<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File Number: 0-24581
CAPROCK COMMUNICATIONS CORP.
(Exact name of registrant as specified in its charter)
TEXAS 75-2765572
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
15601 DALLAS PARKWAY, SUITE 700
DALLAS, TEXAS 75248
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 982-9500
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's Common Stock outstanding as
of April 30, 1999 was 29,017,843.
<PAGE> 2
CAPROCK COMMUNICATIONS CORP.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART 1. FINANCIAL INFORMATION......................................... 1
Item 1. Financial Statements.......................................... 1
Consolidated Balance Sheets at December 31, 1998 and
March 31, 1999 (unaudited).................................... 1
Consolidated Statements of Operations (unaudited) for the
Three Months Ended March 31, 1998 and 1999.................... 2
Consolidated Statements of Cash Flows (unaudited) for the
Three Months Ended March 31,1998 and 1999..................... 3
Notes to Consolidated Financial Statements.................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 18
PART II. OTHER INFORMATION............................................. 19
Item 1. Legal Proceedings............................................. 19
Item 6. Exhibits and Reports on Form 8-K.............................. 19
Signature Page................................................ 21
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
----------- ------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 293,860 $ 4,447,375
Marketable securities 97,019,789 47,040,582
Accounts receivable and unbilled services, less allowance for doubtful
accounts of $709,941 and $2,524,521 at December 31, 1998
and March 31, 1999, respectively 19,936,214 35,443,827
Income tax receivable 1,405,000 2,020,920
Costs and estimated earnings in excess of billings 7,238,402 3,574,090
Inventory 1,301,726 1,273,344
Prepaid expenses and other 706,775 1,088,901
Deferred income taxes 1,989,250 2,122,499
------------- -------------
Total current assets 129,891,016 97,011,538
Property, plant and equipment 71,968,047 92,685,506
Accumulated depreciation (12,361,295) (13,823,888)
------------- -------------
Property, plant and equipment, net 59,606,752 78,861,618
Other assets 2,468,000 18,011,450
------------- -------------
Total assets $ 191,965,768 $ 193,884,606
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 26,850,525 $ 31,264,428
Unearned revenue 551,341 539,096
------------- -------------
Total current liabilities 27,401,866 31,803,524
Senior notes, net of unamortized debt issuance costs 145,187,039 145,308,334
Deferred income taxes 3,314,568 2,334,172
------------- -------------
Total liabilities 175,903,473 179,446,030
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, 28,932,395 and 28,952,747 shares at December 31, 1998 and
March 31, 1999, respectively 289,377 289,593
Additional paid-in capital 10,521,713 10,607,199
Retained earnings 5,608,237 3,902,925
Accumulated other comprehensive income 8,878 468
Unearned compensation (329,070) (308,214)
Treasury stock, at cost (36,840) (53,395)
------------- -------------
Total stockholders' equity 16,062,295 14,438,576
------------- -------------
Total liabilities and stockholders' equity $ 191,965,768 $ 193,884,606
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1998 1999
------------ -------------
<S> <C> <C>
Revenues:
Carriers' carrier $ 12,763,105 $ 24,452,165
Integrated services 4,268,888 4,504,312
System services 7,380,369 8,079,814
------------ ------------
Total revenues 24,412,362 37,036,291
Cost of services 16,229,745 22,381,068
------------ ------------
Gross profit 8,182,617 14,655,223
Operating expenses:
Selling, general and administrative 4,435,250 12,550,949
Depreciation and amortization 1,063,677 1,480,163
------------ ------------
Total operating expenses 5,498,927 14,031,112
------------ ------------
Operating income 2,683,690 624,111
Interest expense (482,015) (4,255,475)
Interest income 31,704 845,051
Other income (expense) 548 (19,419)
------------ ------------
Income (loss) before income taxes 2,233,927 (2,805,732)
Income tax expense (benefit) 875,779 (1,100,420)
------------ ------------
Net income (loss) $ 1,358,148 $ (1,705,312)
============ ============
Earnings (loss) per common share:
Basic $ 0.05 $ (0.06)
Diluted $ 0.05 $ (0.06)
Weighted average shares outstanding:
Basic 28,835,994 28,942,571
Diluted 29,448,890 28,942,571
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1998 1999
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,358,148 $ (1,705,312)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,063,677 1,480,163
Deferred income taxes (45,462) (1,113,645)
Equity earnings of unconsolidated joint venture -- 46,120
Amortization of debt issuance costs, included in interest expense -- 121,295
Changes in operating assets and liabilities:
Accounts receivable and unbilled services (2,275,475) (15,507,613)
Inventory 24,927 28,382
Costs and earnings in excess of billings -- 3,664,312
Prepaid expenses and other (125,887) (487,998)
Accounts payable and accrued liabilities 629,220 4,413,903
Income taxes receivable 542,486 (615,920)
Unearned revenue 92,559 (12,245)
------------ ------------
Net cash provided by (used in) operating activities 1,264,193 (9,688,558)
Cash flows from investing activities:
Purchases of property, plant and equipment (3,525,641) (23,819,240)
Proceeds from sale of marketable securities -- 49,979,207
Proceeds from disposal of property, plant and equipment 73,300 3,136,000
Investment in unconsolidated subsidiary -- (15,514,631)
Purchase of ICEL (609,822) --
------------ ------------
Net cash provided by (used in) investing activities (4,062,163) 13,781,336
Cash flows from financing activities:
Principal payments on notes payable (4,074,495) --
Proceeds from line of credit 19,223,971 --
Principal payments on line of credit (14,457,241) --
Purchase of treasury stock -- (16,555)
Proceeds from issuance of common stock 20,883 85,702
Principal payments under capital lease obligations (57,165) --
------------ ------------
Net cash provided by financing activities 655,953 69,147
Effect of exchange rate on cash and cash equivalents -- (8,410)
------------ ------------
Net increase (decrease) in cash and cash equivalents (2,142,017) 4,153,515
Cash and cash equivalents at beginning of period 3,520,017 293,860
------------ ------------
Cash and cash equivalents at end of period $ 1,378,000 $ 4,447,375
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 455,915 $ 8,950,000
============ ============
Cash paid for income taxes $ 290,000 $ --
============ ============
Non-cash investing activity:
Issuance of stock for ICEL acquisition $ 1,577,814 $ --
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 6
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation and Nature of Business
The 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 Corp., a Texas corporation ("Telecommunications"),
CapRock Fiber Network Ltd., a Texas limited partnership ("Partnership"), and IWL
Communications, Incorporated, a Texas corporation ("IWL"), and its wholly owned
subsidiaries upon the consummation of the business combination of those
companies (the "Combination"). All significant inter-company transactions are
eliminated in the consolidation. 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 Agreement and Plan
of Merger and Plan of Exchange dated February 16, 1998, as amended (the "Merger
Agreement"), among the Company, Telecommunications, the Partnership, IWL and
certain other parties, the Company completed the Combination (note 2).
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 the
process of building an advanced fiber network throughout Texas, Louisiana,
Oklahoma, Arkansas and New Mexico. Additionally, the Company, through its
wholly owned subsidiary - IWL, provides communications solutions to customers
with operations in remote, difficult-access regions. The Company markets its
services through its internal sales representatives and a network of
independent agents.
The accompanying consolidated financial statements, which should be read
in conjunction with the consolidated financial statements and footnotes
included in the Company's 1998 Annual Report on Form 10-K, have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. Accounting measurements at interim dates
inherently involve greater reliance on estimates than at year-end. The results
of operations for the three months ended March 31, 1999 are not necessarily
indicative of the results to be expected for the entire fiscal year ending
December 31, 1999.
(2) BUSINESS COMBINATION
On August 26, 1998, pursuant to the Merger Agreement, the Company
completed the Combination with Telecommunications, the Partnership and IWL.
Accordingly, the Consolidated Balance Sheets as of December 31, 1998 and March
31, 1999 and the Consolidated Statements of Operations and Consolidated
Statements of Cash Flows for the three months ended March 31, 1998 and 1999
include Telecommunications, the Partnership and IWL as though these entities
had always been a part of CapRock.
Upon the consummation 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, 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 28,910,221 common shares in the
Combination. Additionally, outstanding employee stock options of IWL and
Telecommunications were converted at the above exchange factors into options to
purchase shares of
4
<PAGE> 7
CapRock common stock. The mergers and interest exchange constituted a tax-free
reorganization and was accounted for as a pooling of interests.
In May 1998, IWL changed its fiscal year end to coincide with the fiscal
years of CapRock, Telecommunications and the Partnership. The Consolidated
Statement of Operations for the three months ended March 31, 1998 and 1999
combine the operating activity for all three entities for these periods.
The transactions between Telecommunications, 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.
The results of operations for the separate companies and the combined
amounts presented in the Consolidated Financial Statements for periods prior to
the Combination follow:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998
------------------
<S> <C>
Net Sales:
Telecommunications............ $ 15,776,950
Partnership .................. 580,895
IWL .......................... 8,054,517
------------
Combined ........................ $ 24,412,362
============
Net Income:
Telecommunications............ $ 897,241
Partnership .................. 70,322
IWL .......................... 390,585
------------
Combined ........................ $ 1,358,148
============
</TABLE>
3) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted income
(loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1999
------------ -------------
<S> <C> <C>
Numerator:
Net income (loss) $ 1,358,148 $ (1,705,312)
Denominator:
Denominator for basic earnings (loss) per
share-weighted average shares outstanding 28,835,994 28,942,571
Effect of dilutive securities:
Employee stock options 612,896 --
------------ ------------
Denominator for diluted earnings (loss) per
share-weighted average shares outstanding 29,448,890 28,942,571
============ ============
Basic and diluted earnings (loss) per share $ .05 $ (.06)
============ ============
</TABLE>
5
<PAGE> 8
4) SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, Disclosures about Segments of an Enterprise and Related Information,
which the Company adopted in 1998. The Company identifies such segments based
on management responsibility. The Company measures segment profit as operating
income, which is defined as income before interest expense and income taxes.
The service revenue from the Telecommunications Division includes all revenues
generated from the sale of telecommunications products to business and
residential customers. These products include local, long distance, Internet,
data and private line services. The Fiber Division includes the operating
activity and the assets relating to the fiber build out. The revenues for the
Fiber Division primarily relate to the sale of dark fiber through IRUs. The
product and service revenue from the Services Division includes the revenues
generated from the design, installation, leasing and sale of voice and data
systems and products, primarily to companies in the oil and gas industry. The
Corporate Division includes certain general and administrative functions and
operating expenses. Information regarding operating segments is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, 1998
----------------------------------------------------------------------------
TELECOMMUNICATIONS FIBER SERVICES CORPORATE CONSOLIDATED
-------------------- ------------ ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Revenue from external customers $15,770,312 $ 587,533 $ 8,054,517 $ -- $24,412,362
Depreciation and amortization 231,420 184,927 647,330 -- 1,063,677
Operating income 1,560,999 323,948 798,743 -- 2,683,690
Total assets 14,552,339 9,948,579 29,833,549 -- 54,334,467
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, 1999
----------------------------------------------------------------------------
TELECOMMUNICATIONS FIBER SERVICES CORPORATE CONSOLIDATED
-------------------- ------------ ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Revenue from external customers $ 17,304,671 $ 11,651,806 $ 8,079,814 $ -- $ 37,036,291
Depreciation and amortization 532,603 208,000 739,560 -- 1,480,163
Operating income (2,687,535) 7,697,874 343,869 (4,730,097) 624,111
Total assets 30,334,464 65,406,316 32,532,702 65,611,124 193,884,606
</TABLE>
All revenue was derived from unaffiliated customers.
5) FIBER BUILD AGREEMENT
In February 1999, the Company entered into a joint build arrangement with
Enron Communications, Inc., a wholly owned subsidiary of Enron Corp., to
jointly build approximately 1,050 miles of fiber optic network within the state
of Texas. The build plan includes four conduits to be placed throughout the
1,050 miles, with one and one-quarter conduits to be owned and funded by
CapRock and one and one-quarter conduits to be owned and funded by Enron
Communications, Inc., and one and one-half conduits to be owned and funded by a
limited partnership formed by CapRock and Enron Communications, Inc. The
limited partnership will sell a specified amount of fiber usage rights and
CapRock will own 48 fibers.
The total required capital contributions will depend on the costs to
construct the segment. CapRock and Enron are committed to each contribute
equally to fund the construction. The total construction costs for the 1,050
miles are estimated at approximately $100 million.
6) SECONDARY PUBLIC OFFERING
On May 6, 1999, the Company entered into an underwriting agreement with
various underwriters to sell 4,000,000 shares of its common stock at a price of
$22.00 per share in a public offering. The registration statement for the
equity offering was declared effective by the SEC on May 6, 1999 and closed on
May 12, 1999. The net proceeds after the underwriters discount from the sale of
the stock was approximately $82.7 million and the expenses associated with
offering are estimated at approximately $1.2 million.
6
<PAGE> 9
7) SENIOR NOTE OFFERING
The Company is in process of selling securities through a private
placement under Section 4(2) and Rule 144A under the Securities Act of 1933.
The $210 million aggregate principal senior notes (the "Senior Notes") were
priced at an interest rate of 11 1/2% on May 13, 1999. The private placement is
scheduled to close on or about May 18, 1999. The estimated net proceeds to the
Company after deducting the initial purchasers' discount and estimated offering
expenses is approximately $200.7 million. The proceeds will be used to fund
capital expenditures for the construction of the fiber optic network, switching
equipment and other capital expenditures and to expand its sales offices, for
potential acquisitions and for general working capital purposes. The funds will
be invested in high-grade liquid securities classified as available for sale.
The Company is required under the proposed indenture to file a registration
statement to register the Senior Notes within 90 days of the closing of the
transaction.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
CapRock's consolidated financial statements and notes thereto for the year
ended December 31, 1998. The Company believes that all necessary adjustments
(consisting of normal recurring adjustments) have been included in the amounts
stated below to present fairly the following quarterly information. Accounting
measurements at interim dates inherently involve greater reliance on estimates
than at year-end. The results for interim periods are not necessarily
indicative of results to be expected for the year. In this Form 10-Q, the
"Company," "CapRock," "we," "us" and "our" refer to CapRock and its
subsidiaries, including Telecommunications, the Partnership and IWL, which are
our three predecessor companies, as well as CapRock Network Services, L.P.,
CapRock Telecommunications Leasing Corp. and CapRock Design Services, L.P.,
unless the context otherwise requires.
FORWARD LOOKING INFORMATION
This Quarterly Report on Form 10-Q includes forward-looking statements. We
have based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements are subject
to risks, uncertainties and assumptions about CapRock, including:
o our anticipated growth strategies,
o anticipated trends in our business, including trends in technology and
the growth of communications network products and services,
o future expenditures for capital projects, and
o our ability to continue to control costs and maintain quality.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including risks
related to, among other things, building a fiber network (including obtaining
the necessary rights-of-way, permits and regulatory approvals), supply and
demand for data services, competition, the need for additional capital, debt
and interest payment obligations, restrictions in our senior note indenture,
rapid growth, dependence on local telephone companies and long distance
carriers, our information systems, retention of key personnel, dependence on
major customers, year 2000 problems, the continued integration of our
predecessor companies, service interruptions, potential liability as an
internet service provider and protection of our intellectual property.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Because of these risks, uncertainties and assumptions, the
forward-looking events discussed in this Form 10-Q might not occur.
OVERVIEW
We own and operate a scalable long-haul fiber network which upon
completion is expected to cover approximately 5,500 route miles throughout the
Southwest region, which includes Texas, Louisiana, Arkansas, Oklahoma and New
Mexico. This fiber network supports the voice, data, bandwidth and dark fiber
services we provide to our carrier and retail customers.
In August 1998, we announced that we had completed a business combination
transaction in which our predecessor companies combined to form our company as
it exists today. The combination was accounted for as a pooling of interests.
Accordingly, our consolidated results include our three predecessor companies
(i.e., Telecommunications, the Partnership and IWL) as though these entities
had always been a part of CapRock.
8
<PAGE> 11
We intend to be the premier provider of carriers' carrier services and the
leading facilities-based integrated communications provider in the Southwest
region. To measure our progress, we classify our revenues in three categories:
carriers' carrier, integrated services and systems services. Our carriers'
carrier revenues include domestic and international long distance, bandwidth
and dark fiber services sold to telecommunications carriers and other wholesale
customers. Currently, we have over 100 carrier customers, including AT&T, MCI
WorldCom, Sprint Corporation and Qwest Communications, as well as many regional
independent companies such as Century Tel, Inc. and Lufkin Conroe Telephone.
Our integrated services revenues reflect our local, long distance, Internet,
data and private line products provided to over 5,000 small and medium-sized
businesses on a single bundled bill. Lastly, our systems services revenues
represent the voice and data systems and services we provide primarily to the
oil and gas industry offshore in and along the Gulf of Mexico.
Our proximity to Mexico allows us to directly connect to the fiber
networks of multiple Mexican telecommunications carriers. Subject to compliance
with certain regulatory requirements, we are capable of providing dark fiber to
these carriers at several border crossings enabling them to close open fiber
rings in Mexico by using CapRock fiber on the U.S. side of the border.
Additionally, our direct connect agreements with foreign carriers position us
to capture increased levels of growing international traffic.
In addition, in February 1999, CapRock entered into a joint build
agreement with Enron Communications, Inc. to jointly build approximately 1,050
miles of fiber network in Texas. Through this joint build arrangement, we will
connect Amarillo, Lubbock, Dallas, Fort Worth, Waco, Bryan, Austin, San Marcos,
San Antonio and Houston, Texas. The build plan includes four conduits to be
placed throughout the approximately 1,050 miles, with one and one-quarter
conduits to be owned and funded directly by us, one and one-quarter to be owned
and funded by Enron Communications and one and one-half to be owned and funded
by a limited partnership formed by us and Enron Communications. Our agreements
with Enron Communications provide that the partnership will install 192 fibers
in the first conduit and will sell 96 of the 192 fibers to be installed. Of the
remaining 96 fibers, we will own 48 fibers and Enron Communications will own 48
fibers. The joint build arrangement provides several benefits, including
reduction of construction costs, accelerated acquisition of right of way and
franchise agreements, the majority of which are essentially in place, and the
freeing up of resources to potentially accelerate the build of the remaining
portion of the network.
RESULTS OF OPERATIONS
CapRock recognizes revenue from the following sources: carriers' carrier,
integrated services and system services.
Carriers' Carrier. Carriers' carrier revenue includes all carrier revenues
generated from the sale of domestic and international switched services, from
the sale of T-1 and DS-3 broadband capacity and from the sale and lease of dark
fiber. The revenue generated from the international switched services represent
minutes of long distance traffic terminating in foreign countries, but
generated by domestic U.S.-based long distance carriers. Such revenues are
recognized when the services are provided. The cost of revenues associated with
these 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 sales
representatives or agents to acquire customer call traffic are expensed in the
period when associated call revenues are recognized.
We account for long-term construction contracts relating to the
development of telecommunications networks for customers using the
percentage-of-completion method, which would include the sale of fiber usage
rights through IRUs and the related construction services associated with
building the fiber network specified in the IRUs. Our revenues from IRUs will
be generated from the amount of fiber we build on our network in excess of that
which we intend to retain for our own use. As a result, we expect that revenues
from IRUs will diminish over time as our supply of excess fiber is sold.
Progress under the percentage-of-completion method is measured based upon costs
incurred to date compared with total estimated construction costs. Customers
are billed based upon contractual milestones.
9
<PAGE> 12
Integrated Services. Integrated services revenue includes all revenues
generated from the sale of telecommunications products to business and
residential customers. These products include local, long distance, Internet,
data and private line services.
Systems Services. Systems services revenue includes revenues generated
from the design, installation, leasing and sale of voice and data systems and
products, primarily to companies in the oil and gas industry.
The following table represents the various sources of revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Revenues:
Carrier's carrier $12,763,105 $24,452,165
Integrated services 4,268,888 4,504,312
System services 7,380,369 8,079,814
----------- -----------
Total revenues $24,412,362 $37,036,291
=========== ===========
</TABLE>
The following table sets forth for the periods indicated CapRock's
statement of operations as a percentage of its operating revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1999
------------ -------------
<S> <C> <C>
Revenues 100% 100%
Cost of services 66% 60%
--- ---
Gross margin 34% 40%
Operating expenses:
Selling, general and administrative 18% 34%
Depreciation and amortization 4% 4%
--- ---
Total operating expenses 22% 38%
--- ---
Operating income 12% 2%
Interest expense (2)% (12)%
Interest income - % 2%
Other income (expense) - % -%
--- ---
Income (loss) before income taxes 10% (8)%
Income tax expense (benefit) 4% (3)%
--- ---
Net income (loss) 6% (5)%
=== ===
</TABLE>
10
<PAGE> 13
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Revenues. Total revenues increased $12.6 million, or 52%, from $24.4
million during the three months ended March 31, 1998 to $37 million during the
three months ended March 31, 1999. This increase was attributable to increases
of 92% in carriers' carrier, 6% in integrated services and 9% in systems
services revenue for the comparable periods.
Carriers' carrier revenue increased $11.7 million from $12.8 million
during the three months ended March 31, 1998 to $24.5 million during the three
months ended March 31, 1999. The 92% increase resulted primarily from the sale
of IRUs and dark fiber leases. Fiber related revenues increased $11.1 million
from $588,000 during the three months ended March 31, 1998 to $11.7 million
during the three months ended March 31, 1999. The Company anticipates recurring
fiber related revenue relating to IRUs and dark fiber leases to continue
through the remainder of the year. However, period-to-period fluctuations can
be expected as this type of revenue is affected by the negotiation and terms of
these contracts and the build out of our network.
Integrated services revenue increased $235,000 from $4.3 million during
the three months ended March 31, 1998 to $4.5 million during the three months
ended March 31, 1999. The 6% increase was attributable to growth in the number
of business and residential customers both from increased penetration in our
existing markets and from the deployment of our network into new markets.
Additionally, CapRock recognized local telephone revenue for the three months
ended March 31, 1999 as compared to no such revenue during the three months
ended March 31, 1998.
Systems services revenue increased $700,000 from $7.4 million during the
three months ended March 31, 1998 to $8.1 million during the three months ended
March 31, 1999. The 9% increase was attributable to moderate growth associated
with the leasing and sale of voice and data systems products and projects
involving the engineering and integration of telecommunications systems and
sales, service and maintenance of telecommunications equipment. The Company
anticipates quarterly systems services revenue for the remainder of the year to
remain at comparable levels.
Costs of Services. Cost of services increased $6.2 million, or 38%, from
$16.2 million during the three months ended March 31, 1998 to $22.4 million
during the three months ended March 31, 1999. The growth in cost of services
was primarily attributable to the continued growth in all three revenue
categories. The six percentage point increase in gross margin from 34% to 40%
resulted primarily from favorable pricing attributable to the higher traffic
and the sale of dark fiber. The increase in the gross margin during the three
months ended March 31, 1999 was partially offset by lower margins attributable
to Mexico and other international traffic, which carry a lower gross margin
percentage. Gross margins may vary in future periods as a result of these and
other factors.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") include salaries, benefits, occupancy costs,
commissions, sales and marketing expenses and administrative expenses. SG&A
increased $8.1 million, or 183%, from $4.4 million during the three months
ended March 31, 1998 to $12.6 million during the three months ended March 31,
1999. The increase resulted primarily from the additional personnel required to
support CapRock's growth, advertising to increase name recognition and brand
awareness and additional sales commission payments.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $416,000, or 39%, from $1.1 million during the three months
ended March 31, 1998 to $1.5 million during the three months ended March 31,
1999. 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. Interest expense increased $3.8 million from $482,000
during the three months ended March 31, 1998 to $4.3 million during the three
months ended March 31, 1999. The increase
11
<PAGE> 14
resulted from interest expense related to the Company's senior notes. See "--
Liquidity and Capital Resources."
Interest Income. Interest income increased $813,000 from $32,000 during
the three months ended March 31, 1998 to $845,000 during the three months ended
March 31, 1999. The increase was attributable to the interest and investment
accretion associated with the marketable securities purchased with the proceeds
from the Company's senior notes issued in July 1998. See " -- Liquidity and
Capital Resources."
Income Taxes (Benefits). During the three months ended March 31, 1998, the
Company incurred income tax expense of $876,000 compared to an income tax
benefit of $1.1 million for the three months ended March 31, 1999. The expense
or benefit resulted from the income or loss for the respective periods. The
effective tax rate for both periods was 39%.
Net Income (Loss). Net income decreased $3.1 million, or 226%, from $1.4
million during the three months ended March 31, 1998 to a net loss of $1.7
million during the three months ended March 31, 1999 as a result of the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
CapRock had cash and cash equivalents of $294,000 at December 31, 1998, as
compared with $4.4 million at March 31, 1999 and marketable securities of $97
million at December 31, 1998 as compared to $47 million at March 31, 1999.
CapRock had working capital of $102.5 million at December 31, 1998 as compared
to working capital of $65.2 million at March 31, 1999. The decrease in working
capital was attributable to the utilization of working capital for the build
out of the fiber optic network and increase in corporate overhead to support
the Company's growth.
CapRock's cash flow provided from operating activities for the three
months ended March 31, 1998 was $1.3 million as compared to $9.7 million used
in operating activities during the three months ended March 31, 1999. The
change was primarily attributable to an increase in accounts receivable and
unbilled services, and the timing of certain capital expenditure payments to
vendors relating to the fiber optic network build out.
Cash used in investing activities during the three months ended March 31,
1998 was $4.1 million as compared to cash provided by investing activities
during the three months ended March 31, 1999 of $13.8 million. Capital
resources used for the purchase of property and equipment increased $20.3
million from $3.5 million during the three months ended March 31, 1998 to $23.8
million during the three months ended March 31, 1999. This increase primarily
related to the purchase of telecommunications equipment and costs incurred with
the build out of the fiber optic network. During the three months ended March
31, 1999, the Company received $50 million from the sale of marketable
securities as compared to no such sales during the three months ended March 31,
1998.
In January 1998, CapRock completed the acquisition of Integrated
Communications and Engineering, Ltd., 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 CapRock's Common Stock.
In July 1998, CapRock issued $150 million aggregate principal amount of
its senior notes. Interest on the senior notes is payable semi-annually in
arrears on January 15 and July 15 of each year, commencing January 15, 1999, at
the rate of 12% per year. A portion of the net proceeds from the offering of
the senior notes was used to repay all existing debt obligations, totaling
$26.8 million. The remaining proceeds, net of transaction costs, have been, or
will be, used to fund additional capital expenditures for the construction of
CapRock's fiber optic network, switching equipment and other capital
expenditures to expand its sales offices, for potential acquisitions and for
general working capital purposes. The funds are invested in high-grade liquid
securities classified as available for sale. The indenture governing the
issuance of the senior notes contains certain restrictive operating and
financial covenants, including restrictive covenants relating to borrowing
additional money, paying dividends or making other distributions to our
shareholders,
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<PAGE> 15
limiting the ability of subsidiaries to make payments to us, making certain
investments, creating certain liens on our assets, selling certain assets and
using the proceeds from those sales for certain purposes, entering into
transactions with affiliates, and engaging in certain mergers or consolidations.
All of the covenants are subject to a number of important qualifications and
exceptions. These covenants may adversely affect CapRock's ability to finance
its future operations or capital needs or to engage in other business activities
that may be in the best interests of CapRock.
CapRock expects to require significant financing for future capital
expenditure and working capital requirements. By the end of the year 2000,
CapRock intends to build out its fiber optic network to approximately 5,500
route miles throughout the Southwest region. CapRock intends to use advanced
fiber capable of supporting dense wave division multiplexing with an OC-48
backbone scalable to OC-192, and intends to install 96 fibers throughout most of
its network and intends to retain on average 24 fiber strands. CapRock is
burying three to four conduits throughout its network. CapRock currently
estimates that its aggregate capital requirements will total approximately $250
million for 1999 and approximately $160 million for 2000, including expenditures
to be made under the joint build arrangement with Enron Communications. CapRock
expects to make substantial capital expenditures thereafter. Capital
expenditures will be required to (1) fund the construction and operation of the
fiber optic network, including the portion to be constructed through the joint
build arrangement with Enron Communications, (2) fund the installation of voice
and data switches, and (3) open sales offices and add sales support and customer
service personnel in markets throughout Texas, Louisiana, Oklahoma, Arkansas and
New Mexico.
On May 6, 1999, CapRock entered into an underwriting agreement with various
underwriters to sell 4,000,000 shares of its common stock at a price of $22.00
per share in a public offering. The registration statement for the equity
offering was declared effective by the SEC on May 6, 1999 and closed on May 12,
1999. CapRock received net proceeds, after deducting underwriting discounts and
expenses payable by CapRock, of approximately $81.5 million from the sale of its
common stock (CapRock will receive an additional approximately $2.0 million in
net proceeds if the underwriters' over-allotment option to acquire an additional
100,000 shares of common stock from CapRock is exercised in full).
CapRock is currently offering securities through a private placement under
Section 4(2) and Rule 144A under the Securities Act of 1933. The $210 million
aggregate principal senior notes (the "Senior Notes") were priced at an interest
rate of 11 1/2% on May 13, 1999. The private placement is scheduled to close on
May 18, 1999. CapRock expects to receive net proceeds after deducting the
initial purchasers' discount and estimated expenses payable by CapRock, of
approximately $200.7 million. CapRock expects that the proposed Senior Notes
will have a maturity date of ten (10) years after their issuance with interest
payable semi-annually after the date of issuance. The proposed notes will be
senior unsecured obligations and as such will rank pari passu in right of
payment with CapRock's existing senior notes issued in July of 1998 and with all
CapRock's future unsecured and unsubordinated indebtedness. CapRock anticipates
that the indenture governing such notes will have restrictions similar to those,
which currently exist for CapRock's existing senior notes. There is no assurance
that the terms of the proposed notes actually offered and sold, if any, will not
vary significantly from those described above. The proceeds will be used to fund
capital expenditures for the construction of the fiber optic network, switching
equipment and other capital expenditures and to expand its sales offices, for
potential acquisitions and for general working capital purposes. The funds will
be invested in high-grade liquid securities classified as available for sale.
The Company is required under the proposed indenture to file a registration
statement to register the Senior Notes within 90 days of the closing of the
transaction.
CapRock is also considering various alternatives under a revolving credit
facility. CapRock anticipates that this credit facility, if obtained, would
range from approximately $50 to $100 million. The proceeds from this credit
facility would be used in a similar manner to the uses discussed for the Senior
Notes.
CapRock believes that its cash and marketable securities, cash flow from
operations and sales of dark fiber, the net proceeds from the May 1999 equity
offering and the expected net proceeds from the private placement of Senior
Notes will be sufficient to fund completion of its planned network. However, no
assurances can be made as to whether additional sources of capital will be
needed to complete the network and if such sources are needed, but CapRock is
unable to obtain them, CapRock may have to curtail or delay the build out of its
fiber network and its level of capital expenditures. CapRock's EBITDA was $3.7
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<PAGE> 16
million for the three months ended March 31, 1998 and EBITDA of $2.1 million
for the three months ended March 31, 1999.
CapRock may require additional capital in the future 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, public or private equity and debt financings, bank debt, vendor
financings and indefeasible right to use contracts. In addition, CapRock may
enter into joint construction agreements with carriers, thereby reducing its
capital expenditure requirements. However, we cannot assure you 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. If CapRock is unable to obtain such capital, the build
out of portions of its expanded network may be significantly delayed, curtailed
or abandoned. In addition, CapRock may accelerate the rate of deployment of its
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 and cost of expansion into new
markets, the extent of competition and the pricing of dark fiber and
telecommunications services in its markets.
NEW ACCOUNTING PRONOUNCEMENTS
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
CapRock's results of operations, financial position or cash flow.
CONTINGENCIES
CapRock is party to ordinary litigation incidental to its business. No
currently pending litigation is expected to have a material adverse effect on
our results of operations, financial condition or cash flow.
YEAR 2000
The year 2000 problem is the inability of a meaningful portion 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
disk space by truncating the date field to just six digits (two for the day,
two for the month and two for the year). Therefore, information applications
automatically assumed that the two-digit year field represented a year within
the 1900's. As a result of this, systems could fail to operate or fail to
produce correct results when dates roll over to the year 2000.
STATE OF READINESS
The year 2000 problem affects computers, software and other equipment
used, operated or maintained by CapRock for itself and its customers. CapRock
has substantially completed the process of assessing the potential impact of,
and the costs of remediating, the year 2000 problem for its internal systems,
facilities systems and equipment.
CapRock's business depends upon the operation of computer systems. CapRock
has established a year 2000 committee made up of leaders from the operational
areas of CapRock to assess CapRock's year 2000 problem. The committee has the
involvement of senior management and the Board of Directors and its objectives
are a top priority. CapRock has undertaken various initiatives intended to
provide computer equipment and software that will function properly with
respect to dates in the year 2000 and thereafter. Computer equipment and
software include systems that are commonly thought of as Information
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<PAGE> 17
Technology, or IT, systems, including accounting, data processing,
telephone/PBX systems, scanning equipment and other miscellaneous systems, as
well as systems that are not commonly thought of as IT systems, such as alarm
systems, fax machines or other miscellaneous systems. Based upon its
identification and assessment efforts to date, CapRock believes that certain
computer equipment and software it currently uses will require replacement or
modification. In addition, in the ordinary course of replacing computer
equipment and software, CapRock will obtain replacements that are warranted to
be year 2000 compliant. CapRock currently estimates that the year 2000
identification, assessment, remediation and testing efforts will be
substantially complete by June 30, 1999 and that such efforts will be completed
before any currently anticipated impact on its computer equipment and software.
CapRock has substantially completed the identification and assessment process.
CapRock estimates that it currently has completed approximately 80% of the
initiatives that it believes will be necessary to address potential year 2000
issues relating to its computer equipment and software. The projects comprising
the remaining 20% of the initiative are in process and are expected to be
complete on or about September 30, 1999.
<TABLE>
<CAPTION>
YEAR 2000 INITIATIVE TIME FRAME
- -------------------- ----------
<S> <C>
Identification and assessment regarding IT system issues..................... Completed
Remediation and testing regarding critical system issues..................... 6/98-5/99
Identification, assessment, remediation and testing regarding desktop and
individual system issues................................................. 6/98-6/99
Identification and assessment regarding non-IT system
issues................................................................... 8/98-5/99
Remediation and testing regarding non-IT systems............................. 11/98-6/99
Contingency plans regarding critical systems................................. 5/99-9/99
</TABLE>
CapRock has mailed questionnaires to its significant vendors, service
providers and customers with whom CapRock's systems electronically interface to
determine the extent to which such interfaces and system processes are
vulnerable to year 2000 issues and whether the products and services of such
entities are year 2000 compliant. Substantially all of the parties have
responded to the request and no significant matters were noted from these
responses. However, the information contained in a number of the responses was
generic in nature and did not specifically address the stage of their year 2000
initiatives. CapRock will continue seeking alternate vendors in advance of
December 31, 1999 in the event satisfactory responses are not received.
CapRock has evaluated its systems and has identified the following systems
and functions as mission critical:
o switching systems,
o network operations and fiber,
o satellite/microwave transmission equipment and satellite service
providers,
o billing and call record collection systems, and
o supply chain (vendor provider of switched services).
Switching Systems:
Switching equipment is used to connect calls to their destination, while
performing other advanced features and recording call record information for
future billing. The switch opens or closes circuits or selects the paths or
circuits to be used for the transmission of information. CapRock currently owns
seven switches, three of which are physically located in Dallas, Texas (two are
calling card platforms), two in Houston, Texas, one in Victoria, Texas and one
in Phoenix, Arizona. CapRock also manages a switch in Jersey City, New Jersey.
CapRock has completed the assessment and certain test procedures relating to
the
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<PAGE> 18
switching equipment and has identified certain non-compliant features, which
were remediated through software upgrades provided by the respective
manufacturers.
The remainder of the testing procedures for the switching equipment were
substantially complete for all switches which were in service as of March 31,
1999. The switches which have not been placed in service will be subject to
integrated test procedures prior to being placed in service. The test will
incorporate the call collection processes and the interfaces with the billing
system. The test will involve simulating date changes with the switch, such
that the call records will be processed, rated and properly captured in the
billing system as a billable transaction.
The test procedures consist of the following:
o process flow analysis,
o documentation of overall integrated test strategy,
o documentation and test case plans at an individual component level,
o committee agreement regarding the test plan,
o execution of the integrated test plan, and
o documentation regarding the results of test procedures.
Network Operations and Fiber:
CapRock currently owns and operates an 800-route mile fiber optic network,
which was substantially completed by December 31, 1998. Approximately 260 miles
were completed and placed in service in January 1997. The network is currently
being expanded to 5,500 route miles (which CapRock expects to be completed by
the end of the year 2000). The fiber optic network is designed to be scalable
and will include network-advanced fiber, which is capable of supporting dense
wave division multiplexing with an OC-48 backbone scalable to OC-192. The fiber
optic network will include electronic equipment, which regenerates and
transports the voice, data and other information. A detailed assessment of the
network operations and fiber equipment has been performed and no significant
non-compliant issues have been identified.
Satellite/Microwave Transmission Equipment and Satellite Service
Providers:
CapRock utilizes satellite service providers to provide communications
services to certain customers in remote locations. CapRock has sent
correspondence to each of the three vendors supplying the satellite services.
Each of the satellite service providers has responded. None of them noted any
significant non-compliant issues. CapRock is continuing to pursue additional
information and test data from these providers and will seek new providers, if
necessary.
Billing and Call Record Collection Systems:
CapRock handles its provisioning, customer care, billing and traffic
reporting functions on a proprietary software platform developed by RiverRock
Systems, Ltd., a Texas limited partnership in which CapRock has a 49% ownership
interest. These operations support systems, or OSS systems, and other back
office systems are used to enter, schedule and track a customer's order from
the point of sale to the installation and testing of service. The systems also
include or interface with trouble management, inventory, billing, collection
and customer service systems. The test procedures relating to the billing
system and call record collection processes were performed in conjunction with
the switching equipment test procedures and are substantially completed.
CapRock believes that substantially all of the hardware, database platform
and operating systems impacting the billing system function will not be
materially affected by Year 2000 issues.
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<PAGE> 19
Supply Chain (Vendor Provider of Switch Services):
CapRock is dependent upon a number of telecommunications carriers during
the process of initiating and terminating calls to end-users. CapRock has sent
correspondence to each of the significant suppliers regarding their year 2000
status and has received responses from substantially all of these suppliers.
However, the information contained in a number of the responses was generic in
nature and did not specifically address the stage of their year 2000
initiatives. CapRock will seek alternate suppliers in advance of December 31,
1999 in the event satisfactory responses are not received.
Based upon CapRock's current assessment and responses from vendors,
CapRock believes that the risks associated with the year 2000 problem relating
to domestic traffic and terminations are not significant. CapRock is in the
process of evaluating the impact of year 2000 as it relates to the termination
of traffic in international locations, and specifically third world and
developing countries.
Non-IT Systems:
CapRock continues to evaluate non-information technology, or non-IT,
systems. Based on current results and other factors, CapRock does not
anticipate finding any material embedded system issues in its non-IT systems.
COSTS
CapRock anticipates that costs of replacing or remediating non-compliant
systems will not exceed $500,000 (remediation costs incurred to date have been
less than $100,000). Such expenditures represent less than 1% of 1999 projected
capital expenditures and will be funded out of cash flow from operations.
RISKS
CapRock is in the process of preparing a comprehensive analysis of the
problems and costs, including loss of revenues, that would be reasonably likely
to result from the failure by CapRock or certain third parties to complete the
efforts necessary to achieve year 2000 compliance on a timely basis.
CapRock has not yet completed its identification of the most likely worst
case scenario. However, CapRock believes that the most reasonably likely worst
case scenario would involve loss of revenues relating to traffic terminating in
certain developing third world countries, which have not adequately prepared
for the year 2000. CapRock relies upon certain vendors to supply international
services and the possibility exists that some of the traffic in these
developing third world countries may not be able to be completed. The estimated
loss of revenue, if any, has not been determined, and we may not be able to
identify the amount of any loss by the year 2000. Depending on the systems
affected, the failure of any contingency plans developed by CapRock, if
implemented, could have a material adverse effect on CapRock's financial
condition and results of operations.
CONTINGENCY PLANS
The contingency plans include a proactive analysis of countries that are
actively pursuing year 2000 remediation. CapRock is using outside consultants
to assist with an analysis of countries that are not actively pursuing year
2000 compliance and remediation. Contingency plans include identifying these
countries noted with substantial risk and potentially redirecting the sales and
marketing efforts to other countries less likely to be affected by year 2000
problems.
CapRock is still formulating contingency plans relating to the use of the
satellite service providers. CapRock continues to actively pursue receiving
test data and procedures from these service providers regarding year 2000
compliance. CapRock will consider utilizing other service providers if the
current service providers cannot demonstrate compliance to CapRock's
satisfaction by June 30, 1999.
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<PAGE> 20
CapRock is still formulating contingency plans regarding significant
suppliers of telecommunication services, which may suffer a year 2000-related
failure. CapRock utilizes a number of different service providers and the
contingency plan will include re-routing traffic from a vendor which
experiences a year 2000 systems failure to one or more other vendors.
DISCLAIMER
The discussion of CapRock's efforts, and management's expectations,
relating to year 2000 compliance are forward-looking statements and the dates
on which CapRock believes it will complete such efforts are based upon
management's best estimates. These estimates were derived using numerous
assumptions regarding future events, including the continued availability of
certain resources and other factors. We cannot assure you that these estimates
will prove to be accurate, and our actual results could differ materially from
those currently anticipated. Specific factors that could cause such material
differences include, but are not limited to the availability and cost of
personnel trained in year 2000 issues, the ability to identify, assess,
remediate and test all relevant computer codes and embedded technology and
similar uncertainties. In addition, variability of definitions of "compliance
with year 2000" relating to products and services sold by CapRock may lead to
claims whose impact on CapRock is currently not estimable. We cannot assure you
that the aggregate cost of defending and resolving such claims, if any, will
not materially adversely affect our results of operations.
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<PAGE> 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
CapRock is exposed to market risk from changes in marketable securities
(which consist of money market and commercial paper). At March 31, 1999,
marketable securities of CapRock were recorded at a fair value of approximately
$47 million, with an overall weighted average return of approximately 5% and an
overall weighted average life of less than 1 year. The marketable securities
held by CapRock have exposure to price risk, which is estimated as the
potential loss in fair value due to a hypothetical change of 50 basis points
(10% of CapRock's overall average return on marketable securities) in quoted
market prices. This hypothetical change would have an immaterial effect on the
recorded value of the marketable securities.
CapRock is not exposed to material future earnings or cash flow
fluctuations from changes in interest rates on long-term debt since 100% of its
long-term debt is at a fixed rate as of March 31, 1999. The fair value of
CapRock's long-term debt at March 31, 1999 was estimated to be $152.6 million
based on the overall rate of the long-term debt of 12% and an overall maturity
of 9.3 years compared to terms and rates currently available in long-term
financing markets. Market risk is estimated as the potential decrease in fair
value of CapRock's long-term debt resulting from a hypothetical increase of 120
basis points in interest rates (ten percent of CapRock's overall borrowing
rate). Such an increase in interest rates would result in approximately a $9.5
million decrease in fair value of CapRock's long-term debt. To date, CapRock
has not entered into any derivative financial instruments to manage interest
rate risk and is currently not evaluating the future use of any such financial
instruments.
CapRock conducts business in Aberdeen, Scotland, through a wholly owned
subsidiary. However, the business transacted by this subsidiary is in the local
functional currency. Therefore, CapRock does not currently have any exposure to
foreign currency transaction gains or losses. All other business transactions
are in U.S. dollars. To date, CapRock has not entered into any derivative
financial instrument to manage foreign currency risk and is currently not
evaluating the future use of any such financial instruments.
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<PAGE> 22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information pertaining to this item is incorporated herein from Part I.
Financial Information (Item 2-Management's Discussion and Analysis of Financial
Condition and Results of Operations-Contingencies).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation of the Company ((incorporated by reference
to Exhibit 3.1 to the Registration Statement on Form S-4, as
amended, SEC Registration No. 333-57365) (the "Merger Form S-4")).
3.2 Bylaws of the Company ((incorporated by reference to Exhibit 3.2 to
the Registration Statement on Form S-4, as amended, SEC Registration
No. 333-64699) (the "Exchange Offer Form S-4")).
4.1 Specimen certificate for the Common Stock of the Company
(incorporated by reference to Exhibit 4.3 to the Merger Form S-4).
4.2 Indenture dated as of July 16, 1998, among CapRock Communications
Corp., CapRock Telecommunications Corp., CapRock Fiber Network, Ltd.,
IWL (defined below), and Chase Manhattan Trust Company, National
Association (formerly PNC Bank, National Association), Trustee
(Incorporated by reference to Exhibit 4.1 to the Exchange Offer Form
S-4).
4.3 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. (Incorporated by reference to
Exhibit 4.2 to the Exchange Offer Form S-4).
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, SEC Registration 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
Merger Form S-4.)
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 Merger Form S-4.)
10.1 Amendment to Addison Circle One Office Lease Agreement.
(Incorporated by reference to Exhibit 10.60 to the Registration
Statement on Form S-1, as amended, of the Registrant, File No.
333-74735.)
+27.1 Financial Data Schedule.
- ----------------------
+ Filed herewith.
(b) Reports on Form 8-K
None.
20
<PAGE> 23
CAPROCK COMMUNICATIONS CORP.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPROCK COMMUNICATIONS CORP.
By: /s/ MATTHEW M. KINGSLEY
---------------------------------
Matthew M. Kingsley
Corporate Controller
(Principal Accounting Officer)
Date: May 14, 1999
21
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1 Articles of Incorporation of the Company ((incorporated by reference to
Exhibit 3.1 to the Registration Statement on Form S-4, as amended, SEC
Registration No. 333-57365) (the "Merger Form S-4")).
3.2 Bylaws of the Company ((incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-4, as amended, SEC Registration No.
333-64699) (the "Exchange Offer Form S-4")).
4.1 Specimen certificate for the Common Stock of the Company (incorporated
by reference to Exhibit 4.3 to the Merger Form S-4).
4.2 Indenture dated as of July 16, 1998, among CapRock Communications Corp.,
CapRock Telecommunications Corp., CapRock Fiber Network, Ltd., IWL
(defined below), and Chase Manhattan Trust Company, National Association
(formerly PNC Bank, National Association), Trustee (Incorporated by
reference to Exhibit 4.1 to the Exchange Offer Form S-4).
4.3 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. (Incorporated by reference to Exhibit 4.2 to the Exchange
Offer Form S-4).
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,
SEC Registration 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 Merger
Form S-4.)
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 Merger Form S-4.)
10.1 Amendment to Addison Circle One Office Lease Agreement. (Incorporated
by reference to Exhibit 10.60 to the Registration Statement on Form
S-1, as amended, of the Registrant, File No. 333-74735.)
+27.1 Financial Data Schedule.
</TABLE>
- ----------------------
+ Filed herewith.
(b) Reports on Form 8-K
None.
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