes by its acceptance thereof will agree, to offer, sell or
otherwise transfer such Notes prior to (x) the date which is two years (or
such shorter period of time as permitted by Rule 144(k) under the Securities
Act or any successor provision thereunder) after the later of the date of the
original issue of the Notes and the last date on which the Issuer or any
affiliate of the Issuer was the owner of such Notes or (y) such later date,
if any, as may be required by applicable law (the "Resale Restriction
Termination Date") only (a) to the Issuer, (b) pursuant to a registration
statement which has been declared effective under the Securities Act, (c) for
so long as the Notes are eligible for resale pursuant to Rule 144A, to a
person it reasonably believes is a QIB that purchases for its own account or
for the account of a QIB to whom notice is given that the transfer is being
made in reliance on Rule 144A, (d) pursuant to offers and sales to non-U.S.
persons that occur outside the United States within the meaning of Regulation
S under the Securities Act or (e) pursuant to any other available exemption
from the registration requirements of the Securities Act, subject in each of
the foregoing cases to any requirements of law that the disposition of its
property or the property of such investor account or accounts be at all times
within its or their control and to compliance with any applicable state
securities laws. The foregoing restrictions on resale will not apply
subsequent to the Resale Restriction Termination Date (as defined). Each
purchaser acknowledges that the Issuer and the Trustee reserve the right
prior to any offer, sale or other transfer prior to the Resale Restriction
Termination Date of the Notes pursuant to clauses (d) or (e) above to require
the delivery of an opinion of counsel, certifications and/or other
information satisfactory to the Issuer and the Trustee. Each purchaser
acknowledges that each Note will contain a legend substantially to the
following effect:
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR
OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED,
PLEDGED, ENCUMBERED OR
C-2
<PAGE>
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE
TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS
ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL
BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS NOT
A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN "OFFSHORE TRANSACTION"
PURSUANT TO RULE 904 OF REGULATION S, (2) AGREES THAT IT WILL NOT PRIOR TO
(X) THE DATE WHICH IS TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS
PERMITTED BY RULE 144(k) UNDER THE SECURITIES ACT OR ANY SUCCESSOR
PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF OR
THE LAST DAY ON WHICH THE ISSUER OR ANY AFFILIATE OF THE ISSUER WAS THE
OWNER OF THIS SECURITY AND (y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED
BY APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER,
SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE ISSUER,
(B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE
UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE
FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A
"QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A
QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS
BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO
NON-US PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF
REGULATION S UNDER THE SECURITIES ACT OR (E) PURSUANT TO ANOTHER AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND
(3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS
TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND; PROVIDED
THAT THE ISSUER AND THE TRUSTEE SHALL HAVE THE RIGHT PRIOR TO ANY SUCH
OFFER, SALE OR TRANSFER (I) PURSUANT TO CLAUSE (D) OR (E) TO REQUIRE THE
DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION
SATISFACTORY TO EACH OF THEM, AND (II) IN EACH OF THE FOREGOING CASES, TO
REQUIRE THAT A CERTIFICATION OF TRANSFER IN THE FORM APPEARING ON THE
OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR
TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE
HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN,
THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE
THE RESPECTIVE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE
SECURITIES ACT.
C-3
<PAGE>
It acknowledges that the foregoing restrictions apply to holders of
beneficial interest in the Notes, as well as to holders of the Notes.
5. It acknowledges that the Trustee will not be required to
accept for registration of transfer any Notes acquired by it, except upon
presentation of evidence satisfactory to the Issuer and the Trustee that the
restrictions set forth herein have been complied with.
6. It acknowledges that Issuer, the Trustee, the Initial
Purchasers and others will rely upon the truth and accuracy of the foregoing
acknowledgments, representations and agreements and agrees that if any of the
acknowledgments, representations or agreements deemed to have been made by
its purchase of the Notes are no longer accurate, it shall promptly notify
the Issuer, the Trustee and the Initial Purchasers. If it is acquiring the
Notes as a fiduciary or agent for one or more investor accounts, it
represents that it has sole investment discretion with respect to each such
account and it has full power to make the foregoing acknowledgments,
representations and agreements on behalf of each account; and that each such
investor account is eligible to purchase the Notes.
7. It agrees that it will give to each person to whom it
transfers Notes notice of any restrictions or transfer of such Notes.
As used herein, the terms "offshore transaction," "United States"
and "U.S. person" have the respective meanings given to them in Regulation S
under the Securities Act.
THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK.
Very truly yours,
(Name of Purchaser)
By:
Date:
Upon transfer, the Notes would be registered in the name of the new
beneficial owner as follows:
By:
Address:
<PAGE>
EXHIBIT D
FORM OF CERTIFICATE TO BE DELIVERED
IN CONNECTION WITH TRANSFERS
PURSUANT TO REGULATION S
PNC Bank, National Association
1600 Market Street
30th Floor
Philadelphia, Pennsylvania 19103
Attention: Corporate Trust Department
Re: CapRock Communications Corp ("Communications"), CapRock
Telecommunications Corp. ("Telecommunications") and CapRock Fiber
Network, Ltd. (the "Partnership and, together with Communications
and Telecommunications, the "Issuer") 12% Senior Notes due 2008
(the "Securities")
Ladies and Gentlemen:
In connection with our proposed sale of $_______________ aggregate
principal amount at maturity of the Securities, we confirm that such sale has
been effected pursuant to and in accordance with Regulation S under the U.S.
Securities Act of 1933, as amended (the "Securities Act"), and, accordingly,
we represent that:
(1) the offer of the Securities was not made to a person in the
United States;
(2) either (a) at the time the buy offer was originated, the
transferee was outside the United States or we and any person acting on our
behalf reasonably believed that the transferee was outside the United States,
or (b) the transaction was executed in, on or through the facilities of a
designated off-shore securities market and neither we nor any person acting
on our behalf knows that the transaction has been pre-arranged with a buyer
in the United States;
(3) no directed selling efforts have been made in the United
States in contravention of the requirements of Rule 903(b) or Rule 904(b) of
Regulation S, as applicable;
(4) the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act;
<PAGE>
(5) we have advised the transferee of the transfer restrictions
applicable to the Securities;
(6) if the circumstances set forth in Rule 904(c) under the
Securities Act are applicable, we have complied with the additional
conditions therein, including (if applicable) sending a confirmation or other
notice stating that the Securities may be offered and sold during the
restricted period specified in Rule 903(c)(2) or (3), as applicable, in
accordance with the provisions of Regulation S; pursuant to registration of
the Securities under the Securities Act; or pursuant to an available
exemption from the registration requirements under the Securities Act; and
(7) if the sale is made during a restricted period and the
provisions of Rule 903(c)(3) are applicable thereto, we confirm that such
sale has been made in accordance with such provisions.
You and the Issuer are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceedings or official
inquiry with respect to the matters covered hereby. Terms used in this
certificate have the meanings set forth in Regulation S.
Very truly yours,
Name of Transferor
By:
--------------------------
Authorized Signature
D-2
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "AGREEMENT") is made and
entered into this 16th day of July, 1998, by and among CapRock Communications
Corp., a Texas corporation (the "COMPANY"), CapRock Telecommunications Corp.,
a Texas corporation ("TELECOMMUNICATIONS"), and CapRock Fiber Network, Ltd.,
a Texas limited partnership (the "PARTNERSHIP"), and Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"), Donaldson, Lufkin & Jenrette
Securities Corporation and Banc One Capital Markets, Inc. (each, an "INITIAL
PURCHASER" and collectively, the "INITIAL PURCHASERS").
This Agreement is made pursuant to the Purchase Agreement, dated
July 10, 1998, by and among the Company, Telecommunications, the Partnership,
IWL Communications, Incorporated ("IWL") and the Initial Purchasers (the
"PURCHASE AGREEMENT"), which provides for the sale by the Company,
Telecommunications and the Partnership to the Initial Purchasers of $150
million aggregate principal amount of their 12% Senior Notes due 2008, Series
A (the "SECURITIES"). In order to induce the Initial Purchasers to enter
into the Purchase Agreement, the Company, Telecommunications and the
Partnership have agreed to provide to the Initial Purchasers and their direct
and indirect transferees the registration rights set forth in this Agreement.
The execution of this Agreement is a condition to the closing under the
Purchase Agreement.
In consideration of the foregoing, the parties hereto agree as
follows:
1. DEFINITIONS.
As used in this Agreement, the following capitalized defined terms
shall have the following meanings:
"1933 ACT" shall mean the Securities Act of 1933, as amended from time
to time, and the rules and regulations of the Securities and Exchange
Commission promulgated thereunder.
"1934 ACT" shall mean the Securities Exchange Act of 1934, as amended
from time to time, and the rules and regulations of the Securities and
Exchange Commission promulgated thereunder.
"ADDITIONAL INTEREST" shall have the meaning set forth in Section
2.5(a).
"CLOSING DATE" shall mean the Closing Time as defined in the Purchase
Agreement.
<PAGE>
"COMBINATION" shall have the meaning set forth for such term in the
Purchase Agreement.
"COMPANY" shall have the meaning set forth in the preamble and shall
also include the Company's successors.
"DEPOSITARY" shall mean The Depository Trust Company, or any other
depositary appointed by the Issuer; PROVIDED, HOWEVER, that such depositary
must have an address in the Borough of Manhattan, in the City of New York.
"EVENT DATE" shall have the meaning set forth in Section 2.5(b).
"EXCHANGE OFFER" shall mean the exchange offer by the Issuer of
Exchange Securities for certain Registrable Securities pursuant to Section
2.1 hereof
"EXCHANGE OFFER REGISTRATION" shall mean a registration under the 1933
Act effected pursuant to Section 2.1 hereof
"EXCHANGE OFFER REGISTRATION STATEMENT" shall mean an exchange offer
registration statement on Form S-4 (or, if applicable, on another
appropriate form), and all amendments and supplements to such registration
statement, including the Prospectus contained therein, all exhibits thereto
and all documents incorporated by reference therein.
"EXCHANGE PERIOD" shall have the meaning set forth in Section
2.1(b)(ii) hereof.
"EXCHANGE SECURITIES" shall mean the 12% Senior Notes due 2008, Series
B issued by the Issuer under the Indenture containing terms identical to
the Securities in all material respects (except for references to certain
interest rate provisions, restrictions on transfers and restrictive
legends), to be offered to Holders of Securities in exchange for certain
Registrable Securities pursuant to the Exchange Offer.
"HOLDER" shall mean an Initial Purchaser, for so long as it owns any
Registrable Securities, and each of its successors, assigns and direct and
indirect transferees who become registered owners of Registrable Securities
under the Indenture and each Participating Broker-Dealer that holds
Exchange Securities for so long as such Participating Broker-Dealer is
required to deliver a Prospectus meeting the requirements of the 1933 Act
in connection with any resale of such Exchange Securities.
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"INDENTURE" shall mean the Indenture relating to the Securities, dated
as of July 16, 1998 among the Company, Telecommunications, the Partnership,
IWL and PNC Bank, National Association, as Trustee, as the same may be
amended, supplemented, waived or otherwise modified from time to time in
accordance with the terms thereof.
"INITIAL PURCHASER" or "INITIAL PURCHASERS" shall have the meaning set
forth in the preamble.
"ISSUER" shall initially mean, collectively, the Company,
Telecommunications and the Partnership and shall mean (i) the Company,
after the Combination is consummated, or (ii) Telecommunications and the
Partnership after the payment of all Securities tendered pursuant to the
offer to purchase contemplated by Section 10.21 of the Indenture has been
made, if any Securities remain outstanding.
"MAJORITY HOLDERS" shall mean the Holders of a majority of the
aggregate principal amount of outstanding Registrable Securities; PROVIDED
that whenever the consent or approval of Holders of a specified percentage
of Registrable Securities is required hereunder, Registrable Securities
held by the Issuer and other obligors on the Securities or any Affiliate
(as defined in the Indenture) of the Issuer shall be disregarded in
determining whether such consent or approval was given by the Holders of
such required percentage amount.
"PARTICIPATING BROKER-DEALER" shall mean any of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation and Banc One Capital Markets, Inc. and any other broker-dealer
which makes a market in the Securities and exchanges Registrable Securities
in the Exchange Offer for Exchange Securities.
"PARTNERSHIP" shall mean CapRock Fiber Network, Ltd., a Texas limited
partnership, and shall also include its successors.
"PERSON" shall mean an individual, partnership (general or limited),
corporation, limited liability company, trust or unincorporated
organization, or a government or agency or political subdivision thereof.
"PRIVATE EXCHANGE" shall have the meaning set forth in Section 2.1(c)
hereof.
"PRIVATE EXCHANGE SECURITIES" shall have the meaning set forth in
Section 2.1(c) hereof.
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"PROSPECTUS" shall mean the prospectus included in a Registration
Statement, including any preliminary prospectus, and any such prospectus as
amended or supplemented by any prospectus supplement, including any such
prospectus supplement with respect to the terms of the offering of any
portion of the Registrable Securities covered by a Shelf Registration
Statement, and by all other amendments and supplements to a prospectus,
including post-effective amendments, and in each case including all
material incorporated by reference therein.
"PURCHASE AGREEMENT" shall have the meaning set forth in the preamble.
"REGISTRABLE SECURITIES" shall mean the Securities and, if issued, the
Private Exchange Securities; PROVIDED, HOWEVER, that Securities and, if
issued, the Private Exchange Securities shall cease to be Registrable
Securities when (i) a Registration Statement with respect to such
Securities or Private Exchange Securities shall have been declared
effective under the 1933 Act and such Securities or Private Exchange
Securities shall have been disposed of pursuant to such Registration
Statement, (ii) such Securities or Private Exchange Securities have been
sold to the public pursuant to Rule 144 (or any similar provision then in
force, but not Rule 144A) under the 1933 Act, (iii) such Securities or
Private Exchange Securities shall have ceased to be outstanding or (iv) the
Exchange Offer is consummated (except in the case of Securities purchased
from the Issuer and continued to be held by any one of the Initial
Purchasers and Private Exchange Securities issued in exchange therefor).
"REGISTRATION DEFAULT " shall have the meaning set forth in Section
2.5(a).
"REGISTRATION EXPENSES" shall mean any and all expenses incident to
performance of or compliance by the Issuer with this Agreement, including
without limitation: (i) all SEC, stock exchange or National Association of
Securities Dealers, Inc. (the "NASD") registration and filing fees,
including, if applicable, the fees and expenses of any "qualified
independent underwriter" (and its counsel) that is required to be retained
by any holder of Registrable Securities in accordance with the rules and
regulations of the NASD, (ii) all fees and expenses incurred in connection
with compliance with state securities or blue sky laws and compliance with
the rules of the NASD (including reasonable fees and disbursements of
counsel for any underwriters or Holders in connection with blue sky
qualification of any of the Exchange Securities or Registrable Securities
and any filings with the NASD), (iii) all expenses of any Persons in
preparing or assisting in preparing, word processing, printing and
distributing any Registration Statement, any Prospectus, any amendments or
supplements thereto, any underwriting agreements, securities sales
agreements and other documents
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relating to the performance of and compliance with this Agreement,
(iv) all fees and expenses incurred in connection with the listing, if
any, of any of the Registrable Securities on any securities exchange or
exchanges, (v) all rating agency fees, (vi) the fees and disbursements of
counsel for the Issuer and of the independent public accountants of the
Issuer including the expenses of any special audits or "cold comfort"
letters required by or incident to such performance and compliance,
(vii) the fees and expenses of the Trustee, including its counsel, and any
escrow agent or custodian, (viii) the reasonable fees and expenses of the
Initial Purchasers in connection with the Exchange Offer, including the
reasonable fees and expenses of Paul, Hastings, Janofsky & Walker LLP,
counsel to the Initial Purchasers in connection therewith, (ix) the
reasonable fees and disbursements of Paul, Hastings, Janofsky & Walker
LLP, special counsel representing the Holders of Registrable Securities
and the Initial Purchasers and (x) any fees and disbursements of the
underwriters customarily required to be paid by issuers or sellers of
securities and the fees and expenses of any special experts retained by
the Issuer in connection with any Registration Statement, but excluding
underwriting discounts and commissions and transfer taxes, if any,
relating to the sale or disposition of Registrable Securities or Exchange
Securities by a Holder.
"REGISTRATION STATEMENT" shall mean any registration statement of the
Issuer which covers any of the Exchange Securities or Registrable
Securities pursuant to the provisions of this Agreement (including a Shelf
Registration Statement and an Exchange Offer Registration Statement), and
all amendments and supplements to any such Registration Statement,
including post-effective amendments, in each case including the Prospectus
contained therein, all exhibits thereto and all material incorporated by
reference therein.
"SEC" shall mean the United States Securities and Exchange Commission
or any successor agency or government body performing the functions
currently performed by the United States Securities and Exchange
Commission.
"SECURITIES" shall have the meaning set forth in the preamble.
"SHELF REGISTRATION" shall mean a registration effected pursuant to
Section 2.2 hereof.
"SHELF REGISTRATION STATEMENT" shall mean a "shelf" registration
statement of the Issuer pursuant to the provisions of Section 2.2 of this
Agreement which covers all of the Registrable Securities or all of the
Private Exchange Securities on an appropriate form under Rule 415 under the
1933 Act, or any similar rule that may be adopted by the SEC, and all
amendments and supplements to such
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<PAGE>
registration statement, including post-effective amendments, in each case
including the Prospectus contained therein, all exhibits thereto and all
material incorporated by reference therein.
"TELECOMMUNICATIONS" means CapRock Telecommunications Corp., a Texas
corporation, and shall also include its successors.
"TIA " shall have the meaning set forth in Section 2.1(d).
"TRANSFER RESTRICTED SECURITIES" shall mean each Security, each
Exchange Security obtained by a broker-dealer in the Exchange Offer and
each Private Exchange Security until:
(i) the date on which such Security has been exchanged by a
Person other than a broker-dealer for an Exchange Security in the
Exchange Offer;
(ii) following the exchange by a broker-dealer in the Exchange
Offer of a Security for an Exchange Security, the date on which such
Exchange Security is sold to a purchaser who receives from such
broker-dealer on or prior to the date of such sale a copy of the
Prospectus contained in the Exchange Offer Registration Statement;
(iii) the date on which such Security, Exchange Security or
Private Exchange Security has been effectively registered under the
1933 Act and disposed of in accordance with a Shelf Registration
Statement;
(iv) the date on which such Security, Exchange Security or
Private Exchange Security is distributed to the public pursuant to
Rule 144 under the 1933 Act (or any similar provision then in force,
but not Rule 144A under the 1933 Act);
(v) such Security, Exchange Security or Private Exchange
Security shall have been otherwise transferred by the holder thereof
and a new Security, Exchange Security or Private Exchange Security not
bearing a legend restricting further transfer shall have been
delivered by the Issuer and subsequent disposition of such Security,
Exchange Security or Private Exchange Security shall not require
registration or qualification under the 1933 Act or any similar state
law then in force; or
(vi) such Security, Exchange Security or Private Exchange
Security ceases to be outstanding.
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<PAGE>
"TRUSTEE" shall mean the trustee with respect to the Securities, the
Private Exchange Securities and the Exchange Securities under the
Indenture.
"UNDERWRITER" shall have the meaning set forth in Section 4(a).
2. REGISTRATION UNDER THE 1933 ACT.
2.1 EXCHANGE OFFER. (a) To the extent not prohibited by any
applicable law or applicable interpretation of the staff of the SEC, the
Issuer shall, for the benefit of the Holders, at the Issuer's cost, (i)
prepare and, as soon as practicable but not later than 120 days after the
date of this Agreement, file with the SEC an Exchange Offer Registration
Statement on an appropriate form under the 1933 Act with respect to a
proposed Exchange Offer and the issuance and delivery to the Holders, in
exchange for the Registrable Securities (other than Securities purchased from
the Issuer and continued to be held by any one of the Initial Purchasers and
Private Exchange Securities issued in exchange therefor), of a like principal
amount of Exchange Securities, (ii) use its best efforts to cause the
Exchange Offer Registration Statement to be declared effective under the 1933
Act within 180 days after the date of this Agreement, (iii) use its best
efforts to keep the Exchange Offer Registration Statement effective until the
closing of the Exchange Offer and (iv) use its best efforts to cause the
Exchange Offer to be consummated not later than 215 days after the date of
this Agreement. The Exchange Securities will be issued under the Indenture.
Upon the effectiveness of the Exchange Offer Registration Statement, the
Issuer shall promptly commence the Exchange Offer, it being the objective of
such Exchange Offer to enable each Holder eligible and electing to exchange
Registrable Securities for Exchange Securities (assuming that such Holder (i)
is not an affiliate of the Issuer within the meaning of Rule 405 under the
1933 Act, (ii) is not a broker-dealer tendering Registrable Securities
acquired directly from the Issuer or an affiliate of the Issuer for its own
account, (iii) acquired the Exchange Securities in the ordinary course of
such Holder's business and (iv) has no arrangements or understandings with
any Person to participate in the Exchange Offer for the purpose of
distributing the Exchange Securities) to transfer such Exchange Securities
from and after their receipt without any limitations or restrictions under
the 1933 Act and under state securities or blue sky laws.
(b) In connection with the Exchange Offer, the Issuer shall:
(i) mail as promptly as practicable to each Holder a copy of
the Prospectus forming part of the Exchange Offer Registration Statement,
together with an appropriate letter of transmittal and related documents;
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<PAGE>
(ii) keep the Exchange Offer open for acceptance for a
period of not less than 20 business days after the date notice thereof is
mailed to the Holders (or longer if required by applicable law) (such period
referred to herein as the "EXCHANGE PERIOD");
(iii) utilize the services of the Depositary for the Exchange
Offer;
(iv) permit Holders to withdraw tendered Registrable
Securities at any time prior to 5:00 p.m. (Eastern Time), on the last
business day of the Exchange Period, by sending to the institution specified
in the notice, a telegram, telex, facsimile transmission or letter setting
forth the name of such Holder, the principal amount of Registrable Securities
delivered for exchange, and a statement that such Holder is withdrawing such
Holder's election to have such Securities exchanged;
(v) notify each Holder that any Registrable Security not
tendered will remain outstanding and continue to accrue interest, but will
not retain any rights under this Agreement (except in the case of the Initial
Purchasers and Participating Broker-Dealers as provided herein); and
(vi) otherwise comply in all respects with all applicable
laws relating to the Exchange Offer.
(c) If, prior to consummation of the Exchange Offer, the Initial
Purchasers hold any Securities acquired by them that have the status of an
unsold allotment in the initial distribution, the Issuer upon the request of
any Initial Purchaser shall, simultaneously with the delivery of the Exchange
Securities in the Exchange Offer, issue and deliver to such Initial
Purchaser, in exchange (the "PRIVATE EXCHANGE") for the Securities held by
such Initial Purchaser, a like principal amount of debt securities of the
Issuer on a senior basis, that are identical (except that such securities
shall bear appropriate transfer restrictions) to the Exchange Securities (the
"PRIVATE EXCHANGE SECURITIES").
(d) The Exchange Securities and the Private Exchange Securities
shall be issued under (i) the Indenture or (ii) an indenture identical in all
material respects to the Indenture and which, in either case, has been
qualified under the Trust Indenture Act of 1939, as amended (the "TIA"), or
is exempt from such qualification and shall provide that the Exchange
Securities shall not be subject to the transfer restrictions set forth in the
Indenture but that the Private Exchange Securities shall be subject to such
transfer restrictions. The Indenture or such indenture shall provide that
the Exchange Securities, the Private Exchange Securities and the Securities
shall vote and consent together on all matters as one class and that none of
the Exchange Securities, the Private Exchange
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<PAGE>
Securities or the Securities will have the right to vote or consent as a
separate class on any matter. The Private Exchange Securities shall be of
the same series as the Exchange Securities and the Issuer shall use all
commercially reasonable efforts to have the Private Exchange Securities bear
the same CUSIP number as the Exchange Securities. The Issuer shall not have
any liability under this Agreement solely as a result of such Private
Exchange Securities not bearing the same CUSIP number as the Exchange
Securities.
(e) As soon as practicable after the close of the Exchange Offer
and/or the Private Exchange, as the case may be (to the extent not prohibited
by any applicable law or applicable interpretation of the staff of the SEC),
the Issuer shall use its best efforts, on or prior to the 35th day following
the date the Exchange Offer Registration Statement is declared effective by
the SEC, to:
(i) accept for exchange all Registrable Securities duly
tendered and not validly withdrawn pursuant to the Exchange Offer in
accordance with the terms of the Exchange Offer Registration Statement and
the letter of transmittal which shall be an exhibit thereto;
(ii) accept for exchange all Securities duly tendered pursuant
to the Private Exchange;
(iii) deliver to the Trustee for cancellation all Registrable
Securities so accepted for exchange; and
(iv) cause the Trustee promptly to authenticate and deliver
Exchange Securities or Private Exchange Securities, as the case may be, to
each Holder of Registrable Securities so accepted for exchange in a
principal amount equal to the principal amount of the Registrable
Securities of such Holder so accepted for exchange.
(f) Interest on each Exchange Security and Private Exchange
Security will accrue from the last date on which interest was paid on the
Registrable Securities surrendered in exchange therefor or, if no interest
has been paid on the Registrable Securities, from the date of original
issuance. The Exchange Offer and the Private Exchange shall not be subject
to any conditions, other than (i) that the Exchange Offer or the Private
Exchange, or the making of any exchange by a Holder, does not violate
applicable law or any applicable interpretation of the staff of the SEC, (ii)
the due tendering of Registrable Securities in accordance with the Exchange
Offer and the Private Exchange, (iii) that each Holder of Registrable
Securities exchanged in the Exchange Offer shall have represented that it is
not an affiliate (as defined in Rule 405 promulgated under the 1933 Act) of
the Issuer or, if it is an affiliate, it will comply with the registration
and prospectus delivery requirements of the 1933 Act to the extent
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<PAGE>
applicable, that all Exchange Securities to be received by it shall be
acquired in the ordinary course of its business and that at the time of the
consummation of the Exchange Offer it shall have no arrangement or
understanding with any Person to participate in the distribution (within the
meaning of the 1933 Act) of the Exchange Securities and shall have made such
other representations as may be reasonably necessary under applicable SEC
rules, regulations or interpretations to render the use of Form S-4 or other
appropriate form under the 1933 Act available, (iv) that no action or
proceeding shall have been instituted or threatened in any court or by or
before any governmental agency with respect to the Exchange Offer or the
Private Exchange which, in the Issuer's judgment, would reasonably be
expected to impair the ability of the Issuer to proceed with the Exchange
Offer or the Private Exchange and (v) compliance with Section 3(f) hereof.
To the extent permitted by law and ascertainable by the Issuer, the Issuer
shall inform the Initial Purchasers of the names and addresses of the Holders
to whom the Exchange Offer is made, and the Initial Purchasers shall have the
right to contact such Holders and otherwise facilitate the tender of
Registrable Securities in the Exchange Offer.
2.2 SHELF REGISTRATION. (i) If, because of any changes in law,
SEC rules or regulations or applicable interpretations thereof by the staff
of the SEC, the Issuer is not permitted to effect the Exchange Offer as
contemplated by Section 2.1 hereof, (ii) if for any other reason the Exchange
Offer Registration Statement is not declared effective within 180 days
following the date of this Agreement or the Exchange Offer is not consummated
within 215 days after the date of this Agreement, (iii) if within 120 days
after the Closing Time (as defined in the Purchase Agreement) any Holder of
Securities notifies the Issuer that (a) due to a change in law or policy it
is not entitled to participate in the Exchange Offer, (b) due to a change in
law or policy it may not resell the Exchange Securities acquired by it in the
Exchange Offer to the public without delivering a prospectus and (x) the
Prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales by such Holder and (y) such
Prospectus is not promptly amended or modified in order to be suitable for
use in connection with such resales for such Holder and all similarly
situated Holders or (c) it is a broker-dealer and owns Securities acquired
directly from the Issuer or an affiliate of the Issuer for its own account or
(iv) the Holders of a majority of the Securities may not resell the Exchange
Securities acquired or that would be acquired by them in the Exchange Offer
to the public without restriction under the 1933 Act and without restriction
under applicable blue sky or state securities laws, the Issuer Shall, at its
cost:
(x) As promptly as practicable, but in any event prior to the
later of (1) 120 days after the date of this Agreement or (2) 30 days after
the obligation to file the Shelf Registration Statement arises, file with
the SEC, and thereafter shall use its best efforts to cause to be declared
effective as promptly as practicable but no later than 60 days after such
filing obligation arises, a Shelf
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<PAGE>
Registration Statement relating to the offer and sale of the Registrable
Securities by the Holders from time to time in accordance with the methods
of distribution elected by the Majority Holders participating in the Shelf
Registration and set forth in such Shelf Registration Statement; provided
that, with respect to Exchange Securities received by a broker-dealer in
exchange for any Securities that were acquired by such broker-dealer as a
result of market making or other trading activities, the Issuer may, if
permitted by current interpretations by the SEC staff, file a
post-effective amendment to the Exchange Offer Registration Statement
containing the information required by Regulation S-K Items 507 and/or
508, as applicable, in satisfaction of its obligations under this Section
solely with respect to broker-dealers who acquired their Securities as a
result of market making or other trading activities, and any such Exchange
Offer Registration Statement, as so amended, shall be referred to herein
as, and governed by the provisions herein applicable to, a Shelf
Registration Statement. In the event that the Issuer is required to file
a Shelf Registration Statement upon the request of any Holder (including
an Initial Purchaser) not eligible pursuant to clause (iii) or (iv) above
to participate in the Exchange Offer, the Issuer shall file and use its
best efforts to have declared effective by the SEC both an Exchange Offer
Registration Statement pursuant to Section 2.1 with respect to all
Registrable Securities and a Shelf Registration Statement (which may be a
combined Registration Statement with the Exchange Offer Registration
Statement) with respect to offers and sales of Registrable Securities held
by such Holder or such Initial Purchaser, as applicable, after completion
of the Exchange Offer.
(y) Use its best efforts to keep the Shelf Registration
Statement continuously effective in order to permit the Prospectus forming
part thereof to be usable by Holders for a period of two years from the
date the Shelf Registration Statement is declared effective by the SEC, or
for such shorter period that will terminate when all Registrable Securities
covered by the Shelf Registration Statement have been sold pursuant to the
Shelf Registration Statement or cease to be outstanding or otherwise to be
Registrable Securities (the "EFFECTIVENESS PERIOD"); PROVIDED, HOWEVER,
that the Effectiveness Period in respect of the Shelf Registration
Statement shall be extended to the extent required to permit dealers to
comply with the applicable prospectus delivery requirements of Rule 174
under the 1933 Act and as otherwise provided herein; and
(z) Notwithstanding any other provisions hereof, use its best
efforts to ensure that (i) any Shelf Registration Statement and any
amendment thereto and any Prospectus forming part thereof and any
supplement thereto complies in all material respects with the 1933 Act and
the rules and regulations thereunder, (ii) any Shelf Registration Statement
and any amendment thereto does
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<PAGE>
not, when it becomes effective, contain 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 and (iii) any
Prospectus forming part of any Shelf Registration Statement, and any
supplement to such Prospectus (as amended or supplemented from time to
time), does not include an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements, in light
of the circumstances under which they were made, not misleading.
The Issuer shall not permit any securities other than Registrable
Securities to be included in the Shelf Registration Statement. The Issuer
further agrees, if necessary, to supplement or amend the Shelf Registration
Statement, as required by Section 3(b) below, and to furnish to the Holders
of Registrable Securities included in such Shelf Registration Statement
copies of any such supplement or amendment promptly after its being used or
filed with the SEC.
2.3 EXPENSES. The Issuer shall pay all Registration Expenses in
connection with the registration pursuant to Section 2.1 or 2.2. Each Holder
shall pay all underwriting discounts and commissions and transfer taxes, if
any, relating to the sale or disposition of such Holder's Registrable
Securities pursuant to the Shelf Registration Statement and the fees and
expenses of counsel other than the one counsel set forth in the definition of
Registration Expenses.
2.4 EFFECTIVENESS.
(a) The Issuer will be deemed not to have used its best
efforts to cause the Exchange Offer Registration Statement or the Shelf
Registration Statement, as the case may be, to become, or to remain,
effective during the requisite period if the Issuer voluntarily takes any
action that would, or omits to take any action which omission would, result
in any such Registration Statement not being declared effective or in the
Holders of Registrable Securities covered thereby not being able to exchange
or offer and sell such Registrable Securities during that period as and to
the extent contemplated hereby, unless (i) such action is required by
applicable law or (ii) such action is taken by the Issuer in good faith
pursuant to Section 2.4(c).
(b) An Exchange Offer Registration Statement pursuant to
Section 2.1 hereof or a Shelf Registration Statement pursuant to Section 2.2
hereof will not be deemed to have become effective unless it has been
declared effective by the SEC; PROVIDED, HOWEVER, that if, after it has been
declared effective, the offering of Registrable Securities pursuant to an
Exchange Offer Registration Statement or a Shelf Registration Statement is
interfered with by any stop order, injunction or other order or requirement
of the SEC or any other governmental agency or court, such Registration
Statement will be
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<PAGE>
deemed not to be effective during the period of such interference, until the
offering of Registrable Securities pursuant to such Registration Statement
may legally resume.
(c) During any 365-day period, the Issuer may suspend the
availability of a Shelf Registration Statement and the use of the related
Prospectus, for up to two periods of up to 45 consecutive days each (except
for the consecutive 45-day period immediately prior to maturity of the
Security), but no more than an aggregate of 60 days during any 365-day
period, if any event shall occur as a result of which it shall be necessary,
in the good faith determination of the board of directors of the Issuer, to
amend the Shelf Registration Statement or amend or supplement any Prospectus
or prospectus supplement thereunder in order that each such document not
include any untrue statement of material fact or omit to state a material
fact necessary to make the statements therein not misleading in light of the
circumstances under which they were made.
2.5 INTEREST. (a) The Indenture provides that in the event that
either (i) the Exchange Offer Registration Statement is not filed with the
SEC on or prior to the 120th calendar day after the date of this Agreement,
(ii) the Exchange Offer Registration Statement has not been declared
effective on or prior to the 180th calendar day after the date of this
Agreement, (iii) the Exchange Offer is not consummated or, if required, a
Shelf Registration Statement is not declared effective, in either case, on or
prior to the 215th calendar day after the date of this Agreement or (iv) the
Exchange Offer Registration Statement is declared effective but thereafter
ceases to be effective or usable (each such event referred to in clauses (i)
through (iv) above, a "REGISTRATION DEFAULT"), the interest rate borne by the
Securities shall be increased ("ADDITIONAL INTEREST") by one-half of one
percent (0.50%) per annum upon the occurrence of each Registration Default,
which rate will increase by one half of one percent each 90-day period that
such Additional Interest continues to accrue under any such circumstance;
PROVIDED that the maximum aggregate increase in the interest rate will in no
event exceed one percent (1%) per annum. Upon (w) the filing of the Exchange
Offer Registration Statement after the 120-day period described in clause (i)
above, (x) the effectiveness of the Exchange Offer Registration Statement
after the 180-day period described in clause (ii) above, (y) the consummation
of the Exchange Offer or the effectiveness of a Shelf Registration Statement,
as the case may be, after the 215-day period described in clause (iii) above,
or (z) the cure of any Registration Default described in clause (iv) above,
such additional interest shall cease to accrue from the date of such filing,
effectiveness, consummation or cure, as the case may be, if the Issuer is
otherwise in compliance with this section; provided, however, that if, after
any such Additional Interest ceases to accrue, a different event specified in
clause (i), (ii), (iii) or (iv) above occurs, such Additional Interest will
again accrue pursuant to the foregoing provision.
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(b) The Issuer shall notify the Trustee within five business days
after each and every date on which an event occurs in respect of which
Additional Interest is required to be paid (an "EVENT DATE"). Additional
Interest shall be paid by depositing with the Trustee, in trust, for the
benefit of the Holders of Registrable Securities before the applicable
semiannual interest payment date, immediately available funds in sums
sufficient to pay the Additional Interest then due. The Additional Interest
due shall be payable on each interest payment date to the record holder of
Securities entitled to receive the interest payment to be paid on such date
as set forth in the Indenture. Each obligation to pay Additional Interest
shall be deemed to accrue from and including the day following the applicable
Event Date.
3. REGISTRATION PROCEDURES.
In connection with the obligations of the Issuer with respect to
Registration Statements pursuant to Sections 2.1 and 2.2 hereof, the Issuer
shall:
(a) prepare and file with the SEC a Registration Statement, within
the relevant time period specified in Section 2, on the appropriate form
under the 1933 Act, which form (i) shall be selected by the Issuer, (ii)
shall, in the case of a Shelf Registration, be available for the sale of the
Registrable Securities by the selling Holders thereof, (iii) shall comply as
to form in all material respects with the requirements of the applicable form
and include or incorporate by reference all financial statements required by
the SEC to be filed therewith or incorporated by reference therein, and (iv)
shall comply in all respects with the requirements of Regulation S-T under
the 1933 Act, and use its best efforts to cause such Registration Statement
to become effective and remain effective in accordance with Section 2 hereof;
(b) prepare and file with the SEC such amendments and
post-effective amendments to each Registration Statement as may be necessary
under applicable law to keep such Registration Statement effective for the
applicable period; and cause each Prospectus to be supplemented by any
required prospectus supplement, and as so supplemented to be filed pursuant
to Rule 424 (or any similar provision then in force) under the 1933 Act and
comply with the provisions of the 1933 Act, the 1934 Act and the rules and
regulations thereunder applicable to them with respect to the disposition of
all securities covered by each Registration Statement during the applicable
period in accordance with the intended method or methods of distribution by
the selling Holders thereof (including sales by any Participating
Broker-Dealer);
(c) in the case of a Shelf Registration, (i) notify each Holder of
Registrable Securities, at least five business days prior to filing, that a
Shelf Registration Statement with respect to the Registrable Securities is
being filed and advising such Holders that the distribution of Registrable
Securities will be made in accordance with the
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method selected by the Majority Holders participating in the Shelf
Registration; (ii) furnish to each Holder of Registrable Securities included
in the Shelf Registration Statement and to each underwriter of an
underwritten offering of Registrable Securities included in the Shelf
Registration Statement, if any, without charge, as many copies of each
Prospectus, including each preliminary Prospectus, and any amendment or
supplement thereto and such other documents as such Holder or underwriter may
reasonably request, including financial statements and schedules and, if the
Holder so requests, all exhibits in order to facilitate the public sale or
other disposition of the Registrable Securities included in the Shelf
Registration Statement; and (iii) subject to the third from the last
paragraph of this Section 3, hereby consent to the use of the Prospectus or
any amendment or supplement thereto by each of the selling Holders of
Registrable Securities included in the Shelf Registration Statement in
connection with the offering and sale of the Registrable Securities covered
by the Prospectus or any amendment or supplement thereto;
(d) use its best efforts to register or qualify the Registrable
Securities under all applicable state securities or "blue sky" laws of such
jurisdictions as any Holder of Registrable Securities covered by a
Registration Statement and each underwriter of an underwritten offering of
Registrable Securities shall reasonably request by the time the applicable
Registration Statement is declared effective by the SEC, and do any and all
other acts and things which may be reasonably necessary or advisable to
enable each such Holder and underwriter to consummate the disposition in each
such jurisdiction of such Registrable Securities owned by such Holder;
PROVIDED, HOWEVER, that the Issuer shall not be required to (i) qualify as a
foreign corporation or as a dealer in securities in any jurisdiction where it
would not otherwise be required to qualify but for this Section 3(d), or (ii)
take any action which would subject it to general service of process or
taxation in any such jurisdiction where it is not then so subject;
(e) if, following the date hereof there has been announced a
change in SEC policy with respect to exchange offers such as the Exchange
Offer, that in the reasonable opinion of counsel to the Issuer raises a
substantial question as to whether the Exchange Offer is permitted by
applicable federal law, the Issuer hereby agrees to seek a no-action letter
or other favorable decision from the SEC allowing the Issuer to consummate an
Exchange Offer for Registrable Securities contemplated hereby. The Issuer
hereby agrees to pursue the issuance of such a decision to the SEC staff
level. In connection with and subject to the foregoing, the Issuer hereby
agrees to take all such other actions as may be reasonably requested by the
SEC or otherwise required in connection with the issuance of such decision,
including, without limitation, (A) participating in telephonic conferences
with the SEC, (B) delivering to the SEC staff an analysis prepared by counsel
to the Issuer setting forth the legal bases, if any, upon which such counsel
has concluded that such an Exchange Offer should be permitted and (C)
diligently pursuing a resolution (which need not be favorable) by the SEC
staff;
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(f) as a condition to its participation in the Exchange Offer,
each Holder of Registrable Securities (including, without limitation, any
Holder who is a Participating Broker-Dealer) shall furnish, upon the request
of the Issuer, prior to the consummation of the Exchange Offer, a written
representation to the Issuer (which may be contained in the letter of
transmittal contemplated by the Exchange Offer Registration Statement) to the
effect that (A) it is not an affiliate of the Issuer, (B) it is not engaged
in, and does not intend to engage in, and has no arrangement or understanding
with any person to participate in, a distribution of the Exchange Securities
to be issued in the Exchange Offer and (C) it is acquiring the Exchange
Securities in its ordinary course of business. In addition, all such Holders
of Registrable Securities shall otherwise reasonably cooperate to the extent
necessary in the Issuer's preparations for the Exchange Offer. Each Holder
using the Exchange Offer to participate in a distribution of the Exchange
Securities hereby acknowledges and agrees that, if the resales are of
Exchange Securities obtained by such Holder in exchange for Securities
acquired directly from the Issuer or an affiliate thereof, it (1) could not,
under SEC policy as in effect on the date of this Agreement, rely on the
position of the SEC enunciated in MORGAN STANLEY AND CO., INC. (available
June 5, 1991) and EXXON CAPITAL HOLDINGS CORPORATION (available May 13,
1988), as interpreted in the SEC's letter to SHEARMAN & STERLING dated July
2, 1993, and similar no-action letters (including, if applicable, any
no-action letter obtained pursuant to clause (e) above), and (2) must comply
with the registration and prospectus delivery requirements of the 1933 Act in
connection with a secondary resale transaction and that such a secondary
resale transaction must be covered by an effective registration statement
containing the selling security holder information required by Item 507 or
508, as applicable, of Regulation S-K;
(g) prior to effectiveness of the Exchange Offer Registration
Statement, the Issuer shall, to the extent requested or required by the SEC,
provide a supplemental letter to the SEC (A) stating that the Issuer is
registering the Exchange Offer in reliance on the position of the SEC
enunciated in EXXON CAPITAL HOLDINGS CORPORATION (available May 13, 1988),
and MORGAN STANLEY AND CO., INC. (available June 5, 1991) as interpreted in
the SEC's letter to SHEARMAN & STERLING dated July 2, 1993, and, if
applicable, any no-action letter obtained pursuant to clause (e) above, (B)
including a representation that the Issuer has not entered into any
arrangement or understanding with any Person to distribute the Exchange
Securities to be received in the Exchange Offer, and to the extent that the
Issuer is capable of so representing, to the best of the Issuer's information
and belief, each Holder participating in the Exchange Offer is acquiring the
Exchange Securities in its ordinary course of business and has no arrangement
or understanding with any Person to participate in the distribution of the
Exchange Securities received in the Exchange Offer and (C) any other
undertaking or representation required by the SEC as set forth in any
no-action letter obtained pursuant to clause (e) above, if applicable;
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(h) notify promptly each Holder of Registrable Securities included
in a Shelf Registration or any Participating Broker-Dealer who has notified
the Issuer that it is utilizing the Exchange Offer Registration Statement as
provided in paragraph (f) above and, if requested by such Holder or
Participating Broker-Dealer, confirm such advice in writing promptly (i) when
a Registration Statement has become effective and when any post-effective
amendments and supplements thereto become effective, (ii) of any request by
the SEC or any state securities authority for post-effective amendments and
supplements to a Registration Statement and Prospectus or for additional
information after the Registration Statement has become effective, (iii) of
the issuance by the SEC or any state securities authority of any stop order
suspending the effectiveness of a Registration Statement or the initiation of
any proceedings for that purpose, (iv) in the case of a Shelf Registration,
if, between the effective date of a Registration Statement and the closing of
any sale of Registrable Securities covered thereby, the representations and
warranties of the Issuer contained in any underwriting agreement, securities
sales agreement or other similar agreement, if any, relating to the offering
cease to be true and correct in all material respects, (v) of the happening
of any event or the discovery of any facts during the period a Shelf
Registration Statement is effective which makes any statement made in such
Registration Statement or the related Prospectus untrue in any material
respect or which requires the making of any changes in such Registration
Statement or Prospectus in order to make the statements therein not
misleading, (vi) of the receipt by the Issuer of any notification with
respect to the suspension of the qualification of the Registrable Securities
or the Exchange Securities, as the case may be, included in the Registration
Statement for sale in any jurisdiction or the initiation or threatening of
any proceeding for such purpose and (vii) of any determination by the Issuer
that a post-effective amendment to such Registration Statement would be
appropriate;
(i) in the case of the Exchange Offer Registration Statement (i)
include in the Exchange Offer Registration Statement a section entitled "Plan
of Distribution" which section shall be reasonably acceptable to Merrill
Lynch on behalf of the Participating Broker-Dealers, and which shall contain
a summary statement of the positions taken or policies made by the staff of
the SEC with respect to the potential "underwriter" status of any
broker-dealer that holds Registrable Securities acquired for its own account
as a result of market-making activities or other trading activities and that
will be the beneficial owner (as defined in Rule l3d-3 under the 1934 Act) of
Exchange Securities to be received by such broker-dealer in the Exchange
Offer, whether such positions or policies have been publicly disseminated by
the staff of the SEC or such positions or policies, in the reasonable
judgment of Merrill Lynch, on behalf of the Participating Broker-Dealers, and
its counsel, represent the prevailing views of the staff of the SEC,
including a statement that any such broker-dealer who receives Exchange
Securities for Registrable Securities pursuant to the Exchange Offer may be
deemed a statutory underwriter and must deliver a prospectus meeting the
requirements of the 1933
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Act in connection with any resale of such Exchange Securities, (ii) furnish
to each Participating Broker-Dealer who has delivered to the Issuer the
notice referred to in Section 2.2(iii)(c), without charge, as many copies of
each Prospectus included in the Exchange Offer Registration Statement,
including any preliminary prospectus, and any amendment or supplement
thereto, as such Participating Broker-Dealer may reasonably request, (iii)
hereby consent to the use of the Prospectus forming part of the Exchange
Offer Registration Statement or any amendment or supplement thereto, by any
Person subject to the prospectus delivery requirements of the SEC, including
all Participating Broker-Dealers, in connection with the sale or transfer of
the Exchange Securities covered by the Prospectus or any amendment or
supplement thereto, and (iv) include in the transmittal letter or similar
documentation to be executed by an exchange offeree in order to participate
in the Exchange Offer (x) the following provision:
"If the exchange offeree is not a broker-dealer, it hereby represents
that it is not engaged in, and does not intend to engage in, the
distribution of the Exchange Securities. If the exchange offeree is a
broker-dealer that will receive Exchange Securities for its own
account in exchange for Securities that were acquired as a result of
market-making activities or other trading activities, it will deliver
a prospectus meeting the requirements of the 1933 Act in connection
with any resale of Exchange Securities received in respect of such
Securities pursuant to the Exchange Offer;" and
(y) a statement to the effect that by a broker-dealer making the
acknowledgment described in clause (x) and by delivering a Prospectus in
connection with the exchange of Registrable Securities, the broker-dealer
will not be deemed to admit that it is an underwriter within the meaning of
the 1933 Act;
(j) to the extent any Participating Broker-Dealer participates in
the Exchange Offer, the Issuer agrees to deliver to the Initial Purchasers on
behalf of the Participating Broker-Dealers upon the effectiveness of the
Exchange Offer Registration Statement, (i) officers' certificates
substantially in the form customarily delivered in a public offering of debt
securities and (ii) a comfort letter or comfort letters in customary form to
the extent permitted by Statement on Auditing Standards No. 72 of the
American Institute of Certified Public Accountants (or if such a comfort
letter is not permitted, an agreed upon procedures letter in customary form)
from the Issuer's independent certified public accountants (and, if
necessary, any other independent certified public accountants of any
subsidiary of the Issuer or of any business acquired by the Issuer for which
financial statements are, or are required to be, included in the Registration
Statement) at least as broad in scope and coverage as the comfort letter or
comfort letters delivered to
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the Initial Purchasers in connection with the initial sale of the Securities
to the Initial Purchasers;
(k) (i) in the case of an Exchange Offer, furnish counsel for the
Initial Purchasers and (ii) in the case of a Shelf Registration, furnish
counsel for the Holders of Registrable Securities, copies of any comment
letters received from the SEC or any other request by the SEC or any state
securities authority for amendments or supplements to a Registration
Statement and Prospectus or for additional information;
(l) make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of a Registration Statement at the
earliest possible moment;
(m) in the case of a Shelf Registration, furnish to each Holder of
Registrable Securities included therein, and each underwriter, if any,
without charge, at least one conformed copy of each Registration Statement
and any post-effective amendment thereto, including financial statements and
schedules (without documents incorporated therein by reference and all
exhibits thereto, unless requested);
(n) in the case of a Shelf Registration, cooperate with the
selling Holders of Registrable Securities included therein to facilitate the
timely preparation and delivery of certificates representing Registrable
Securities to be sold and not bearing any restrictive legends; and enable
such Registrable Securities to be in such denominations (consistent with the
provisions of the Indenture) and registered in such names as the selling
Holders or the underwriters, if any, may reasonably request at least three
business days prior to the closing of any sale of Registrable Securities;
(o) in the case of a Shelf Registration, upon the occurrence of
any event or the discovery of any facts, each as contemplated by Sections
3(h)(v) and 3(h)(vi) hereof, as promptly as practicable after the occurrence
of such an event, use its best efforts to prepare a supplement or
post-effective amendment to the Registration Statement or the related
Prospectus or any document incorporated therein by reference or file any
other required document so that, as thereafter delivered to the purchasers of
the Registrable Securities included therein or by Participating
Broker-Dealers, such Prospectus will not contain at the time of such delivery
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. At such time as such public disclosure
is otherwise made or the Issuer determines that such disclosure is not
necessary, in each case to correct any misstatement of a material fact or to
include any omitted material fact, the Issuer agrees promptly to notify each
such Holder of such determination and to furnish each such Holder such number
of copies of the Prospectus as amended or supplemented, as such Holder may
reasonably request;
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<PAGE>
(p) in the case of a Shelf Registration, a reasonable time prior to
the filing of any Registration Statement, any Prospectus, any amendment to a
Registration Statement or amendment or supplement to a Prospectus or any
document which is to be incorporated by reference into a Registration Statement
or a Prospectus after initial filing of a Registration Statement, provide copies
of such document to the Initial Purchasers on behalf of the Holders whose
Registrable Securities are included therein; and make such representatives of
the Issuer as shall be reasonably requested by the Holders of Registrable
Securities included therein, or the Initial Purchasers, on behalf of such
Holders, available for discussion of such document;
(q) obtain a CUSIP number for all Exchange Securities, Private
Exchange Securities or Securities, as the case may be, not later than the
effective date of a Registration Statement, and provide the Trustee with printed
certificates for the Exchange Securities, Private Exchange Securities or the
Securities, as the case may be, in a form eligible for deposit with the
Depositary;
(r) (i) cause the Indenture to be qualified under the TIA in
connection with the registration of the Exchange Securities or Registrable
Securities, as the case may be, (ii) cooperate with the Trustee and the Holders
to effect such changes to the Indenture as may be required for the Indenture to
be so qualified in accordance with the terms of the TIA and (iii) execute, and
use its best efforts to cause the Trustee to execute, all documents as may be
required to effect such changes, and all other forms and documents required to
be filed with the SEC to enable the Indenture to be so qualified in a timely
manner;
(s) in the case of a Shelf Registration, enter into agreements
(including underwriting agreements) and take all other customary and appropriate
actions in order to expedite or facilitate the disposition of the Registrable
Securities included therein and in such connection whether or not an
underwriting agreement is entered into and whether or not the registration is an
underwritten registration:
(i) make such representations and warranties to the Holders of
the Registrable Securities included therein and the underwriters, if any,
in form, substance and scope as are customarily made by issuers to
underwriters in similar underwritten offerings as may be reasonably
requested by them;
(ii) obtain opinions of counsel to the Issuer and updates
thereof (which counsel and opinions (in form, scope and substance) shall be
reasonably satisfactory to the managing underwriters, if any, and the
holders of a majority in principal amount of the Registrable Securities
being sold) addressed to each selling Holder and the underwriters, if any,
covering the matters customarily covered in opinions requested in sales of
securities or underwritten offerings and
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<PAGE>
such other matters as may be reasonably requested by such Holders and
underwriters;
(iii) obtain "cold comfort" letters and updates thereof from the
Issuer's independent certified public accountants (and, if necessary, any
other independent certified public accountants of any subsidiary of the
Issuer or of any business acquired by the Issuer for which financial
statements are, or are required to be, included in the Registration
Statement) addressed to the underwriters, if any, and use reasonable
efforts to have such letter addressed to the selling Holders of Registrable
Securities (to the extent consistent with Statement on Auditing Standards
No. 72 of the American Institute of Certified Public Accounts), such
letters to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters to underwriters in connection
with similar underwritten offerings;
(iv) enter into a securities sales agreement with the selling
Holders and an agent of the selling Holders providing for, among other
things, the appointment of such agent for the selling Holders for the
purpose of soliciting purchases of Registrable Securities included therein,
which agreement shall be in form, substance and scope customary for similar
offerings;
(v) if an underwriting agreement is entered into, cause the
same to set forth indemnification provisions and procedures substantially
equivalent to the indemnification provisions and procedures set forth in
Section 4 hereof with respect to the underwriters and all other parties to
be indemnified pursuant to said Section or, at the request of any
underwriters, in the form customarily provided to such underwriters in
similar types of transactions; and
(vi) deliver such documents and certificates as may be
reasonably requested and as are customarily delivered in similar offerings
to the Holders of a majority in principal amount of the Registrable
Securities being sold and the managing underwriters, if any.
The above shall be done at (i) the effectiveness of such Registration Statement
(and each post-effective amendment thereto) and (ii) each closing under any
underwriting or similar agreement as and to the extent required thereunder;
(t) in the case of a Shelf Registration, or in the case of an
Exchange Offer, if a Prospectus is required to be delivered by any Participating
Broker-Dealer, make available for inspection by representatives of the Holders
of the Registrable Securities included therein, any underwriters participating
in any disposition pursuant to a Shelf Registration Statement, any such
Participating Broker-Dealer and any counsel or
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accountant retained by any of the foregoing, all financial and other records,
pertinent corporate documents and properties of the Issuer reasonably
requested by any such persons, and cause the respective officers, directors,
employees, and any other agents of the Issuer to supply all information
reasonably requested by any such representative, underwriter, special counsel
or accountant in connection with a Registration Statement, and make such
representatives of the Issuer available for discussion of such documents as
shall be reasonably requested by the Initial Purchasers; provided that any
such records, documents, properties and such information that is designated
in writing by the Issuer, in good faith, as confidential at the time of
delivery of such records, documents, properties or information shall be kept
confidential by any such representative, underwriter, special counsel or
accountant and shall be used only in connection with such Shelf Registration
Statement, unless disclosure thereof is made in connection with a court
proceeding or required by law, or such information has become available (not
in violation of this Agreement) to the public generally or through a third
party without an accompanying obligation of confidentiality, and the Issuer
shall be entitled to request that such representative, underwriter, special
counsel or accountant sign a confidentiality agreement to the foregoing
effect;
(u) (i) in the case of an Exchange Offer Registration Statement, a
reasonable time prior to the filing of any Exchange Offer Registration
Statement, any Prospectus forming a part thereof, any amendment to an Exchange
Offer Registration Statement or amendment or supplement to such Prospectus,
provide copies of such document to the Initial Purchasers and to counsel to the
Holders of Registrable Securities and make such changes in any such document
prior to the filing thereof as the Initial Purchasers or counsel to the Holders
of Registrable Securities may reasonably request and, except as otherwise
required by applicable law, not file any such document in a form to which the
Initial Purchasers on behalf of the Holders of Registrable Securities and
counsel to such Holders of Registrable Securities shall not have previously been
advised and furnished a copy of or to which the Initial Purchasers on behalf of
the Holders of Registrable Securities or counsel to the Holders of Registrable
Securities shall reasonably object, and make the representatives of the Issuer
available for discussion of such documents as shall be reasonably requested by
the Initial Purchasers, and
(ii) in the case of a Shelf Registration, a reasonable time
prior to filing any Shelf Registration Statement, any Prospectus forming a part
thereof, any amendment to such Shelf Registration Statement or amendment or
supplement to such Prospectus, provide copies of such document to the Holders of
Registrable Securities included or to be included in such Shelf Registration, to
the Initial Purchasers, to counsel for such Holders and to the underwriter or
underwriters of an underwritten offering of Registrable Securities, if any, make
such changes in any such document prior to the filing thereof as the Initial
Purchasers, the counsel to such Holders or the underwriter or underwriters
reasonably request and not file any such document in a form to which the
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Majority Holders, the Initial Purchasers on behalf of such Holders of
Registrable Securities, counsel for the Holders of Registrable Securities or any
underwriter shall not have previously been advised and furnished a copy of or to
which the Majority Holders, the Initial Purchasers of behalf of such Holders of
Registrable Securities, counsel to such Holders of Registrable Securities or any
underwriter shall reasonably object, and make the representatives of the Issuer
available for discussion of such document as shall be reasonably requested by
such Holders of Registrable Securities, the Initial Purchasers on behalf of such
Holders, counsel for such Holders of Registrable Securities or any underwriter;
(v) in the case of a Shelf Registration, use its best efforts to
cause all Registrable Securities included therein to be listed on any securities
exchange on which similar debt securities issued by the Issuer are then listed
if requested by the Majority Holders whose securities are included therein, or
if requested by the underwriter or underwriters of an underwritten offering of
Registrable Securities, if any;
(w) in the case of a Shelf Registration, use its best efforts to
cause the Registrable Securities included therein to be rated by the appropriate
rating agencies, if so requested by the Majority Holders whose securities are
included therein, or if requested by the underwriter or underwriters of an
underwritten offering of Registrable Securities included therein, if any;
(x) otherwise comply with all applicable rules and regulations of the
SEC and make available to its security holders, as soon as reasonably
practicable, an earnings statement covering at least 12 months which shall
satisfy the provisions of Section 11(a) of the 1933 Act and Rule 158 thereunder;
and
(y) cooperate and assist in any filings required to be made with the
NASD and, in the case of a Shelf Registration, in the performance of any due
diligence investigation by any underwriter and its counsel (including any
"qualified independent underwriter" that is required to be retained in
accordance with the rules and regulations of the NASD).
In the case of a Shelf Registration Statement, the Issuer may (as a
condition to such Holder's participation in the Shelf Registration) require each
Holder of Registrable Securities to furnish to the Issuer such information
regarding the Holder and the proposed distribution by such Holder of such
Registrable Securities as the Issuer may from time to time reasonably request in
writing.
In the case of a Shelf Registration Statement, each Holder agrees
that, upon receipt of any notice from the Issuer of the happening of any event
or the discovery of any facts, each of the kind described in Section 3(h)(v) or
3(h)(vi) hereof, such Holder
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will keep such information confidential and will forthwith discontinue
disposition of Registrable Securities pursuant to a Registration Statement
until such Holder's receipt of the copies of the supplemented or amended
Prospectus contemplated by Section 3(o) hereof, and, if so directed by the
Issuer, such Holder will deliver to the Issuer (at its expense) all copies in
such Holder's possession, other than permanent file copies then in such
Holder's possession, of all Prospectuses covering such Registrable Securities
in effect at or prior to the time of receipt of such notice.
In the event that the Issuer fails to effect the Exchange Offer or
file any Shelf Registration Statement and maintain the effectiveness of any
Shelf Registration Statement as provided herein, the Issuer shall not file any
Registration Statement with respect to any securities (within the meaning of
Section 2(l) of the 1933 Act) of the Issuer other than Registrable Securities.
If any of the Registrable Securities covered by any Shelf Registration
Statement are to be sold in an underwritten offering, the underwriter or
underwriters and manager or managers that will manage such offering will be
selected by the Majority Holders of such Registrable Securities included in such
offering and shall be acceptable to the Issuer. No Holder of Registrable
Securities may participate in any underwritten registration hereunder unless
such Holder (a) agrees to sell such Holder's Registrable Securities on the basis
provided in any underwriting arrangements approved by the Persons entitled
hereunder to approve such arrangements and (b) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents required under the terms of such underwriting arrangements.
4. INDEMNIFICATION; CONTRIBUTION.
(a) The Issuer agrees to indemnify and hold harmless the Initial
Purchasers, each Holder, each Participating Broker-Dealer, each Person who
participates as an underwriter (any such Person being an "UNDERWRITER") and each
Person, if any, who controls any Holder or Underwriter within the meaning of
Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all losses, liabilities, claims, damages
and expenses whatsoever, as incurred, arising out of any untrue statement
or alleged untrue statement of a material fact contained in any
Registration Statement (or any amendment or supplement thereto) pursuant to
which Exchange Securities or Registrable Securities were registered under
the 1933 Act, including all documents incorporated therein by reference, or
the omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading, or arising out of any untrue statement or alleged untrue
statement of a material fact contained in any Prospectus (or any
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amendment or supplement thereto) or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading;
(ii) against any and all losses, liabilities, claims, damages
and expenses whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; PROVIDED that (subject to Section
4(d) below) any such settlement is effected with the written consent of the
Issuer; and
(iii) against any and all expenses whatsoever, as incurred
(including the fees and disbursements of counsel chosen by any indemnified
party), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, to the extent that any such expense
is not paid under subparagraph (i) or (ii) above;
PROVIDED, HOWEVER, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense (A) to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Issuer by the
Holder or Underwriter expressly for use in a Registration Statement (or any
amendment thereto) or any Prospectus (or any amendment or supplement thereto),
(B) result from the use of the Prospectus during a period when the use of the
Prospectus has been suspended in accordance with Section 2.4(c); provided, in
each case, that Holders received reasonable prior notice of such suspension or
(c) result from the use of the Prospectus in violation of the third to last
paragraph of Section 3.
(b) Each Holder severally, but not jointly, agrees to indemnify and
hold harmless the Issuer, the Initial Purchasers, each Underwriter and the other
selling Holders, and each of their respective directors and officers, and each
Person, if any, who controls the Issuer, the Initial Purchasers, any
Underwriter or any other selling Holder within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act, against any and all loss, liability,
claim, damage and expense described in the indemnity contained in Section 4(a)
hereof, as incurred, but only with respect to untrue statements or omissions, or
alleged untrue statements or omissions, made in the Shelf Registration Statement
(or any amendment thereto) or any Prospectus included therein (or any amendment
or supplement thereto) in reliance upon and in conformity with written
information with respect to such Holder furnished to the Issuer by such Holder
expressly
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for use in the Shelf Registration Statement (or any amendment thereto) or
such Prospectus (or any amendment or supplement thereto); PROVIDED, HOWEVER,
that no such Holder shall be liable for any claims hereunder in excess of the
amount of net proceeds received by such Holder from the sale of Registrable
Securities pursuant to such Shelf Registration Statement.
(c) Each indemnified party shall give notice in writing as promptly
as reasonably practicable to each indemnifying party of any action or proceeding
commenced against it in respect of which indemnity may be sought hereunder, but
failure so to notify an indemnifying party shall not relieve such indemnifying
party from any liability hereunder to the extent it is not materially prejudiced
as a result thereof and in any event shall not relieve it from any liability
which it may have otherwise than on account of this indemnity agreement. An
indemnifying party may participate at its own expense in the defense of such
action; PROVIDED, HOWEVER, that counsel to the indemnifying party shall not
(except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying party or parties be
liable for the fees and expenses of more than one counsel (in addition to any
local counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
No indemnifying party shall, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 4 (whether or not the indemnified parties are actual or
potential parties thereto), unless such settlement, compromise or consent (i)
includes an unconditional release of each indemnified party from all liability
arising out of such litigation, investigation, proceeding or claim and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party.
(d) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 4(a)(ii) effected without its
written consent if (i) such settlement is entered into more than 45 days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such settlement at
least 30 days prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed such indemnified party in
accordance with such request prior to the date of such settlement.
(e) If the indemnification provided for in this Section 4 is for any
reason unavailable to or insufficient to hold harmless an indemnified party in
respect of
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<PAGE>
any losses, liabilities, claims, damages or expenses referred to therein,
then each indemnifying party shall contribute to the aggregate amount of such
losses, liabilities, claims, damages and expenses incurred by such
indemnified party, as incurred, in such proportion as is appropriate to
reflect the relative fault of the Issuer on the one hand and the Holders and
the Initial Purchasers on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative fault of the Issuer on the one hand and the Holders and
the Initial Purchasers on the other hand shall be determined by reference to,
among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Issuer, the Holders or the Initial Purchasers and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
The Issuer, the Holders and the Initial Purchasers agree that it would
not be just and equitable if contribution pursuant to this Section 4 were
determined by pro rata allocation (even if the Initial Purchasers 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 above in this
Section 4. The aggregate amount of losses, liabilities, claims, damages and
expenses incurred by an indemnified party and referred to above in this Section
4 shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 4, no Initial Purchaser
shall be required to contribute any amount in excess of the amount by which the
total price at which the Securities sold by it were offered exceeds the amount
of any damages which such Initial Purchaser has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission.
No Person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
Person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 4, each Person, if any, who controls an
Initial Purchaser or Holder within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as such
Initial Purchaser or Holder, and each director of the Issuer, and each Person,
if any, who controls the Issuer within the meaning of Section 15 of the 1933 Act
or Section 20 of the 1934 Act shall
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<PAGE>
have the same rights to contribution as the Issuer. The Initial Purchasers'
respective obligations to contribute pursuant to this Section 4 are several
in proportion to the principal amount of Securities set forth opposite their
respective names in Schedule A to the Purchase Agreement and not joint.
5. MISCELLANEOUS.
5.1 RULE 144 AND RULE 144A. For so long as the Issuer is subject to
the reporting requirements of Section 13 or 15 of the 1934 Act, the Issuer
covenants that it will file the reports required to be filed by it under the
1933 Act and Section 13(a) or 15(d) of the 1934 Act and the rules and
regulations adopted by the SEC thereunder. If the Issuer ceases to be so
required to file such reports, the Issuer covenants that it will upon the
request of any Holder of Registrable Securities (a) make publicly available such
information as is necessary to permit sales pursuant to Rule 144 under the 1933
Act, (b) deliver such information to a prospective purchaser as is necessary to
permit sales pursuant to Rule 144A under the 1933 Act and it will take such
further action as any Holder of Registrable Securities may reasonably request,
and (c) take such further action that is reasonable in the circumstances in each
case, to the extent required from time to time to enable such Holder to sell its
Registrable Securities without registration under the 1933 Act within the
limitation of the exemptions provided by (i) Rule 144 under the 1933 Act, as
such Rule may be amended from time to time, (ii) Rule 144A under the 1933 Act,
as such Rule may be amended from time to time, or (iii) any similar rules or
regulations hereafter adopted by the SEC. Upon the request of any Holder of
Registrable Securities, the Issuer will deliver to such Holder a written
statement as to whether it has complied with such requirements.
5.2 TERMINATION OF CERTAIN PARTIES' OBLIGATIONS UNDER THIS AGREEMENT.
Upon the consummation of the Combination, Telecommunications and the Partnership
will automatically, and without any further action by any person, be released
from their obligations under this Agreement. In the event the offer to purchase
referred to in Section 10.21 of the Indenture is made and Securities remain
outstanding thereafter, the Company will automatically, and without any further
action by any person, be released from its obligations under this Agreement.
5.3 NO INCONSISTENT AGREEMENTS. The Issuer has not entered into and
the Issuer will not after the date of this Agreement enter into any agreement
which is inconsistent with the rights granted to the Holders of Registrable
Securities in this Agreement or otherwise conflicts with the provisions hereof.
The rights granted to the Holders hereunder do not and will not for the term of
this Agreement in any way conflict with the rights granted to the holders of the
Issuer's other issued and outstanding securities under any such agreements.
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<PAGE>
5.4 AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given unless the Issuer has obtained the written consent of Holders
of at least a majority in aggregate principal amount of the outstanding
Registrable Securities affected by such amendment, modification, supplement,
waiver or departure.
5.5 NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand delivery, registered
first-class mail, telex, telecopier, or any courier guaranteeing overnight
delivery (a) if to a Holder, at the most current address given by such Holder
to the Issuer by means of a notice given in accordance with the provisions of
this Section 5.5, which address initially is the address set forth in the
Purchase Agreement with respect to the Initial Purchasers; and (b) if to the
Issuer, initially at the Issuer's address set forth in the Purchase
Agreement, and thereafter at such other address of which notice is given in
accordance with the provisions of this Section 5.5.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; two business days
after being deposited in the mail, postage prepaid, if mailed; when answered
back, if telexed; when receipt is acknowledged, if telecopied; and on the next
business day if timely delivered to an air courier guaranteeing overnight
delivery.
Copies of all such notices, demands, or other communications shall be
concurrently delivered by the person giving the same to the Trustee under the
Indenture, at the address specified in such Indenture.
5.6 SUCCESSOR AND ASSIGNS. This Agreement shall inure to the benefit
of and be binding upon the successors, assigns and transferees of each of the
parties, including, without limitation and without the need for an express
assignment, subsequent Holders; PROVIDED that nothing herein shall be deemed to
permit any assignment, transfer or other disposition of Registrable Securities
in violation of the terms of the Purchase Agreement or the Indenture. If any
transferee of any Holder shall acquire Registrable Securities, in any manner,
whether by operation of law or otherwise, such Registrable Securities shall be
held subject to all of the terms of this Agreement, and by taking and holding
such Registrable Securities such Person shall be conclusively deemed to have
agreed to be bound by and to perform all of the terms and provisions of this
Agreement, including the restrictions on resale set forth in this Agreement and,
if applicable, the Purchase Agreement, and such Person shall be entitled to
receive the benefits hereof.
5.7 THIRD PARTY BENEFICIARIES. The Initial Purchasers (even if the
Initial Purchasers are not Holders of Registrable Securities) shall be third
party
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<PAGE>
beneficiaries to the agreements made hereunder between the Issuer, on the one
hand, and the Holders, on the other hand, and shall have the right to enforce
such agreements directly to the extent they deem such enforcement necessary
or advisable to protect their rights or the rights of Holders hereunder.
Each Holder of Registrable Securities shall be a third party beneficiary to
the agreements made hereunder between the Issuer, on the one hand, and the
Initial Purchasers, on the other hand, and shall have the right to enforce
such agreements directly to the extent it deems such enforcement necessary or
advisable to protect its rights hereunder.
5.8 SPECIFIC ENFORCEMENT. Without limiting the remedies available to
the Initial Purchasers and the Holders, the Issuer acknowledges that any failure
by the Issuer to comply with its obligations under Sections 2.1 through 2.4
hereof may result in material irreparable injury to the Initial Purchasers or
the Holders for which there is no adequate remedy at law, that it would not be
possible to measure damages for such injuries precisely and that, in the event
of any such failure, the Initial Purchasers or any Holder may obtain such relief
as may be required to specifically enforce the Issuer's obligations under
Sections 2.1 through 2.4 hereof
5.9 RESTRICTION ON RESALES. Until the expiration of two years after
the original issuance of the Securities, the Issuer will not, and will cause its
"affiliates" (as such term is defined in Rule 144(a)(1) under the 1933 Act) not
to, resell to anyone other than the Issuer any Securities which are "restricted
securities" (as such term is defined under Rule 144(a)(3) under the 1933 Act)
that have been reacquired by any of them and shall immediately upon any purchase
of any such Securities submit such Securities to the Trustee for cancellation
after payment therefor by the Issuer (if the Securities are being submitted by
an affiliate of the Issuer).
5.10 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
5.11 HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
5.12 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO THE
PRINCIPLES OF CONFLICT OF LAWS THEREOF.
5.13 SEVERABILITY. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every
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<PAGE>
other respect and of the remaining provisions contained herein shall not be
affected or impaired thereby.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
CAPROCK COMMUNICATIONS CORP.
By: /s/ Ignatius W. Leonards
------------------------------------------
Name: Ignatius W. Leonards
Title: President
CAPROCK TELECOMMUNICATIONS CORP.
By: /s/ Timothy M. Terrell
------------------------------------------
Name: Timothy M. Terrell
Title: Executive Vice President
CAPROCK FIBER NETWORK, LTD.
By: CapRock Systems, Inc., its general partner
By: /s/ Jere W. Thompson, Jr.
------------------------------------------
Name: Jere W. Thompson, Jr.
Title: President
<PAGE>
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BANC ONE CAPITAL MARKETS, INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: /s/ Mark W. Mancinelli
-----------------------------
Name: Mark W. Mancinelli
Title: Vice President
For itself and as Representative of the other Initial Purchasers named in this
Agreement.
<PAGE>
EXHIBIT 10.57
, 1998
PNC Bank, National Association
1600 Market Street, 30th Floor
Philadelphia, PA 19103
Attention: Corporate Trust Department
Ladies and Gentlemen:
CapRock Communications Corp. (the "Company") is making an offer to exchange
up to $150,000,000 in principal amount of its registered 12% Senior Subordinated
Notes due 2008 (the "New Notes") for $150,000,000 in principal amount of its
outstanding unregistered 12% Senior Subordinated Notes due 2008 (the "Old
Notes"), upon the terms and subject to the conditions set forth in the
Prospectus dated October , 1998 (the "Prospectus") and in the related Letter
of Transmittal (the "Letter of Transmittal"). The Old Notes were issued and the
New Notes will be issued pursuant to the Indenture (the "Indenture") dated as of
July 16, 1998 by and among the Company, CapRock Telecommunications Corp.,
CapRock Fiber Network, Ltd., IWL Communications, Incorporated, and PNC Bank,
National Association, as trustee (the "Trustee"), registrar (the "Registrar")
and paying agent (the "Paying Agent"). The issuance of the New Notes has been
registered pursuant to a Registration Statement on Form S-4 filed by the Company
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended. The offer to exchange New Notes for Old Notes pursuant to the
Prospectus and the Letter of Transmittal is referred to herein as the "Exchange
Offer." Attached hereto as exhibits are the following:
Exhibit 1. The Prospectus;
Exhibit 2. The Form of the Letter of Transmittal;
Exhibit 3. The Form of the Notice of Guaranteed Delivery; and
Exhibit 4. The Form of New Note.
The Exchange Offer will commence on October , 1998 (the "Commencement
Date"), and will expire at 5:00 p.m., New York City time, on , 1998,
unless extended by the Company as provided in the Exchange Offer (the date on
which the Exchange Offer (including as it may be extended) expires is herein
referred to as the "Expiration Date"). The Company will notify you in writing on
the day of any extension of the Exchange Offer.
The Company hereby appoints you, and you hereby agree, to act as the
exchange agent (the "Exchange Agent") in connection with the Exchange Offer. In
that capacity, you will, on behalf of the Company, receive Old Notes tendered
and deliver New Notes in exchange therefor pursuant to this Agreement and the
Letter of Transmittal. The parties hereto acknowledge that the Old Notes and the
New Notes may be held in book-entry form as well as in certificated form and
that all references to the tender, delivery or exchange of Old Notes for New
Notes shall be deemed to include book-entry procedures. In carrying out your
duties as the Exchange Agent in connection with the Exchange Offer, you and the
Company agree as follows:
1. You will make a request to establish an account with respect to the Old
Notes at the Depository Trust Company ("DTC") within two business days after the
date of this Agreement. You agree that any financial institution that is a
participant in DTC's systems may make book-entry delivery of Old Notes in
accordance with DTC's Automated Tender Offer Program ("ATOP").
<PAGE>
PNC Bank, National Association
, 1998
Page 2
2. On the Commencement Date, you will send by first class mail to each
holder of Old Notes, at the address of such holder shown on the register
maintained by you as Registrar under the Indenture, for use by that holder in
forwarding and tendering the Old Notes to you as Exchange Agent, one copy of
each of the Prospectus, the Letter of Transmittal and the Notice of Guaranteed
Delivery, along with a return envelope addressed to you as Exchange Agent. Upon
request of any holder of Old Notes, you are hereby authorized and directed to
issue and mail additional copies of the foregoing documents to that holder of
Old Notes or to the persons that such holder may direct.
3. You will examine each Letter of Transmittal, certificate evidencing Old
Notes, and Notice of Guaranteed Delivery and each of the other documents mailed
or otherwise delivered to you in connection with tenders of Old Notes
(collectively, the "Tender Instruments") to ascertain whether each Letter of
Transmittal or Notice of Guaranteed Delivery has been properly completed and
duly executed and whether the certificates evidencing Old Notes accompanying the
Letter of Transmittal or received pursuant to a Notice of Guaranteed Delivery
are in proper form for transfer, in each case, in accordance with the
instructions set forth in the Letter of Transmittal. Final determination of all
questions as to the validity, form, eligibility and acceptance for exchange of
any tender of Old Notes shall be made by the Company, in its sole discretion,
and that determination shall be final and binding. The Company has reserved in
the Exchange Offer the absolute right to reject any or all tenders of Old Notes
determined by it not to be timely or in proper form or the acceptance of or
exchange for which may, in the opinion of the Company's counsel, be unlawful and
to waive any of the conditions of the Exchange Offer or any defect or
irregularity in the tender of the Old Notes, and the Company's interpretation of
the terms and conditions of the Exchange Offer will be final. The Company
promptly shall notify you, in writing, of any such rejection or waiver.
4. Subject to the provisions of Paragraph 3 hereof concerning the Company's
ability to waive defects in the tender, Old Notes must be tendered only in
accordance with the terms and conditions set forth in the Letter of Transmittal
and the section of the Prospectus under the caption "The Exchange Offer."
(a) Exchange of New Notes for Old Notes tendered and accepted for
exchange pursuant to the Exchange Offer shall be made only if,
(i) you receive on or prior to the Expiration Date (A) certificates
for such Old Notes and (B) a properly completed and duly executed Letter
of Transmittal (or facsimile thereto) relating thereto; or
(ii) you receive on or prior to the Expiration Date electronic
instructions tendering the Old Notes through the ATOP system that contain
the character by which the participant at DTC acknowledges its receipt of
and agrees to be bound by the Letter of Transmittal; or
(iii) you receive (A) a Notice of Guaranteed Delivery relating to
such Old Notes from an Eligible Institution (as defined in the
Prospectus) on or prior to the Expiration Date and (B) certificates for
such Old Notes and a properly completed and duly executed Letter of
Transmittal (or facsimile thereto relating thereto at or prior to 5:00
p.m., New York City time, on or before the third New York Stock Exchange
(the "NYSE") trading day after the date of execution of that Notice of
Guaranteed Delivery.
(b) Exchange shall be made only if a final determination of the adequacy
of the items received, as provided in Paragraph 3 hereof, has been made by
the Company and you receive written notice from the Company that the
conditions of the Exchange Offer have been satisfied or waived.
(c) You are authorized to take such actions as may be necessary and
appropriate to correct any irregularities or deficiencies associated with
any tender not in proper order and to follow the
<PAGE>
PNC Bank, National Association
, 1998
Page 3
instructions of the Company with respect to the waiver of any irregularities
or deficiencies associated with any tender.
5. A tendering holder of Old Notes may withdraw Old Notes tendered prior to
the Expiration Date as set forth in the Prospectus, in which event you shall, as
promptly as possible after notification of that withdrawal, return such Old
Notes to, or in accordance with the instructions of, that holder of Old Notes,
and such Old Notes shall thereafter be deemed not to have been validly tendered.
All questions as to the form and validity (including time of receipt) of notices
of withdrawal shall be determined by the Company, in its sole discretion, whose
determination shall be final and binding.
6. Once each week, on the day of the week fixed by notice to you from the
Company, and once each day on the Expiration Date and the four business days
immediately preceding the Expiration Date, you shall advise by telephone and
promptly thereafter confirm in writing to Kevin W. McAleer (telephone: (972)
982-9515; facsimile: (972) 982-9528) at the Company and A. Michael Hainsfurther
(telephone: (214) 855-7567; facsimile: (214) 978-4356) at Munsch Hardt Kopf Harr
& Dinan, P.C. (or such other person or persons who may be designated by the
Company in writing) as to the information on the attached EXHIBIT A. You shall
also provide the aforementioned persons (or any other persons identified to you
by the aforementioned persons), with such other information as any of them may
reasonably request.
7. You shall record as to the date and time of receipt and preserve as
permanent records each Letter of Transmittal, Notice of Guaranteed Delivery, and
withdrawn tender of Old Notes and each facsimile transmission submitted in lieu
thereof pursuant to the Letter of Transmittal and the section of the Prospectus
under the caption "The Exchange Offer," until you are otherwise instructed in
writing by the Company. You shall match submitted Notices of Guaranteed Delivery
with Old Notes tendered pursuant thereto, although you shall have no duty to
enforce any Notices of Guaranteed Delivery.
8. You shall follow and act upon any written amendments, modifications or
supplements to these instructions to which you agree in writing, and upon any
further instructions in connection with the Exchange Offer, any of which may be
given to you by the Company or those persons as it may authorize in writing.
9. As soon as practicable after the Expiration Date, the Company shall
notify you in writing of the tendered Old Notes, if any, which have been
accepted for exchange (the "Acceptance Notice"), and that written notification
shall be irrevocable. On the date specified by the Company for delivery of the
New Notes (the "Closing Date"), you shall deliver New Notes for such tendered
Old Notes on behalf of the Company. You shall thereupon mark "Canceled" the
certificates representing tendered Old Notes accepted for exchange and retain
such Old Notes as Registrar under the Indenture. Upon completion of the issuance
of New Notes, you will promptly provide to the Company upon the written request
or the Company (i) a list, certified by an authorized signatory, of the Old
Notes that have been canceled in accordance herewith, (ii) a list, certified by
an authorized signatory, of the New Notes that have been issued and (iii) a
list, certified by an authorized signatory, of the Old Notes not tendered for
exchange or tendered and withdrawn, each list to include the name and address of
the former or current holder, as applicable, and the principal amount of each
Old Note or New Note, as applicable.
10. If, pursuant to the provisions of the instructions to the Letter of
Transmittal, less than the entire principal amount evidenced by any certificate
delivered to you is to be tendered, you shall, promptly after the Expiration
Date, and after receipt of the Acceptance Notice provided in Paragraph 9 with
respect to the tendered portion, return or cause to be returned a new
certificate evidencing the untendered remainder of the principal amount of the
Old Note that was evidenced by the certificate to, or in accordance with the
instructions of, the tendering holder of the Old Note.
<PAGE>
PNC Bank, National Association
, 1998
Page 4
11. If, pursuant to the terms of the Exchange Offer, the Company does not
accept for exchange all or any part of the tendered Old Notes, or Old Notes are
tendered but withdrawn in the manner provided in the Exchange Offer, you shall
promptly return to, or in accordance with the instructions of, each tendering
holder of such Old Notes the certificates evidencing the principal amount of Old
Notes not exchanged or, to the extent required, submit to the Company (through
the Registrar) for reissuance to, or in accordance with the instructions of,
each tendering holder of Old Notes certificates evidencing the principal amount
of Old Notes not tendered or exchanged, which certificates shall be returned to
you for disposition, together with a letter of notice provided by the Company,
explaining why the tendered Old Notes are being returned.
12. Certificates evidencing the New Notes as well as certificates evidencing
principal amounts of Old Notes not exchanged shall be forwarded in accordance
with Paragraphs 9, 10 or 11 hereof, as the case may be, by (a) first-class mail
under an existing insurance policy protecting you and the Company from loss or
liability arising out of the non-receipt or non-delivery of such certificates or
(b) by registered mail insured separately for the replacement value of such
certificates.
13. Upon request of any person, you shall furnish copies of the Prospectus,
and supplements thereto, the Letter of Transmittal, Notice of Guaranteed
Delivery and other materials referred to in the Prospectus as being available to
holders of Old Notes. The Company will supply you promptly with copies of those
documents upon your request.
14. As Exchange Agent you:
(a) shall have no duties or obligations other than those specifically
set forth herein or as subsequently may be requested by the Company in
writing and agreed to in writing by you, and no implied duties or
obligations shall be read into this Agreement against you;
(b) will be regarded as making no representations and having no
responsibilities as to the validity, accuracy, sufficiency, value or
genuineness of (i) any certificates evidencing Old Notes deposited with you
pursuant to the Exchange Offer and (ii) any signatures or endorsements,
other than your own;
(c) shall not be required to make any representation or have any
responsibility as to the validity, sufficiency, value or genuineness of the
Exchange Offer or the New Notes;
(d) shall not be required to initiate any legal action hereunder that
might in your judgment involve any expense or liability to you, except upon
written instructions of the Company and then only if you have been furnished
by the Company with such indemnity as shall be reasonably satisfactory to
you;
(e) may rely on and shall be protected in acting upon any certificate,
instrument, opinion, notice, letter, telex, telegram, facsimile transmission
or other document delivered to you and reasonably believed by you to be
genuine and to have been signed by the proper party or parties;
(f) may rely on and shall be protected in acting upon written or oral
instructions from the Chief Executive Officer, the President, the Chief
Financial Officer, any Vice President or the Secretary of the Company (each,
an "Authorized Officer"), or such other person or persons as may be
designated by the Company in writing, with respect to any matter relating to
your actions as Exchange Agent specifically covered by this Agreement or
supplementing or qualifying any such actions;
(g) may consult with counsel satisfactory to you (including counsel for
the Company) and the advice or opinion of that counsel shall be full and
complete authorization and protection in respect of any action taken,
suffered or omitted by you hereunder in good faith and in accordance with
the advice or opinion of that counsel;
<PAGE>
PNC Bank, National Association
, 1998
Page 5
(h) shall not at any time advise or be called upon to advise any person
as to the wisdom of making any tender pursuant to the Exchange Offer, the
market value or decline or appreciation in market value of the Old Notes or
the New Notes, or any other financial or legal aspect of The Exchange Offer
or any transaction related thereto;
(i) shall be entitled, in the event that conflicting claims are made, or
threatened, against you with respect to the Exchange Offer, to institute an
interpleader action in any court of competent jurisdiction requesting that
court to resolve the conflicting claims; and
(j) shall be entitled to receive from the Company the fees set forth in
EXHIBIT B hereto, together with the expenses incurred by you in connection
with your service as Exchange Agent.
15. You hereby agree that all securities, money, assets and property
(collectively, the "Property") deposited with or received by you as Exchange
Agent constitute a special, segregated account, held solely for the benefit of
the Company and holders of Old Notes tendering Old Notes, as their interests may
appear, and the Property shall not be commingled with the securities, money,
assets or property of you or any other person or entity,
16. The Company covenants and agrees to indemnify and to hold you harmless
against any and all costs, expenses (including reasonable fees and expenses of
your legal counsel), losses or damages which may be paid, incurred or suffered
by you or to which you may become subject, arising from or out of, directly or
indirectly, any claim or liability resulting from your actions or inactions as
Exchange Agent pursuant hereto; PROVIDED that such covenant and agreement does
not extend to, and you shall not be indemnified and held harmless with respect
to, such costs, expenses, losses and damages incurred or suffered by you as a
result of, or arising out of, your gross negligence, bad faith, or willful
misconduct in connection with your obligations hereunder.
17. All reports, notices and other communications required or permitted
hereunder (other than the telephonic advice required by Paragraph 6) shall be in
writing (unless otherwise provided herein) and shall be deemed given when
delivered by hand, telegram, telex, facsimile transmission or first-class mail,
postage prepaid, as follows:
To the Exchange Agent:
PNC Bank, National Association
1600 Market St., 30th Floor
Philadelphia, PA 19103
Attn: Stephen Schaaf,
Corporate Trust Department
Telephone: 215-585-3848
Facsimile: 215-585-8872
To the Company:
CapRock Communications Corp.
Two Galleria Tower
13455 Noel Road, Suite 1925
Dallas, TX 75240
Attn: Mr. Kevin W. McAleer
Telephone: (972) 982-9500
Facsimile: (972) 788-4243
<PAGE>
PNC Bank, National Association
, 1998
Page 6
With copy to:
A. Michael Hainsfurther, Esq.
Munsch Hardt Kopf Harr & Dinan, P.C.
4000 Fountain Place
1445 Ross Avenue
Dallas, TX 75202
Telephone: (214) 855-7567
Facsimile: (214) 978-4356
18. This Agreement and your appointment as Exchange Agent hereunder shall be
construed and enforced in accordance with the laws of the Commonwealth of
Pennsylvania and shall inure to the benefit of, and the obligation created
hereby shall be binding upon, the successors and assigns of each of the parties
hereto; PROVIDED, HOWEVER, that no assignment by the Company shall affect the
Exchange Agent's rights under Paragraph 16 hereof. This Agreement may not be
assigned by you without prior written consent of the Company.
19. Any corporation into which the Exchange Agent may be merged or with
which it may be consolidated, or any corporation resulting from any merger or
consolidation to which the Exchange Agent shall be a party, or any corporation
to which the Exchange Agent may transfer all or substantially all of its
corporate trust business, shall be the successor Exchange Agent hereunder,
without the execution or filing of any paper or any further act on the part of
the parties hereto, anything herein to the contrary notwithstanding.
20. This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original but which together shall constitute one
and the same agreement. This Agreement may only be amended, modified or
supplemented in writing signed by all parties hereto.
21. Upon the first to occur of (a) the completion of your duties hereunder
or (b) March 31, 1999, your designation as Exchange Agent and your obligations
hereunder will terminate at the close of business on said date. The provisions
of Paragraph 16 shall survive the termination of this Agreement and shall
continue in full force and effect.
Please acknowledge receipt of this Agreement and confirm the arrangements
herein provided by signing and returning the enclosed copy.
CAPROCK COMMUNICATIONS CORP.
--------------------------------------
By:
--------------------------------------
Kevin W. McAleer
Chief Financial Officer
Accepted as of , 1998 PNC Bank, National Association
as Exchange Agent
By:
- ------------------------------------------
Name: Stephen Schaaf
Title: Vice President
<PAGE>
EXHIBIT A
SAMPLE REPORT LETTER
DATE:
---------------------------------------------------------------
REPORT NUMBER:
--------------------------------------------------
AS OF DATE:
--------------------------------------------------------
RE: Offer of CapRock Communications Corp. to Exchange 12% Senior Subordinated
Notes Due 2008 of the Company ("New Notes") for Outstanding 12% Senior
Subordinated Notes Due 2008 of the Company ("Old Notes")
Ladies and Gentlemen:
As Exchange Agent for the Exchange Offer (as described in the Company's
Prospectus dated as of October , 1998), we hereby render the following report:
Principal amount of Old Notes previously received: _____________________________
Principal amount of Old Notes received today: __________________________________
Total principal amount of Old Notes received to date: __________________________
Very truly yours,
PNC Bank, National Association,
as Exchange Agent
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
<PAGE>
EXHIBIT B
FEE SCHEDULE
CapRock Communications Corp.
Two Galleria Tower
13455 Noel Road, Suite 1925
Dallas, TX 75240
Attn: Mr. Kevin W. McAleer
RE: CapRock Communications Corp. proposed $150,000,000 12% Senior Subordinated
Notes due 2008 Registered Exchange Offering (A/C #350031078296)
<TABLE>
<CAPTION>
DATE DESCRIPTION AMOUNT
- ------------------------------ ------------------------------ ------------------------------
<S> <C> <C>
September , 1998 Exchange Agent Fee $4,500.00
Pay This Amount $4,500.00
</TABLE>
Kindly return "copy" of this invoice with remittance (retaining original for
your file) to, PNC Bank, National Association, Corporate Trust, 1600 Market
Street, 30th Floor, Philadelphia, PA 19103, Attn: Stephen Schaaf
To make payment by wire transfer, the following information is necessary:
ABA# 031000053, Telegraph Name - PNC BANK-PHIL, account to be credited
85-1102-6217, advise by phone to Stephen Schaaf at (215) 585-3848.
<PAGE>
EXHIBIT 1
THE PROSPECTUS
<PAGE>
EXHIBIT 2
FORM OF LETTER OF TRANSMITTAL
<PAGE>
EXHIBIT 3
FORM OF THE NOTICE OF GUARANTEED DELIVERY
<PAGE>
EXHIBIT 4
FORM OF NEW NOTE
<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 Supplemental Consolidated Condensed Financial Data," "Selected
Supplemental Consolidated Financial Data of CapRock," "Selected Historical
Financial Data of Telecommunications" and "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Dallas, Texas
September 28, 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
Supplemental Consolidated Condensed Financial Data," "Selected Supplemental
Consolidated Financial Data of CapRock," "Selected Historical Financial Data
of the Partnership" and "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Dallas, Texas
September 28, 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 Supplemental Consolidated Condensed Financial Data,"
"Selected Supplemental Consolidated Financial Data of CapRock," "Selected
Historical Financial Data of IWL" and "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Houston, Texas
September 28, 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 prospectus.
KPMG PEAT MARWICK LLP
Dallas, Texas
September 28, 1998
<PAGE>
Exhibit 23.5
The Board of Directors
CapRock Communications Corp. and Subsidiaries
(formerly IWL Holdings Corporation)
We consent to the use of our report related to CapRock Communications Corp.
and Subsidiaries included herein and to the reference to our firm under the
headings "Summary Supplemental Consolidated Condensed Financial Data,"
"Selected Supplemental Consolidated Financial Data of CapRock" and "Experts"
in the prospectus.
KPMG PEAT MARWICK LLP
Dallas, Texas
September 28, 1998
<PAGE>
EXHIBIT 23.6
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 "Selected Historical Financial Data of
Telecommunications," "Selected Historical Financial Data of the Partnership,"
and "Experts" in the prospectus.
Burds Reed & Mercer, P.C.
Dallas, Texas
September 28, 1998
<PAGE>
EXHIBIT 25.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORM T-1
---------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT
OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY
OF A TRUSTEE PURSUANT TO SECTION 305(b)(2)
------
---------------------
PNC BANK, NATIONAL ASSOCIATION
(Exact Name of Trustee as Specified in its Charter)
NOT APPLICABLE
(Jurisdiction of incorporation or organization if not a U.S. national bank)
25-1197336
(I.R.S. Employer Identification No.)
ONE PNC PLAZA
FIFTH AVENUE AND WOOD STREET, PITTSBURGH, PENNSYLVANIA 15222
(Address of principal executive offices--Zip code)
ALLAN K. POUST, VICE PRESIDENT, PNC BANK, NATIONAL ASSOCIATION
4TH FLOOR, TWO PNC PLAZA, PITTSBURGH, PENNSYLVANIA 15222
(412) 762-2838
(Name, address and telephone number of agent for service)
------------------------
CAPROCK COMMUNICATIONS CORP.
(Exact name of obligor as specified in its charter)
TEXAS
(State or other jurisdiction of incorporation or organization)
75-2765572
(I.R.S. Employer Identification No.)
TWO GALLERIA TOWER, SUITE 1925
13455 NOEL ROAD
DALLAS, TX 75240-6638
(Address of principal executive offices--Zip code)
12% SENIOR NOTES DUE 2008, SERIES B
(Title of the indenture securities)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
<TABLE>
<CAPTION>
Comptroller of the Currency Washington, D.C.
<S> <C>
Federal Reserve Bank of Cleveland Cleveland, Ohio
Federal Deposit Insurance Corporation Washington, D.C.
</TABLE>
(b) Whether it is authorized to exercise corporate trust powers.
Yes. (See Exhibit T-1-3)
ITEM 2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS.
If the obligor or any underwriter for the obligor is an affiliate of the
trustee, describe each such affiliation.
Neither the obligor nor any underwriter for the obligor is an affiliate
of the trustee.
ITEM 3 THROUGH ITEM 14.
The issuer currently is not in default under any of its outstanding
securities for which PNC Bank is trustee. Accordingly, responses to Items 3
through 14 of Form T-1 are not required pursuant to Form T-1 General
Instructions B.
ITEM 15. FOREIGN TRUSTEE.
Identify the order or rule pursuant to which the foreign trustee is
authorized to act as sole trustee under the indentures qualified or to be
qualified under the Act.
Not applicable (trustee is not a foreign trustee).
ITEM 16. LIST OF EXHIBITS.
List below all exhibits filed as part of this statement of eligibility.
<TABLE>
<S> <C> <C>
Exhibit -- Articles of Association of the trustee, with all amendments thereto,
T-1-1 as presently in effect, filed as Exhibit 1 to Trustee's Statement of
Eligibility and Qualification, Registration No. 333-43153 and
incorporated herein by reference.
Exhibit -- Copy of Certificate of the Authority of the Trustee to Commence
T-1-2 Business, filed as Exhibit 2 to Trustee's Statement of Eligibility and
Qualification, Registration No. 2-58789 and incorporated herein by
reference.
Exhibit -- Copy of Certificate as to Authority of the Trustee to Exercise Trust
T-1-3 Powers, filed as Exhibit 3 to Trustee's Statement of Eligibility and
Qualification, Registration No. 2-58789, and incorporated herein by
reference.
Exhibit -- The By-Laws of the trustee, filed as Exhibit 4 to Trustee's Statement
T-1-4 of Eligibility and Qualification, Registration No. 333-28711 and
incorporated herein by refenence.
Exhibit -- The consent of the trustee required by Section 321(b) of the Act.
T-1-5
Exhibit -- The copy of the Balance Sheet taken from the latest Report of
T-1-6 Condition of the trustee published in response to call made by
Comptroller of the Currency under Section 5211 U.S. Revised Statutes.
</TABLE>
2
<PAGE>
NOTE
The answers to this statement, insofar as such answers relate to (a) what
persons have been underwriters for any securities of the obligor within three
years prior to the date of filing this statement, or are owners of 10% or more
of the voting securities of the obligor, or are affiliates or directors or
executive officers of the obligor, and (b) the voting securities of the trustee
owned beneficially by the obligor and each director and executive officer of the
obligor, are based upon information furnished to the trustee by the obligor and
also, in the case of (b) above, upon an examination of the trustee's records.
While the trustee has no reason to doubt the accuracy of any such information
furnished by the obligor, it cannot accept any responsibility therefor.
------------------------
SIGNATURE APPEARS ON NEXT PAGE
3
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
trustee, PNC Bank, National Association, a corporation organized and existing
under the laws of the United States of America, has duly caused this statement
of eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Pittsburgh and Commonwealth of Pennsylvania on
September 22, 1998.
PNC BANK, NATIONAL ASSOCIATION
(Trustee)
By /s/ Richard Ranii
--------------------------------------
Richard Ranii
Vice President
4
<PAGE>
EXHIBIT T-1-5
CONSENT OF TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of
1939, as amended by the Trust Indenture Reform Act of 1990, in connection with
the proposed issuance by CAPROCK COMMUNICATIONS CORP. of its 12% Senior Notes
due 2008, Series B, we hereby consent that reports of examination by Federal,
State, Territorial, or District authorities may be furnished by such authorities
to the Securities and Exchange Commission upon request therefor.
PNC BANK, NATIONAL ASSOCIATION
(Trustee)
By /s/ Richard Ranii
--------------------------------------
Richard Ranii
Vice President
Dated: September 22, 1998
5
<PAGE>
EXHIBIT T-1-6
SCHEDULE RC--BALANCE SHEET
FROM
REPORT OF CONDITION
CONSOLIDATING DOMESTIC AND FOREIGN SUBSIDIARIES OF
PNC BANK, NATIONAL ASSOCIATION
OF PITTSBURGH IN THE STATE OF PENNSYLVANIA
AT THE CLOSE OF BUSINESS ON
JUNE 30, 1998
FILED IN RESPONSE TO CALL MADE BY
COMPTROLLER OF THE CURRENCY,
UNDER TITLE 12, UNITED STATES CODE, SECTION 161
CHARTER NUMBER 540
COMPTROLLER OF THE CURRENCY NORTHEASTERN DISTRICT
BALANCE SHEET
<TABLE>
<CAPTION>
THOUSANDS OF
DOLLARS
-------------
<S> <C> <C>
ASSETS
Cash and balances due from depository institutions
Noninterest-bearing balances and currency and coin.............................................. $ 2,125,144
Interest-Bearing Balances....................................................................... 86,718
Securities
Held-to-maturity securities..................................................................... 0
Available-for-sale securities................................................................... 6,268,812
Federal funds sold and securities purchased under agreements to resell in domestic offices of the
bank and of its Edge and Agreement subsidiaries, and in IBFs:
Federal funds sold and Securities purchased under agreements to resell.......................... 533,355
Loans and lease financing receivables:
Loans and leases, net of unearned income......................................... $ 56,487,879
LESS: Allowance for loan and lease losses........................................ 826,069
LESS: Allocated transfer risk reserve............................................ 0
Loans and leases, net of unearned income, allowance and reserve................................. 55,661,810
Trading assets.................................................................................... 190,500
Premises and fixed assets (including capitalized leases).......................................... 797,786
Other real estate owned........................................................................... 43,023
Investments in unconsolidated subsidiaries and associated companies............................... 4,401
Customers' liability to this bank on acceptances outstanding...................................... 70,753
Intangible assets................................................................................. 2,144,235
Other assets...................................................................................... 2,345,052
-------------
Total Assets.................................................................................. $ 70,271,589
-------------
-------------
</TABLE>
6
<PAGE>
LIABILITIES
<TABLE>
<S> <C> <C>
Deposits:
In domestic offices.......................................................... $40,095,977
Noninterest-bearing............................................ $9,645,083
Interest-bearing............................................... 30,450,894
In foreign offices, Edge and Agreement subsidiaries, and IBFs................ 4,133,211
Noninterest-bearing............................................ $ 5,376
Interest-bearing............................................... 4,127,835
Federal funds purchased and securities sold under agreements to repurchase in
domestic offices of the bank and of its Edge and Agreement subsidiaries, and
in IBFs:
Federal funds purchased and Securities sold under agreements to
repurchase............................................................... 1,950,155
Demand notes issued to U.S. Treasury........................................... 25
Trading Liabilities............................................................ 489,268
Other borrowed money
With original maturity of one year or less................................... 8,780,835
With original maturity of more than one year through three years............. 1,754,215
With original maturity of more than one year................................. 4,710,181
Bank's liability on acceptances executed and outstanding....................... 70,753
Subordinated notes and debentures.............................................. 901,354
Other liabilities.............................................................. 1,250,979
----------
Total liabilities.............................................................. 64,136,953
EQUITY CAPITAL
Perpetual preferred stock and related surplus.................................. 0
Common Stock................................................................... 218,919
Surplus........................................................................ 2,549,559
Undivided profits and capital reserves......................................... 3,380,559
Net unrealized holding gains (losses) on available-for-sale securities......... (14,401)
Cumulative foreign currency translation adjustments............................ 0
Total equity capital........................................................... 6,134,636
----------
Total liabilities and equity capital........................................... $70,271,589
----------
----------
</TABLE>
7
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND JUNE
30, 1998 (UNAUDITED) AND FOR THE YEAR ENDED DECEMBER 31, 1997 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 JUN-30-1998
<CASH> 3,520 742
<SECURITIES> 0 0
<RECEIVABLES> 15,144 17,275
<ALLOWANCES> (1,781) (465)
<INVENTORY> 1,023 1,092
<CURRENT-ASSETS> 21,441 22,948
<PP&E> 27,341 33,953
<DEPRECIATION> (8,167) (10,222)
<TOTAL-ASSETS> 49,389 60,048
<CURRENT-LIABILITIES> 21,746 38,511
<BONDS> 0 0
0 0
0 0
<COMMON> 287 289
<OTHER-SE> 13,800 18,358
<TOTAL-LIABILITY-AND-EQUITY> 49,389 60,048
<SALES> 75,349 51,420
<TOTAL-REVENUES> 75,349 51,420
<CGS> 52,471 34,035
<TOTAL-COSTS> 69,891 45,845
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,603 919
<INCOME-PRETAX> 4,075 4,760
<INCOME-TAX> 1,514 1,887
<INCOME-CONTINUING> 2,562 2,873
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,562 2,873
<EPS-PRIMARY> 0.09 0.10
<EPS-DILUTED> 0.09 0.10
</TABLE>
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
FOR
TENDER OF 12% SENIOR NOTES DUE 2008, SERIES A
IN EXCHANGE FOR
12% SENIOR NOTES DUE 2008, SERIES B
CAPROCK COMMUNICATIONS CORP.
- -----------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). PRIVATE NOTES
TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE
EXPIRATION DATE
- --------------------------------------------------------------------------------
DELIVER TO THE EXCHANGE AGENT
BY REGISTERED OR CERTIFIED
MAIL, HAND OR OVERNIGHT COURIER:
PNC Bank, National Association
1600 Market Street, 30th Floor
Philadelphia, PA 19103
ATTN: Stephen Schaaf, Corporate Trust Department
BY FACSIMILE:
(FOR ELIGIBLE INSTITUTIONS ONLY)
(215) 585-8872
CONFIRM BY TELEPHONE:
(215) 585-3848
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE
LISTED ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS
ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS
COMPLETED.
The undersigned hereby acknowledges receipt and review of the Prospectus
dated October , 1998 (the "Prospectus") of CapRock Communications Corp. (the
"Company") and this Letter of Transmittal (the "Letter of Transmittal"), which
together describe the Company's offer (the "Exchange Offer") to exchange its 12%
Senior Notes due 2008, Series B (the "Exchange Notes"), which have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to a Registration Statement of which the Prospectus is a part, for a
like principal amount of its issued and outstanding 12% Senior Notes due 2008,
Series A (the "Private Notes"). Capitalized terms used but not defined herein
have the respective meaning given to them in the Prospectus.
The Company reserves the right, at any time or from time to time, to extend
the Exchange Offer at its discretion, in which event the term "Expiration Date"
shall mean the latest time and date in which the Exchange Offer is extended. The
Company shall notify the holders of the Private Notes of any extension by oral
or written notice prior to 9:00 A.M., New York City time, on the next business
day after the previously scheduled Expiration Date.
This Letter of Transmittal is to be used by a Holder of Private Notes either
if original Private Notes are to be forwarded herewith or if delivery of Private
Notes, if available, is to be made by book-entry transfer to the account
maintained by the Exchange Agent at The Depository Trust Company (the
"Book-Entry Transfer Facility") pursuant to the procedures set forth in the
Prospectus under the caption "The Exchange Offer--Book-Entry Transfer." Holders
of Private Notes whose Private Notes are not immediately available, or who are
unable to deliver their Private Notes and all other documents required by this
Letter of Transmittal to the Exchange Agent on or prior to the Expiration Date,
or who are unable to complete the procedure for book-entry transfer on a timely
basis, must tender their Private Notes according to the guaranteed delivery
procedures set forth in the Prospectus under the caption
<PAGE>
"The Exchange Offer--Guaranteed Delivery Procedures." See Instruction 2.
Delivery of documents to the Book-Entry Transfer Facility does not constitute
delivery to the Exchange Agent.
The term "Holder" with respect to the Exchange Offer means any person in
whose name Private Notes are registered on the books of the Company or any other
person who has obtained a properly completed bond power from the registered
Holder. The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer. Holders who wish to tender their Private Notes must
complete this Letter of Transmittal in its entirety.
The undersigned has checked the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS CAREFULLY
BEFORE CHECKING ANY BOX BELOW.
THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED.
QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS
AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
List below the Private Notes to which this Letter of Transmittal relates. If
the space below is inadequate, list the registered numbers and principal amounts
on a separate signed schedule and affix the list to this Letter of Transmittal.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
DESCRIPTION OF PRIVATE NOTES TENDERED
----------------------------------------------------------------------------------------------------
(1) (2) (3) (4)
NAME(S) AND ADDRESS(S) PRINCIPAL
OF REGISTERED PRIVATE NOTE HOLDER(S) AMOUNT PRINCIPAL
EXACTLY AS NAME(S) APPEAR(S) ON PRIVATE NOTES REGISTERED REPRESENTED BY AMOUNT
(PLEASE FILL IN IF BLANK) NUMBERS* NOTE(S) TENDERED**
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
TOTAL
- ------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by book-entry Holders.
** Unless otherwise indicated, any tendering Holder of Private Notes will be
deemed to have tendered the entire aggregate principal amount represented by
such Private Notes. All tenders must be in integral multiples of $1,000.
/ / CHECK HERE IF TENDERED PRIVATE NOTES ARE ENCLOSED HEREWITH.
/ / CHECK HERE IF TENDERED PRIVATE NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THIS ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE
BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING (FOR USE BY ELIGIBLE
INSTITUTIONS ONLY):
Name of Tendering Institution: _____________________________________________
Account Number: ____________________________________________________________
Transaction Code Number: ___________________________________________________
/ / CHECK HERE IF TENDERED PRIVATE NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY ENCLOSED HEREWITH AND COMPLETE THE FOLLOWING
(FOR USE BY ELIGIBLE INSTITUTIONS ONLY):
Name(s) of Registered Holder(s) of Private Notes: __________________________
Date of Execution of Notice of Guaranteed Delivery: ________________________
Window Ticket Number (if available): _______________________________________
Name of Eligible Institution that Guaranteed Delivery: _____________________
Account Number (if delivered by book-entry transfer): ______________________
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
<PAGE>
Name: ______________________________________________________________________
Address: ___________________________________________________________________
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of
Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Private Notes that were acquired as a
result of market-making activities or other trading activities, it will deliver
a prospectus meeting the requirements of the Securities Act in connection with
any resale of such Exchange Notes received in respect of such Private Notes in
the Exchange Offer; however, by so acknowledging and by delivering a prospectus,
the undersigned will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Subject to the terms and conditions of the Exchange Offer, the undersigned
hereby tenders to the Company for exchange the principal amount of Private Notes
indicated above. Subject to and effective upon the acceptance for exchange of
the principal amount of Private Notes tendered in accordance with this Letter of
Transmittal, the undersigned hereby exchanges, assigns, and transfers to the
Company all right, title and interest in and to the Private Notes tendered for
exchange hereby. The undersigned hereby irrevocably constitutes and appoints the
Exchange Agent as the agent and attorney-in-fact of the undersigned (with full
knowledge that the Exchange Agent also acts as the agent of the Company in
connection with the Exchange Offer) with respect to the tendered Private Notes
with full power of substitution to (i) deliver such Private Notes, or transfer
ownership of such Private Notes on the account books maintained by the
Book-Entry Transfer Facility to the Company and deliver all accompanying
evidences of transfer and authenticity, and (ii) present such Private Notes for
transfer on the books of the Company and receive all benefits and otherwise
exercise all rights of beneficial ownership of such Private Notes, all in
accordance with the terms of the Exchange Offer. The power of attorney granted
in this paragraph shall be deemed to be irrevocable and coupled with an
interest.
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, exchange, assign and transfer the Private Notes
tendered hereby and to acquire the Exchange Notes issuable upon the exchange of
such tendered Private Notes and that the Company will acquire good and
unencumbered title thereto, free and clear of all liens, restrictions, charges
and encumbrances and not subject to any adverse claim, when the same are
accepted for exchange by the Company.
The undersigned acknowledge(s) that this Exchange Offer is being made in
reliance upon interpretations contained in no-action letters issued to third
parties by the staff of the Securities and Exchange Commission (the
"Commission") that the Exchange Notes issued in exchange for the Private Notes
pursuant to the Exchange Offer may be offered for resale, resold and otherwise
transferred by Holders thereof (other than any such Holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such Holders' business and such Holders are not
engaging in and do not intend to engage in a distribution of the Exchange Notes
and have no arrangement or understanding with any person to participate in a
distribution of such Exchange Notes. By acceptance of the Exchange Offer, the
undersigned hereby further represent(s) to the Company that (i) any Exchange
Notes acquired in exchange for Private Notes tendered hereby are being acquired
in the ordinary course of business of the person receiving such Exchange Notes,
(ii) neither the undersigned nor any such other person is engaging in or intends
to engage in a distribution of the Exchange Notes, (iii) neither the undersigned
nor any such other person has an arrangement or understanding with any person to
participate in the distribution of such Exchange Notes, and (iv) neither the
Holder nor any such other person is an "affiliate" as defined in Rule 405 under
the Securities Act, of the Company or, if it is an affiliate, it will comply
with the registration and prospectus delivery requirements of the Securities Act
to the extent applicable.
If the undersigned or the person receiving the Exchange Notes is a
broker-dealer that is receiving Exchange Notes for its own account in exchange
for Private Notes, the undersigned hereby represents to the Company that such
Private Notes were acquired in the ordinary course of business as a result of
market-making activities or other trading activities and the undersigned hereby
acknowledges that it or such other person will deliver a prospectus meeting the
requirements of the Securites Act in connection with any resale of such Exchange
Notes; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that the undersigned or such other
person is an "underwriter" within the meaning of the Securities Act. The
undersigned acknowledges that if the undersigned is participating in the
Exchange Offer for the purpose of distributing the Exchange Notes or if resales
are of Exchange Notes obtained by such person in exchange for Private Notes
acquired directly from the Company (i) the
<PAGE>
undersigned cannot rely on the position of the staff of the Commission in
certain no-action letters and, in the absence of an exemption therefrom, must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction of the Exchange
Notes, in which case the registration statement must contain the selling
security holder information required by Item 507 or Item 508, as applicable, of
Regulation S-K of the Securities Act and (ii) failure to comply with such
requirements in such instance could result in the undersigned incurring
liability under the Securities Act for which the undersigned is not indemnified
by the Company.
If the undersigned or the person receiving the Exchange Notes is an
"affiliate" (as defined in Rule 405 under the Securities Act) of the Company,
the undersigned represents to the Company that the undersigned understands and
acknowledges that the Exchange Notes may not be offered for resale, resold or
otherwise transferred by the undersigned or such other person without
registration under the Securities Act or an exemption therefrom.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the exchange, assignment and transfer of the Private Notes
tendered hereby, including the transfer of such Private Notes on the account
books maintained by the Book-Entry Transfer Facility.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted for exchange validly tendered Private Notes when, as and if the Company
gives oral or written notice thereof to the Exchange Agent. Any tendered Private
Notes that are not accepted for exchange pursuant to the Exchange Offer for any
reason will be returned, without expense to the undersigned, at the address
shown below or at a different address as may be indicated herein under "Special
Delivery Instructions" as promptly as practicable after the Expiration Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this Letter of
Transmittal shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns.
The undersigned acknowledges that the Company's acceptance of properly
tendered Private Notes pursuant to the procedures described under the caption
"The Exchange Offer--Procedures for Tendering" in the Prospectus and in the
instructions hereto will constitute a binding agreement between the undersigned
and the Company upon the terms and subject to the conditions of the Exchange
Offer.
Unless otherwise indicated under "Special Issuance Instructions," please
issue the Exchange Notes issued in exchange for the Private Notes accepted for
exchange and return any Private Notes not tendered or not exchanged in the
name(s) of the undersigned. Similarly, unless otherwise indicated under "Special
Delivery Instructions," please mail or deliver the Exchange Notes issued in
exchange for the Private Notes accepted for exchange and any Private Notes not
tendered or not exchanged (and accompanying documents, as appropriate) to the
undersigned at the address shown below the undersigned's signature(s). In the
event that both "Special Issuance Instructions" and "Special Delivery
Instructions" are completed, please issue the Exchange Notes issued in exchange
for the Private Notes accepted for exchange in the name(s) of, and return any
Private Notes not tendered or not exchanged to, the person(s) so indicated. The
undersigned recognizes that the Company has no obligation pursuant to the
"Special Issuance Instructions" and "Special Delivery Instructions" to transfer
any Private Notes from the name of the registered holder(s) thereof if the
Company does not accept for exchange any of the Private Notes so tendered for
exchange.
- --------------------------------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS
(See Instructions 5 and 6)
To be completed ONLY (i) if Private Notes in a principal amount not
tendered, or Exchange Notes issued in exchange for Private Notes accepted
for exchange, are to be issued in the name of someone other than the
undersigned, or (ii) if Private Notes tendered by book-entry transfer that
are not exchanged are to be returned by credit to an account maintained at
the Book-Entry Transfer Facility. Issue Exchange Notes and/or Private Notes
to:
Name(s): ___________________________________________________________________
(PLEASE TYPE OR PRINT)
Address: ___________________________________________________________________
____________________________________________________________________________
(INCLUDE ZIP CODE)
__________________________________________________________________________
(TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER)
(Complete Substitute Form W-9)
/ / Credit unexchanged Private Notes delivered by book-entry transfer to the
Book-Entry Transfer Facility set forth below:
____________________________________________________________________________
(BOOK-ENTRY TRANSFER FACILITY ACCOUNT NUMBER, IF APPLICABLE)
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
PLEASE SIGN HERE WHETHER OR NOT PRIVATE NOTES ARE BEING PHYSICALLY TENDERED
HEREBY
(Complete Accompanying Substitute Form W-9)
____________________________________________________________________________
DATE
__________________________________________________________________________
DATE
__________________________________________________________________________
AREA CODE AND TELEPHONE NUMBER
-----------------------------------------------------------
The above lines must be signed by the registered Holder(s) of Private Notes
as name(s) appear(s) on the Private Notes or on a security position listing or
by person(s) authorized to become registered Holder(s) by a properly completed
bond power from the registered Holder(s), a copy of which must be transmitted
with this Letter of Transmittal. If Private Notes to which this Letter of
Transmittal relate are held of record by two or more joint Holders, then all
such Holders must sign this Letter of Transmittal. If signature is by a trustee,
executor, administrator, guardian, attorney-in-fact, officer of a corporation or
other person acting in a fiduciary or representative capacity, then such person
must (i) set forth his or her full title below and (ii) unless waived by the
Company, submit evidence satisfactory to the Company of such person's authority
so to act. See Instruction 5 regarding the completion of this Letter of
Transmittal, printed below.
Name(s): _______________________________________________________________________
(PLEASE TYPE OR PRINT)
Capacity: ______________________________________________________________________
Address: _______________________________________________________________________
________________________________________________________________________________
(INCLUDE ZIP CODE)
- --------------------------------------------------------------------------------
MEDALLION SIGNATURE GUARANTEE
(If Required By Instruction 5)
Certain signatures must be Guaranteed by an Eligible Institution.
Signature(s) Guaranteed by an Eligible Institution:
____________________________________________________________________________
(AUTHORIZED SIGNATURE)
____________________________________________________________________________
(TITLE)
____________________________________________________________________________
(NAME OF FIRM)
____________________________________________________________________________
(ADDRESS, INCLUDING ZIP CODE)
____________________________________________________________________________
(AREA CODE AND TELEPHONE NUMBER)
Date:________________________________________________________________, 19___
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 5 and 6)
To be completed ONLY if Private Notes in a principal amount not
tendered, or Exchange Notes issued in exchange for Private Notes accepted
for exchange, are to be mailed or delivered to someone other than the
undersigned, or to the undersigned at an address other than that shown below
the undersigned's signature.
Mail or deliver Exchange Notes and/or Private Notes to:
Name: ______________________________________________________________________
(PLEASE TYPE OR PRINT)
Address: ___________________________________________________________________
(INCLUDE ZIP CODE)
__________________________________________________________________________
(TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER)
- --------------------------------------------------------------------------------
INSTRUCTIONS
FORMING PART OF THE TERMS AND
CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND PRIVATE NOTES OR BOOK-ENTRY
CONFIRMATIONS. All physically delivered Private Notes or any confirmation of a
book-entry transfer to the Exchange Agent's account at the Book-Entry Transfer
Facility of Private Notes tendered by book-entry transfer (a "Book-Entry
Confirmation"), as well as a properly completed and duly executed copy of this
Letter of Transmittal or facsimile hereof and any other documents required by
this Letter of Transmittal must be received by the Exchange Agent at its address
set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date.
The method of delivery of the tendered Private Notes, this Letter of Transmittal
and all other required documents to the Exchange Agent is at the election and
risk of the Holder and, except as otherwise provided below, the delivery will be
deemed made only when actually received or confirmed by the Exchange Agent.
Instead of delivery by mail, it is recommended that the Holder use an overnight
or hand delivery service. In all cases, sufficient time should be allowed to
assure delivery to the Exchange Agent before the Expiration Date. No Letter of
Transmittal or Private Notes should be sent to the Company.
2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their
Private Notes and (a) whose Private Notes are not immediately available, (b) who
cannot deliver their Private Notes, this Letter of Transmittal or any other
documents required hereby to the Exchange Agent prior to the Expiration Date or
(c) who are unable to complete the procedure for book-entry transfer on a timely
basis, must tender their Private Notes according to the guaranteed delivery
procedures set forth in the Prospectus. Pursuant to such procedures (i) such
tender must be made by or through a firm which is a member of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc. or a commercial bank or a trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17 Ad-15 under the Securities Exchange Act of 1934, as
amended (an "Eligible Institution"), (ii) prior to the Expiration Date, the
Exchange Agent must have received from the Eligible Institution a properly
completed and duly executed Notice of Guaranteed Delivery (by facsimile
transmission, mail or hand delivery) setting forth the name and address of the
Holder of the Private Notes, the certificate number(s) of such Private Notes and
the principal amount of Private Notes tendered, stating that the tender is being
made thereby and guaranteeing that, within three (3) New York Stock Exchange,
Inc. ("NYSE") trading days after the Expiration Date, the Letter of Transmittal
(or facsimile hereof) together with the certificates representing the Private
Notes (or a Book-Entry Confirmation) in proper form for transfer, will be
received by the Exchange Agent and (iii) the properly completed and executed
Letter of Transmittal (or facsimile thereof) as well as the certificates for all
physically tendered shares of Private Notes, in proper form for transfer, or
Book-Entry Confirmation as the case may be, and all other documents required by
this Letter must be received by the Exchange Agent within three (3) NYSE trading
days after the Expiration Date.
Any Holder of Private Notes who wishes to tender Private Notes pursuant to
the guaranteed delivery procedures described above must ensure that the Exchange
Agent receives the Notice of Guaranteed Delivery prior to 5:00 p.m, New York
City time, on the Expiration Date. Upon request of the Exchange Agent, a Notice
of Guaranteed Delivery will be sent to Holders who wish to tender their Private
Notes according to the guaranteed delivery procedures set forth above.
See "The Exchange Offer--Guaranteed Delivery Procedures" section of the
Prospectus.
<PAGE>
3. TENDER BY HOLDER. Only a Holder of Private Notes may tender such
Private Notes in the Exchange Offer. Any beneficial Holder of Private Notes who
is not the registered Holder and who wishes to tender should arrange with the
registered Holder to execute and deliver this Letter of Transmittal on his
behalf or must, prior to completing and executing this Letter of Transmittal and
delivering his Private Notes, either make appropriate arrangements to register
ownership of the Private Notes in such Holder's name or obtain a properly
completed bond power from the registered Holder.
4. PARTIAL TENDERS. Tenders of Private Notes will be accepted only in
integral multiples of $1,000. If less than the entire principal amount of any
Private Notes is tendered, the tendering Holder should fill in the principal
amount tendered in the third column of the box entitled "Description of Private
Notes" above. The entire principal amount of Private Notes delivered to the
Exchange Agent will be deemed to have been tendered unless otherwise indicated.
If the entire principal amount of all Private Notes is not tendered, then
Private Notes, for the principal amount of Private Notes not tendered, and
Exchange Notes issued in exchange for any Private Notes accepted will be sent to
the Holder at his or her registered address, unless a different address is
provided in the appropriate box on this Letter of Transmittal, promptly after
the Private Notes are accepted for exchange.
5. SIGNATURES ON THIS LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
MEDALLION GUARANTEE OF SIGNATURES. If this Letter of Transmittal (or facsimile
hereof) is signed by the registered Holder(s) of the Private Notes tendered
hereby, the signature must correspond with the name(s) as written on the face of
the Private Notes without alteration, enlargement or any change whatsoever. If
this Letter of Transmittal is signed by a participant in the Book-Entry Transfer
Facility, the signature must correspond with the name as it appears on the
security position listing as the Holder of the Private Notes.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered Holder or Holders of any Private Notes listed, such Private Notes
must be endorsed or accompanied by appropriate bond powers, in each case signed
as the name of the registered Holder or Holders appears on the Private Notes.
If this Letter of Transmittal (or facsimile hereof) or any Private Notes or
bond powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, or officers of corporations or others acting in a fiduciary
or representative capacity, such persons should so indicate when signing and,
unless waived by the Company, evidence satisfactory to the Company of their
authority so to act must be submitted with this Letter of Transmittal.
Endorsements on Private Notes or signatures on bond powers required by this
Instruction 5 must be guaranteed by an Eligible Institution.
No signature guarantee is required if (i) this Letter of Transmittal is
signed by the registered holder(s) of the Private Notes tendered herewith (or by
a participant in the Book-Entry Transfer Facility whose name appears on a
security position listing as the owner of the tendered Private Notes) and the
issuance of Exchange Notes (and any Private Notes not tendered or not accepted)
are to be issued directly to such registered holder(s) (or, if signed by a
participant in the Book-Entry Transfer Facility, any Exchange Notes or Private
Notes not tendered or not accepted are to be deposited to such participant's
account at such Book-Entry Transfer Facility) and neither the box entitled
"Special Delivery Instructions" nor the box entitled "Special Issuance
Instructions" has been completed, or (ii) such Private Notes are tendered for
the account of an Eligible Institution. In all other cases, all signatures on
this Letter of Transmittal must be guaranteed by an Eligible Institution.
6. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS. Tendering holders
should indicate, in the applicable box or boxes, the name and address (or
account at the Book-Entry Transfer Facility) to which Exchange Notes or
substitute Private Notes for principal amounts not tendered or not accepted for
exchange are to be issued or sent, if different from the name and address of the
person signing this Letter of Transmittal. In the case of issuance in a
different name, the taxpayer identification or social security number of the
person named must also be indicated.
7. TRANSFER TAXES. The Company will pay all transfer taxes, if any,
applicable to the exchange of Private Notes pursuant to the Exchange Offer. If,
however, Exchange Notes or Private Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person, other than the registered Holder of the Private
Notes tendered hereby, or if tendered Private Notes are registered in the name
of any person other than the person signing this Letter of Transmittal, or if a
transfer tax is imposed for any reason other than the exchange of Private Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered Holder or any other persons) will be payable
by the tendering Holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with this Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering Holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 7, IT WILL NOT BE NECESSARY FOR
TRANSFER TAX STAMPS TO BE AFFIXED TO THE PRIVATE NOTES LISTED IN THIS LETTER OF
TRANSMITTAL.
<PAGE>
8. TAX IDENTIFICATION NUMBER. Federal income tax law requires that a
holder of any Private Notes which are accepted for exchange must provide the
Company (as payer) with its correct taxpayer identification number ("TIN")
which, in the case of a holder who is an individual, is his or her social
security number. If the Company is not provided with the correct TIN, the Holder
may be subject to a $50 penalty imposed by the Internal Revenue Service. (If
withholding results in an over-payment of taxes, a refund may be obtained.)
Certain holders (including, among others, all corporations and certain foreign
individuals) are not subject to these backup withholding and reporting
requirements. See the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional instructions.
To prevent backup withholding, each tendering holder must provide such
holder's correct TIN by completing the Substitute Form W-9 set forth herein,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN), and that (i) the holder has not been notified by the Internal Revenue
Service that such holder is subject to backup withholding as a result of failure
to report all interest or dividends or (ii) the Internal Revenue Service has
notified the holder that such holder is no longer subject to backup withholding.
If the Private Notes are registered in more than one name or are not in the name
of the actual owner, see the enclosed "Guidelines for Certification of Taxpayer
Identification Number of Substitute Form W-9" for information on which TIN to
report.
The Company reserves the right in its sole discretion to take whatever steps
are necessary to comply with the Company's obligation regarding backup
withholding.
9. VALIDITY OF TENDERS. All questions as to the validity, form,
eligibility (including time of receipt), and acceptance of tendered Private
Notes will be determined by the Company, in its sole discretion, which
determination will be final and binding. The Company reserves the right to
reject any and all Private Notes not validly tendered or any Private Notes, the
Company's acceptance of which would, in the opinion of the Company or its
counsel, be unlawful. The Company also reserves the right to waive any
conditions of the Exchange Offer or defects or irregularities in tenders of
Private Notes as to any ineligibility of any holder who seeks to tender Private
Notes in the Exchange Offer. The interpretation of the terms and conditions of
the Exchange Offer (including this Letter of Transmittal and the instructions
hereto) by the Company shall be final and binding on all parties. Unless waived,
any defects or irregularities in connection with tenders of Private Notes must
be cured within such time as the Company shall determine. The Company will use
reasonable efforts to give notification of defects or irregularities with
respect to tenders of Private Notes, but shall not incur any liability for
failure to give such notification.
10. WAIVER OF CONDITIONS. The Company reserves the absolute right to
waive, in whole or in part, any of the conditions to the Exchange Offer set
forth in the Prospectus.
11. NO CONDITIONAL TENDER. No alternative conditional, irregular or
contingent tender of Private Notes on transmittal of this Letter of Transmittal
will be accepted.
12. MUTILATED, LOST, STOLEN OR DESTROYED PRIVATE NOTES. Any Holder whose
Private Notes have been mutilated, lost, stolen or destroyed should contact the
Exchange Agent at the address indicated above for further instructions.
13. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for assistance
or for additional copies of the Prospectus or this Letter of Transmittal may be
directed to the Exchange Agent at the address or telephone number set forth on
the cover page of this Letter of Transmittal. Holders may also contact their
broker, dealer, commercial bank, trust company or other nominee for assistance
concerning the Exchange Offer.
14. ACCEPTANCE OF TENDERED PRIVATE NOTES AND ISSUANCE OF EXCHANGE NOTES;
RETURN OF PRIVATE NOTES. Subject to the terms and conditions of the Exchange
Offer, the Company will accept for exchange all validly tendered Private Notes
as soon as practicable after the Exchange Date and will issue Exchange Notes
therefor as soon as practicable thereafter. For purposes of the Exchange Offer,
the Company shall be deemed to have accepted tendered Private Notes when, as and
if the Company has given written or oral notice thereof to the Exchange Agent.
If any tendered Private Notes are not exchanged pursuant to the Exchange Offer
for any reason, such unexchanged Private Notes will be returned, without
expense, to the undersigned at the address shown above (or credited to the
undersigned's account at the Book-Entry Transfer Facility designated above) or
at a different address as may be indicated under the box entitled "Special
Delivery Instructions."
15. WITHDRAWAL. Tenders may be withdrawn only pursuant to the limited
withdrawal rights set forth in the Prospectus under the caption "The Exchange
Offer--Withdrawal of Tenders."
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE HEREOF
TOGETHER WITH THE PRIVATE NOTES WHICH MUST BE DELIVERED BY BOOK-ENTRY TRANSFER
OR IN ORIGINAL HARD COPY FORM OR THE NOTICE OF GUARANTEED DELIVERY MUST BE
RECEIVED BY THE EXCHANGE AGENT PRIOR TO THE EXPIRATION TIME.
<PAGE>
TO BE COMPLETED BY ALL TENDERING HOLDERS (SEE INSTRUCTION 8)
PAYER'S NAME: PNC BANK, NATIONAL ASSOCIATION
<TABLE>
<C> <S> <C>
- ---------------------------------------------------------------------------------------------------
SUBSTITUTE Part I: PLEASE PROVIDE YOUR TIN Social Security Number
FORM W-9 IN THE BOX AT RIGHT AND CERTIFY OR ------------------------
Department of the Treasury BY SIGNING AND DATING BELOW Employer Identification Number
Internal Revenue Service
-----------------------------------------------------------------
Part II: For Payees exempt from backup withholding, see the
enclosed Guidelines for Certification of Taxpayer Identification
Payer's Request for Taxpayer Number on Substitute Form W-9 and complete as instructed.
Identification Number (TIN)
-----------------------------------------------------------------
Part III: Awaiting TIN / /
- ---------------------------------------------------------------------------------------------------
CERTIFICATION. Under penalty of perjury, I certify that:
(1) the number shown on this form is my correct Taxpayer Identification Number (or I am waiting
for a number to be issued to me) and
(2) I am not subject to backup withholding either because I have not been notified by the Internal
Revenue Service (IRS) that I am subject to backup withholding as a result of a failure to report
all interest or dividends, or the IRS has notified me that I am no longer subject to backup
withholding.
(3) Any other information provided on this form is true, correct and complete.
CERTIFICATION INSTRUCTIONS. You must cross out item (2) above if you have been notified by the IRS
that you are subject to backup withholding because of underreported interest or dividends on your
tax return. However, if after being notified by the IRS that you were subject to backup
withholding you received another notification from the IRS that you are no longer subject to
backup withholding, do not cross out item (2). (Also see instructions in the enclosed Guidelines.)
Signature ----------------------------------------------------------------- Date
--------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE
EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION
OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL
DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU ARE AWAITING A TIN.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (2)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number with sixty (60) days, 31%
of all payments with respect to the Private Notes or the Exchange Notes made to
me thereafter will be withheld until I provide a number.
Signature
------------------------------------------------------------------ Date
---------------------
<PAGE>
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
FOR
TENDER OF 12% SENIOR NOTES DUE 2008, SERIES A
IN EXCHANGE FOR
12% SENIOR NOTES DUE 2008, SERIES B
CAPROCK COMMUNICATIONS CORP.
This form or one substantially equivalent hereto must be used by a holder to
accept the Exchange Offer of CapRock Communications Corp., a Texas corporation
(the "Company"), and, in connection therewith, who wishes to tender 12% Senior
Notes due 2008, Series A (the "Private Notes") to the Exchange Agent pursuant to
the guaranteed delivery procedures described in "The Exchange Offer-- Guaranteed
Delivery Procedures" of the Company's Prospectus, dated October , 1998 (the
"Prospectus") and in Instruction 2 to the related Letter of Transmittal. Any
holder who wishes to tender Private Notes pursuant to such guaranteed delivery
procedures must ensure that the Exchange Agent receives this Notice of
Guaranteed Delivery prior to the Expiration Date (as defined below) of the
Exchange Offer. Capitalized terms used but not defined herein have the meanings
ascribed to them in the Prospectus or the Letter of Transmittal.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). PRIVATE NOTES TENDERED IN THE
EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE.
- --------------------------------------------------------------------------------
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
BY REGISTERED OR CERTIFIED
MAIL, HAND OR OVERNIGHT COURIER:
PNC Bank, National Association
1600 Market Street, 30th Floor
Philadelphia, PA 19103
ATTN: Stephen Schaaf, Corporate Trust Department
BY FACSIMILE:
(FOR ELIGIBLE INSTITUTIONS ONLY)
(212) 585-8872
CONFIRM BY TELEPHONE:
(212) 585-3848
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET
FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED BOX ON THE
LETTER OF TRANSMITTAL FOR GUARANTEE OF SIGNATURES.
This Notice of Guaranteed Delivery must be signed by the Holder(s) exactly
as their name(s) appear on certificates for Private Notes or on a security
position listing as the owner of Private Notes, or by person(s) authorized to
become Holder(s) by endorsements and documents transmitted with this Notice of
Guaranteed Delivery. If signature is by a trustee, executor, administrator,
guardian, attorney-in-fact,
<PAGE>
officer or other person acting in a fiduciary or representative capacity, such
person must provide the following information:
PLEASE PRINT NAME(S) AND ADDRESS(ES) AND OTHER INFORMATION
Name(s):
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Capacity:
________________________________________________________________________________
Address(es):
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY
1. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY. A properly completed and
duly executed copy of this Notice of Guaranteed Delivery and any other documents
required by this Notice of Guaranteed Delivery must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. The method
of delivery of this Notice of Guaranteed Delivery and any other required
documents to the Exchange Agent is at the election and sole risk of the holder,
and the delivery will be deemed made only when actually received by the Exchange
Agent. If delivery is by mail, registered mail with return receipt requested,
properly insured, is recommended. As an alternative to delivery by mail, the
holders may wish to consider using an overnight or hand delivery service. In all
cases, sufficient time should be allowed to assure timely delivery. For a
description of the guaranteed delivery procedures, see Instruction 2 of the
Letter of Transmittal.
2. SIGNATURES ON THIS NOTICE GUARANTEED DELIVERY. If this Notice of
Guaranteed Delivery is signed by the registered holder(s) of the Private Notes
referred to herein, the signature must correspond with the name(s) written on
the face of the Private Notes without alteration, enlargement, or any change
whatsoever. If this Notice of Guaranteed Delivery is signed by a participant of
the Book-Entry Transfer Facility whose name appears on a security position
listing as the owner of the Private Notes, the signature must correspond with
the name shown on the security listing as the owner of the Private Notes.
If this Notice of Guaranteed Delivery is signed by a person other than the
registered holder(s) of any Private Notes listed or a participant of the
Book-Entry Transfer Facility, this Notice of Guaranteed Delivery must be
accompanied by appropriate bond powers, signed as the name of the registered
holder(s) appear on the Private Notes or signed as the name of the
participant shown on the Book-Entry Transfer Facility's security position
listing.
If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation, or
other person acting in a fiduciary or representative capacity, such person
should so indicate when signing and submit with the Letter of Transmittal
evidence satisfactory to the Company of such person's authority to so act.
3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for
assistance and requests for additional copies of the Prospectus may be directed
to the Exchange Agent at the address specified in the Prospectus. Holders may
also contact their broker, dealer, commercial bank, trust company, or other
nominee for assistance concerning the Exchange Offer.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to the Company, upon the terms and subject to
the conditions set forth in the Prospectus and the related Letter of
Transmittal, the Private Notes indicated below pursuant to the guaranteed
delivery procedures set forth in the Prospectus under the caption "Guaranteed
Delivery Procedures."
Name(s) of Registered Holder(s): _______________________________________________
(PLEASE PRINT OR TYPE)
Signature(s): __________________________________________________________________
Address(es): ___________________________________________________________________
Area Code(s) and Telephone Number(s): __________________________________________
Account Number: ________________________________________________________________
Date: __________________________________________________________________________
<TABLE>
<S> <C>
Certificate No(s). Principal Amount of
(if available) Private Notes Tendered*
</TABLE>
* Must be integral multiples of $1,000 principal amount at maturity.
GUARANTEES:
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
or is a commercial bank or trust company having an office or correspondent in
the United States, or is otherwise an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934,
guarantees deposit with the Exchange Agent of the Letter of Transmittal (or
facsimile thereof), together with the Private Notes tendered hereby in proper
form for transfer (or confirmation of the book-entry transfer of such Private
Notes into the Exchange Agent's account at the Book-Entry Transfer Facility
described in the Prospectus under the caption "The Exchange Offer--Guaranteed
Delivery Procedures" and in the Letter of Transmittal and any other required
documents, all by 5:00 p.m., New York City time, within three New York Stock
Exchange trading days following the Expiration Date.
<TABLE>
<S> <C>
Name of Firm
(AUTHORIZED SIGNATURE)
Address: Name:
(INCLUDE ZIP CODE)
Title: Area Code and Tel. Number
(PLEASE TYPE OR PRINT)
Date: , 19
</TABLE>
DO NOT SEND PRIVATE NOTES WITH THIS FORM. ACTUAL SURRENDER OF PRIVATE NOTES
MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY A PROPERLY COMPLETED AND DULY
EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS.
<PAGE>
EXHIBIT 99.3
LETTER TO BROKERS
FOR
TENDER OF 12% SENIOR NOTES DUE 2008, SERIES A
IN EXCHANGE FOR
12% SENIOR NOTES DUE 2008, SERIES B
CAPROCK COMMUNICATIONS CORP.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1998, UNLESS EXTENDED (THE "EXPIRATION DATE").
PRIVATE NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN
AT ANY TIME PRIOR TO THE EXPIRATION DATE
To Registered Holders and Depository
Trust Company Participants:
We are enclosing herewith the material listed below relating to the offer by
CapRock Communications Corp. (the "Company"), a Texas corporation, to exchange
its 12% Senior Notes Due 2008, Series B (the "Exchange Notes"), which have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
for a like principal amount of its issued and outstanding 12% Senior Notes Due
2008, Series A (the "Private Notes") upon the terms and subject to the
conditions set forth in the Company's Prospectus, dated October , 1998, and the
related Letter of Transmittal (which together constitute the "Exchange Offer").
Enclosed herewith are copies of the following documents:
1. Prospectus dated October , 1998;
2. Letter of Transmittal (together with accompanying Substitute Form
W-9 Guidelines);
3. Notice of Guaranteed Delivery; and
4. Letter which may be sent to your clients for whose account you hold
Private Notes in your name or in the name of your nominee, with space
provided for obtaining such client's instruction with regard to the Exchange
Offer.
We urge you to contact your clients promptly. Please note that the Exchange
Offer will expire on the Expiration Date unless extended.
The Exchange Offer is not conditioned upon any minimum number of Private
Notes being tendered.
Pursuant to the Letter of Transmittal, each holder of Private Notes will
represent to the Company that (i) the Exchange Notes acquired pursuant to the
Exchange Offer are being acquired in the ordinary course of business of the
person receiving such Exchange Notes, (ii) neither the holder nor any such other
person has an arrangement or understanding with any person to participate in the
distribution within the meaning of the Securities Act of such Exchange Notes,
(iii) if the holder is not a broker-dealer, or is a broker-dealer but will not
receive Exchange Notes for its own account in exchange for Private Notes,
neither the holder nor any such other person is engaged in or intends to
participate in the distribution of such Exchange Notes and (iv) neither the
holder nor any such other person is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act or, if the holder is an
"affiliate," that the holder will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable. If the
holder is a broker-dealer (whether or not it is also an "affiliate") that will
receive Exchange Notes for its own account in exchange for Private Notes, it
will represent that such Private Notes were acquired as a result of
market-making activities or other trading activities, and it will acknowledge
that it will deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of such Exchange Notes. By acknowledging that it
will deliver and by delivering a prospectus meeting the requirements of the
<PAGE>
Securities Act in connection with any resale of such Exchange Notes, such holder
is not deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. Each holder of the Private Notes will further be required to
acknowledge that if the holder is participating in the Exchange Offer for the
purpose of distributing the Exchange Notes or if resales are of Exchange Notes
obtained by such person in exchange for Private Notes acquired directly from the
Company or an affiliate of the Company (i) the holder cannot rely on the
position of the staff of the Commission in certain no-action letters and, in the
absence of an exemption therefrom, must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the Exchange Notes, in which case the
registration statement must contain the selling security holder information
required by Item 507 or Item 508, as applicable, of Regulation S-K of the
Securities Act and (ii) failure to comply with such requirements in such
instance could result in the holder incurring liability under the Securities Act
for which the holder is not indemnified by the Company.
The enclosed Letter to Clients contains an authorization by the beneficial
owners of the Private Notes for you to make the foregoing representations.
The Company will not pay any fee or commission to any broker or dealer or to
any other persons (other than the Exchange Agent) in connection with the
solicitation of tenders of Private Notes pursuant to the Exchange Offer. The
Company will pay or cause to be paid any transfer taxes payable on the transfer
of Private Notes to it, except as otherwise provided in Instruction 7 of the
enclosed Letter of Transmittal.
Additional copies of the enclosed material may be obtained from the
undersigned.
Very truly yours,
PNC BANK, NATIONAL ASSOCIATION
<PAGE>
EXHIBIT 99.4
LETTER TO CLIENTS
FOR
TENDER OF 12% SENIOR NOTES DUE 2008, SERIES A
IN EXCHANGE FOR
12% SENIOR NOTES DUE 2008, SERIES B
CAPROCK COMMUNICATIONS CORP.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1998, UNLESS EXTENDED (THE "EXPIRATION DATE")
PRIVATE NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN
AT ANY TIME PRIOR TO THE EXPIRATION DATE
To Our Clients:
We are enclosing herewith a Prospectus, dated October , 1998, of CapRock
Communications Corp. (the "Company"), a Texas corporation, and a related Letter
of Transmittal (which together constitute the "Exchange Offer") relating to the
offer by the Company to exchange its 12% Senior Notes Due 2008, Series B (the
"Exchange Notes"), which have been registered under the Securities Act of 1933,
as amended (the "Securities Act"), for a like principal amount of its issued and
outstanding 12% Senior Notes Due 2008, Series A (the "Private Notes"), upon the
terms and subject to the conditions set forth in the Exchange Offer.
The Exchange Offer is not conditioned upon any minimum number of Private
Notes being tendered.
We are the holder of record of Private Notes held by us for your own
account. A tender of such Private Notes can be made only by us as the record
holder and pursuant to your instructions. The Letter of Transmittal is furnished
to you for your information only and cannot be used by you to tender Private
Notes held by us for your account.
We request instructions as to whether you wish to tender any or all of the
Private Notes held by us for your account pursuant to the terms and conditions
of the Exchange Offer. We also request that you confirm that we may on your
behalf make the representations contained in the Letter of Transmittal.
Pursuant to the Letter of Transmittal, each holder of Private Notes will
represent to the Company that (i) the Exchange Notes acquired pursuant to the
Exchange Offer are being acquired in the ordinary course of business of the
person receiving such Exchange Notes, (ii) neither the holder nor any such other
person has an arrangement or understanding with any person to participate in the
distribution within the meaning of the Securities Act of such Exchange Notes,
(iii) if the holder is not a broker-dealer, or is a broker-dealer but will not
receive Exchange Notes for its own account in exchange for Private Notes,
neither the holder nor any such other person is engaged in or intends to
participate in the distribution of such Exchange Notes, and (iv) neither the
holder nor any such other person is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act or, if the holder is an
"affiliate," that the holder will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable. If the
holder is a broker-dealer (whether or not it is also an "affiliate") that will
receive Exchange Notes for its own account in exchange for Private Notes, it
will represent that such Private Notes were acquired as a result of
market-making activities or other trading activities, and it will acknowledge
that it will deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of such Exchange Notes. By acknowledging that it
will deliver and by delivering a prospectus meeting the requirements of the
Securities Act in connection with any resale of such Exchange Notes, the holder
is not deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. Each holder of the Private Notes will further be required to
acknowledge that if the holder is participating in the Exchange Offer for the
purpose of distributing the Exchange Notes or if resales of Exchange Notes
obtained by such person in exchange for Private Notes acquired directly from the
Company or an affiliate of the Company (i) the holder cannot rely on the
position of the staff of the Commission in certain no-action letters and, in the
<PAGE>
absence of an exemption therefrom, must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the Exchange Notes, in which case the
registration statement must contain the selling security holder information
required by Item 507 or Item 508, as applicable, of Regulation S-K of the
Securities Act and (ii) failure to comply with such requirements in such
instance could result in the holder incurring liability under the Securities Act
for which the holder is not indemnified by the Company.
Very truly yours,
<PAGE>
EXHIBIT 99.5
INSTRUCTION TO REGISTERED HOLDER AND/OR BOOK
ENTRY TRANSFER PARTICIPANT FROM BENEFICIAL OWNER
FOR
TENDER OF 12% SENIOR NOTES DUE 2008, SERIES A
IN EXCHANGE FOR
12% SENIOR NOTES DUE 2008, SERIES B
CAPROCK COMMUNICATIONS CORP.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1998, UNLESS EXTENDED (THE "EXPIRATION DATE").
PRIVATE NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN
AT ANY TIME PRIOR TO THE EXPIRATION DATE
To Registered Holder and/or Participant
of the Book-Entry Transfer Facility:
The undersigned hereby acknowledges receipt of the Prospectus dated October
, 1998 (the "Prospectus") of CapRock Communications Corp., a Texas corporation
(the "Company"), and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), that together constitute the Company's offer (the "Exchange
Offer") to exchange its 12% Senior Notes Due 2008, Series B (the "Exchange
Notes") for all of its outstanding 12% Senior Notes Due 2008, Series A (the
"Private Notes"). Capitalized terms used but not defined herein have the
meanings ascribed to them in the Prospectus.
This will instruct you, the registered holder and/or book-entry transfer
facility participant, as to the action to be taken by you relating to the
Exchange Offer with respect to the Private Notes held by you for the account of
the undersigned.
The aggregate face amount of the Private Notes held by you for the account
of the undersigned is (FILL IN AMOUNT):
$ of the 12% Senior Notes Due 2008, Series A.
With respect to the Exchange Offer, the undersigned hereby instructs you
(CHECK APPROPRIATE BOX).
/ / To TENDER the following Private Notes held by you for the account of the
undersigned [INSERT PRINCIPAL AMOUNT OF OLD NOTES TO BE TENDERED (IF ANY)]:
/ / Not to TENDER any Private Notes by you for the account of the undersigned.
If the undersigned instructs you to tender the Private Notes held by you for
the account of the undersigned, it is understood that you are authorized to
make, on behalf of the undersigned (and the undersigned, by its signature below,
hereby makes to you), the representations and warranties contained in the Letter
of Transmittal that are to be made with respect to the undersigned as a
beneficial owner, including, but not limited to, the representations that (i)
the Exchange Notes acquired pursuant to the Exchange Offer are being acquired in
the ordinary course of business of the person receiving such Exchange Notes,
(ii) neither the undersigned nor any such other person has an arrangement or
understanding with any person to participate in the distribution within the
meaning of the Securities Act of 1933, as amended (the "Securities Act"), of
such Exchange Notes, (iii) if the undersigned is not a broker-dealer, or is a
broker-dealer but will not receive Exchange Notes for its own account in
exchange for Private Notes, neither the undersigned nor any such other person is
engaged in or intends to participate in the distribution of such Exchange Notes
and (iv) neither the undersigned nor any such other person is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act or, if the
undersigned is an "affiliate," that the undersigned will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable. If the undersigned is a broker-dealer (whether or not
<PAGE>
it is also an "affiliate") that will receive Exchange Notes for its own account
in exchange for Private Notes, it represents that such Private Notes were
acquired as a result of market-making activities or other trading activities,
and it acknowledges that it will deliver a prospectus meeting the requirements
of the Securities Act in connection with any resale of such Exchange Notes. By
acknowledging that it will deliver and by delivering a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes, the undersigned is not deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. The undersigned
acknowledges that if the undersigned is participating in the Exchange Offer for
the purpose of distributing the Exchange Notes or if resales are of Exchange
Notes obtained by such person in exchange for Private Notes acquired directly
from the Company or an affiliate of the Company (i) the undersigned cannot rely
on the position of the staff of the Commission in certain no-action letters and,
in the absence of an exemption therefrom must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the Exchange Notes, in which case the
registration statement must contain the selling security holder information
required by Item 507 or Item 508, as applicable, of Regulation S-K of the
Securities Act and (ii) failure to comply with such requirements in such
instance could result in the undersigned incurring liability under the
Securities Act for which the undersigned is not indemnified by the Company.
SIGN HERE
Name of beneficial owner(s): ___________________________________________________
Signature(s): __________________________________________________________________
Name(s) (please print): ________________________________________________________
Address: _______________________________________________________________________
Telephone Number: ______________________________________________________________
Taxpayer Identification or Social Security Number: _____________________________
Date: __________________________________________________________________________
<PAGE>
EXHIBIT 99.6
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER.--Social Security numbers have nine digits separated by two hyphens: i.e.,
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen: i.e., 00-000000. The table below will help determine the number to
give the payer.
<TABLE>
<C> <S> <C>
FOR THIS TYPE OF ACCOUNT: GIVE THE SOCIAL SECURITY NUMBER OF:
- ----------------------------------------------------------------- ------------------------------------------------------
1. An individual's account The individual
2. Two or more individuals (joint account) The actual owner of the account or, if combined funds,
any one of the individuals(1)
3. Husband and wife (joint account) The actual owner of the account or, if joint funds,
either person(1)
4. Custodian account of a minor (Uniform Gift to Minors The minor(2)
Act)
5. Adult and minor (joint account) The adult or, if the minor is the only contributor,
the minor(1)
6. Account in the name of guardian or committee for a The ward, minor, or incompetent person(3)
designated ward, minor or incompetent person
7. a. The usual revocable savings trust account (grantor The grantor-trustee(1)
is also trustee)
b. So-called trust account that is not a legal or The actual owner(1)
valid trust under state law
8. Sole proprietorship account The owner(4)
9. A valid trust, estate, or pension trust The legal entity (Do not furnish the identification
number of the personal representative or trustee
unless the legal entity itself is not designated in
the account title)(5)
10. Corporate account The corporation
11. Religious, charitable, or educational The organization
organization account
12. Partnership account The partnership
13. Association, club or other tax-exempt The organization
organization
14. A broker or registered nominee The broker or nominee
15. Account with the Department of Agriculture in the name The public entity
of a public entity (such as a State or local
government, school district, or prison) that
receives agricultural program payments
</TABLE>
- ------------------------
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate or pension trust.
NOTE: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
<PAGE>
OBTAINING A NUMBER:
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include
the following:
- A corporation.
- A financial institution.
- An organization exempt from tax under section 501(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), or an individual retirement
plan.
- The United States or any agency or instrumentality thereof.
- A State, the District of Columbia, a possession of the United States, or
any subdivision or instrumentality thereof.
- An international organization or any agency or instrumentality thereof.
- A registered dealer in securities or commodities registered in the United
States or a possession of the United States.
- A real estate investment trust.
- A common trust fund operated by a bank under section 584(a) of the Code.
- An exempt charitable remainder trust, or a nonexempt trust described in
section 4947(a)(1) of the Code.
- An entity registered at all times under the Investment Company Act of
1940.
- A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to
backup withholding include the following:
- Payments to nonresident aliens subject to withholding under section 1441
of the Code.
- Payments to partnerships not engaged in a trade or business in the Untied
States and which have at least one nonresident partner.
- Payments of patronage dividends where the amount received is not paid in
money.
- Payments made by certain foreign organizations.
- Payments made to a nominee.
Payments of interest not generally subject to backup withholding include the
following:
- Payments of interest on obligations issued by individuals. Note: You may
be subject to backup withholding if this interest is $600 or more and is
paid in the course of the payer's trade or business and you have not
provided your correct taxpayer identification number to the payer.
- Payments of tax-exempt interest (including exempt-interest dividends under
section 852 of the Code).
- Payments described in section 6049(b)(5) of the Code to non-resident
aliens.
2
<PAGE>
- Payments on tax-free covenant bonds under section 1451 of the Code.
- Payments made by certain foreign organizations.
- Payments made to a nominee.
EXEMPT PAYEES DESCRIBED ABOVE MUST STILL COMPLETE THE SUBSTITUTE FORM W-9 TO
AVOID POSSIBLE ERRONEOUS BACKUP WITHHOLDING. FILE SUBSTITUTE FORM W-9 WITH THE
PAYER, REMEMBERING TO CERTIFY YOUR TAXPAYER IDENTIFICATION NUMBER ON THE FORM,
WRITE "EXEMPT" ON THE FACE OF THE FORM AND SIGN AND DATE THE FORM AND RETURN IT
TO THE PAYER.
Payments that are not subject to information reporting are also not subject
to backup withholding. For details, see sections 6041, 6041(A)(a), 6042, 6044,
6045, 6049, 6050A, and 6050N of the Code and their regulations.
PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividends,
interest, or other payments to give taxpayer identification numbers to payers
who must report the payments to IRS. The IRS uses the numbers for identification
purposes and to help verify the accuracy of your tax return. Payers must be
given the numbers whether or not recipients are required to file a tax return.
Payers must generally withhold 31% of taxable interest, dividends and certain
other payments to a payee who does not furnish a taxpayer identification number
to a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you
fail to furnish your taxpayer identification number to a payer, you are subject
to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Falsifying certifications
or affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL
REVENUE SERVICE.
3
