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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 30, 1999
REGISTRATION NO. 333-82557
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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CAPROCK COMMUNICATIONS CORP.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
TEXAS 1731 75-2765572
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
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15601 DALLAS PARKWAY, SUITE 700
DALLAS, TX 75248
(972) 982-9500
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
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MR. JERE W. THOMPSON, JR.
CHIEF EXECUTIVE OFFICER
CAPROCK COMMUNICATIONS CORP.
15601 DALLAS PARKWAY, SUITE 700
DALLAS, TX 75248
(972) 982-9500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
A. MICHAEL HAINSFURTHER
MARK A. KOPIDLANSKY
MUNSCH HARDT KOPF & HARR, P.C.
1445 ROSS AVENUE, 4000 FOUNTAIN PLACE
DALLAS, TEXAS 75202-2790
(214) 855-7500
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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. [ ]
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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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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JULY 30, 1999
PROSPECTUS
OFFER TO EXCHANGE
11 1/2% SENIOR NOTES DUE 2009, SERIES B
FOR ALL OUTSTANDING
11 1/2% SENIOR NOTES DUE 2009, SERIES A
OF
CAPROCK COMMUNICATIONS CORP.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME ON SEPTEMBER 1, 1999, UNLESS EXTENDED.
---------------------
This is an offer to exchange the outstanding, unregistered 11 1/2% Senior
Notes due 2009 of CapRock Communications Corp. you now hold for new,
substantially identical 11 1/2% Senior Notes that will be free of the transfer
restrictions that apply to the old notes. The material terms of the exchange
offer include the following:
- - We are offering to exchange the notes we sold in a private offering for new
registered notes,
- - The exchange offer expires at 5:00 p.m., New York City time, on September 1,
1999, unless extended,
- - The terms of the new notes are substantially identical to the outstanding
notes, except for the transfer restrictions and registration rights relating
to the outstanding notes,
- - Tenders of outstanding notes may be withdrawn any time prior to 5:00 p.m., New
York City time, on the expiration date of the exchange offer, and
- - We will exchange all outstanding notes that are properly tendered for exchange
and not validly withdrawn.
No public market exists for the outstanding notes or the new notes. We do
not intend to list the new notes on any securities exchange or to seek approval
for quotation through any automated quotation system. We are not soliciting a
proxy from holders of old notes, and such holders are requested not to send us a
proxy. See "The Exchange Offer."
SEE "RISK FACTORS" COMMENCING ON PAGE 14 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN CONNECTION WITH
THE EXCHANGE OFFER AND AN INVESTMENT IN THE NEW NOTES.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this prospectus is August 4, 1999.
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TABLE OF CONTENTS
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PAGE
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Forward-Looking Statements.................................. 3
Summary..................................................... 5
Risk Factors................................................ 14
Use of Proceeds............................................. 23
Capitalization.............................................. 24
Selected Consolidated Financial Data........................ 25
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 27
Business.................................................... 40
Regulation and Licenses..................................... 54
Management.................................................. 64
Certain Transactions........................................ 74
Principal Shareholders...................................... 76
The Exchange Offer.......................................... 78
Description of the Notes.................................... 88
Book-Entry; Delivery and Form............................... 120
Description of Certain Indebtedness......................... 122
Description of Capital Stock................................ 123
Certain Federal Income Tax Considerations................... 125
Plan of Distribution........................................ 128
Legal Matters............................................... 128
Experts..................................................... 129
Where You Can Find More Information......................... 129
Index To Consolidated Financial Statements.................. F-1
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FORWARD-LOOKING STATEMENTS
This prospectus 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:
- our anticipated growth strategies,
- anticipated trends in our business, including trends in technology and
the growth of communications network products and services,
- future expenditures for capital projects, and
- our ability to continue to control costs and maintain quality.
These statements may be found in the sections of this prospectus entitled
"Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" and in
this prospectus generally. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including all the risks discussed in "Risk Factors" and elsewhere in this
prospectus and 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 indentures, 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 prospectus might not occur.
---------------------
In making a decision about buying these securities, you should rely only on
the information contained in this prospectus. We have not authorized anyone to
provide you with information that is different from the information contained in
this prospectus. This prospectus is intended to offer no securities other than
the offer to exchange your old notes for new notes issued by CapRock. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are not making an offer to exchange the old notes for new notes or
issuing or selling new notes in any jurisdiction where such an offer or sale is
not permitted. You should assume that the information appearing in this
prospectus is accurate as of the date on the front cover of this prospectus
only, regardless of the time of delivery of this prospectus or the exchange of
the old notes for the new notes. Our business, financial condition, results of
operations and prospects may have changed since that date.
---------------------
We use market data and industry forecasts throughout this prospectus, which
we have obtained from internal surveys, market research, publicly available
information and industry publications. Industry publications generally state
that the information they provide has been obtained from sources believed to be
reliable, but that the accuracy and completeness of this information is not
guaranteed. Similarly, we believe that the surveys and market research we or
others have performed is reliable, but we have not independently verified this
information. We do not represent that this information is accurate.
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We are a Texas corporation that was formed on February 3, 1998 to be a
holding company for our predecessor companies. Our principal executive offices
are located at 15601 Dallas Parkway, Suite 700, Dallas, Texas 75248, and our
telephone number is (972) 982-9500. We maintain a World Wide Web site at
www.caprock.com. The reference to our World Wide Web address does not constitute
incorporation by reference of the information contained at the site. In this
prospectus, the "Company," "CapRock," "we," "us" and "our" refer to CapRock
Communications Corp. and its subsidiaries, including IWL Communications,
Incorporated ("IWL Communications"), CapRock Telecommunications Corp. ("CapRock
Telecommunications") and CapRock Fiber Network Ltd. ("CapRock Fiber"), 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. CapRock and CapRock Communications are
trademarks of CapRock. All other trade names or trademarks appearing in this
prospectus are the property of their respective holders.
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SUMMARY
This summary highlights some information contained in this prospectus and
may not contain all of the information that is important to you. You should read
this summary together with the more detailed information and our financial
statements and notes appearing elsewhere in this prospectus. This summary is not
complete and may not contain all of the information that you should consider
before tendering your old notes in exchange for new notes. You should carefully
consider, among other things, the matters shown in "Risk Factors."
OUR BUSINESS
We own and operate a scalable long-haul fiber network which upon completion
is expected to cover approximately 6,100 route miles throughout the Southwest
region, which includes Texas, Louisiana, Arkansas, Oklahoma, New Mexico and
Arizona. This fiber network supports the voice, data, bandwidth and dark fiber
services we provide to our carrier and retail customers. Our 1998 revenues were
$121.8 million and earnings before interest, taxes, depreciation and
amortization ("EBITDA") (exclusive of merger related expenses of $2.3 million)
was $15.0 million, and our revenues for the quarter ended March 31, 1999 were
$37.0 million and EBITDA was $2.1 million. Over the past five years, our
revenues have grown at a compound annual growth rate of 55%.
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 120 carrier customers, including AT&T, MCI
WorldCom, Sprint Corporation and Qwest Communications, as well as many regional
independent companies such as Century Telephone Enterprises, Inc. and Lufkin
Conroe Telephone. Our integrated services revenues reflect our local, long
distance, Internet, data and private line products provided to over 7,000 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.
We are focused on the Southwest region because of this region's size and
attractive growth prospects and because we believe that as a region it is
currently underserved by other major telecommunications providers. We believe
our ability to offer integrated telecommunications services along with superior
customer service will be particularly attractive to small and medium-sized
businesses that desire simple bundled plans from a single provider. Many of the
smaller markets within our region do not have telecommunications alternatives to
the incumbent local telephone company. We also believe that a regional focus
enables us to achieve certain economies of scale due to the concentrated
deployment of network assets, our sales and marketing efforts and our
management. By maximizing the amount of traffic that remains on our network, we
can maximize our gross profit margins and returns on invested capital.
OUR STRATEGY
Our business objectives are to establish ourselves as the premier carriers'
carrier and to be the dominant integrated communications provider in the
Southwest region. To achieve these objectives, we intend to:
- build the region's most advanced, scalable and extensive fiber optic
network,
- create a strategic, regionally focused asset,
- pursue a cost-effective network build out,
- focus on high value-added local switching infrastructure,
- provide bundled communications solutions to small and medium-sized
businesses,
- pursue acquisitions and strategic alliances,
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- build market share through personalized sales and customer service, and
- leverage our advanced back office systems.
OUR NETWORK
By the end of the year 2000, we intend to build out our fiber optic network
to approximately 6,100 route miles throughout the Southwest region. We began
constructing and operating a regional fiber network in 1993. At the end of 1998,
the first 800 route miles of our scalable, regional fiber network were
substantially completed, linking San Antonio, Laredo, McAllen, Harlingen, Corpus
Christi, Victoria and Houston, Texas. Over the past two years, we have met
substantially all of our milestones with respect to our construction schedules
and budgets. We currently have approximately 1,700 route miles under
construction and expect to have approximately 3,000 route miles completed by the
end of 1999, linking south Texas, San Antonio, Houston, Austin, Waco, Dallas,
Fort Worth, and Amarillo, Texas, Oklahoma City and Tulsa, Oklahoma, Little Rock,
Arkansas and Monroe and New Orleans, Louisiana. We expect that the remainder of
the 6,100 mile fiber network will be completed by the end of the year 2000.
Given the increased demand for our fiber-based telecommunications services over
the past year, we increased our planned network build out from approximately
4,300 route miles to approximately 6,100 route miles, as discussed below under
"-- Recent Developments." We also increased the number of conduits being
deployed along certain routes from three to four.
In addition to our extensive fiber network, our network facilities also
include eight local and long distance switches (seven which we own and one which
we manage), with another three local switches scheduled to be installed by the
end of the fourth quarter of 1999. We plan to colocate our equipment in 20
central offices with incumbent local telephone companies (13 of which are
currently in process) for the provision of local services using unbundled
network elements, or UNEs, by the end of 1999. We also plan to purchase and
deploy eight asynchronous transfer mode, or ATM, data switches to support our
Internet, frame relay and ATM services in the third quarter of 1999, and plan to
purchase and deploy an additional 10 ATM data switches in the fourth quarter of
1999.
RECENT DEVELOPMENTS
In June 1999, we publicly announced that we had extended the planned build
out of our fiber network to include Arizona. When completed, this expansion will
increase our fiber network by approximately 600 route miles to approximately
6,100 route miles and connect Phoenix and Tucson, Arizona with El Paso, Texas
and our previously planned five-state network. We anticipate completion of the
Arizona portion of our network in the first half of 2000.
On May 18, 1999, we sold, through a private placement under Section 4(2)
and Rule 144A under the Securities Act of 1933, as amended (the "Securities
Act"), $210 million aggregate principal amount of our senior notes, which were
priced at an interest rate of 11 1/2%. Our net proceeds from such offering,
after deducting the initial purchasers' discount and estimated offering
expenses, was approximately $201.4 million. As required by the terms of the
registration rights agreement we entered into in connection with such offering,
we have filed the registration statement (of which this prospectus is a part) to
register our offer to exchange the new, registered notes for the outstanding
notes. In addition, in connection with that offering, we agreed, among other
things, to deliver to you this prospectus and to use our best efforts to
complete the exchange offer by November 19, 1999. The terms of the exchange
offer are summarized on Page 7.
On May 6, 1999, we entered into an underwriting agreement with various
underwriters to sell 4,000,000 shares of our common stock at a price per share
of $22.00 in a public offering. The offering closed on May 12, 1999. We received
net proceeds, after deducting underwriting discounts and expenses payable by us,
of approximately $82.0 million from the sale of our common stock.
OUR ADDRESS
The mailing address of our principal executive offices is 15601 Dallas
Parkway, Suite 700, Dallas, Texas 75248 and our telephone number at that address
is (972) 982-9500.
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THE EXCHANGE OFFER
The Exchange Offer......... We are offering to exchange $1,000 principal amount
of CapRock's 11 1/2% Senior Notes due 2009, Series
B which have been registered under the Securities
Act for each $1,000 principal amount of CapRock's
outstanding 11 1/2% Senior Notes due 2009, Series
A, which were issued in May 1999 in a private
offering. In order to be exchanged, an old note
must be properly tendered and accepted. We will
exchange all notes validly tendered and not validly
withdrawn. As of this date, there is $210.0 million
aggregate principal amount of old notes
outstanding.
Expiration and Exchange
Dates.................... This offer will expire at 5:00 p.m., New York City
time, on September 1, 1999, unless we extend it,
and we will consummate the exchange on the next
business day.
Registration Rights
Agreement.................. You have the right to exchange the old notes that
you now hold for new notes with substantially
identical terms. This exchange offer is intended to
satisfy these rights. After the exchange offer is
complete, you will no longer be entitled to any
exchange or registration rights with respect to
your notes.
Conditions................. This offer is conditioned only upon compliance with
the securities laws. The offer applies to any and
all old notes tendered by the deadline.
Withdrawal Rights.......... You may withdraw your tender of old notes at any
time before the offer expires.
Federal Income Tax
Consequences............. The exchange will not be a taxable event for United
States Federal income tax purposes. You will not
recognize any taxable gain or loss or any interest
income as a result of such exchange. However, we
recommend that you consult your own tax advisor to
make this determination.
Resale Without Further
Registration............. We believe that the new notes may be offered for
resale, resold and otherwise transferred by you
without compliance with the registration and
prospectus delivery provisions of the Securities
Act so long as all of the following statements are
true:
- you acquire the new notes issued in the exchange
offer in the ordinary course of your business,
- you are not an "affiliate," as defined under Rule
405 of the Securities Act, of ours, and
- you are not participating, and do not intend to
participate, and have no arrangement or
understanding with any person to participate, in
the distribution of the new notes issued to you
in the exchange offer.
By tendering your notes as described below, you
will be making representations to this effect.
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Transfer Restrictions on
New Notes.................. You may incur liability under the Securities Act
if:
(1) any of the representations or statements listed
above are not true, and
(2) you transfer any new note issued to you in the
exchange offer without:
- delivering a prospectus meeting the
requirements of the Securities Act, or
- an exemption from the requirements under the
Securities Act to register your new notes.
We do not assume or indemnify you against such
liability.
Each broker-dealer that is issued new notes for its
own account in exchange for old notes that were
acquired as a result of market-making or other
trading activities must acknowledge that it will
deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of
the new notes. A broker-dealer may use this
prospectus for an offer to resell, a resale or
other retransfer of the new notes issued to it in
the exchange offer.
Procedures for Tendering
Old Notes.................. Each holder of old notes who wishes to accept the
exchange offer must:
- complete, sign and date the accompanying letter
of transmittal, or a facsimile thereof, or
- arrange for The Depository Trust Company to
transmit certain required information to the
exchange agent in connection with a book-entry
transfer.
You must mail or otherwise deliver such
documentation and your old notes to Chase Manhattan
Trust Company, National Association, as exchange
agent, at the address set forth under "The Exchange
Offer -- Exchange Agent."
Failure to Exchange Will
Affect You Adversely....... If you are eligible to participate in the exchange
offer and you do not tender your old notes, you
will not have any further registration or exchange
rights and your old notes will continue to be
subject to certain restrictions on transfer.
Accordingly, the liquidity of the old notes could
be adversely affected.
Special Procedures for
Beneficial Owners.......... If you beneficially own old notes registered in the
name of a broker, dealer, commercial bank, trust
company or other nominee and you wish to tender
your old notes in the exchange offer, you should
contact such registered holder promptly and
instruct it to tender on your behalf. If you wish
to tender on your own behalf, you must, before
completing and executing the letter of transmittal
for the exchange offer and delivering your old
notes, either arrange to have your old notes
registered in your name or obtain a properly
completed bond power from the registered holder.
The transfer of registered ownership may take
considerable time.
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Guaranteed Delivery
Procedures............... You may comply with the procedures described in
this prospectus under the heading "The Exchange
Offer -- Guaranteed Delivery Procedures" if you
wish to tender your old notes and:
- time will not permit your required documents to
reach the exchange agent by the expiration date
of the exchange offer,
- you cannot complete the procedure for book-entry
transfer on time, or
- your old notes are not immediately available.
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THE NEW NOTES
Notes Offered.............. We are offering $210 million aggregate principal
amount of our 11 1/2% Senior Notes due 2009. The
form and term of the new notes will be the same as
the form and terms of the outstanding notes except
that:
- the new notes will bear a different CUSIP number
from the outstanding notes,
- the new notes will have been registered under the
Securities Act and, therefore, will not bear
legends restricting their transfer, and
- you will not be entitled to any exchange or
registration rights with respect to the new
notes.
The new notes will evidence the same debt as the
outstanding notes, will be entitled to the benefits
of the indenture governing the outstanding notes
and will be treated under the indenture as a single
class with the outstanding notes. The new notes
will have the same financial terms and covenants as
the old notes.
Issuer..................... CapRock Communications Corp.
Maturity................... May 1, 2009
Interest................... Interest accrues from May 18, 1999 at the rate of
11 1/2% per year, payable semi-annually in arrears
on each May 1 and November 1, beginning on November
1, 1999.
Ranking.................... The notes will be our general unsecured senior
obligations. They will rank equally with all our
other existing and future unsecured debt and
unsubordinated debt, including our 12% Senior Notes
due 2008. They will effectively rank junior to all
of our secured debt, to the extent of the value of
the assets securing the debt. In addition, they
will effectively rank junior to all existing and
future debt (including trade payables) of our
subsidiaries.
Optional Redemption........ We may redeem the notes, in whole or in part, at
any time on or after May 1, 2004, at the redemption
prices set forth in this prospectus.
Public Equity Offering and
Strategic Equity Sale
Optional
Redemption............... Before May 1, 2002, we may redeem up to 35% of the
aggregate principal amount of the notes originally
issued with the net proceeds of certain public
equity offerings and/or certain private sales of
capital stock to strategic equity investors, at
111.50% of the principal amount thereof, plus
accrued interest, if at least 65% of the originally
issued aggregate principal amount of the notes
remains outstanding. See "Description of the
Notes -- Optional Redemption."
Change of Control.......... Upon certain change of control events, each holder
of notes may require us to repurchase all or a
portion of its notes at a purchase price equal to
101% of the principal amount thereof, plus accrued
and unpaid interest thereon, if any, to the date of
purchase. See "Description of the Notes -- Change
of Control."
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Covenants.................. The indenture under which the old notes have been
and the new notes are being issued contains
covenants for your benefit which, among other
things and subject to important exceptions,
restrict our ability and the ability of our
subsidiaries to:
- incur additional indebtedness,
- make certain investments,
- pay dividends on, redeem or repurchase our
capital stock,
- issue or sell capital stock of certain of our
subsidiaries,
- in the case of certain of our subsidiaries,
guarantee indebtedness,
- engage in transactions with affiliates,
- create certain liens,
- enter into sale-leaseback transactions,
- sell assets, and
- consolidate, merge or transfer all or
substantially all of our assets and the assets of
our subsidiaries on a consolidated basis.
These covenants are subject to important exceptions
and qualifications, which are described under the
heading "Description of the Notes" in this
prospectus.
Risk Factors............... See "Risk Factors" for a discussion of factors you
should carefully consider before deciding to
exchange your old notes for the new notes.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth our summary consolidated financial data as
of and for the years ended December 31, 1994, 1995, 1996, 1997 and 1998 and as
of and for the three months ended March 31, 1998 and 1999. The business
combination among our predecessor companies was completed on August 26, 1998 and
was accounted for as a pooling of interests. Accordingly, the Consolidated
Balance Sheets as of December 31, 1997 and 1998 and the Consolidated Statements
of Operations, Stockholders' Equity and Comprehensive Income and Cash Flows for
each of the years in the three year period ended December 31, 1998 include our
three predecessor companies (i.e., CapRock Telecommunications, CapRock Fiber and
IWL Communications) as though these entities were always part of CapRock.
The following table also includes our summary consolidated financial data
as of and for the three months ended March 31, 1998 and 1999 derived from
unaudited financial statements for the respective periods. 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.
In May 1998, IWL Communications changed its fiscal year end to coincide
with the fiscal years of CapRock, CapRock Telecommunications and CapRock Fiber.
The Consolidated Statement of Operations for the year ended December 31, 1996
combines the operating activity of IWL Communications for the year ended June
30, 1996 with the operating activity of CapRock Telecommunications and CapRock
Fiber for the year ended December 31, 1996. The net income of IWL Communications
in the amount of approximately $260,000 for the six month period ended December
31, 1996 was excluded from the Consolidated Statement of Operations for the year
ended December 31, 1996 as a result of the non-conforming year ends for such
period. This amount was included as an adjustment to retained earnings in the
Consolidated Statement of Stockholders' Equity and Comprehensive Income in 1997.
The cash flow for IWL Communications for this six month period was added to the
1997 beginning balance in the Consolidated Statement of Cash Flows.
<TABLE>
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AS OF AND FOR
THE THREE MONTHS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- -------- -------- --------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................... $21,159 $29,407 $ 50,970 $ 75,349 $ 121,774 $24,412 $ 37,036
Cost of services and product resales........ 15,295 21,185 39,357 52,471 83,221 16,229 22,381
------- ------- -------- -------- --------- ------- --------
Gross profit........................ 5,864 8,222 11,613 22,878 38,553 8,183 14,655
Operating expenses:
Selling, general and administrative....... 5,565 7,326 8,983 14,074 23,528 4,435 12,551
Merger related expenses................... -- -- -- -- 2,313 -- --
Depreciation and amortization............. 631 1,186 1,536 3,346 4,887 1,064 1,480
------- ------- -------- -------- --------- ------- --------
Total operating expenses............ 6,196 8,512 10,519 17,420 30,728 5,499 14,031
------- ------- -------- -------- --------- ------- --------
Operating income (loss)..................... (332) (290) 1,094 5,458 7,825 2,684 624
Interest expense, net....................... (224) (484) (585) (1,603) (6,441) (451) (3,410)
Other income (expense)...................... 256 151 42 220 106 1 (19)
------- ------- -------- -------- --------- ------- --------
Income (loss) before income taxes and
extraordinary item........................ (300) (623) 551 4,075 1,490 2,234 (2,805)
Income tax expense (benefit)................ 77 48 227 1,513 1,267 876 (1,100)
------- ------- -------- -------- --------- ------- --------
Income (loss) before extraordinary item..... (377) (671) 324 2,562 223 1,358 (1,705)
Extraordinary item-- extinguishment of
debt...................................... -- 645 -- -- -- -- --
------- ------- -------- -------- --------- ------- --------
Net income (loss)................... $ (377) $ (26) $ 324 $ 2,562 $ 223 $ 1,358 $ (1,705)
======= ======= ======== ======== ========= ======= ========
</TABLE>
12
<PAGE> 14
<TABLE>
<CAPTION>
AS OF AND FOR
THE THREE MONTHS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- -------- -------- --------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Pro forma net income (loss):
Income (loss) before income taxes and
extraordinary item...................... $ (300) $ (623) $ 551 $ 4,075 $ 1,490 $ 2,234 $ (2,805)
Pro forma income taxes, as if CapRock
Fiber were a C Corporation.............. (131) (211) 143 1,475 1,267 876 (1,100)
------- ------- -------- -------- --------- ------- --------
Income (loss) before extraordinary item... (169) (412) 408 2,600 223 1,358 (1,705)
Extraordinary item, net of taxes.......... -- 397 -- -- -- -- --
------- ------- -------- -------- --------- ------- --------
Pro forma net income (loss)......... $ (169) $ (15) $ 408 $ 2,600 $ 223 $ 1,358 $ (1,705)
======= ======= ======== ======== ========= ======= ========
Historical and pro forma income (loss) per
common share:
Income (loss) before extraordinary item... $ (0.01) $ (.002) $ 0.01 $ 0.09 $ 0.01 $ 0.05 $ (0.06)
Extraordinary item, net of tax............ -- .002 -- -- -- -- --
------- ------- -------- -------- --------- ------- --------
Basic and diluted......................... $ (0.01) $ -- $ 0.01 $ 0.09 $ 0.01 $ 0.05 $ (0.06)
======= ======= ======== ======== ========= ======= ========
Weighted average shares outstanding:
Basic..................................... 25,715 25,926 27,146 27,984 28,899 28,836 28,943
Diluted................................... 25,715 25,936 27,156 28,481 30,028 29,449 28,943
OPERATING DATA:
EBITDA(1)................................... $ 299 $ 896 $ 2,630 $ 8,804 $ 15,025 $ 3,748 $ 2,104
Cash flows provided by (used in)
operations................................ (593) 827 781 4,112 7,125 1,264 (9,689)
Cash flows provided by (used in) investing
activities................................ (1,366) (1,919) (9,350) (12,987) (134,350) (4,062) 13,781
Cash flows provided by financing
activities................................ 2,324 903 8,605 12,113 123,989 656 69
Capital expenditures........................ (1,822) (2,282) (10,212) (13,630) (36,855) (3,526) (23,819)
BALANCE SHEET DATA:
Working capital (deficit)................... $ (441) $ (797) $ (2,153) $ (305) $ 102,489 $ -- $ 65,208
Property, plant and equipment, net.......... 2,935 6,705 15,901 27,341 59,607 -- 78,862
Total assets................................ 9,596 13,198 28,522 49,389 191,966 -- 193,885
Long-term debt and capital lease
obligations............................... 1,221 2,443 13,254 21,062 145,187 -- 145,308
Stockholders' equity........................ 2,829 3,552 3,886 14,086 16,062 -- 14,439
Ratio of earnings to fixed charges(2)....... -- 1.0x 1.5x 2.6x 1.1x 4.4x --
</TABLE>
- ---------------
(1) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization and merger related expenses. EBITDA is a measure commonly used
in the communications industry to analyze companies on the basis of
operating performance. EBITDA is not a measure of financial performance
under generally accepted accounting principles and should not be considered
as an alternative to net income as a measure of performance nor as an
alternative to cash flow as a measure of liquidity.
(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 CapRock. 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). For the
year ended December 31, 1994 and for the three months ended March 31, 1999,
earnings were inadequate to cover fixed charges by $358,000 and $2,806,000,
respectively.
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<PAGE> 15
RISK FACTORS
You should carefully consider the following risk factors and warnings
before making a decision to tender your old notes for the new ones offered
hereby. The risks described below are not the only ones facing our company.
Additional risks that we do not yet know of, or that we currently think are
immaterial, may also impair our business operations. If any of the following
risks actually occur, our business, financial condition or results of operations
could be materially adversely affected. You should also refer to the other
information shown in this prospectus, including our consolidated financial
statements and the related notes. These risks may be generally applicable to the
old notes as well as to the new notes.
THERE MAY BE CONSEQUENCES OF A FAILURE TO EXCHANGE OLD NOTES FOR NEW NOTES
If you do not exchange your old notes for new notes, you will no longer be
able to require us to register the old notes under the Securities Act. In
addition, you will not be able to offer or sell the old notes unless:
- they are registered under the Securities Act, or
- you offer or sell them under an exemption from the registration
requirements of the Securities Act. See "The Exchange Offer."
HOLDERS OF OLD NOTES MUST COMPLY WITH THE EXCHANGE OFFER PROCEDURES
The exchange agent will only issue new notes in exchange for old notes
after timely receipt of the old notes, a properly completed and duly executed
letter of transmittal and all other required documents. We are under no duty to
give notification of defects or irregularities with respect to old notes
tendered for new notes. Holders of old notes who do not participate in the
exchange will continue to be subject to the restrictions on transfer of such old
notes. See "The Exchange Offer."
WE HAVE SIGNIFICANT INDEBTEDNESS AND INTEREST PAYMENT OBLIGATIONS
We are highly leveraged. On a pro forma basis, after giving effect to the
May 1999 offering of the old notes and our use of the proceeds, at March 31,
1999, we would have had approximately $346.7 million of consolidated debt, which
as a percentage of capitalization would have been 78%.
The terms of the indenture governing our senior notes issued in July 1998
(the "1998 Senior Notes") and the indenture governing the notes that you hold
permit us and our subsidiaries to incur substantial indebtedness in the future.
If we incur additional indebtedness, the risks we now face could increase.
Our high level of indebtedness could have important consequences to us and
you such as:
- making it more difficult for us to satisfy our obligations with respect
to the notes,
- limiting our ability to obtain additional financing to fund our growth
strategy, working capital, capital expenditures, debt service
requirements or other purposes,
- limiting our ability to use operating cash flow in other areas of our
business because we must dedicate a substantial portion of these funds to
make principal payments and fund debt service requirements,
- limiting our ability to compete with others who are not as highly
leveraged as we are,
- limiting our ability to react to changing market conditions, changes in
our industry and economic downturns, and
- increasing our vulnerability to general adverse economic and industry
conditions.
Our ability to pay interest on the notes and to satisfy our other
obligations will depend upon our future operating performance and our ability to
obtain additional debt or equity financing. Prevailing economic conditions and
financial, business and other factors, many of which are beyond our control,
will
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<PAGE> 16
affect our ability to make these payments. If in the future we cannot generate
sufficient cash from operations to make scheduled payments on the notes or to
meet our other obligations, we will need to refinance our debt, obtain
additional financing or sell assets. We can not assure you that our business
will generate cash flow, or that we will be able to obtain funding, sufficient
to satisfy our debt service requirements.
THE RESTRICTIONS IN OUR DEBT INSTRUMENTS LIMIT OUR ABILITY TO EFFECT
TRANSACTIONS AND RESTRICT OUR
OPERATIONS
The indenture for the 1998 Senior Notes and the indenture for the notes
that you hold impose significant operating and financial restrictions on us and
our subsidiaries. See "Description of the Notes" and "Description of Certain
Indebtedness." These restrictions may significantly limit or prohibit us from
engaging in certain transactions, including the following:
- incurring additional indebtedness,
- making investments,
- issuing or selling capital stock of certain of our subsidiaries,
- paying dividends or making other distributions to our shareholders,
- limiting the ability of subsidiaries to guaranty indebtedness,
- engaging in transactions with affiliates,
- creating certain liens on our assets,
- entering into sale-leaseback transactions, and
- engaging in certain mergers or consolidations.
We expect that the credit facility that we are currently negotiating will
contain similar restrictive covenants. These restrictions could limit our
ability to obtain future financing, make needed capital expenditures, withstand
a future downturn in our business or in the economy or otherwise conduct
necessary corporate activities.
Our failure to comply with the restrictions in the indentures and any
senior credit facilities that we have in place from time to time could lead to a
default under the terms of those agreements. We expect that the credit facility
will also require us to maintain specified financial ratios and satisfy certain
financial tests. Our ability to meet these financial ratios and tests may be
affected by events beyond our control and, as a result, we cannot assure you
that we will be able to meet such tests. In the event of a default under any of
our senior credit facilities, the applicable lenders could terminate their
commitments to lend money to us or accelerate the loans and declare all amounts
borrowed due and payable. Borrowings under other debt instruments that contain
cross-acceleration or cross-default provisions may also be accelerated and
become due and payable. If any of these events occurs, we cannot assure you that
we would be able to make the necessary payments to the lenders or be able to
find alternate financing. Even if we could obtain alternate financing, we cannot
assure you that it would be on terms that are favorable or acceptable to us.
WE ARE A HOLDING COMPANY AND HOLDERS OF THE NOTES OFFERED HEREBY WILL BE
STRUCTURALLY SUBORDINATED
The notes are the obligations of CapRock, which is a holding company. Our
subsidiaries conduct all of our consolidated operations and own substantially
all of our consolidated assets. Consequently, our cash flow and our ability to
meet our debt service obligations depends upon the cash flow of our subsidiaries
and the payment of funds by our subsidiaries to us in the form of loans,
dividends or otherwise. Our subsidiaries are not obligated to make funds
available to us for payment on the notes or otherwise. In addition, our
subsidiaries' ability to make any payments will depend on their earnings, the
terms of their indebtedness (including the terms of any credit facilities they
may enter into from time to time), business and tax considerations and legal
restrictions.
15
<PAGE> 17
The old notes do, and the new notes will, effectively rank junior to all
liabilities of our subsidiaries. In the event of a bankruptcy, liquidation or
dissolution of a subsidiary and following payment of these liabilities, our
subsidiaries may not have sufficient assets remaining to make payments to us as
a shareholder or otherwise. At March 31, 1999, our subsidiaries had no
outstanding debt (other than trade payables). See "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The indenture governing the notes permits us to incur additional
indebtedness, including secured indebtedness, under certain circumstances, all
of which may be incurred by our subsidiaries.
SUCCESSFUL COMPLETION AND UTILIZATION OF OUR FIBER NETWORK DEPENDS ON MANY
FACTORS
Meeting our business objectives will largely depend on our ability to
complete and efficiently utilize our fiber network. We must also achieve
substantial traffic volume over the expanded network in order to fully realize
the expected cash flows, operating efficiencies and cost benefits. The
successful completion of our fiber network depends upon many factors, some of
which are beyond our control, including:
- gaining access to sufficient capital,
- obtaining access to rights-of-way,
- the timely granting of franchise agreements,
- the 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 we believe that our cost estimates and build out schedule are
reasonable, we cannot assure you that the actual construction costs or time
required to complete the construction of our fiber network will match our
estimates.
INCREASING SUPPLY COULD EXCEED DEMAND AND REDUCE PRICES
We expect that prices for fiber, bandwidth and data services will decline
over the next several years as the deployment of new fiber networks adds
substantially more supply than in the past. Additionally, technological advances
such as dense wave division multiplexing, high speed optical transmission
electronics and packet switching will substantially increase the transmission
capacity of fiber at much lower costs. We cannot assure you that we will be able
to achieve increased traffic volumes at acceptable prices and volumes to support
our expanded network. Our financial condition could be adversely affected if we
are unable to successfully market the capacity of our network or adequately
utilize our network capacity for internal traffic.
THE COMMUNICATIONS SERVICES INDUSTRY IS HIGHLY COMPETITIVE
The communications services industry is highly competitive, rapidly
evolving and subject to constant technological change. In particular, numerous
companies offer long distance, local, Internet, data and bandwidth services, and
we expect competition to increase in the future. We believe that existing
competitors will likely continue to expand their service offerings to appeal to
our existing or potential customers. Many of our existing competitors have
greater financial, personnel, brand and name recognition and other resources.
Moreover, we expect that new competitors will enter the communications market,
and that some of these new competitors may offer similar services to those
offered by us. In addition, the regulatory environment in which we operate is
undergoing significant change. As this regulatory environment evolves, changes
may occur that could create greater or unique competitive advantages for
16
<PAGE> 18
our current or potential competitors, or could make it easier for other new
entrants to provide services. Other providers currently offer one or more of
each of the services we offer, and many communications companies operate
generally in the same long distance, local, Internet, data and bandwidth service
submarkets as we do. As a service provider in the long distance communications
industry, we compete with several well established providers, as well as many
other long distance providers with less significant market share. See
"Business -- Competition."
WE MAY NEED ADDITIONAL CAPITAL AFTER THE YEAR 2000 TO FINANCE FURTHER EXPANSION
OF OUR FIBER NETWORK
We estimate that our total capital requirements for 1999 will be
approximately $250 million and approximately $205 million for 2000. We believe
that the net proceeds of approximately $201.4 million from the May 1999 offering
of the old notes, together with cash and marketable securities (including
approximately $82.0 million of net proceeds, after expenses, that we received
from our May 1999 equity offering), cash flow from operations and sales of dark
fiber, will be sufficient to fund our capital expenditures and working capital
requirements through the end of the year 2000. However, we cannot assure you
that the anticipated sources of working capital will continue to be available,
that we have anticipated all future costs, or that our expected financial
resources will be sufficient to cover future expenditures. Our revenues and
costs are dependent upon factors that are not within our control, such as
regulatory changes, changes in technology, and increased competition. Due to the
uncertainty of these factors, actual revenues and costs may vary from expected
amounts, and such variations are likely to affect our future capital
requirements.
We expect to use cash for, among other purposes:
- expansion and operation of our fiber network,
- installation of additional voice and data switches,
- colocating in the central offices of local telephone companies,
- opening new sales offices,
- recruiting and training new personnel,
- additional and increased marketing expenses, and
- for potential acquisitions and general corporate purposes.
We may need additional capital after the year 2000 to finance further
expansion of our fiber and switching networks. The actual amount and timing of
future capital requirements may differ from our estimates, depending on the
demand for services, regulatory, technological and competitive developments, new
market developments and new opportunities. We may also require additional
capital in the future, or sooner than we currently anticipate, for new business
activities related to our current and planned businesses or in the event we
decide to make additional acquisitions or enter into joint ventures and
strategic alliances. Sources of additional capital may include cash flow from
operations, public and private equity, debt financings, vendor financings and
sales of dark fiber. If we fail to generate or raise enough capital, some or all
of our future expansion plans may be delayed or abandoned, which could have a
material adverse effect on our company.
OUR RAPID GROWTH MAY BE DIFFICULT TO MANAGE
Our company has experienced significant growth in recent years, which has
increased the level of responsibility on our management personnel. We intend to
continue growing so that we can pursue existing and potential market
opportunities. This continued growth will place a significant strain on our
management, as well as our financial and other resources. In order to manage our
growth effectively, we must continue to implement and improve our operational
systems, procedures, and controls. If we fail to implement these systems, our
business, financial condition, and results of operations will be materially and
adversely affected. As we continue to grow, it is important that our management
information systems
17
<PAGE> 19
provide adequate, accurate and timely financial information so management can
make effective and timely business decisions. Although we believe that our
current management information systems are adequate, they may need to be
upgraded eventually. If our current management information systems fail, or we
fail to hire and retain qualified sales, marketing, administrative, operating
and technical personnel, our business operations may be adversely affected.
Although we believe we are properly anticipating our needs, we cannot assure you
that we will be able to properly manage our rapid growth.
OUR ABILITY TO PROVIDE LOCAL TELEPHONE SERVICE IS DEPENDENT ON EXISTING LOCAL
TELEPHONE COMPANIES
In addition to providing local service utilizing total service resale
provided by the existing local telephone companies, or ILECs, we intend to
significantly expand our use of unbundled network elements. Unbundled network
elements constitute the components of the services customers purchase from local
telephone companies. We expect the resale of unbundled network elements and
services of incumbent local telephone companies to play an important part in our
local service business strategy. Although the 1996 Telecommunications Act
requires the ILECs to allow such resale, we cannot guarantee either:
(1) that the 1996 Telecommunications Act, certain provisions of which
ILECs have challenged in federal court, will be implemented on a timely
basis and on favorable terms, including specifically that the rules
governing which elements ILECs must provide and the cost methodology for
providing these elements, which are currently under FCC and judicial
review, will be upheld, or
(2) that we can successfully negotiate with ILECs the necessary
colocation, interconnection and resale agreements, particularly those
agreements that govern the purchase of the unbundled network elements.
Any substantial limitation on our ability to secure reasonable and timely
access to ILEC services and unbundled network elements, to obtain agreements on
as favorable terms as our competitors, or difficulties obtaining ILEC
cooperation in migrating our local service customers from ILEC facilities to our
facilities could have a material adverse effect on our financial condition,
results of operations and cash flow. See "Regulation and Licenses."
OUR ABILITY TO PROVIDE LONG DISTANCE SERVICE IS DEPENDENT ON OTHER LONG DISTANCE
CARRIERS
Our ability to provide long distance services to certain domestic and
international locations, especially those not on our network, depends on
agreements with many other carriers. The transmission rates under some of these
agreements are lower than the rates we would charge by terminating traffic
directly with the ILEC at tariffed rates. If we lost access to the services we
receive under these contracts, if the carriers providing these services raise
their rates or if the services we receive suffer a reduction in quality, it
could have a negative effect on our financial condition, results of operations
and cash flow.
OUR INFORMATION SYSTEMS ARE VITAL TO ALL ASPECTS OF OUR BUSINESS
Sophisticated operations support systems, or OSS systems, are vital to all
aspects of our business. Internally developed and externally purchased
information and support systems help to manage our growth and operations
efficiently. As part of our business, we transfer large amounts of electronic
data to and from ILECs and other local telephone companies that compete with the
ILECs or competitive local exchange carriers, also known as CLECs. We will be at
a competitive disadvantage if we fail to establish Electronic Data Interfaces,
or EDIs, with Southwestern Bell, GTE, Bell South and other ILECs if our
competitors successfully establish EDIs with those carriers. Unanticipated
problems in any of the above areas, or our inability to implement solutions in a
timely manner or our failure to establish or upgrade systems as necessary, could
have a material adverse impact on our ability to reach our objectives and on our
financial condition, results of operations and cash flow. See
"Business -- Customer Care and Support."
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<PAGE> 20
WE NEED TO RETAIN OUR KEY MANAGEMENT PERSONNEL AND HIRE ADDITIONAL QUALIFIED
PERSONNEL
We believe that our success largely depends on the continued involvement
and management of our executive management team and our ability to hire
additional qualified personnel. The competition for qualified managers and
employees in the telecommunications industry is intense. Accordingly, we cannot
assure you that we will be able to retain these key employees or that we will be
able to attract or retain skilled personnel in the future. The loss of the
services of any of these people could have a material adverse effect on our
business, results of operations and financial condition. See "Management --
Employment Agreements."
WE DEPEND ON OUR MAJOR CUSTOMERS
Our customers generally use more than one telecommunications service
provider. They can quickly switch from our services to other providers without
incurring significant expense. In addition, our customer agreements generally
provide that in the event of prolonged loss of service or for other good
reasons, customers may terminate our service without penalty. As a result, we
cannot assure you that we will be able to retain our customers. For the year
ended December 31, 1998, revenues from services provided to MCI WorldCom
accounted for more than 10% of our revenues. The loss or significant decrease of
business from any of our largest customers would have a material adverse effect
on our business. Customers in the oil and gas industry accounted for
substantially all of our offshore and project related sales for the fiscal year
ended December 31, 1998 and the three months ended March 31, 1999. Our oil and
gas customers could develop their own telecommunications facilities. A
corresponding reduction in the demand for our services could have a material
adverse effect on our financial condition, results of operations and cash flow.
THE REGULATORY ENVIRONMENT FOR TELECOMMUNICATIONS BUSINESSES CREATES RISKS
Significant regulations imposed at the international, federal, state and
local levels govern the provision of telecommunications services and affect our
business and our 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 our
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 we intend to operate, in ways not necessarily
to our advantage. See "Business -- Competition" and "Regulation and Licenses."
WE NEED RIGHTS-OF-WAY FRANCHISES AND PERMITS TO BUILD OUR FIBER NETWORK
We need certain rights-of-way, franchises and permits to install
underground conduits from railroads, utilities, state highway authorities, local
governments and transit authorities. We cannot assure you that we will be able
to get and keep all the additional rights, franchises and permits we need to
successfully implement our business plan. If we lose or fail to maintain certain
critical rights, franchises or permits necessary for the fiber network, there
may be a material adverse effect on our financial condition, results of
operations and cash flow.
WE MAY EXPERIENCE PROBLEMS ASSOCIATED WITH THE YEAR 2000
Some computers, software, and other equipment include computer codes in
which calendar year data is abbreviated to only two digits. Some of these
computer systems could fail to operate properly if they interpret "00" to mean
1900, rather than 2000. This problem is widely known as the "year 2000 problem."
We are highly dependent on our computer systems and those of third party
suppliers, vendors and customers. The year 2000 problem affects some of our
computers, software, and other equipment, including the computers which run our
product development and administrative functions. If we fail to properly
identify, correct and test our computer systems for the year 2000 problem, our
business operations could be adversely affected.
19
<PAGE> 21
We are taking steps to remediate our year 2000 problem. We do not believe
that the cost to remediate our year 2000 problem will have a material adverse
effect on our operations. We believe that our computer systems will be year 2000
compliant and will function adequately by, during and after the year 2000. At
this time, however, we cannot assure you that our computer systems will not be
affected to some degree by the year 2000 problem, in spite of our continuing
efforts. More importantly, we cannot assure you that the computer systems used
by our service providers such as electric companies, other telecommunications
companies, our customers and other third parties, will function properly by the
year 2000. A failure of our service providers to cause their computer systems to
be year 2000 compliant could have an adverse effect on our operations. Their
year 2000 problem could become our year 2000 problem. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000."
THE CONTINUED INTEGRATION OF OUR THREE PREDECESSOR COMPANIES INVOLVES
UNCERTAINTY AND RISK
In August 1998, three predecessor companies combined to form our company.
The combination of these businesses involves assimilating the operations,
services, products and personnel of each business. We cannot assure you that the
benefits and revenue growth expected from the combination will be realized. We
are still managing the integration of portions of those businesses into our
company.
We expect to continue incurring costs from the ongoing integration of the
operations, financial reporting and accounting systems, and networks of our
three predecessor companies. Additional unexpected costs or delays could have a
material adverse effect on our financial condition, results of operations and
cash flow.
SERVICE INTERRUPTIONS COULD AFFECT OUR BUSINESS
Our equipment, facilities and service operations can be adversely affected
by any of the following factors: fiber cuts, fire, equipment failures, inclement
weather, hurricanes, power loss, service outages, failures or loss of
satellites, human error, unauthorized intrusion, natural disasters, acts of
sabotage and other similar events.
We currently have switches in Houston, Dallas and Victoria, Texas and
Phoenix, Arizona and manage a switch in Jersey City, New Jersey. A substantial
portion of our long distance voice traffic currently passes through the Dallas
switch, and thus we rely heavily upon the operation of the Dallas switch. Any
event that negatively impacts the Dallas switch could have a material adverse
effect on our financial condition and our ability to continue our business.
We house a significant portion of the satellite communications equipment
and foreign circuits we use in international private-line services in a single
location in our Houston network operations center. We also lease access to a
satellite in connection with the provision of these services; however, we do not
have any back-up equipment for such satellite. In addition, the equipment we own
and lease in the Gulf of Mexico is susceptible to hurricanes.
We cannot guarantee that fire, equipment failure or other events will not
disable our equipment. Loss or impairment of some or all of our key facilities
could have a material adverse effect on our financial condition, results of
operations and cash flow. Our networks and switching facilities experience
periodic service interruptions and equipment failures, and the operation of such
networks remain subject to international, national and regional
telecommunications outages or regulatory issues from time to time. As a result,
we may, from time to time, experience service interruptions or equipment
failures that could have a material adverse effect on our financial condition,
results of operations and cash flow.
WE MAY INCUR LIABILITY AS AN INTERNET SERVICE PROVIDER
We are an Internet service provider, or an ISP. The law governing the
liability of on-line service providers and Internet access providers for
participating in the hosting or transmission of objectionable materials or
information currently remains unsettled. Under the terms of the 1996
Telecommunications
20
<PAGE> 22
Act, courts can impose civil and criminal penalties for the use of interactive
computer services for the transmission of certain indecent or obscene
communications. The United States Supreme Court in 1997 held this provision
unconstitutional as it relates to indecent, but not obscene, communications. In
October 1998, Congress enacted the Child Online Protection Act, which requires
that online material that is "harmful" to minors be restricted. This law is
currently being challenged and on February 1, 1999 a U.S. District Court judge
issued a preliminary injunction against enforcement of portions of that act. The
U.S. Justice Department has filed an appeal of the February 1999 ruling. Also,
some states have adopted or may adopt in the future similar requirements. The
constitutionality of such state requirements remains unsettled at this time. In
addition, several private parties have filed lawsuits seeking to hold Internet
service providers accountable for information that they transmit, such as
libelous material and copyrighted material. We cannot predict the outcome of
this litigation or the potential for the imposition of liability on Internet
service providers for information that they host, distribute or transport. These
suits and other regulations could materially change the way ISPs must conduct
business and could impact our determination to expand or continue this business.
To the extent that we become parties to future litigation, such litigation could
have a material adverse effect on our financial condition, results of operations
and cash flow.
OTHER COMPANIES HAVE NAMES SIMILAR TO OURS
Even though we have registered the mark "CapRock Communications" in the
United States, other companies in many different industries, particularly in
West Texas, have preexisting rights to the name "Caprock" within defined
territories. One specific company may have the right to use the name for
telecommunications services within an established area. If any of these other
companies are successful with their claims to our name, we may be required to
either obtain a license from them for the use of the name "CapRock," or be
required to change our name within certain defined territories. Either result
would cause us to incur additional expenses. If we are required to change our
name, we may lose the goodwill associated with the CapRock name in these
markets.
WE WILL BE REQUIRED TO REPURCHASE THE NOTES UPON A CHANGE OF CONTROL
Upon a change of control we will be required to offer to purchase all of
the outstanding old notes and new notes at a price equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase. This purchase requirement may in certain circumstances discourage
or make more difficult a sale or takeover of our business. In particular, a
change of control may cause an acceleration of, or require an offer to
repurchase under, our indenture governing the 1998 Senior Notes and certain of
our subsidiaries' other indebtedness.
In addition, a change of control under the indenture for the notes that you
hold will also constitute a change of control for purposes of the indenture
governing the 1998 Senior Notes, which would require us to offer to repurchase
the 1998 Senior Notes.
We could, subject to limitations on additional indebtedness, in the future
enter into certain transactions, including acquisitions, refinancings or other
recapitalizations or highly leveraged transactions that would not constitute a
change of control under our indenture, but could increase the amount of
indebtedness outstanding at such time or otherwise affect our capital structure
or credit rating or otherwise adversely affect holders of the notes. The
inability to repay such indebtedness, if accelerated, and to purchase all of the
tendered notes would constitute an event of default under the indenture.
Finally, we cannot assure you that we will have funds available to repurchase
the notes upon the occurrence of a change of control.
THERE IS NO PUBLIC MARKET FOR THE NEW NOTES, SO YOU MAY BE UNABLE TO SELL NEW
NOTES
There has not been an established trading market for the old notes.
Although each initial purchaser of the old notes informed us that it currently
makes a market in the old notes and, when issued, intends to
21
<PAGE> 23
make a market in the new notes, they have no obligation to do so and may
discontinue making a market at any time without notice.
The notes have been designated as eligible for trading in the PORTAL
market. However, we do not intend to apply for listing of the old notes or the
new notes, which will replace the old notes, on any securities exchange or for
quotation through the National Association of Securities Dealers Automated
Quotation System.
The liquidity of any market for the notes and the market price quoted for
the notes will depend upon the number of holders of the notes, our performance
or prospects or in the prospects for companies in our industry generally, the
market for similar securities, the interest of securities dealers in making a
market in the notes and other factors. A liquid trading market may not develop
for the old notes or, if issued, the new notes.
OUR OFFICERS AND DIRECTORS WILL OWN ENOUGH SHARES TO CONTROL CAPROCK AFTER THE
MAY 1999 EQUITY OFFERING
After the closing of the May 1999 equity offering, our officers and
directors together beneficially owned approximately 73% of the outstanding
shares of our Common Stock. As a result, they are able to exercise control over
matters requiring shareholder approval, including the election of directors, the
approval of mergers, consolidations and sales of all or substantially all of our
assets. This may prevent or discourage tender offers for our Common Stock.
COMMUNICATIONS LAWS AND STATE CORPORATE LAWS MAY MAKE IT HARDER FOR SOMEONE TO
ACQUIRE CONTROL OF CAPROCK
In most instances, before we transfer control or assign any of our
intrastate certification authorities, international authority or FCC licenses
and authorizations, we need regulatory approval by the FCC and various state
regulatory agencies. Certain communications laws also impose limits on foreign
ownership of radio station licenses. In addition, our Articles of Incorporation
provide that Article 13.03 of the Texas Business Corporation Act, which limits
statutory takeovers, does not apply to us. Any of these factors could have the
effect of delaying, deferring or preventing a change in control of CapRock. See
"Regulation and Licenses" and "Description of Capital Stock -- Preferred Stock"
and "-- Certain Anti-Takeover Effects."
22
<PAGE> 24
USE OF PROCEEDS
The exchange offer is intended to satisfy obligations we have under the
registration rights agreement entered into in connection with the May 1999
offering of $210 million aggregate principal amount of our outstanding 11 1/2%
Senior Notes dues 2009. We will not receive any cash proceeds from the issuance
of the new notes as described in this prospectus. We will receive in exchange
old notes in like principal amount. The old notes surrendered in exchange for
the new notes will be retired and canceled and cannot be reissued. Accordingly,
the issuance of the new notes will not result in any change in our indebtedness.
We received the net proceeds from the sale of the old notes in May 1999 of
approximately $201.4 million, after deducting the initial purchasers' discount
and offering expenses that we incurred. We currently intend to use the net
proceeds from the offering of the old notes (and from our May 1999 equity
offering):
- to fund additional capital expenditures for the construction and
operation of our fiber optic network,
- to fund the installation of voice and data switches, including the cost
of colocations in the central offices of local telephone companies,
- to open sales offices and add sales support and customer service
personnel in markets throughout the Southwest region, and
- for potential acquisitions, additional working capital and other general
corporate purposes.
Our use of proceeds may vary significantly and will depend on a number of
factors described under "Risk Factors." Accordingly, our management has broad
discretion in the allocation of the net proceeds. Pending such uses, the net
proceeds of the May 1999 offering of the old notes (and the net proceeds from
our May 1999 equity offering) will be invested in short-term, high grade
investment securities.
23
<PAGE> 25
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999 on
an actual basis and on an as adjusted basis to give effect to (i) our sale and
issuance of 4,000,000 shares of Common Stock in the May 1999 equity offering
(which closed on May 12, 1999) at a public offering price of $22.00, after
deducting the underwriting discounts and commissions and estimated offering
expenses and fees totaling approximately $6.0 million, and (ii) the May 1999
sale of 11 1/2% Senior Notes, due 2009, that you hold (after deducting the
initial purchasers' discount and estimated offering expenses totaling
approximately $5.5 million). The table shown below should be read in conjunction
with our Consolidated Financial Statements including the accompanying notes
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and marketable securities............ $ 51,488 $334,935
======== ========
Long-term debt:
11 1/2% Senior Notes, due 2009............................ $ -- $201,432
12% Senior Notes, due 2008................................ 145,308 145,308
-------- --------
Total long-term debt.............................. 145,308 346,740
Stockholders' equity:
Preferred Stock, $.01 par value; 20,000,000 shares
authorized; none issued................................ -- --
Common Stock, $.01 par value; 200,000,000 shares
authorized; 28,952,747 shares issued and outstanding,
actual and 32,952,747 shares issued and outstanding, as
adjusted(1)............................................ 290 330
Additional paid-in capital................................ 10,607 92,582
Retained earnings......................................... 3,903 3,903
Unearned compensation..................................... (308) (308)
Treasury stock, at cost................................... (53) (53)
-------- --------
Total stockholders' equity........................ 14,439 96,454
-------- --------
Total capitalization.............................. $159,747 $443,194
======== ========
</TABLE>
- ---------------
(1) Excludes (1) 2,402,525 shares of Common Stock issuable upon exercise of
options outstanding on March 31, 1999, with a weighted average exercise
price of $5.61 per share, (2) 3,523,414 shares available for future issuance
under our employee and director stock option plans as of March 31, 1999 and
(3) 145,000 shares of Common Stock subject to outstanding warrants. See
"Management -- Benefit Plans," "Description of Capital Stock," and Note 12
of Notes to Consolidated Financial Statements.
24
<PAGE> 26
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our summary consolidated financial data as
of and for the years ended December 31, 1994, 1995, 1996, 1997 and 1998 and as
of and for the three months ended March 31, 1998 and 1999. The business
combination among our predecessor companies was completed on August 26, 1998 and
was accounted for as a pooling of interests. Accordingly, the Consolidated
Balance Sheets as of December 31, 1997 and 1998 and the Consolidated Statements
of Operations, Stockholders' Equity and Comprehensive Income and Cash Flows for
each of the years in the three year period ended December 31, 1998 include our
three predecessor companies (i.e., CapRock Telecommunications, CapRock Fiber and
IWL Communications) as though these entities were always part of CapRock.
The following table also includes our summary consolidated financial data
as of and for the three months ended March 31, 1998 and 1999 derived from
unaudited financial statements for the respective periods. 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.
In May 1998, IWL Communications changed its fiscal year end to coincide
with the fiscal years of CapRock, CapRock Telecommunications and CapRock Fiber.
The Consolidated Statement of Operations for the year ended December 31, 1996
combines the operating activity of IWL Communications for the year ended June
30, 1996 with the operating activity of CapRock Telecommunications and CapRock
Fiber for the year ended December 31, 1996. The net income of IWL Communications
in the amount of approximately $260,000 for the six month period ended December
31, 1996 was excluded from the Consolidated Statement of Operations for the year
ended December 31, 1996 as a result of the non-conforming year ends for such
period. This amount was included as an adjustment to retained earnings in the
Consolidated Statement of Stockholders' Equity and Comprehensive Income in 1997.
The cash flow for IWL Communications for this six month period was added to the
1997 beginning balance in the Consolidated Statement of Cash Flows.
<TABLE>
<CAPTION>
AS OF AND FOR
THE THREE MONTHS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- -------- -------- --------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................... $21,159 $29,407 $ 50,970 $ 75,349 $ 121,774 $24,412 $ 37,036
Cost of services and product resales........ 15,295 21,185 39,357 52,471 83,221 16,229 22,381
------- ------- -------- -------- --------- ------- --------
Gross profit........................ 5,864 8,222 11,613 22,878 38,553 8,183 14,655
Operating expenses:
Selling, general and administrative....... 5,565 7,326 8,983 14,074 23,528 4,435 12,551
Merger related expenses................... -- -- -- -- 2,313 -- --
Depreciation and amortization............. 631 1,186 1,536 3,346 4,887 1,064 1,480
------- ------- -------- -------- --------- ------- --------
Total operating expenses............ 6,196 8,512 10,519 17,420 30,728 5,499 14,031
------- ------- -------- -------- --------- ------- --------
Operating income (loss)..................... (332) (290) 1,094 5,458 7,825 2,684 624
Interest expense, net....................... (224) (484) (585) (1,603) (6,441) (451) (3,410)
Other income (expense)...................... 256 151 42 220 106 1 (19)
------- ------- -------- -------- --------- ------- --------
Income (loss) before income taxes and
extraordinary item........................ (300) (623) 551 4,075 1,490 2,234 (2,805)
Income tax expense (benefit)................ 77 48 227 1,513 1,267 876 (1,100)
------- ------- -------- -------- --------- ------- --------
Income (loss) before extraordinary item..... (377) (671) 324 2,562 223 1,358 (1,705)
Extraordinary item -- extinguishment of
debt...................................... -- 645 -- -- -- -- --
------- ------- -------- -------- --------- ------- --------
Net income (loss)................... $ (377) $ (26) $ 324 $ 2,562 $ 223 $ 1,358 $ (1,705)
======= ======= ======== ======== ========= ======= ========
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
AS OF AND FOR
THE THREE MONTHS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- -------- -------- --------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Pro forma net income (loss):
Income (loss) before income taxes and
extraordinary item...................... $ (300) $ (623) $ 551 $ 4,075 $ 1,490 $ 2,234 $ (2,805)
Pro forma income taxes, as if CapRock
Fiber were a C Corporation.............. (131) (211) 143 1,475 1,267 876 (1,100)
------- ------- -------- -------- --------- ------- --------
Income (loss) before extraordinary item... (169) (412) 408 2,600 223 1,358 (1,705)
Extraordinary item, net of taxes.......... -- 397 -- -- -- -- --
------- ------- -------- -------- --------- ------- --------
Pro forma net income (loss)......... $ (169) $ (15) $ 408 $ 2,600 $ 223 $ 1,358 $ (1,705)
======= ======= ======== ======== ========= ======= ========
Historical and pro forma income (loss) per
common share:
Income (loss) before extraordinary item... $ (0.01) $ (.002) $ 0.01 $ 0.09 $ 0.01 $ 0.05 $ (0.06)
Extraordinary item, net of tax............ -- .002 -- -- -- -- --
------- ------- -------- -------- --------- ------- --------
Basic and diluted......................... $ (0.01) $ -- $ 0.01 $ 0.09 $ 0.01 $ 0.05 $ (0.06)
======= ======= ======== ======== ========= ======= ========
Weighted average shares outstanding:
Basic..................................... 25,715 25,926 27,146 27,984 28,899 28,836 28,943
Diluted................................... 25,715.. 25,936 27,156 28,481 30,028 29,449 28,943
OPERATING DATA:
EBITDA(1)................................... $ 299 $ 896 $ 2,630 $ 8,804 $ 15,025 $ 3,748 $ 2,104
Cash flows provided by (used in)
operations................................ (593) 827 781 4,112 7,125 1,264 (9,689)
Cash flows provided by (used in) investing
activities................................ (1,366) (1,919) (9,350) (12,987) (134,350) (4,062) 13,781
Cash flows provided by financing
activities................................ 2,324 903 8,605 12,113 123,989 656 69
Capital expenditures........................ (1,822) (2,282) (10,212) (13,630) (36,855) (3,526) (23,819)
BALANCE SHEET DATA:
Working capital (deficit)................... $ (441) $ (797) $ (2,153) $ (305) $ 102,489 $ -- $ 65,208
Property, plant and equipment, net.......... 2,935 6,705 15,901 27,341 59,607 -- 78,862
Total assets................................ 9,596 13,198 28,522 49,389 191,966 -- 193,885
Long-term debt and capital lease
obligations............................... 1,221 2,443 13,254 21,062 145,187 -- 145,308
Stockholders' equity........................ 2,829 3,552 3,886 14,086 16,062 -- 14,439
Ratio of earnings to fixed charges(2)....... -- 1.0x 1.5x 2.6x 1.1x 4.4x --
</TABLE>
- ---------------
(1) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization and merger related expenses. EBITDA is a measure commonly used
in the communications industry to analyze companies on the basis of
operating performance. EBITDA is not a measure of financial performance
under generally accepted accounting principles and should not be considered
as an alternative to net income as a measure of performance nor as an
alternative to cash flow as a measure of liquidity.
(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 CapRock. 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). For the
year ended December 31, 1994 and for the three months ended March 31, 1999,
earnings were inadequate to cover fixed charges by $358,000 and $2,806,000,
respectively.
26
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto of CapRock contained
elsewhere in this prospectus. This information is not necessarily indicative of
future operating results. Except for the historical information contained below,
the matters discussed in this section are forward-looking statements that
involve a number of risks and uncertainties, including those described in "Risk
Factors." Our actual liquidity needs, capital resources and operating results
may differ materially from the discussion shown below in these forward-looking
statements.
OVERVIEW
We own and operate a scalable long-haul fiber network which upon completion
is expected to cover approximately 6,100 route miles throughout the Southwest
region, which includes Texas, Louisiana, Arkansas, Oklahoma, New Mexico and
Arizona. 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., CapRock Telecommunications, CapRock Fiber and IWL Communications) as
though these entities had always been a part of CapRock.
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 120 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 7,000 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.
27
<PAGE> 29
RESULTS OF OPERATIONS
CapRock recognizes revenue from the following sources: carriers' carrier,
integrated services, systems services and product resales.
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 indefeasible
right to use contracts, or 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.
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.
Product Resales. In 1997, CapRock 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 CapRock's total sales in future
years.
The following table represents the various sources of revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Carriers' carrier................. $22,405 $41,805 $ 72,165 $12,763 $24,452
Integrated services............... 1,980 8,640 17,978 4,269 4,504
Systems services.................. 16,031 21,959 31,631 7,380 8,080
------- ------- -------- ------- -------
Total service revenue..... 40,416 72,404 121,774 24,412 37,036
Product resales..................... 10,554 2,945 -- -- --
------- ------- -------- ------- -------
Total revenues............ $50,970 $75,349 $121,774 $24,412 $37,036
======= ======= ======== ======= =======
Gross margin percent:
Gross margin-- service revenue.... 27% 31% 32% 34% 40%
======= ======= ======== ======= =======
Gross margin-- product resales.... 8% 20% --% --% --%
======= ======= ======== ======= =======
Gross margin-- total.............. 23% 30% 32% 34% 40%
======= ======= ======== ======= =======
</TABLE>
28
<PAGE> 30
The following table sets forth for the periods indicated CapRock's
statement of operations as a percentage of its operating revenues:
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------ --------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues.................................. 100% 100% 100% 100% 100%
Cost of services.......................... 58% 67% 68% 66% 60%
Cost of product resales................... 19% 3% --% --% --%
--- --- --- --- ---
Gross profit.............................. 23% 30% 32% 34% 40%
Operating expenses:
Selling, general and administrative..... 18% 19% 19% 18% 34%
Merger related expenses................. --% --% 2% --% --%
Depreciation and amortization........... 3% 4% 4% 4% 4%
--- --- --- --- ---
Total operating expenses.................. 21% 23% 25% 22% 38%
--- --- --- --- ---
Operating income.......................... 2% 7% 7% 12% 2%
Interest expense.......................... (1)% (2)% (8)% (2)% (12)%
Interest income........................... --% --% 2% --% 2%
Other income.............................. --% --% --% --% --%
--- --- --- --- ---
Income before income taxes................ 1% 5% 1% 10% (8)%
Income tax expense........................ --% 2% 1% 4% (3)%
--- --- --- --- ---
Net income................................ 1% 3% --% 6% (5)%
=== === === === ===
</TABLE>
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. CapRock 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. CapRock
anticipates quarterly systems services revenue for the remainder of the year to
remain at comparable levels.
29
<PAGE> 31
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. 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 resulted from interest expense related
to CapRock'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 CapRock's senior notes issued in July 1998. See "-- Liquidity and Capital
Resources."
Income Taxes (Benefits). During the three months ended March 31, 1998,
CapRock 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.
YEAR ENDED 1997 COMPARED TO 1998
Revenues. Total revenues increased $46.5 million, or 62%, from $75.3
million in 1997 to $121.8 million in 1998. The 62% increase was attributable to
increases of 73% in carriers' carrier, 108% in integrated services and 44% in
systems services revenue.
Carriers' carrier revenue increased $30.4 million from $41.8 million in
1997 to $72.2 million in 1998. The 73% increase resulted primarily from the
rapid growth in domestic and international switched services sold to other
carriers and as a result of $9.5 million in IRUs in 1998; no such revenue from
IRUs was recorded before 1998.
Integrated services revenue increased $9.3 million from $8.6 million in
1997 to $18.0 million in 1998. The 108% increase was attributable to growth in
the number of business customers both from increased penetration in our existing
markets and from the deployment of our network into new markets.
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Systems services revenue increased $9.7 million from $22.0 million in 1997
to $31.6 million in 1998. The 44% increase was attributable to 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.
Product resale revenue was $2.9 million in 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 in future years.
Costs of Services and Product Resales. Cost of services increased $30.7
million, or 59%, from $52.5 million in 1997 to $83.2 million in 1998. The growth
in cost of services was primarily attributable to the continued growth in all
three revenue categories. The two percentage point increase in gross margin from
30% to 32% resulted primarily from favorable pricing attributable to the higher
traffic and new vendors and the sale of dark fiber. The increase in the gross
margin in 1998 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. SG&A includes salaries,
benefits, occupancy costs, commissions, sales and marketing expenses and
administrative expenses. SG&A increased $9.4 million, or 67%, from $14.1 million
in 1997 to $23.5 million in 1998. 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.
CapRock recorded merger related expenses of $2.3 million in 1998, as
compared to no such costs in 1997. The merger related costs relate to the
business combination of CapRock Telecommunications, CapRock Fiber and IWL
Communications, our predecessor companies. This combination was consummated on
August 26, 1998. The merger related expenses consist of fees for investment
bankers, attorneys, accountants, financial printing and other related charges.
Depreciation and amortization expense increased $1.5 million, or 46%, from
$3.3 million in 1997 to $4.9 million 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. Interest expense increased $7.8 million from $1.7 million
in 1997 to $9.5 million in 1998. The increase resulted from interest expense
related to its senior notes. See "-- Liquidity and Capital Resources."
Interest Income. Interest income increased $2.9 million from $133,000 in
1997 to $3.0 million in 1998. The increase was attributable to the interest and
investment accretion associated with the marketable securities purchased with
the proceeds from the senior notes. See "-- Liquidity and Capital Resources."
Income Taxes. Income tax expense of $1.5 million in 1997 was comparable to
the income tax expense of $1.3 million in 1998. The effective tax rate was 37%
in 1997 as compared to 85% in 1998. The increase in the effective tax rate was
primarily attributable to certain non-deductible merger related costs in the
amount of approximately $1.8 million.
Net Income. Net income decreased $2.3 million, or 91%, from $2.6 million in
1997 to $223,000 in 1998 as a result of the factors discussed above.
YEAR ENDED 1996 COMPARED TO 1997
Revenues. Total revenues increased $24.3 million from $51.0 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 the continued expansion of CapRock's direct and agent sales. The 48%
increase was attributable to increases of 87% in carriers' carrier, 336% in
integrated services and 37% in systems services revenue. Product resale revenue
was $10.6 million in 1996, as compared to $2.9 million in 1997.
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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.
Carriers' carrier revenue increased $19.4 million from $22.4 million in
1996 to $41.8 million in 1997. The 87% increase resulted primarily from the
rapid growth in domestic and international switched services sold to the other
carriers.
Integrated services revenue increased $6.7 million from $2.0 million in
1996 to $8.6 million in 1997. The 336% increase was attributable to growth in
the number of business customers.
Systems services revenue increased $6.0 million from $16.0 million in 1996
to $22.0 million in 1997. The 37% increase was attributable to 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, services and maintenance of telecommunication equipment.
Costs of Services and Product Resales. Cost of services increased $13.1
million from $39.4 million in 1996 to $52.5 million in 1997. The growth in cost
of services was primarily attributable to the continued growth in all three
revenue categories. The seven percentage point increase in gross margin from 23%
to 30% resulted primarily from favorable pricing attributable to the higher
traffic and new vendors, as well as a more favorable mix of international and
domestic traffic. Additionally, the total margin increase was partially
attributable 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.
Selling, General and Administrative Expenses. 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 $9.0 million in
1996 to $14.1 million in 1997. The increase resulted from additional personnel
needed to support CapRock's growth, additional sales commission payments and
from increases in travel and advertising expenses.
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
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 was approximately $631,000 in 1996, as
compared to $1.7 million in 1997.
Income Taxes. Income tax expense increased $1.3 million from $227,000 in
1996 to $1.5 million in 1997. This increase was attributable to the improved
profitability of CapRock.
Net Income. Net income increased $2.2 million from $324,000 in 1996 to
approximately $2.6 million in 1997 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
CapRock'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.
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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,
CapRock 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
1998 Senior Notes. Interest on the 1998 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
1998 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. These funds are invested in short-term,
high-grade investment securities classified as available for sale. The indenture
governing the issuance of the 1998 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, 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.
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 Commission 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 $82.0 million from
the sale of its common stock.
On May 18, 1999, CapRock issued $210 million aggregate principal amount of
private senior notes due May 1, 2009. We have filed the registration statement
(of which this prospectus is a part) to exchange new, registered senior notes
for these private senior notes. Interest on these senior notes is payable
semi-annually in arrears on May 1 and November 1 of each year, commencing
November 1, 1999, at the rate of 11 1/2% per year. CapRock received net proceeds
from such offering, after deducting the initial purchasers' discount and
estimated expenses payable by CapRock, of approximately $201.4 million. These
senior notes are senior unsecured obligations and as such rank pari passu in
right of payment with CapRock's existing 1998 Senior Notes and with all
CapRock's future unsecured and unsubordinated indebtedness. The indenture
governing the May 1999 senior notes has restrictions similar to those which
currently exist for CapRock's existing 1998 Senior Notes. The proceeds have been
and 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. Unutilized funds have been invested in short-term, high-grade
investment securities classified as available for sale.
CapRock is also considering various alternatives under a revolving credit
facility. CapRock anticipates that this credit facility, if obtained, would be
approximately $100 million. The proceeds from this credit facility would be used
in a similar manner to the uses discussed for the notes issued by CapRock.
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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 6,100
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 $205 million for 2000, including expenditures
to be made under the joint build arrangement with Enron Communications. 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,
New Mexico and Arizona.
CapRock believes that its cash and marketable securities (including the net
proceeds from the May 1999 equity offering and the net proceeds from the May
1999 sale of notes), cash flow from operations and sales of dark fiber 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 million for the
three months ended March 31, 1998 and was $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
CapRock's results of operations, financial condition or cash flow.
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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 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 by the manufacturer to be year 2000 compliant.
CapRock currently estimates that the year 2000 identification, assessment,
remediation and testing efforts will be substantially complete by August 31,
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.... 6/98-7/99
Identification, assessment, remediation and testing
regarding desktop and individual system issues............ 6/98-7/99
Identification and assessment regarding non-IT system
issues.................................................... 8/98-8/99
Remediation and testing regarding non-IT systems............ 11/98-8/99
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.
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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:
- switching systems,
- network operations and fiber,
- satellite/microwave transmission equipment and satellite service
providers,
- billing and call record collection systems, and
- 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
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 will consist of the following:
- process flow analysis,
- documentation of overall integrated test strategy,
- documentation and test case plans at an individual component level,
- committee agreement regarding the test plan,
- execution of the integrated test plan, and
- documentation regarding the results of test procedures.
Network Operations and Fiber:
CapRock currently owns and operates a 1,200-route mile fiber optic network,
which was substantially completed by June 30, 1999. Approximately 400 route
miles were completed and placed in service in the first six months of 1999. The
network is currently being expanded to 6,100 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.
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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.
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
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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
CapRock's year 2000 contingency planning effort is designed to provide
immediate response and subsequent recovery from any unplanned business
interruption due to failure of technical infrastructure resulting from the year
2000. Contingency planning is a process that aids in determining the most
effective actions, identifies when contingent actions should be taken and helps
to ensure those resources necessary for response are available.
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 August 31,
1999.
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. These contingency
plans are expected to be completed by August 31, 1999.
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.
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
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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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BUSINESS
CapRock owns and operates a scalable long-haul fiber network which upon
completion is expected to cover approximately 6,100 route miles throughout the
Southwest region, which includes Texas, Louisiana, Arkansas, Oklahoma, New
Mexico and Arizona. This fiber network supports the voice, data, bandwidth and
dark fiber services we provide to our carrier and retail customers. Our 1998
revenues were $121.8 million and EBITDA (exclusive of merger related expenses of
$2.3 million) was $15.0 million, and our revenues for the quarter ended March
31, 1999 were $37.0 million and EBITDA was $2.1 million. Over the past five
years, our revenues have grown at a compound annual growth rate of 55%.
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 120 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 7,000 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.
We are focused on the Southwest region because of this region's size and
attractive growth prospects and because we believe that as a region it is
currently underserved by other major telecommunications providers. We believe
our ability to offer integrated telecommunications services along with superior
customer service will be particularly attractive to small and medium-sized
businesses that desire simple bundled plans from a single provider. Many of the
smaller markets within our region do not have telecommunications alternatives to
the incumbent local telephone company. We also believe that a regional focus
enables us to achieve certain economies of scale due to the concentrated
deployment of network assets, our sales and marketing efforts and our
management. By maximizing the amount of traffic that remains on our network, we
can maximize our gross profit margins and returns on invested capital.
We intend to build the most extensive alternative fiber network in the
Southwest region, which will allow us to serve nearly every primary, secondary
and tertiary city within the region. Our fiber network is scalable, and we are
deploying a minimum of 96 fibers and two to three spare conduits along certain
routes. Each fiber is capable of supporting dense wave division multiplexing,
and each conduit is capable of housing a cable with hundreds of additional
fibers. In order to reduce the cost of fiber retained for our own use, we intend
to sell excess fiber to other carriers. We are currently in discussions for the
sale of fiber over segments of our network with over 25 carriers. Consistent
with our planned network deployment schedule, approximately 800 route miles of
the long-haul fiber network were substantially completed at year-end 1998. We
currently have another 1,700 route miles under construction and expect to have
approximately 3,000 route miles completed by the end of 1999, with the remainder
of the 6,100 route mile network expected to be completed by the end of 2000. We
recently entered into an agreement with Enron Communications to jointly build
approximately 1,050 miles of fiber network in Texas. We believe that this
agreement and any other similar agreements we may execute in the future may
enable us to significantly lower the overall cost of network construction as
well as accelerate its deployment.
In addition to our extensive fiber network, our voice network facilities
include eight local and long distance switches (seven which we own and one which
we manage) with another three local switches scheduled to be installed by the
end of the fourth quarter of 1999. We plan to colocate our equipment in 20
central offices with incumbent local telephone companies (13 of which are
currently in process) for the provision of local services using UNEs by the end
of 1999. We also plan to purchase and deploy eight ATM data switches to support
our Internet, frame relay and ATM services in the third quarter of 1999 and plan
to purchase and deploy an additional 10 ATM data switches in the fourth quarter
of 1999.
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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. See Note 18 to the Consolidated
Financial Statements of CapRock included in this prospectus.
Our executive management team has extensive experience in developing
advanced telecommunications networks as well as significant executive managerial
experience. Jere W. Thompson, Jr., our Chief Executive Officer and Chairman of
the Board, founded CapRock Fiber in 1992, became President of CapRock
Telecommunications in 1994 and has overseen the development of our company since
that time. Ignatius W. Leonards, our President, founded IWL Communications and
has over 24 years of telecommunications industry experience. Kevin W. McAleer,
our Chief Financial Officer, has over 17 years of experience as the chief
financial officer of several publicly held companies. In addition, Scott L.
Roberts, our Executive Vice President of International Sales, Timothy W. Rogers,
our Executive Vice President of Retail Sales and Network Operations, and Timothy
M. Terrell, our Executive Vice President of Carrier Sales, were all co-founders
of CapRock Telecommunications and prior to that were employed as directors and
managers in the carrier sales divisions of Qwest and Sprint. Byron M. Allen,
Executive Vice President of International, has six years of experience in the
domestic and international telecommunications industry.
MARKET OPPORTUNITY
We believe that a substantial market opportunity exists for us as a result
of the following factors:
- attractive growth dynamics of the Southwest region,
- rapidly developing telecommunications technologies,
- growing demand for data services and Internet access,
- need for integrated communications solutions for small and medium-sized
businesses,
- increasing traffic between the U.S. and Mexico, and
- the 1996 Telecommunications Act.
Attractive growth dynamics of the Southwest region. We believe that there
is a significant opportunity in the Southwest region. Incumbent local telephone
companies, or ILECs, still control almost 98% of the local service market, and
the population of the Southwest region is large and growing rapidly. Texas is
the second largest state in the U.S., and its population is expected to exceed
20 million in 1999. Over the past two years, Texas was the second fastest
growing state in terms of total population and, over the past ten years, was the
fastest growing state in terms of new job creation. The combined population of
the Dallas/ Ft. Worth, Houston and San Antonio metropolitan areas exceeds the
total populations of each of 43 other states. Based on statistics published by
the Federal Communications Commission (FCC), in 1998 there were over 5.4 million
business access lines, approximately 12.0 million residential access lines and a
total of approximately 17.4 million total access lines in the Southwest region.
We believe that access lines in this region will grow slightly more than 5%
annually.
Rapidly developing telecommunications technologies. Advances in various
telecommunications technologies, such as high speed optical transmission
electronics, dense wave division multiplexing, or DWDM, and packet-switches are
reducing the cost structure of newly-deployed telecommunications networks. High
speed OC-192 transmission electronics operate at approximately 10 billion pulses
of light per second, four times faster and far more cost effective than prior
generation electronics. Dense wave division multiplexing significantly increases
the transmission capacity of a single strand of fiber optic cable (it can
increase the carrying capacity of a single fiber 32 fold by allowing
simultaneous transmission of up to 32 optical channels per fiber). High
performance packet switches break up data into "packets." Compared to circuit
switches, packet switches are almost half the cost on a per port basis and
utilize bandwidth more than ten
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times as efficiently for the transmission of voice and data. These technologies
effectively combine to manufacture more bandwidth and to make it faster and
available to more locations and at lower costs than ever before.
Growing demand for data services and Internet access. Demand for bandwidth
is being fueled by the demand from data and Internet services. Although rapid
access to information and the ability to distribute it quickly through the use
of data connections are critical to businesses, many of the nation's businesses
do not have access to data services, especially small and medium-sized
businesses located in secondary and tertiary cities. Market studies estimate
that, in response to this demand, spending on end-user subscriptions for data
services will grow at an annual rate of 77% over the next four years. In
addition, the proliferation of local area networks, wide area networks, private
networks, Internet services, e-mail and other enhanced services has caused data
transmissions to become a significant and increasing portion of overall
telecommunications traffic. These services are expected to drive much of the
growth in the data communications market. As a result, the data services market
has been the fastest growing segment of the communications industry, expanding
at a rate five times faster than the voice services market, with an increase
from approximately $3.7 billion in revenues in 1994 to approximately $9.9
billion in revenues in 1997. Market studies estimate that the data
communications services market will grow to approximately $24.3 billion in
annual revenues by the end of 2001, representing a compound annual growth rate
of 25% from 1997.
Need for integrated communications solutions for small and medium-sized
businesses. Currently the vast majority of the nation's small and medium-sized
businesses need to deal with multiple communications providers to obtain their
communications needs. These businesses tend to use the incumbent local telephone
company for local services, long distance carriers for long distance services,
equipment integrators for on-premise voice and network systems, and Internet
service providers for Internet access. As a result, we believe that there exists
a significant and growing demand from businesses for the provision of advanced
telecommunications services from a single provider that can not only provide a
convenient bundled package of products and services, but also provide integrated
customer care and support.
Increasing traffic between the U.S. and Mexico. We believe that over half
of the traffic between Mexico and the U.S. passes through border crossings along
the Texas border. In 1997, Mexico was the second largest destination for U.S.
outbound telecommunications traffic, accounting for approximately 12.1% 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 89% 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. International calling tends to be price
elastic: as rates fall, volume increases. Rates into Mexico have steadily
dropped over the past four years, and traffic volume has increased
commensurately. CapRock has a direct connection into Mexico with a Mexican
carrier, which enables us to provide reliable, high quality terminations to our
customers. We are in discussions with several Mexican carriers regarding
potential sales or exchanges of dark fiber.
The 1996 Telecommunications Act. Competition in the telecommunications
industry has been impacted significantly by the 1996 Telecommunications Act.
This act allows competitive carriers to use the existing incumbent local carrier
infrastructure, as opposed to building a competing infrastructure at significant
cost. The 1996 Telecommunications Act requires all incumbent carriers to allow
competitive carriers to colocate their equipment along with incumbent carrier
equipment in incumbent carrier central offices. This enables competitive
carriers to access end users through existing telephone line connections. The
1996 Telecommunications Act creates an incentive for incumbent carriers that
were formerly part of the Bell system to cooperate with competitive carriers.
These incumbent carriers cannot provide long distance service until regulators
determine that there is competition in the incumbent carrier's local market.
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BUSINESS STRATEGY
Our business objectives are to establish ourselves as the premier carriers'
carrier and to be the dominant integrated communications provider in the
Southwest region. To achieve these objectives, we intend to:
- Build the region's most advanced, scalable and extensive fiber optic
network. We believe that existing fiber networks cannot meet the
bandwidth needs of businesses and carriers in the Southwest region. We
also believe that the secondary and tertiary markets located between the
major markets in this region are underserved, creating a significant
market opportunity. To address this need, we are currently expanding our
network to cover approximately 6,100 route miles throughout the Southwest
region. We intend to construct the most extensive and advanced fiber
network in the region. By installing multiple conduits, along with a
large number of advanced fiber strands in each conduit that are capable
of supporting dense wave division multiplexing, we are creating a robust
network that will have significant flexibility to add capacity to meet
future customer demand. The unused conduits allow us to add fiber and to
cost-effectively deploy future generations of optical networking
components, which will expand capacity and reduce per unit costs, without
new construction. Through our use of these technologies, we believe that
we can rapidly scale our network to support the demands for increased
bandwidth, that the bandwidth we utilize is lower in cost and that the
markets we can reach are greater in number. We intend to have our network
interconnect with the networks of selected Mexican carriers at multiple
border crossings, creating international synchronous optical network, or
SONET, ring connections between the United States and Mexico. Given the
strong demand for dark fiber over the past year, we increased our planned
network build out from our original plan of approximately 4,300 route
miles to approximately 6,100 route miles.
- Create a strategic, regionally focused asset. We are focused on the
Southwest region because of the region's size, attractive growth
prospects and its border with Mexico, and because we believe that as a
region it is currently underserved by other major telecommunications
providers. We believe that existing fiber networks cannot meet the fiber
and bandwidth needs of businesses and carriers in the Southwest region.
This creates a significant market opportunity for an alternative network
provider that offers communications services throughout this region. Our
network has been designed to complement existing major long haul-fiber
networks. To the extent possible, our routes are geographically diverse
from the existing fiber networks of AT&T, MCI WorldCom, Sprint, Qwest and
IXC. We also believe that the majority of communications traffic is
regional in nature. By concentrating our network build within a region,
we feel we can maximize the amount of traffic that originates and
terminates end-to-end on our network, which captures significant regional
traffic and allows us to maximize our gross profit margins and returns on
invested capital.
- Pursue a cost-effective network build out. While our fiber network
principally supports our voice, data and bandwidth products, we also
expect the network to provide us with significant financial benefits.
Demand for dark fiber is strong, so we intend to sell excess dark fiber
to third parties. Also, we may enter into arrangements with other
carriers, similar to our agreement with Enron Communications, to jointly
build certain segments of our fiber network. These dark fiber sales and
joint build arrangements may enable us to accelerate our construction
schedule and significantly lower the cost of fiber retained for our own
use. We believe that on a per fiber mile basis we will own one of the
lowest net cost networks in the Southwest region.
- Focus on high value-added local switching infrastructure. As we enter
markets, we initially provide local services by reselling the services of
the incumbent local telephone companies. As we obtain enough customers to
economically justify the deployment of local switches, we plan to migrate
our resale customers to our own switching facilities. We also intend to
reach our customers by utilizing either the unbundled network elements of
ILECs or the fiber facilities of other CLECs. We believe that this
"success-based capital deployment" strategy, whereby we deploy capital
incrementally and only in attractive markets with an existing customer
base, will enable us to construct a network and
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facilities that can serve customers in all of our markets, while
minimizing the risk of making substantial up-front capital expenditures
in unproven markets. We are constantly exploring alternative technologies
to provide local loop, or last-mile connectivity, to customers in our
target markets, such as digital subscriber lines (DSL) and local
multipoint distribution systems (LMDS).
- Provide bundled communications solutions to small and medium-sized
businesses. We believe that there is a strong desire among small and
medium-sized business customers to simplify their operations by dealing
with a single telecommunications provider for an integrated package of
communications services. We currently offer local, long distance,
Internet, data and private line services. In addition, we also offer
asynchronous transfer mode (ATM), frame relay, Integrated Services
Digital Network (ISDN), Web server hosting, and other enhanced services
not generally available from the ILECs (or available only at prices
higher than those that we intend to charge). We believe that our ability
to provide a wide array of integrated services, to invoice these services
on a single bundled bill, and to serve as a single point of contact for
sales and service will enable us to (1) better compete in and to rapidly
penetrate our targeted markets, (2) capture virtually all of our existing
and newly acquired customers' expenditures for telecommunications
services and equipment, (3) enhance our profit margins, (4) increase
customer satisfaction, and (5) maintain lower customer churn. In
addition, we believe that our cost structure in offering bundled local
and long distance services will allow us to offer those services at a
bundled price that will be substantially lower than those services
purchased separately.
- Pursue acquisitions and strategic alliances. As part of our growth plan,
we routinely engage in discussions with other companies considering
potential business ventures and combinations. In our target markets, a
large number of small private companies provide local, long distance,
data, and Internet services, as well as telecommunications equipment.
This fragmentation creates opportunities to acquire industry participants
that can provide additional management talent, customers and product
extensions. In addition, as part of our strategy to rapidly deploy our
network, we intend to pursue strategic relationships with cable
television companies, utilities, state transportation departments and
other governmental authorities. By utilizing strategic alliances, we
believe we will be able to enter our target markets quickly and
efficiently and will be able to reduce the up-front capital investment
required to develop our network. Our agreement with Enron Communications
to jointly build approximately 1,050 miles of fiber network in Texas is
an example of this strategy. This agreement and any other similar
agreements we may execute in the future may enable us to accelerate the
construction schedule for our network and significantly lower the cost of
fiber retained for our use.
- Build market share through personalized sales and customer service. We
focus on superior customer service and offer our integrated services
primarily to small and medium-sized businesses. Unlike large corporate,
government, or other institutions, small and medium-sized businesses
often do not have the necessary in-house personnel required to manage and
implement complex telecommunications solutions. As a result, we believe
that a consultative direct sales effort combined with a superior and
personalized customer care program that provides customers with a
comprehensive turn-key telecommunications solution will give us a
competitive advantage in capturing our customers' total
telecommunications traffic. As of May 31, 1999, our direct sales force
consisted of 140 account executives and managers in Dallas, Ft. Worth,
Houston, San Antonio, Austin and Victoria, Texas, as well as Lafayette,
Louisiana. In addition, we had 135 sales agents located throughout Texas.
We intend to recruit, train and deploy approximately 65 additional
account executives by the end of 1999. We believe that our low customer
attrition in 1998, which was less than 3% for the entire year, was
achieved because of our superior customer service.
- Leverage our advanced back office systems. We handle our provisioning,
customer care, billing and traffic reporting functions through a
proprietary software platform developed by RiverRock Systems, Ltd., a
Texas limited partnership in which we have a 49% ownership interest. The
system has been designed to be both scalable and flexible in order to
support our expected future back office
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requirements. We believe that this system provides us with a significant
competitive advantage by allowing us to creatively bundle and price
various telecommunication services, to process large order volumes, and
to provide superior customer service when compared to the incumbent local
telephone companies or other providers using legacy systems that either
outsource back-office services or that do not have an advanced office
support systems platform. The RiverRock system is part of a larger back
office organization which enables us to: (1) minimize the time required
to initiate services for new customers, (2) provide customer bills, (3)
respond quickly to customers' needs and information requests, and (4)
better monitor and analyze traffic, financial and operating trends. We
intend to continue to develop this system to meet increasing demands for
our services and to continue to provide our customers with superior
customer care.
NETWORK BUILD OUT AND FINANCING PLAN
By the end of the year 2000, we intend to build out our fiber optic network
to approximately 6,100 route miles throughout the Southwest region. We began
constructing and operating a regional fiber network in 1993. We completed
construction of the first 260 route miles of our fiber network in 1997, and at
the end of 1998, the first 800 route miles of our scalable, regional fiber
network were substantially completed, linking San Antonio, Laredo, McAllen,
Harlingen, Corpus Christi, Victoria and Houston, Texas. Over the past two years,
we have met substantially all of our milestones with respect to our construction
schedules and budgets. We currently have approximately 1,700 route miles under
construction and expect to have approximately 3,000 route miles completed by the
end of 1999, linking south Texas, San Antonio, Houston, Austin, Waco, Dallas,
Fort Worth and Amarillo, Texas, Oklahoma City and Tulsa, Oklahoma, Little Rock,
Arkansas and Monroe and New Orleans, Louisiana. We expect that the remainder of
the 6,100 route mile fiber network will be completed by the end of the year
2000. Given the increased demand for our fiber-based telecommunications services
over the past year, we increased our planned network build out from our original
plan of approximately 4,300 route miles to approximately 6,100 route miles.
We believe that our network, once completed, will be the most extensive
alternative fiber network in the Southwest region and will enable us to serve
nearly every primary, secondary and tertiary city in the region. Our network is
designed to be scalable and will have significant excess capacity to meet future
demand and flexibility to accommodate new fiber technology and electronics. We
are burying three to four conduits throughout our network. We are installing in
a conduit a minimum combination of 96 Lucent Truewave and single-mode fibers.
Both Truewave and single-mode fiber are capable of supporting dense wave
division multiplexing. We intend to retain on average 24 fiber strands
throughout most of our network. The routes of the network are primarily
constructed on state highway and county road rights-of-way, and are planned to
be generally geographically diverse from the existing fiber networks of AT&T,
Sprint, MCI WorldCom, and IXC. The fiber network will also interconnect with the
fiber networks of selected Mexican carriers at multiple border crossings.
Through the continuing and successful integration of IWL Communications and
its personnel and network facilities, we have been able to continue developing
our fiber network and our switching facilities. In addition to our extensive
fiber network, our network facilities also include eight local and long distance
switches (seven which we own and one which we manage), with another three local
switches scheduled to be installed by the end of the fourth quarter of 1999. We
plan to colocate our equipment in 20 central offices with incumbent local
telephone companies (13 of which are currently in process) for the provision of
local services using UNEs by the end of 1999. We also plan to purchase and
deploy eight ATM data switches to support our Internet, frame relay and ATM
services in the third quarter of 1999 and plan to purchase and deploy an
additional 10 ATM data switches in the fourth quarter of 1999.
We estimate total gross capital expenditures of approximately $455 million
to complete our planned regional network build out, including fiber,
transmission electronics, voice and data switches and corporate capital
expenditures.
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To reduce the cost of fiber retained for our own use, we have sold in the
past, and intend to sell in the future, conduit and dark fiber to third parties.
In the past, we have jointly constructed segments with Teleport Communications
Inc., a competitive local phone company, and with TCI Communications Inc., a
cable television company, and we recently announced our agreement with Enron
Communications 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 partnership we formed with Enron Communications is installing four
conduits throughout the approximate 1,050 miles. We intend to jointly market 96
of the 192 fibers 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. This
agreement and any similar agreements we may execute in the future may enable us
to accelerate our construction schedule and accelerate the rate of deployment of
our network, which in turn may accelerate our need for additional capital. Each
city-pair segment of our fiber network is operational upon completion of
construction. Should network construction be slowed or postponed, our existing
network is still operational and our integrated services strategy can continue
essentially unchanged.
By installing a large fiber count, advanced fiber capable of supporting
dense wave division multiplexing and spare conduits, the network will be
scalable and will have significant flexibility to add capacity to meet future
demand. The integrity and survivability of the network will be enhanced through
the design of multiple SONET rings, and its diverse location from existing
long-haul networks. The expanded network is expected to deliver the following
significant strategic and financial benefits to us: (1) substantial savings by
allowing us to move onto our own network a significant portion of the traffic
that we currently carry on circuits which we lease from other carriers; (2) high
capacity new routes allowing us to increase revenues by leasing additional
circuits to our customers, including high capacity circuits such as OC-3s,
OC-12s, and OC-48s; (3) lower underlying transmission and network operating
costs; (4) sufficient capacity to support increasing demand from Internet,
multimedia applications, frame relay and ATM; and (5) reduced capital costs
through sales and exchanges of excess fiber which we are including in our
network expansion specifically for that purpose.
We also provide services to our 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. Our microwave network
includes a system that has been built by us onshore in the Southwest region and
extends offshore into the Gulf of Mexico. We believe that the fiber and
microwave network we have created to support our oil and gas industry customers
has excess capacity and can readily support integrated communications'
activities in secondary and tertiary markets along the Texas and Louisiana Gulf
Coast, where we expect less competition for customers than in the larger
markets. We intend to leverage our 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 our existing and
planned communications infrastructure.
PRODUCTS AND SERVICES
Carriers' Carrier
We intend to establish ourself as the premier carriers' carrier within the
Southwest region, providing voice, data, broadband and dark fiber services over
the most extensive advanced fiber optic network in the Southwest region. Our
principal carriers' carrier products are: long distance terminating access,
calling cards, dark fiber, and bandwidth provision. Our carrier customer base
includes more than 120 carriers, including AT&T, IXC, MCI WorldCom, Qwest and
Sprint, and including regional independents such as Century Tel, Inc. and Lufkin
Conroe Telephone. For the year ended December 31, 1998, revenues from services
provided to MCI WorldCom accounted for more than 10% of our revenues.
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Long Distance Terminating Access. This service enables carrier customers to
terminate regional, domestic or international long distance calls through our
switches. We terminate calls over our own network and feature groups established
with incumbent local telephone companies or through other carriers providing
services to us. We sell these services on a per-call basis, charging by minutes
of use, or MOUs, with payment due monthly after services are rendered.
Bandwidth Provision. We offer T-1, DS-3, OC-3, OC-12 and OC-48 capacity and
individual wavelength channels to our carrier customers. Carriers utilize the
broadband capacity to support their voice and data traffic requirements and to
provide diverse routing as backup in the event of a fiber cut along their
primary routes. Services are provided generally through one year contracts,
requiring fixed monthly payments, generally in advance.
Dark Fiber. We lease and sell excess dark fiber to carrier customers over
our fiber network. We are burying three to four conduits and installing a cable
with a minimum of 96 fiber strands throughout our 6,100 route mile fiber
network. We intend to retain an average of 24 fibers for our own use and to
continue to lease or sell excess capacity to lower our net cost for fiber
retained for our own use. Dark fiber lease contracts are generally for a minimum
of ten years with multiple five year renewals at discounted rates. Dark fiber
sales are in the form of indefeasible right of use contracts for terms for 20
years and longer.
Integrated Services
We intend to become the dominant integrated communications provider in the
Southwest region, offering local, long distance, Internet, data and private line
services to end-user customers on an integrated basis invoiced on a single,
bundled bill. We believe that our ability to provide integrated services, and to
invoice these services on a single, bundled bill enables us to (1) better
compete in and rapidly penetrate our targeted markets, (2) capture virtually all
of our existing and newly acquired customers' expenditures for
telecommunications services and equipment, (3) increase customer satisfaction,
and (4) maintain low customer churn.
We offer (or, where indicated, intend to offer) the following products:
Local. These services offer customers local switched and enhanced services.
We intend to continue to obtain local telephone services from incumbent local
telephone companies on a total service resale, or TSR, basis and as demand
economically justifies, to install local switches and migrate customers to our
network utilizing unbundled network elements leased from incumbent local
telephone companies for last mile local lines. We believe this approach
significantly boosts our gross margins, maximizes our return on invested
capital, and reduces 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 can select us as their primary long distance
provider by placing an order with us. 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 our switch. This eliminates ILEC originating
access fees and reduces per minute rates to the user.
Internet. We provide Internet services to approximately 860 customers. The
services include e-mail server, news server and hosting of customer web pages.
Data. Frame relay and ATM data services are currently provided on a resale
basis. Our fiber network has been designed to provide a platform to support high
capacity, bandwidth-intensive products. We intend to migrate our data services
onto our own data and fiber networks as these networks are built out.
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Private Lines. This service provides customers dedicated broadband
capacity, typically T-1s and DS-3s. Private lines enable customers to connect
directly to their long distance carriers, bypassing the ILEC and thereby
reducing long distance rates. Private lines also enable customers to establish
virtual private wide area networks for data and voice transmissions between or
among multiple locations.
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. Later in 1999,
we plan to expand our service to include Mexico. We also offer additional
features including conference calling 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.
System Services
We intend to maintain our position as a major provider of
telecommunications services to remote installations, primarily in the Gulf of
Mexico. Our principal products are offshore voice and data services, as well as
the sale and installation of equipment to carry those services.
Offshore Services. We provide offshore voice and data systems and services
to the oil and gas industry in the Gulf of Mexico. Satellite and microwave
transmission media are used depending on the type and location of the drilling
rig involved. Our communications systems are flexible and can be quickly
re-aligned as rigs move to new locations.
Customer Premise Equipment. We currently sell and install telephone and
switchboard equipment to our offshore customers. We intend to add office
switchboard and private branch exchange equipment for our small and medium-sized
business customers. We intend to continue to build our relationships with local
customer premise equipment installation companies in all of our markets for the
purpose of selling and installing customer premise equipment not otherwise
provided by us.
SALES AND MARKETING
Carriers' Carrier. We established a carrier services sales force in 1992.
We believe it competes effectively in this market based on a combination of
price, reliability, quality of service, route diversity, ease of ordering,
ability to obtain traffic information and superior customer service. We market
our carriers' carrier services primarily through eight direct sales personnel
and four support specialists located in our headquarters in Dallas. In general,
these sales professionals locate potential customers for our carrier services
through customer referrals, trade forums, trade shows and industry alliances.
Integrated Services. We focus our sales efforts on small to medium-sized
businesses in the Southwest region primarily through two channels: our direct
sales force and our network of independent sales agents. Our direct sales force
and our authorized agents are trained to emphasize our customer-focused sales
efforts, superior customer service and product value. We reinforce building
customer relationships by tying a portion of each account executive's and
agent's compensation directly to the longevity of their customer accounts.
As of May 31, 1999, our direct sales force consisted of 140 account
executives in Dallas, Fort Worth, Houston, San Antonio, Austin, and Victoria,
Texas, as well as Lafayette, Louisiana. We intend to hire and train
approximately 65 additional account executives by the end of 1999 and an
additional 100 account executives by the end of 2000.
Our sales personnel call on prospective and existing business customers,
conduct analyses of business customers' telecommunications usage histories and
service needs, and demonstrate how our various service
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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, personal
telemarketing and through other networking alliances such as endorsement
agreements with trade associations and local chambers of commerce. We recruit
new account executives by emphasizing our extensive and advanced fiber
communications network, broad array of services bundled on a single bill,
superior customer service, attractive compensation and commission plans, stock
option programs and marketing support plans.
We also have 135 sales agents located throughout Texas. Our agent program
was established in 1996, and consists primarily of independent telephone
equipment vendors authorized by us to market our products and services.
Authorized agents receive recurring commissions based on product, pricing,
volume of usage and customer retention. We have four agent managers who actively
recruit new agents. We intend to add an additional 55 agents in 1999.
Our marketing strategy is built upon the belief that customers want to
reduce the number of providers, simplify the complexity and enhance the value of
their telecommunications needs. To address this strategy, we seek to be a single
source provider, offering the bulk of our customers' needs on single bills and
through single sales channels. We believe that our personalized attention to the
needs of our business customers, coupled with our ability to provide a fully
integrated bill, is appealing to both existing and prospective customers.
Project Management and Offshore Services. We target domestic customers that
require turnkey system solutions and other telecommunications services. Our
sales force sells frequency bandwidth and call completion and system solutions,
which allows us to further develop our own telecommunications infrastructure.
CUSTOMER CARE AND SUPPORT
We believe that our reputation has been built on outstanding customer care.
We strive to provide superior customer care and support for our customers and
believe that personal contact with our customers through knowledgeable, friendly
and efficient customer service representatives is a significant factor in
customer retention. We intend to significantly increase the number of our
customer service representatives as the number of direct and agent sales
representatives grows.
To support our carriers' carrier and integrated services customers, we
operate a call center in Dallas, Texas staffed by our customer service
representatives, who have completed a certification and training program
provided by us. To enhance their effectiveness, we provide ongoing training to
all customer service representatives. Our customer service department uses
on-line, real-time automated systems that provide notes from all prior contacts
with the customer, provide a complete account and payment history for customers
billed by us and enable the customer service representatives to provision new
services and modify existing services on all of our products.
We handle our provisioning, customer care, billing and traffic reporting
functions through a proprietary software platform developed by RiverRock
Systems, Ltd., a Texas limited partnership in which we have a 49% ownership
interest. The system has been designed to be both scalable and flexible in order
to support our expected future back office requirements. We believe that this
system provides us with a significant competitive advantage by allowing us to
creatively bundle and price various telecommunication services, to process large
order volumes, and to provide superior customer service when compared to the
incumbent local telephone companies using legacy systems and their competitors
that outsource back-office services or that do not have an advanced office
support systems platform. The RiverRock system is part of a larger back office
organization which enables us to: (1) minimize the time required to initiate
services for new customers, (2) provide customer bills, (3) respond quickly to
customers' needs and information requests, and (4) better monitor and analyze
traffic, financial and operating trends. We intend to continue to develop this
system to meet increasing demands for our services and to continue to provide
our customers with superior customer care. See "Certain Transactions."
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We also provide customer support for our offshore products and services
through our full-service support teams in Friendswood, Texas, Lafayette and New
Orleans, Louisiana, Moscow, Russia and Aberdeen, Scotland. Support services
include: (1) on-site maintenance, with over 50 technical specialists on call for
immediate dispatch when customers' communications systems require maintenance;
(2) a network operations center in Friendswood, Texas where our professionals
remotely monitor customers' communications systems throughout the Gulf of Mexico
and around the world seven days a week, 24 hours a day; (3) customer support for
our wireless products; (4) training programs designed to maximize the customers'
communications investment through classroom training at customers' sites and
multimedia video training tools; and (5) research and development for unique
applications where our engineers can custom design or modify hardware to improve
our performance within a particular system.
COMPETITION
Overview. The communications services industry is highly competitive,
rapidly evolving and subject to constant technological change. In particular,
numerous companies offer long distance, local, Internet, data and bandwidth
services, and we expect competition to increase in the future. We compete in
these markets primarily on the basis of price, customer service and the ability
to provide a variety of communications products and services.
Fiber Networks. We intend to expand our fiber optic network to
approximately 6,100 route miles throughout the Southwest region. We expect to
compete with numerous established and start-up national and regional fiber optic
networks owned by long distance carriers, ILECs and competitive local exchange
carriers ("CLECs") throughout the Southwest region. These competitors include
very large companies such as:
- AT&T,
- MCI WorldCom,
- Sprint,
- Level 3,
- Williams,
- SBC, and
- Qwest.
Each of these companies has greater name recognition, financial, personnel,
technical and marketing resources than we have. We also anticipate that other
providers of local and long distance telecommunications services will plan and
construct fiber networks that could compete with our network. In addition to
long distance carriers and local telephone companies, entities potentially
capable of offering broadband services in competition with our 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.
Competing networks may also have advanced fiber and operating capabilities
similar to those of our network. Furthermore, we expect that some of our
competitors will compete in our geographic market and
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directly with us for many of the same customers along a significant portion of
the routes along which we intend to operate.
Domestic and International Long Distance. We provide long distance services
using our own facilities and by reselling the facilities of other carriers, both
in the United States and between the United States and other countries. The long
distance communications industry is intensely competitive and the marketing and
pricing decisions of the larger industry participants such as AT&T, MCI
WorldCom, and Sprint have a significant impact on us. In addition, significant
consolidation in the industry has created and will continue to create numerous
other entities with substantial resources to compete for long distance business.
Such entities include Excel Communications, Inc., Frontier Communications
Service, Inc. and Qwest. In addition, as a result of the Telecommunications Act
of 1996 (the "1996 Telecommunications Act"), we anticipate that the Federal
Communications Commission ("FCC") may permit the Regional Bell Operating
Companies (the "RBOCs") to enter the long distance market in the future. The GTE
Operating Companies ("GTOCs") do not require FCC approval and may enter the long
distance market now. These larger competitors have significantly greater name
recognition and greater personnel, financial, technical, network and marketing
resources. Many may also offer a broader portfolio of services and have long
standing relationships with customers targeted by us. Moreover, we cannot
guarantee that our competitors cannot negotiate contracts with suppliers of
telecommunications services to obtain conditions of service more favorable than
ours. Many of our competitors enjoy economies of scale that can result in a
lower cost structure for transmission and related terminating costs. Those
carriers could bring significant pricing pressure to bear on us.
Customers frequently change long distance providers in response to lower
rates or promotional incentives by competitors. Prices for domestic and
international long distance calls have declined in recent years and we expect
them to continue to decrease further and more rapidly. Indeed, we expect
competition in all of our relevant markets to increase. This increased
competition could adversely affect our net revenue per minute and gross margins.
We cannot guarantee that we can compete effectively in the domestic or
international long distance markets.
Local Exchange Service. Our business objective is to expand significantly
our operations to provide local services. Regulation permitting us to compete in
the local service market has only recently been enacted into law, following
enactment of the 1996 Telecommunications Act. The services we intend to offer
will compete with those offered by ILECs, such as BellSouth, Southwestern Bell
and the GTOCs, as well as very large long distance carriers, such as AT&T, MCI
WorldCom, and Sprint. The ILECs currently dominate the provision of local
services in their respective markets, and the ILECs and the very large long
distance carriers have greater name recognition and greater financial,
technical, network, marketing and personnel resources than we do. Those entities
also hold longer standing relationships with regulatory authorities at the
federal and state levels than we do. We may also face competition from other
current and potential market entrants, including:
- other CLECs,
- cable TV companies,
- electric utilities,
- ILECs 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.
We cannot guarantee that we can compete effectively in the local service
markets.
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Internet Telephony. The FCC currently classifies Internet services as
enhanced services. As a result, federal and state common carrier regulations,
including long distance interstate and intra-state access fees, tariffing,
certification and rate regulation do not apply to the provision of Internet
services. Some Internet service providers, or 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 long-distance companies and other
communications companies to reduce prices and margins on domestic and
international long distance services. We cannot guarantee that either we or our
carrier customers will not experience substantial decreases in call volume,
pricing and/or margins due to IP Telephony. We also cannot guarantee that we can
offer telecommunications services to end users at prices that can compete with
the IP Telephony services offered by these new companies.
We also provide Internet services. We cannot guarantee that federal or
state regulators will not impose additional regulation on Internet services in
the future. We expect to compete by introducing IP Telephony shortly. The
Internet services market is highly competitive, in part because no substantial
barriers to entry exist. We expect that competition will continue to intensify.
Our competitors in this market include:
- Internet service providers,
- other telecommunications companies,
- online services providers, and
- Internet software providers.
Many of these competitors have greater personnel, financial, technical and
marketing resources than those available to us.
On April 5, 1999, US West filed a petition with the FCC asking the FCC to
find that IP telephony services are telecommunications services, not enhanced
services or information services, and therefore should be subject to access
charge and universal service obligations. We cannot predict how the FCC will
rule on US West's petition. If the FCC does ultimately determine that IP
telephony is subject to the FCC's access charge and universal service regimes,
such a ruling would likely substantially increase the costs of providing IP
telephony. US West filed similar requests before the Nebraska Public Service
Commission and the Colorado Public Utility Commission.
Technological Advances. Dense wave division multiplexing, high-speed OC-192
transmission electronics, advanced fiber technology and packet switching are
converging to increase significantly the supply of domestic and international
transmission capacity. Rapid and on-going technological advances have brought
new product and service offerings similar to the services we provide. The
introduction of new products or emergence of new technologies may cause capacity
to greatly exceed demand, reducing the pricing of certain services we provide.
We cannot guarantee that we can satisfy future customer needs, that our
technologies will not become obsolete because of future technological
developments, or that we will not have to make significant additional capital
investments to upgrade or replace our system and equipment. We cannot predict
the impact of these technological changes on our operations. If we fail to keep
pace with advances, it could have a material adverse effect on our financial
condition, results of operations and cash flow.
Offshore and Remote Telecommunications Services. Currently, we provide
telecommunications services to oil and gas customers in the Gulf of Mexico. In
the Gulf of Mexico, we compete directly principally with Autocomm Communications
Engineering Corp., Sola Communications, Inc., Datacom and Shell. 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. Although we believe that we compete
successfully in each of our markets today, we cannot guarantee that we can
continue to compete successfully in the future. We believe that most of our
larger competitors have generally not made it a priority to provide remote,
difficult-access telecommunications
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services. Should one or more of our competitors decide to focus on such
services, it could have a material adverse effect on our financial condition,
results of operations and cash flow.
EMPLOYEES
As of May 31, 1999, we employed approximately 476 people, including
approximately 161 in sales and marketing, approximately 132 in engineering and
technical services and approximately 183 in management, customer care,
provisioning, administration and finance. At that date, we also had an agent
sales force numbering approximately 135 independent agents throughout Texas. We
use the services of independent contractors for construction of our fiber
network. None of our employees is represented by a labor union or is subject to
a collective bargaining agreement. We believe that we have good relations with
our employees.
PROPERTIES
We own or lease buildings that contain approximately 170,000 square feet of
floor space. Our primary headquarters are located in Dallas, Texas. We entered
into a lease agreement effective March 1999 for our new corporate headquarters
and expect to occupy an additional approximately 30,000 square feet at the new
headquarters in the year 2000. We own an office building in Friendswood, Texas
and an office building in Lafayette, Louisiana, and we lease the remainder of
our office space.
All of the fiber optic cable, fiber optic telecommunications equipment and
other properties and equipment used in the networks, are owned or leased by us.
We have entered into various franchise, rights of way and lease agreements for
network regeneration sites. These properties and agreements do not lend
themselves to description by character and location of principal units and are
not considered meaningful for this disclosure. Our principal facilities include:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FEET DESCRIPTION
- -------- ----------- -----------
<S> <C> <C>
Dallas, Texas.......................... 70,000 Corporate headquarters for
administration, finance and carrier
sales functions, sales, switching and
customer support personnel
Houston, Texas......................... 24,000 Division headquarters for
administration, finance and sales
functions
Friendswood, Texas..................... 24,000 Engineering, network operations center,
administration, production and
warehouse
Phoenix, Arizona....................... 10,300 Switching facility and sales functions
</TABLE>
We consider our current facilities adequate for our current needs and
believe 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
We are a party to ordinary litigation incidental to our business from time
to time. Currently, we are not a party to any litigation that we expect would
have a material adverse effect on our results of operations, financial condition
or cash flow.
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REGULATION AND LICENSES
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 us or the telecommunications industry, can be predicted at this time. This
section also sets forth a brief description of regulatory and tariff issues
pertaining to our operations.
We provide domestic and international services subject to varying degrees
of U.S. federal, state and local regulation, and regulation by foreign
authorities. In the United States, the 1934 Communications Act, as amended,
including as amended by the 1996 Telecommunications Act and the regulations
promulgated by the FCC thereunder, as well as the applicable laws and
regulations of the various states and state regulatory commissions all govern
the provision of telecommunications services. 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 common carrier communications,
including international communications originating from or terminating in the
United States. State regulatory authorities retain jurisdiction over
jurisdictionally intrastate communications. Under Title III of the 1934
Communications Act, the FCC also regulates 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
we provide in other countries remain subject to the telecommunications laws and
regulations of those countries.
The FCC and the state regulatory agencies impose and enforce regulatory
requirements applicable to our operations. 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, we must also comply with the Federal
digital wiretapping administered by the U.S. Department of Justice and the FCC.
The telecommunications industry varies substantially from state to state and
continues to change rapidly. Moreover, as deregulation at the federal level
occurs, some states are reassessing the level and scope of regulation applicable
to carriers. Domestic or international regulators or third parties could raise
material issues with regard to our compliance or non-compliance with applicable
regulations. Future regulatory, judicial or legislative activities could have a
material adverse effect on our financial condition, results of operations or
cash flow.
U.S. Federal Regulation
Local Service Regulation Under The 1996 Telecommunications Act. The 1996
Telecommunications Act, which amended the 1934 Communications Act, provided for
comprehensive reform of the United States' telecommunications laws. In passing
the 1996 Telecommunications Act, Congress sought to increase local competition
from newer competitors such as long distance carriers, cable TV companies and
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public utility companies. The 1996 Telecommunications Act specifically requires
all local exchange carriers, or LECs (including ILECs and CLECs):
- not to prohibit or unduly restrict resale of their services,
- to provide dialing parity, number portability and nondiscriminatory
access to telephone numbers, operator services, directory assistance and
directory listings,
- to afford access to poles, ducts, conduits and rights-of-way, and
- to establish reciprocal compensation arrangements for the transport and
termination of telecommunications.
In addition, ILECs must provide:
- interconnection on certain terms and conditions,
- 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 colocation of equipment necessary for interconnection and access
to unbundled network elements at the LECs' premises.
On March 31, 1999, the FCC released its Collocation Order which requires
ILECs to permit CLECs to collocate any equipment used for interconnection or
access to unbundled network elements even if that equipment includes switching
or enhanced service functions. Among other things, the Collocation Order also:
- prohibits ILECs from placing any limits on the use of switching or
enhanced features for collocated equipment; and
- requires ILECs to make cageless collocation available and permit CLECs to
construct their own cross-connect facilities.
Under the 1996 Telecommunications Act, Regional Bell Operating Companies,
or RBOCs, have the opportunity to provide out-of-region long distance and
certain cable TV services immediately and in-region long distance services after
the RBOCs meet certain conditions. Specifically, an RBOC can enter the market
for in-region long distance services within areas where the RBOC provides local
exchange service upon FCC approval based on a showing that facilities-based
competition and interconnection agreements meeting a 14-point checklist both
exist. Entry of RBOCs into the domestic and international long distance business
and the emergence of other new local competitors could subject us to substantial
competition and could have a material adverse effect on our financial condition,
results of operations and cash flow.
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 prices for unbundled
network elements and for wholesale resale services.
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On January 25, 1999, the Supreme Court issued an opinion overturning prior
decisions issued by the U.S. Court of Appeals for the Eighth Circuit that had
vacated certain portions of the Interconnection Decision. The Supreme Court's
decision confirmed the FCC's authority to issue regulations implementing the
pricing and other provisions of the 1996 Telecommunications Act and reinstated
most of the challenged rules. However, the Supreme Court vacated a key FCC rule
that identified the network elements that incumbent LECs must unbundle. The FCC
has initiated a rulemaking to consider that issue. The Eighth Circuit decisions
and their recent reversal by the Supreme Court perpetuate continuing uncertainty
about the rules governing the pricing, terms and conditions of interconnection
agreements. During the pendency of the Eighth Circuit proceedings, state public
utilities commissions have continued to conduct arbitrations, and to implement
and enforce interconnection agreements. However, the Supreme Court's recent
ruling and further proceedings on remand may affect the scope of the state
commissions' authority to conduct such proceedings or to implement or enforce
interconnection agreements. The U.S. Supreme Court's decision will likely result
in new or additional rules being promulgated by the FCC, and the FCC has
initiated a proceeding to delineate the network elements that must be provided
by incumbent LECs. Given the general uncertainty surrounding the effect of the
Eighth Circuit decisions and the recent decision of the Supreme Court reversing
them, we cannot guarantee that we can continue to obtain or enforce acceptable
interconnection terms or interconnection terms consistent with our business
plans.
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 constitute telecommunications services and
that ILECs must comply with the unbundling and resale obligations and the
in-region inter-LATA restrictions of the 1996 Telecommunications Act in their
provision of advanced services. The FCC also proposed in a rulemaking to allow
ILECs to provide advanced services on an unregulated basis through separate
subsidiaries. We cannot predict the outcome of the FCC's proceeding. However, if
the FCC does forbear from regulating advanced telecommunications services, such
a decision would increase the ability of ILECs to compete against less
established carriers such as us.
Domestic Interstate Services. The FCC considers domestic interstate common
carriers (including us) that do not have market power as "nondominant." The FCC
subjects nondominant carriers to minimal regulation. However, interstate
carriers offering services to the public must comply with the federal statutory
and regulatory requirements of common carriage under the 1934 Communications Act
file various reports and pay various fees and assessments. Among other things,
interstate common carriers must offer service on a non-discriminatory basis at
just and reasonable rates. Nondominant carriers need not obtain specific prior
FCC approval to initiate or expand domestic interstate services, although they
must file a tariff with the FCC. Nondominant carriers remain subject to the
FCC's complaint jurisdiction. In particular, we may be subject to complaint
proceedings in conjunction with alleged noncompliance such as unauthorized
changes in a customer's preferred carrier. To date, one such complaint has been
filed at the FCC against us. In the event that the FCC finds that we have
violated an applicable rule or regulation, due to a complaint, noncompliance
with a fee payment or other reporting requirement or an internal investigation,
the FCC retains broad authority to impose various sanctions or penalties. The
complaint alleges that we participated with another carrier in a "slamming"
violation in which we improperly reassigned a toll free 800 number held by one
customer to a different customer. We are vigorously defending the complaint and
we have argued that no penalties or damages should be imposed because, among
other things, we complied with all applicable service change requirements at the
time we purchased the toll free number from the other codefendant carrier and
played no role in and had no prior knowledge of any alleged unauthorized change
by that carrier. We believe that the ultimate outcome of this matter will not
have a material adverse effect on our financial condition, results of operations
or cash flow. The FCC has issued an order eliminating the requirement that
nondominant carriers maintain tariffs for their domestic interstate services on
file at the FCC. Several carriers have appealed the FCC's order to the U.S.
Court of Appeals for the District of Columbia and that court has stayed the
FCC's order 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
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their interstate services. The FCC recently released an order specifying how
carriers should inform customers of their rates if detariffing occurs. Rate
information is to be provided to customers by such means as posting the rates on
a carrier's World Wide Web site. Elimination of tariffs will require that we
secure with each of our customers contractual agreements containing the terms of
the services offered. To the extent that disputes arise over such contracts,
carriers, including us, may no longer resort to the legal doctrine that the
terms of a filed tariff supersede individual contract language.
International Service Regulation. As a provider of international
telecommunications services, we must comply with the federal statutory and
regulatory requirements of common carriage under the 1934 Communications Act.
International common carriers must obtain authority from the FCC under Section
214 of the 1934 Communications Act and file a tariff containing the rates,
terms, and conditions applicable to their services before initiating their
international telecommunications services. We hold global authority from the FCC
to provide resale of switched services and private line services (where
permitted by the FCC) and to provide facilities-based services. We maintain an
international tariff on file with the FCC. International telecommunications
service providers must also file with the FCC:
- copies of their contracts with other carriers,
- certain foreign carrier agreements, and
- various reports regarding their international revenue, traffic flows and
use of international facilities.
Carriers holding Section 214 authority must also comply with FCC rules
requiring, among other things, prior approval for most transfers of control and
assignments.
Authorized international carriers must also comply with the FCC's
international service regulations, including the International Settlements
Policy ("ISPY") which 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 settlements, and
- the permissible deviations from these policies.
The ISPY applies to both resale and facilities-based operations. To the
extent that we acquire or own facilities that permit us to carry international
traffic, the FCC may pay particular attention to our compliance with that
policy.
The FCC also recently approved significant reform of its ISPY, and
deregulated intercarrier settlement arrangements between U.S. carriers and
non-dominant foreign carriers and arrangements with all foreign carriers on
competitive routes. Specifically, the new FCC rules, issued but not yet
effective, generally eliminated the ISPY and contract filing requirements for
arrangements with foreign carriers that lack market power. The recent ISPY
reform also changed the FCC's private line resale (or international simple
resale ("ISR")) policy, which prohibits carriers from using private line
circuits to provide switched services to a foreign country unless the FCC has
approved that foreign route for ISR service. The FCC will approve a foreign
route for ISR if it finds that the country offers equivalent resale
opportunities to engage in similar activities in that country or, with WTO
countries, if the local telecommunications provider charges U.S. carriers rates
at or below the FCC-determined rate for terminating U.S. traffic (the "Benchmark
Rate"). The new ISPY reform effectively permits ISR arrangements with
nondominant foreign carriers. Where U.S. carriers enter into agreements with
dominant foreign carriers, ISR will continue to be permitted on those foreign
routes approved by the FCC. The ISPY reform will open new opportunities for U.S.
carriers to enter into innovative, economic traffic arrangements with foreign
carriers, but will also likely increase competition in the international
services market.
The FCC recently streamlined 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
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telecommunications market, they will also likely increase the level of
competition in the international telecommunications marketplace.
Wireless Services. We own and maintain a variety of telecommunications
infrastructures and we hold various FCC and international licenses to transmit
voice and data. We currently hold numerous FCC licenses to provide land mobile,
microwave and satellite communications services. See "-- Licenses."
FCC licensees authorized to provide microwave, satellite earth station and
land mobile service must comply with under Title III of the 1934 Communications
Act and a variety of detailed licensing, operational and technical requirements
specific to each service. Among other requirements, licensees seeking to alter
the technical or operational configurations of their equipment or to continue
operating beyond the expiration date of the licenses must seek additional prior
authority from the FCC. We recently became aware that some of our earth station
operations do not strictly comply with the licenses we hold. We recently filed
applications to modify our FCC licenses to ensure that they fully reflect our
operations. FCC rules also contain various other requirements such as
restrictions on proposed transfers of control or assignments and required
compliance with relevant Federal Aviation Administration rules on wireless tower
construction and operation. The FCC generally retains the right to sanction a
carrier or revoke its authorizations if a carrier violates applicable laws or
regulations.
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 the FCC assigns wireless
licenses 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. The term "access service" describes the use of local exchange
facilities for the origination and termination of interexchange communications.
On May 8, 1997, the FCC released an order intended to reform the FCC's system of
interstate access charges to make that regime compatible with the
pro-competitive deregulatory framework of the 1996 Telecommunications Act. The
FCC's access reform order adopts various changes to federal policies governing
interstate access service pricing designed to move access charges, over time, to
more economically efficient levels and rate structures. Among other things, the
FCC:
- modified rate structures for certain non-traffic sensitive access rate
elements, moving some costs from a per-minute-of-use basis to flat-rate
recovery, including one new flat rate element,
- changed its structure for interstate transport services, and
- affirmed interstate access charges do not apply to ISPs.
On April 5, 1999, US West filed a petition with the FCC asking the FCC to
find that IP telephony services are telecommunications services, not enhanced
services or information services, and therefore should be subject to access
charge and universal service obligations. We cannot predict how the FCC will
rule on US West's petition. If the FCC does ultimately determine that IP
telephony is subject to the FCC's access charge and universal service regimes,
such a ruling would likely substantially increase the costs of providing IP
telephony. US West filed similar requests before the Nebraska Public Service
Commission and the Colorado Public Utility Commission.
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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 competitive levels but that a "prescriptive" approach might
be considered if necessary. In the absence of competition, the FCC stated that
it might specify the nature and timing of changes to existing access rate
levels. The FCC has indicated that it will promulgate additional rules sometime
in 1999 that may grant increased pricing flexibility to price cap LECs upon
demonstrations of increased competition (or potential competition) in relevant
markets. Price cap LECs include the RBOCs, GTE and certain independents that
must establish rates only at or below a designated price ceiling. The Eighth
Circuit has affirmed the FCC's access reform order.
Universal Service Charges. In 1997, the FCC released an order establishing
a significantly expanded federal universal service subsidy regime. Specifically,
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. The FCC collects money to fund this
expanded regime from interstate carriers and certain other entities. Our
payments for the schools and libraries and rural health care fund depend on
estimated quarterly intrastate, interstate and international gross end-user
telecommunications revenues. Contribution factors vary quarterly and the FCC
bills carriers on a monthly basis. Contribution factors for 1999 ranged from
3.08 to 3.19% for the high cost and low income funds (interstate and
international revenues); and 0.72 to 0.76% for the schools, libraries, and rural
health care funds (intrastate, interstate and international revenues). Because
the contribution factors do vary quarterly, we cannot currently accurately
determine the annualized impact on our annual performance. Several parties have
appealed the FCC's universal service order and those appeals remain pending
before the Fifth Circuit Court of Appeals.
The FCC may also issue new regulations governing the treatment of calls to
ISPs for the purposes of universal service obligations. In a recent report to
Congress, the FCC clarified that carriers must consider revenues earned from the
transmission services supplied to ISPs when calculating universal service
obligations. 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. We cannot predict the outcome of these proceedings
or their potential effect on our operations.
Internet Services. There are currently few U.S. laws or regulations which
specifically regulate communications or commerce over the Internet. One area in
which Congress did attempt to regulate information over the Internet involved
the dissemination of obscene or indecent materials. Certain provisions of the
1996 Telecommunications Act relating to indecent communication over the
Internet, generally referred to as the Communications Decency Act, were found to
be unconstitutional by the U.S. Supreme Court in 1997. In October 1998, Congress
enacted the Child Online Protection Act, which requires that on-line material
that is "harmful" to minors be restricted. This law is currently being
challenged in federal district court. On February 1, 1999, a U.S. District Court
judge issued a preliminary injunction against enforcement of portions of that
Act and the U.S. Department of Justice has appealed that decision.
It is possible that in the future laws and regulations could be adopted
which address matters such as user privacy, copyrights, pricing and the
characteristics and quality of Internet services, among other areas.
Internet-related legislation and regulatory policies are continuing to develop
and we could be subject to increased regulation in the future. Laws or
regulations could be adopted in the future that may decrease the growth and
expansion of the Internet's use, increase our cost of doing business, or
otherwise adversely affect our business.
In addition, in 1998 Congress passed the Digital Millennium Copyright Act.
That act provides ISPs that comply with its requirements numerous protections
from certain types of copyright liability. To the extent that we have not met
those requirements, third parties could seek recovery from us for copyright
infringements caused by our Internet customers.
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The law relating to the liability of ISPs for information carried on or
disseminated through their networks is currently unsettled. It is possible that
claims could be made against ISPs for defamation, negligence, copyright or
trademark infringement, or on other theories based on the nature and content of
the materials disseminated through their networks. We could be required to
implement measures to reduce our exposure to potential liability, which may
require, for instance, the expenditure of resources or the discontinuance or
modification of certain product or service offerings. Costs that may be incurred
as a result of contesting any claims relating to our services or the consequent
imposition of liability could have a material adverse effect on our financial
condition, results of operations and cash flow.
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 RBOC served
customers to CLEC served ISPs, to be local calls under the interconnection
agreements between the RBOCs and the CLECs. The RBOCs also claimed that the FCC
exempted these calls from access charges, and therefore that CLECs could not
recover compensation 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 RBOCs must pay reciprocal compensation for
such calls. Various RBOCs have appealed these cases. We cannot predict the
outcome of these appeals.
On February 26, 1999, the FCC determined that calls made to ISPs are
largely interstate in nature, and requested comments regarding how this traffic
should be regulated once existing interconnection agreements expire. However,
the FCC also determined that since federal law did not govern compensation for
this traffic when existing interconnection agreements were signed, the states
could determine whether carriers should pay reciprocal compensation for these
calls under existing agreements. There is a risk that state commissions which
previously considered this issue and ordered the payment of reciprocal
compensation could revisit this issue on their own volition or at the request of
an ILEC, and revise their prior decisions on this issue. The U.S. Court of
Appeals for the Seventh Circuit recently affirmed a decision that reciprocal
corporations should be paid for calls to ISPs. To date, at least one ILEC has
filed suit seeking a refund from a carrier of reciprocal compensation the ILEC
has paid to that carrier.
State Regulation
Most states require carriers to obtain a certification or other
authorization before offering 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. We hold long distance
authorization in most, but not all, of the states in which certificates are
required. In addition most states impose tariff requirements on carriers and
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 often require prior approvals or notifications for certain transfers of
assets (such as fiber optic cable or other telecommunications facilities),
customers, or ownership. Some states also require approval or notice for the
issuance of securities or debt or for name changes. We have sought or expect to
seek various additional authority in some states. We cannot guarantee that we
will be able to successfully obtain such approvals. 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 concluded that
we provide intrastate service without the appropriate authority, or that we are
not otherwise in compliance with state public utility commission rules, that
agency could initiate enforcement actions, potentially including 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. We hold authority to provide interexchange and competitive local
exchange services in certain service areas in Arkansas, Kansas, Louisiana,
Oklahoma and Texas, and have authority to provide interexchange service in at
least 35 states.
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In addition, carriers providing intrastate services must comply with state
utility commission rules and 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. Numerous other
states have also instituted proceedings to adopt state universal service funding
obligations rules. 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
sought reductions in state regulatory requirements, including greater pricing
flexibility. If regulators allow variable pricing of access charges based on
volume, we could face a competitive disadvantage in competing against larger
long distance carriers. We also could face increased price competition from the
RBOCs and other LECs for local and long distance services. In addition, the
removal of former restrictions on long distance service offerings by the RBOCs
as a result of the 1996 Telecommunications Act could further increase
competition. We cannot predict what impact of such rule changes might have on
our operations.
Local Government Authorizations
We also own telecommunications facilities that may be subject to certain
local government requirements. In particular, facilities-based companies must
generally obtain street use and construction permits and licenses and/or
franchises to install and expand fiber optic networks using municipal rights of
way. While regulation of municipal rights of way generally remains a matter
under local jurisdiction, some states have enacted or are considering enacting
measures that affect the ability of local governments to impose certain types of
restrictions on franchisees or to require certain types of concessions from
carriers seeking franchise agreements.
Termination of our existing franchise or license agreements before their
expiration dates or failure to renew those agreements and any resulting
requirement to remove facilities could have a material adverse effect on our
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. We cannot guarantee that we can retain existing franchises or
that franchise fees will remain at their current levels.
The Texas Public Service Commission generally requires us to provide 911
service along with our 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, we have not obtained a franchise. On May 26, 1998, we, 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 violates the 1996
Telecommunications Act, particularly with respect to resellers of LEC services.
The Texas court has consolidated our action 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, we cannot guarantee that we will prevail in
our pending lawsuit against the City of Dallas.
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Foreign Regulation
International telecommunications providers are subject to varying degrees
of regulation in each of the jurisdictions in which they provide service. Local
laws and regulations, and the interpretation of such laws and regulations,
differ significantly from country to country. To the extent that we provide, now
or in the future, services in non-U.S. countries, we must comply with 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 we may also face to obtain initial licensing, operational and rate
requirements in the relevant countries. For example, many countries, including
Mexico, have international settlements policies similar to the one imposed by
the U.S. Such policies and their enforcement vary between different countries.
To the extent that we provide service between the U.S. and other countries,
various international settlement policies may apply.
Licenses
We have received authorization, 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 wireless mobile services, we
own various radio systems that provide two-way voice communications and have
obtained approximately 35 FCC licenses with approximately 300 frequency pairs.
These licenses have varying terms that expire and will require renewal. As each
license comes due for renewal, we will evaluate the need for such license and
elect to either renew the license or let it expire where, for example, we expect
no further need to use a particular license. These licenses allow us to provide
two-way wireless radio services along the Texas and Louisiana Gulf Coast and
offshore to oil and gas-related companies. Each frequency pair allows two-way
transmission and reception. We hold approximately 20 microwave FCC licenses
providing voice and data services along the Texas and Louisiana Gulf Coast and
offshore to drilling, production and related companies. We hold approximately
five C band fixed earth station authorizations. We also hold seven
authorizations that permit us to own and operate a network of Very Small
Aperture Terminal ("VSAT") networks that operate in the Ku band. As noted
previously, we recently filed modification applications with the FCC earth
station licenses to ensure that those authorizations reflect our current
operations.
We also operate as an FCC certificated Section 214 carrier to provide
resold switched telecommunications services. We have 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.
We currently provide international facilities-based private line service on
a private carrier basis into Bolivia, Bosnia, Croatia, Ecuador, Hungary and
Russia. As part of our plans to increase service offerings, we have obtained
authority to provide dedicated services in Louisiana and CLEC and long distance
services in Arkansas, Kansas, Louisiana and Texas. In addition, we have received
approval to have pole attachment rights to existing or future facilities of
Entergy, BellSouth and the State of Louisiana. Pole attachment rights allow us
to attach our own fiber optic cable to other parties' respective utility poles.
In addition, we own installed fiber optic cable placed under various public and
private rights-of-ways.
Digital Wiretapping
The Communications Assistance to Law Enforcement Act ("CALEA"), enacted in
1994, requires telecommunications carriers to make available certain
telecommunications capabilities to U.S. law enforcement officials to permit
those authorities to continue 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. Courts may
impose fines of up to $10,000 per day on telecommunications carriers that fail
to meet the required capability functions, as determined by industry standards.
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
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the telecommunications industry. Because 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 to permit manufacturers sufficient time to develop
CALEA compliant equipment. In the meantime, we expect the FCC to issue shortly
an order identifying the capabilities carriers, such as us, will have to provide
to law enforcement officials in order to meet CALEA's requirements.
Telecommunications carriers must also meet CALEA capacity requirement mandating
that by March 12, 2001, carriers enable a specific number of simultaneous
interceptions determined on a geographic basis. We cannot predict the nature and
extent of the impact the CALEA requirements will have on us or on
telecommunications carriers in general.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors, officers and key employees as of the date of this prospectus
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
Jere W. Thompson, Jr. ............... 42 Chairman of the Board, Chief Executive Officer
and Director
Ignatius W. Leonards................. 45 Vice Chairman of the Board, President and
Director
Kevin W. McAleer..................... 49 Senior Vice President, Chief Financial Officer,
Treasurer and Secretary
Byron M. Allen....................... 51 Executive Vice President of International
Timothy W. Rogers.................... 36 Executive Vice President of Retail Sales and
Network Operations and Director
Timothy M. Terrell................... 37 Executive Vice President of Carrier Sales
Scott L. Roberts..................... 37 Executive Vice President of International Sales
Matthew M. Kingsley.................. 34 Corporate Controller
Mark Langdale........................ 45 Director
Christopher J. Amenson............... 49 Director
John R. Harris....................... 50 Director
Richard G. Ellenberger............... 47 Director
</TABLE>
Mr. Jere W. Thompson, Jr. has served as Chairman of the Board and Chief
Executive Officer of CapRock since its formation in February 1998. Mr. Thompson
also has served as President of CapRock Telecommunications, one of our
predecessor companies, since April 1994, and since July 1992, upon founding
CapRock Fiber, as the President of its general partner. In 1987, Mr. Thompson
joined The Thompson Company, an investment 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 Cistercian Preparatory School. Mr. Thompson has a B.A. in
Economics from Stanford University and a 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 CapRock since its formation in February 1998. Mr. Leonards served
as Chairman of the Board, Chief Executive Officer and a director of IWL
Communications since founding IWL Communications 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 CapRock since May 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 of International
of CapRock since its formation in February 1998. Mr. Allen served as a director
of CapRock from February 1998 until May 3, 1999, and served as President and a
director of IWL Communications since February 1997 and served as a Vice
President of IWL Communications 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 W. Rogers has served as Executive Vice President of Retail
Sales and Network Operations and as a director of CapRock since its formation in
February 1998. Mr. Rogers served as Executive Vice President of Retail Sales and
Network Operations and as a Director of CapRock Telecommunications since April
1994. In 1992, Mr. Rogers 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 1992 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 CapRock Telecommunications. 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. Timothy M. Terrell has served as Executive Vice President of Carrier
Sales of CapRock since its formation in February 1998. Mr. Terrell served as
Executive Vice President, Carrier Sales, and a Director of CapRock
Telecommunications since April 1994. In 1992, Mr. Terrell co-founded Synergy and
from February 1993 to April 1994 served as one of its three executive officers.
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 WorldCom. 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. Scott L. Roberts has served as Executive Vice President of
International Sales of CapRock since its formation in February 1998. Mr. Roberts
served as Executive Vice President, International Sales, and a Director of
CapRock 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 CapRock since
August 1998. From August 1996 to August 1998, Mr. Kingsley was an audit manager
for KPMG LLP and 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 CapRock since its formation
in February 1998. Mr. Langdale served as a Director of CapRock
Telecommunications since April 1994 and Secretary of the general partner of
CapRock Fiber since 1992. Mr. Langdale is President of Posadas USA, Inc., a
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subsidiary of Grupo Posadas S.A. De C.V., a hotel management company domiciled
in Mexico, a position he has held since 1989. From 1987 to 1989, he served as
Vice President for Thompson Realty Company, a real estate investment company.
Mr. Langdale currently serves as a member of the Board of Directors of Grupo
Posadas S.A. De C.V., a director of the Texas Department of Commerce Policy
Board and as Chairman of the Texas Department of Economic Development.
Mr. Christopher J. Amenson has served as a director of CapRock since
February 1998. Mr. Amenson has served as a director of IWL Communications 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 before 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 CapRock since August 1998.
Mr. Harris is currently an information technology services industry consultant.
Prior thereto, Mr. Harris served as a Corporate Vice President at Electronic
Data Systems Corporation, an information and technology outsourcing and data
processing company ("EDS"), from 1997 until March 31, 1999 (when he resigned
from EDS), where he was 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.
Mr. Richard G. Ellenberger was elected as a director of CapRock at
CapRock's 1999 Annual Meeting of Shareholders held on May 3, 1999. Mr.
Ellenberger has served as President and Chief Executive Officer of Cincinnati
Bell, Inc., a telecommunications company, since March 1, 1999, its Chief
Operating Officer since September 1, 1998, a director since November 1998 and as
President and Chief Executive Officer of Cincinnati Bell Telephone since June
1997. From 1996 to 1997, Mr. Ellenberger served as Chief Executive Officer of
XLConnect, a technical services company. From 1992 to 1996, Mr. Ellenberger
served in various capacities with MCI Telecommunications and was its President,
Business Services, from 1995 to 1996. Mr. Ellenberger served as Chief Operating
Officer of Entrade Corporation, a natural gas company, from 1990 to 1992. Mr.
Ellenberger currently serves on the Cincinnati Chamber of Commerce Board of
Directors and is a member of the Family Services Board of Greater Cincinnati.
Mr. Ellenberger is a graduate of Old Dominion University.
Our Board of Directors is currently composed of seven directors. Each
director serves until the next annual meeting of shareholders and until his
successor is duly elected and qualified. Byron Allen declined to stand for
re-election as a director at CapRock's 1999 Annual Meeting of Shareholders held
on May 3, 1999, and Richard Ellenberger was elected to fill the vacancy. Our
officers are elected by and serve at the discretion of the Board of Directors.
There are no family relationships among any of our directors or executive
officers.
BOARD COMMITTEES
We have established a Compensation Committee and an Audit Committee. The
Compensation Committee consists of Christopher J. Amenson, John R. Harris and
Richard G. Ellenberger (who was appointed to the committee upon being elected as
a director of CapRock on May 3, 1999). The Audit Committee consists of
Christopher J. Amenson, John R. Harris, and Mark Langdale. 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 Internal Revenue Code of 1986, as amended (the
"Code"). The Audit Committee reviews our internal accounting procedures and
consults with and reviews the services provided by our independent auditors. The
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Compensation Committee reviews and recommends to the Board of Directors the
compensation and benefits of all our officers and establishes and reviews
general policies relating to compensation and benefits of our employees,
including the administering of our 1998 Equity Incentive Plan.
DIRECTOR COMPENSATION
We reimburse each member of our Board of Directors for out-of-pocket
expenses incurred for attending board meetings. Each non-employee director
receives a $10,000 annual retainer and a $1,000 fee for each meeting of the
Board of Directors and each meeting of any committee of the Board attended by
the director. No employee director on our Board of Directors currently receives
any additional cash compensation. Our non-employee directors are eligible to
participate in and receive nonqualified stock options under our 1998 Director
Stock Option Plan.
LIMITATION OF LIABILITY
Our Articles of Incorporation provide that our directors will not be liable
to us or our shareholders for monetary damages for an act or omission in the
director's capacity as a director. However, this provision does not authorize
the elimination or limitation of liability of a director to the extent the
director is found liable for (1) a breach of the director's duty of loyalty to
us or our shareholders, (2) any act or omission not in good faith that
constitutes a breach of duty of the director to us or an act or omission that
involves intentional misconduct or a knowing violation of law, (3) 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 (4) any act or omission for which the liability of the
director is expressly provided by statute.
Because this provision is included in our Articles of Incorporation, we or
our shareholders may not be able 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, our Articles of Incorporation and Bylaws provide certain
rights of indemnification for all officers and directors.
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EXECUTIVE COMPENSATION
Summary Compensation Table. The following table shows the compensation that
we paid or awarded to our Chief Executive Officer and our other four most highly
compensated executive officers for the fiscal year ended December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
1998 ANNUAL ------------
COMPENSATION SHARES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(S) SALARY(1) BONUS(2) OPTIONS COMPENSATION
- ------------------------------ --------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Jere W. Thompson, Jr. ........................... $194,583 $110,000 125,000 $ --
Chief Executive Officer and Chairman of the
Board
Kevin W. McAleer................................. 128,846 80,000 100,000 18,750(3)
Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
Timothy M. Terrell............................... 135,555 107,500 55,000 --
Executive Vice President
Timothy W. Rogers................................ 138,555 100,000 62,500 --
Executive Vice President
Scott L. Roberts................................. 133,055 70,000 40,000 --
Executive Vice President
</TABLE>
- ---------------
(1) Under the terms of their employment agreements with CapRock (which were
entered into in February 1998), the annual base salary for Messrs. Thompson,
Terrell, Rogers and Roberts through December 31, 1998 was $180,000,
$133,333, $133,333, and $133,333, respectively, in each case subject to
increase upon review annually by the Board of Directors. Under the terms of
his employment agreement with CapRock (which was entered into in May 1998),
the annual base salary for Mr. McAleer through December 31, 1998 was
$200,000, subject to increase upon review annually by the Board of
Directors. Mr. McAleer became an employee of CapRock in May 1998.
(2) Represents bonus amount earned from CapRock in fiscal year 1998 and paid in
fiscal year 1999.
(3) Represents amounts paid to Mr. McAleer as a consultant prior to his
employment.
Option Grants in Last Fiscal Year. The following table contains information
concerning the stock option grants made to each of our executive officers who
are named in the "Summary Compensation Table" during the fiscal year ended
December 31, 1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -----------------------
NAME GRANTED(1) FISCAL YEAR PRICE DATE 5% 10%
- ---- ---------- ------------ -------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jere W. Thompson, Jr. ........... 125,000 7.26% $6.50 10/13/08 $510,977 $1,294,916
Kevin W. McAleer................. 100,000 5.81% 6.50 10/13/08 408,782 1,035,933
Timothy M. Terrell............... 55,000 3.20% 6.50 10/13/08 224,830 569,763
Timothy W. Rogers................ 62,500 3.63% 6.50 10/13/08 255,488 647,458
Scott L. Roberts................. 40,000 2.32% 6.50 10/13/08 163,513 414,373
</TABLE>
- ---------------
(1) The options generally vest over a five-year period and expire on the tenth
anniversary of the date of grant.
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<PAGE> 70
(2) The potential realizable value is calculated based on the term of the option
at its time of grant (ten years). It is calculated assuming that the fair
market value of the Common Stock on the date of grant appreciates at the
indicated annual rate compounded annually for the entire term of the option
and that the option is exercised and sold on the last day of its term for
the appreciated stock price.
Fiscal Year-End Option Values. The following table contains information
through December 31, 1998 concerning options held by each of our executive
officers who are named in the "Summary Compensation Table."
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1998 AT DECEMBER 31, 1998(1)
--------------------------------- ---------------------------
NAME EXERCISABLE(2) UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE
- ---- -------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Jere W. Thompson, Jr. ................... -- 125,000 -- $23,438
Kevin W. McAleer......................... -- 100,000 -- 18,750
Timothy M. Terrell....................... -- 55,000 -- 10,313
Timothy W. Rogers........................ -- 62,500 -- 11,719
Scott L. Roberts......................... -- 40,000 -- 7,500
</TABLE>
- ---------------
(1) Value is determined by subtracting the exercise price from the fair market
value of the Common Stock at December 31, 1998 ($6.6875 per share),
multiplied by the number of shares underlying the options.
(2) "Exercisable" refers to those options which were vested and exercisable at
December 31, 1998, while "Unexercisable" refers to those options which were
unvested at such time.
BENEFIT PLANS
The Equity Incentive Plan
Our 1998 Equity Incentive Plan was adopted and approved by our Board of
Directors and shareholders in 1998. The Equity Incentive Plan provides for the
awards of (1) stock options, (2) stock appreciation rights, (3) restricted
stock, (4) deferred stock, (5) stock reload options and (6) other stock-based
awards (collectively, "Awards"). Our employees and consultants and the employees
of and consultants to our subsidiaries are eligible to participate in the Equity
Incentive Plan.
Administration
The Equity Incentive Plan is administered by our Compensation Committee.
The Committee has full authority, subject to the provisions of the Equity
Incentive Plan, to determine the persons to whom from time to time Awards may be
granted ("Participants"), the specific type of Awards to be granted (e.g., stock
options, restricted stock, etc.), the number of shares subject to each Award,
share prices, any restrictions or limitations on such Awards and any vesting,
exchange, deferral, surrender, cancellation, acceleration, termination, exercise
or forfeiture provisions related to such Awards. The Committee has complete
discretion to make all decisions relating to the interpretation, administration
and operation of the Equity Incentive Plan.
Shares Subject to the Plan, General Terms
The Equity Incentive Plan authorizes the granting of Awards which allows up
to an aggregate of 5,000,000 shares of Common Stock to be acquired by the
Participants. The Equity Incentive Plan provides that a maximum of 2,500,000
shares of Common Stock may be issued to any one Participant. In order to prevent
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 if any increase or decrease in the
number of shares of outstanding Common Stock results 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
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<PAGE> 71
Incentive Plan are forfeited or terminated, these shares will again be available
for distribution of Awards subsequently granted. We have granted 1,948,186
options under the Plan and these options generally vest over five years. As of
March 31, 1999, 101,600 of the options granted were forfeited and canceled and
1,846,586 options were outstanding. We have also granted 3,514 shares of
Restricted Stock to a former director of one of our predecessor companies who is
currently a consultant to our Company. See "Certain Transactions." The remaining
Awards available for future grant as of March 31, 1999 was 3,153,414.
Eligibility
Subject to the provisions of the Equity Incentive Plan, Awards may be
granted to key employees, officers, directors, consultants and other persons who
have rendered or are expected to render significant services to us or our
subsidiaries. Incentive stock options may be awarded only to our employees or
employees of our subsidiaries at the time the award is granted.
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 are not, which are
non-qualified stock options. 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 ten years (or five years in the case
of an incentive stock option granted to an optionee owning 10% or more of the
Common Stock). Options may be granted that may be exercised in whole or in part
upon certain defined events causing a "change of control." 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 our company.
Stock Appreciation Rights. The Committee may grant stock appreciation
rights ("SARs" or singularly "SAR") in conjunction with all or part of any stock
option granted under the Equity Incentive Plan or may grant SARs on a
freestanding basis. If granted in conjunction with non-qualified stock options,
SARs may be granted either at or after the time of the grant of the
non-qualified stock options. If granted in conjunction with incentive stock
options, SARs may be granted only at the time of the grant of an incentive stock
option. An SAR entitles the holder 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 our physical custody until the
restrictions on these 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 during the entire deferral period in
order to be issued the stock.
Stock Reload Options. The Committee may grant stock reload options with any
option granted under the Equity Incentive Plan. Stock reload options may be
granted only at the time of the grant of an incentive stock option or, in the
case of a non-qualified stock option, either at or after the time of the
70
<PAGE> 72
grant of a non-qualified stock option. 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 us a new option, at the current
market price, for the same number of shares delivered to exercise the option.
The 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 by our performance. Performance grants may be made 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. Terms and conditions of Awards may require continued
employment or the attainment of specified performance objectives or both.
Termination of Awards
Generally, no option, or any portion thereof, granted under the Equity
Incentive Plan may be exercised by the holder later than three months following
the date of termination of such holder's employment or consulting relationship
with CapRock or any affiliate. However, if the holder's status as an employee
with or consultant to CapRock or its affiliates is terminated due to the death
or disability of the holder prior to termination of the holder's right to
exercise the option in accordance with the provisions of the holder's stock
option agreement, without having totally exercised the option, the option may be
exercised, to the extent to which the option could have been exercised by the
holder on the date of the holder's termination, by (1) the holder's estate or by
the person who acquired the right to exercise the option by bequest or
inheritance, in the event of the holder's death, or (2) the holder or his or her
personal representative, in the event of the holder's disability; provided in
either case that the option is exercised not more than twelve (12) months (or
such shorter period specified in the option agreement granting such option) from
the date of the holder's termination, but in no event later than the expiration
date of such option. If holder's disability is not a "disability" as such term
is defined in Section 22(e)(3) of the Code, then in the case of an incentive
stock option such incentive stock option will automatically cease to be treated
for tax purposes as an incentive stock option and will instead be treated for
tax purposes as a nonqualified option on the day that is three months and one
day following such termination.
Term and Termination of the Equity Incentive Plan
The Equity Incentive Plan became effective upon shareholder approval on
August 24, 1998. Unless terminated by the Board of Directors, the Equity
Incentive Plan shall continue to remain effective until no further Awards may be
granted and all Awards granted under the Equity Incentive Plan are no longer
outstanding. Grants of incentive stock options may only be made during the
ten-year period from August 24, 1998.
Amendments to the Plan
The Board of Directors may amend or terminate the Equity Incentive Plan as
long as no amendment or termination affects Awards previously granted. If the
Board of Directors amends the plan, shareholder approval will be sought only if
required by an applicable law.
The Director Stock Option Plan
Our Director Stock Option Plan was approved in 1998 by our Board of
Directors and our shareholders. The purpose of the Director Stock Option Plan is
to encourage ownership of Common Stock by our eligible non-employee directors.
Options will be granted to directors whose continued services are considered
essential to our future progress and to provide them with a further incentive to
remain as directors. All options granted under the Director Stock Option Plan
are non-qualified stock options. A total of 400,000 shares of Common Stock have
been reserved for issuance under the Director Stock Option
71
<PAGE> 73
Plan. As of March 31, 1999, we have granted 30,000 options under this Plan and
all are outstanding. There were 370,000 remaining options available for future
grant as of March 31, 1999.
The Director Stock Option Plan is administered by the Board of Directors.
The Board of Directors has full authority, subject to the provisions of the
Director Stock Option Plan, to 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. The Board of Directors has full authority to
construe and interpret the terms of the Director Stock Option Plan and the
options granted under it. We expect that each new non-employee director will
receive option grants under the Director Stock Option Plan upon becoming a
director. 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, 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 our 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 our company or upon certain mergers in which the shareholders of
CapRock receive cash or securities of another issuer, the options may be either
assumed by the successor entity or substituted with an equivalent option.
The Board of Directors may amend or terminate the Director Stock Option
Plan except that any such amendment or termination will not affect options
previously granted. If the Board of Directors amends the Director Stock Option
Plan, shareholder approval will be sought only if required by an applicable law.
EMPLOYMENT AGREEMENTS
In February 1998 we entered into employment agreements with 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, we 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 Employment Agreement is for an initial term of three years, subject to
the right of either party to terminate their agreement upon 30 days' advance
written notice.
The Employment Agreements provide for Mr. Thompson to serve as Chief
Executive Officer and Mr. Leonards to serve as President of our company. Mr.
Thompson receives an annual base salary of $180,000 and Mr. Leonards receives
$168,000, both subject to increase upon review annually by the Board of
Directors.
The Employment Agreements provide for Mr. McAleer to serve as our Senior
Vice President and Chief Financial Officer (Mr. McAleer also serves as our
Treasurer and Secretary), and for Messrs. Allen, Roberts, Rogers and Terrell
each to serve as an Executive Vice President. Messrs. McAleer, Allen, Roberts,
Rogers and Terrell will receive annual salaries of $200,000, $125,000, $133,333,
$133,333 and $133,333, in each case subject to increase upon review annually by
the Board of Directors.
Each Employment Agreement provides that, at the discretion of the Board of
Directors, each employee may be paid bonus compensation or may be allowed to
participate in a management incentive bonus plan should we adopt one or both.
Each Employment Agreement 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 CapRock and any equity
or other employee benefit plan of CapRock that is generally available to senior
executive officers of such company. In addition, each Employment Agreement
provides for certain payments and benefits if the employee is terminated without
cause or due to death or permanent disability.
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<PAGE> 74
Each Employment Agreement generally provides that the employee will keep
confidential certain non-public information regarding our company and further
provides that, during the period after termination of employment 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 we are 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 (1) solicit or engage the business of any of
our clients or our clients of our affiliates or (2) solicit any of our employees
or employees of our affiliates to terminate any relationship that person may
have with us or our affiliates or engage, employ or compensate any of our
employees or employees of our affiliates.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors established a Compensation Committee effective upon
consummation of our business combination (which occurred in August 1998). This
committee currently consists of Messrs. Amenson, Harris and Ellenberger. Before
that, during fiscal 1998, compensation decisions for executive officers of
CapRock Telecommunications were made by the Board of Directors of CapRock
Telecommunications, compensation decisions for the officers of CapRock Fiber's
general partner were made by its Board of Directors and compensation decisions
for executive officers of IWL Communications were made by Christopher J. Amenson
and Myron Goins, the sole members of IWL Communications' compensation committee.
Our business combination with our predecessor companies was completed on
August 26, 1998. During the last fiscal year, prior to the consummation of our
business combination, no executive officer of IWL Communications served as a
member of the Board of Directors or compensation committee of CapRock
Telecommunications or CapRock Fiber's general partner or any entity that had one
or more executive officers serving as a member of IWL Communications' Board of
Directors or compensation committee. During the last fiscal year prior to the
consummation of our business combination, no executive officer of CapRock
Telecommunications or CapRock Fiber's general partner served as a member of the
Board of Directors or compensation committee of IWL Communications or any entity
(other than CapRock Telecommunications or the general partner of CapRock Fiber)
that had one or more executive officers serving as a member of their Board.
During the last fiscal year after consummation of our business combination, no
executive officer of CapRock served as a member of the Board of Directors or
compensation committee of any entity that has one or more executive officers
serving as a member of CapRock's Board of Directors or compensation committee.
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<PAGE> 75
CERTAIN TRANSACTIONS
Caroline Fontenot, the sister of Mr. Leonards, our President, lent IWL
Communications, one of our predecessor companies, $75,000 on June 1, 1992 at an
interest rate of 12% per annum. We used a portion of the net proceeds from the
offering of our senior notes in July 1998 to repay the loan in full.
Our operations support system was developed by RiverRock Systems, Ltd.
CapRock owns a 49% limited partnership interest in RiverRock and David E.
Thompson, the brother of Jere W. Thompson, Jr., owns a 50% limited partnership
interest in RiverRock. Thompson Technology, Inc., a Texas corporation that is
owned by David E. Thompson, is the general partner and owns a 1% general
partnership interest in RiverRock. Although it is the intention of RiverRock to
market and sell licenses for the 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 CapRock and TTI transferred all rights to the system developed by
CapRock and TTI into RiverRock. CapRock has been granted a royalty-free,
perpetual and non-exclusive license for the use of the system. CapRock also
receives upgrades, maintenance and other support from RiverRock for three years,
without the payment of any fees or royalties, which expires in June 2001.
Thereafter, CapRock will be required to pay the same fees and royalties for
system upgrades, maintenance and support as other licensees of RiverRock. During
the fiscal year ended December 31, 1998 and the fiscal quarter ended March 31,
1999, CapRock contributed a total of approximately $170,000 and $90,000 to
RiverRock for the development of the 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 system.
Jere W. Thompson, Sr. is the president of The Williamsburg Corporation, a
Texas corporation. The Williamsburg Corporation lent CapRock Telecommunications,
one of our predecessor companies, $1,170,000 in 1995 at the rate of 13% per
annum and payable on demand, but no later than 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 CapRock Telecommunications common stock. The remaining principal balance of
the note, together with interest thereon, was repaid by CapRock
Telecommunications during the fiscal year ended December 31, 1997. Jere W.
Thompson, Sr. is the father of Jere W. Thompson, Jr.
CapRock currently leases private line services from TISP, Inc. ("TISP").
TISP is owned by Patrick J. Thompson, a brother of Jere W. Thompson, Jr. Total
payments to TISP in the fiscal year ended December 31, 1998 and the fiscal
quarter ended March 31, 1999, were approximately $1,176,000 and $331,000. We
believe 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 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, CapRock Telecommunications executed three promissory notes, one
payable to the order of each of Scott L. Roberts, Timothy M. Terrell and Timothy
W. Rogers, each an Executive Vice President of CapRock, relating to 334 shares
of common stock of CapRock Telecommunications repurchased from each of them with
such shares of stock pledged by CapRock Telecommunications to repay the notes.
The aggregate purchase price for the 334 shares from each individual was
$50,000. Each of the original notes were in the amount of $50,000 with no stated
interest rate. The notes were discounted using an interest rate of 5.8% and were
payable in three annual installments beginning April 1998. We used a portion of
the net proceeds from the offering of our senior notes in July 1998 to repay the
notes in full.
CapRock 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. We used a portion of the net proceeds from the offering of our
senior notes in July 1998 to repay in full all amounts outstanding under the
line of credit, and at that time Mr. Thompson was released from his guaranty.
Mark Langdale, one of our directors, Joe C. Thompson, Jr., an uncle of Jere
W. Thompson, Jr., The Florida Company (which is owned by Joe C. Thompson), The
Hayden Company (which is owned by
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<PAGE> 76
John P. Thompson, an uncle of Jere W. Thompson, Jr.), and Jere W. Thompson, Sr.
guaranteed portions of the $10.0 million loan from Bank One, Texas, N.A. to
CapRock Fiber, one of our predecessor companies, in 1996, which was repaid on
August 27, 1998 totaling $439,602. Each guarantor received in exchange for each
$1 million of indebtedness guaranteed (1) a 2.67% limited partnership interest
in CapRock Fiber (which was converted into shares of our Common Stock in our
business combination in August 1998), (2) 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 remained unpaid and (3) 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 after April 1, 1997 other than the accrued interest. The
total commitment fees, loan guarantee fees, and accrued interest thereon, as of
December 31, 1996, 1997, and 1998 were approximately $208,000 and $406,000 and
$430,000. Additionally, in exchange for Mark Langdale remaining on his joint and
several guaranty, CapRock Fiber agreed to pay him $20,000 which was paid in
1998. We used a portion of the net proceeds from the offering of our senior
notes in July 1998 to pay in full all of such commitment and guaranty fees.
CapRock entered into an agreement with CapRock Systems, which was the
general partner of CapRock Fiber prior to our business combination, to manage
the construction of the fiber optic network build out for the initial 260 route
miles, which was completed in 1997. Under this agreement, CapRock paid 4% of the
costs of constructing this portion of the network, payable monthly at a minimum
of $15,000 per month. CapRock paid management fees of $296,576 in 1997 and
$461,576, cumulative under the arrangement since construction of this segment
commenced. This arrangement ended in 1997.
In 1998, CapRock granted to Myron J. Goins, a former director of one of its
predecessor companies and currently one of CapRock's consultants, 3,514 shares
of "Restricted Stock" under the terms of a Restricted Stock Agreement under our
Equity Incentive Plan. The restriction period under the agreement with Mr. Goins
expired on February 28, 1999.
CapRock sold telecommunications services in the amount of approximately
$70,000 from June 1998 through December 1998 and $77,000 from January 1999
through March 1999 to Summit Communications, Inc., which is owned by Sherwood
Allen, a brother of Byron M. Allen. Byron Allen is an Executive Vice President
of CapRock.
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<PAGE> 77
PRINCIPAL SHAREHOLDERS
The following table shows information concerning the beneficial ownership
of our Common Stock as of May 31, 1999 by: (1) each director and director
nominee and each of our executive officers named in the "Summary Compensation
Table," (2) each person we know to beneficially own more than 5% of the
outstanding shares of our Common Stock; and (3) all of our officers and
directors as a group. The address for Messrs. Jere W. Thompson, Jr., Rogers,
Roberts, Terrell and McAleer, CapRock Investors and Greenway Holdings, L.P. is
15601 Dallas Parkway, Suite 700, Dallas, Texas 75248. The address for Messrs.
Leonards and Allen is 12000 Aerospace Ave., Suite 200, Houston, Texas 77034.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF SHARES OF SHARES OF
COMMON STOCK COMMON STOCK
NAME AND ADDRESS BENEFICIALLY OWNED(1) OUTSTANDING(1)
- ---------------- --------------------- --------------
<S> <C> <C>
Jere W. Thompson, Jr.(2).................................... 10,775,218 32.6%
Ignatius W. Leonards(3)..................................... 1,897,528 5.7%
Timothy W. Rogers(4)........................................ 2,883,628 8.7%
Scott L. Roberts............................................ 2,883,628 8.7%
Timothy M. Terrell.......................................... 2,883,628 8.7%
Byron M. Allen(5)........................................... 214,200 *
Kevin W. McAleer............................................ -- --
Mark Langdale(6)............................................ 11,224,352 34.0%
5950 Berkshire, Suite 990
Dallas, TX 75225
Christopher J. Amenson(7)................................... 5,333 *
c/o SBS Technologies, Inc.
2400 Louisiana Blvd., N.E
AFC Building 5, Suite 600
Albuquerque, NM 87110
John R. Harris.............................................. 7,000 *
2808 McKinney Avenue, Suite 220
Dallas, TX 75204
Richard G. Ellenberger...................................... -- --
c/o Cincinnati Bell, Inc.
201 East Fourth Street
Cincinnati, Ohio 45201
Jere W. Thompson, Sr.(8).................................... 10,647,930 32.2%
Two Turtle Creek Village
3838 Oak Lawn Ave., Suite 1850
Dallas, TX 75219
Greenway Holdings, L.P.(2).................................. 2,014,082 6.1%
CapRock Investors(2)........................................ 8,650,884 26.2%
All executive officers and directors as a group(7) (eleven
persons).................................................. 24,014,699 72.7%
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of the class.
(1) The numbers and percentages in the table were calculated based upon the
33,022,059 shares of Common Stock issued and outstanding on May 31, 1999.
The information contained in this table with respect to beneficial ownership
reflects "beneficial ownership" as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, 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 May 31, 1999 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
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<PAGE> 78
shareholder and we believe that, except as otherwise noted or pursuant to
community property laws, each shareholder has sole voting and investment
power with respect to shares shown.
(2) Includes 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 CapRock. 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 20,166 shares held by Ignatius W. Leonards as custodian for minor
children.
(4) Includes 8,970 shares held by Neal S. Rogers as custodian for minor children
of Timothy W. Rogers. Neal S. Rogers is Timothy W. Roger's brother.
(5) Includes 7,300 shares held by Byron M. Allen as custodian for minor children
and 7,300 shares held by Mr. Allen's daughters, the voting, investment and
dispositive power of which are shared by Mr. Allen with his daughter.
(6) Includes 8,650,884 shares held of record by CapRock Investors and 108,932
shares held of record of CapRock Systems, Inc. Under the Joint Venture
Agreement of CapRock Investors, the approval of a majority-in-interest of
the venturers is required to approve the disposition of the shares. Because
of the ownership interest of Jere W. Thompson, Jr., Mark Langdale, and Jere
W. Thompson, Sr. (23.5%, 42.5% and 30.9%, respectively), two of the three
acting together can authorize or prevent a disposition of the shares. As a
result, each may be deemed to be the beneficial owner of all of the shares.
CapRock Systems, Inc. is a Texas corporation of which Mr. Langdale owns 50%
of the outstanding common stock and is an officer and a director; as a
result he has shared voting, investment and dispositive power with respect
to the 108,932 shares held by CapRock Systems, Inc.
(7) Includes 3,333 shares subject to currently exercisable options.
(8) 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, Sr.'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. (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.
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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THE EXCHANGE OFFER
BACKGROUND
CapRock originally sold the outstanding 11 1/2% Senior Notes due 2009 on
May 18, 1999 in a transaction exempt from the registration requirements of the
Securities Act. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Chase
Securities Inc., Bear, Stearns & Co. Inc., Donaldson, Lufkin & Jenrette
Securities Corporation and Goldman, Sachs & Co., as the initial purchasers,
subsequently resold the notes to qualified institutional buyers in reliance on
Rule 144A under the Securities Act. As of the date of this prospectus, $210.0
million aggregate principal amount of the notes are outstanding.
CapRock and the initial purchasers entered into a registration rights
agreement under which CapRock agreed that it would, at its own cost,
- file an exchange offer registration statement under the Securities Act
within 90 days after May 18, 1999, the original issue date of the old
notes,
- use its best efforts to cause the exchange offer registration statement
to be declared effective under the Securities Act within 150 days after
May 18, 1999, the original issue date of the old notes, and
- use its best efforts to consummate the exchange offer and issue new notes
within 35 days after the exchange offer registration statement is
declared effective.
The summary in this prospectus of provisions of the registration rights
agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all the provisions of the registration rights agreement, a copy
of which is filed as an exhibit to the registration statement of which this
prospectus is a part.
RESALE OF THE NEW NOTES
Based on no-action letters issued by the staff of the Commission to third
parties, CapRock believes that a holder of outstanding notes, but not a holder
who is an affiliate of CapRock within the meaning of Rule 405 of the Securities
Act, who exchanges outstanding notes for new notes in the exchange offer,
generally may offer the new notes for resale, sell the new notes and otherwise
transfer the new notes without further registration under the Securities Act and
without delivery of a prospectus that satisfies the requirements of Section 10
of the Securities Act. However, CapRock believes that a holder may so offer,
sell or transfer the new notes only if the holder acquires the new notes in the
ordinary course of its business and is not participating, does not intend to
participate and has no arrangement or understanding with any person to
participate in a distribution of the new notes.
Any holder of outstanding notes using the exchange offer to participate in
a distribution of new notes (including a broker-dealer that acquired outstanding
notes directly from CapRock, but not as a result of market-making activities or
other trading activities) cannot rely on the no-action letters referred to
above. Consequently, the holder must comply with the registration and prospectus
delivery requirements of the Securities Act in the absence of an exemption from
such requirements.
Each broker-dealer that receives new notes for its own account in exchange
for outstanding notes, where such outstanding notes were acquired by the
broker-dealer as a result of market-making activities or other trading
activities ("Participating Broker-Dealer") may be a statutory underwriter and
must acknowledge that it will deliver a prospectus meeting the requirements of
the Securities Act in connection with the resale of new notes received in
exchange for outstanding notes. The letter of transmittal which accompanies this
prospectus states that by so acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
underwriter within the meaning of the Securities Act. A Participating
Broker-Dealer may use this prospectus, as it may be amended from time to time,
in connection with resales of new notes it receives in exchange for outstanding
notes in the exchange offer. CapRock will make this prospectus available to any
Participating Broker-Dealer in connection with any
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<PAGE> 80
resale of this kind for a period of 180 days after the expiration date of the
exchange offer. See "Plan of Distribution".
Each holder of the outstanding notes who wishes to exchange outstanding
notes for new notes in the exchange offer will be required to represent and
acknowledge, for the holder and for each beneficial owner of such outstanding
notes, whether or not the beneficial owner is the holder, in the letter of
transmittal that:
- the new notes to be acquired by the holder and each beneficial owner, if
any, are being acquired in the ordinary course of business,
- neither the holder nor any beneficial owner is an affiliate, as defined
in Rule 405 of the Securities Act, of CapRock or any of its subsidiaries,
- any person participating in the exchange offer with the intention or
purpose of distributing new notes received in exchange for outstanding
notes (including a broker-dealer that acquired outstanding notes directly
from CapRock, but not as a result of market-making activities or other
trading activities) cannot rely on the no-action letters referenced above
and must comply with the registration and prospectus delivery
requirements of the Securities Act, in connection with a secondary resale
of the new notes acquired by such person,
- if the holder is not a broker-dealer, the holder and each beneficial
owner, if any, are not participating, do not intend to participate and
have no arrangement or understanding with any person to participate in
any distribution of the new notes received in exchange for outstanding
notes, and
- if the holder is a broker-dealer that will receive new notes for the
holder's own account in exchange for outstanding notes, the outstanding
notes to be so exchanged were acquired by the holder as a result of
market-making or other trading activities and the holder will deliver a
prospectus meeting the requirements of the Securities Act in connection
with any resale of such new notes received in the exchange offer.
However, by so representing and acknowledging and by delivering a
prospectus, the holder will not be deemed to admit that it is an
underwriter within the meaning of the Securities Act.
Under the registration rights agreement, CapRock is required to allow
Participating Broker-Dealers to use this prospectus in connection with the
resale of new notes received in the exchange offer. See "Plan of Distribution."
SHELF REGISTRATION STATEMENT
In the event that:
(1) applicable law or interpretations of the staff of the Commission
do not permit CapRock to effect the exchange offer,
(2) the exchange offer registration statement is not declared
effective within 150 days after May 18, 1999,
(3) the exchange offer is not consummated within 185 days after May
18, 1999,
(4) any holder of Notes notifies CapRock within 90 days after May 18,
1999 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 new notes acquired by it in the exchange offer to the
public without delivering a prospectus and (x) this prospectus is not
appropriate or available for such resales 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 for such holder and all similarly
situated holders or (c) it is a broker-dealer and owns notes acquired
directly from CapRock or an affiliate of CapRock, or
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<PAGE> 81
(5) the holders of a majority of the notes may not resell the new
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 CapRock will, at its cost:
- file prior to the later of 90 days after May 18, 1999 or 30 days after
the obligation arises, a shelf registration statement covering resales of
the outstanding notes,
- use its best efforts to cause the shelf registration statement to be
declared effective under the Securities Act within 60 days after the
filing obligation arises, and
- use its best efforts to keep effective the shelf registration statement
until the earlier of (1) two years after its effective date, (2) the time
when all of the applicable outstanding notes have been sold thereunder
and (3) the time when all of the applicable outstanding notes cease to be
outstanding or have been sold to the public pursuant to Rule 144 under
the Securities Act.
CapRock will, in the event of the filing of the shelf registration
statement, provide to each holder of the outstanding notes copies of the
prospectus which is a part of the shelf registration statement, notify each
holder when the shelf registration statement has become effective and take other
actions as are required to permit unrestricted resales of the outstanding notes.
A holder that sells outstanding notes pursuant to the shelf registration
statement generally 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 civil liability provisions under the Securities Act in connection
with these sales and will be bound by the provisions of the registration rights
agreement which are applicable to the holder (including indemnification
obligations). In addition, each holder of outstanding notes will be required to
deliver information to be used in connection with the shelf registration
statement in order to have its outstanding notes included in the shelf
registration statement.
INCREASE IN INTEREST RATE
If (1) CapRock fails to file any of the registration statements required by
the registration rights agreement on or before the date specified for such
filing, (2) any of such registration statements are not declared effective by
the Commission on or prior to the date specified for such effectiveness, subject
to certain limited exceptions, (3) CapRock fails to consummate the exchange
offer within 35 days of the target date for effectiveness with respect to the
exchange offer registration statement, or (4) the shelf registration statement
or the exchange offer registration statement is declared effective but
thereafter, subject to certain limited exceptions, ceases to be effective or
usable in connection with the exchange offer or resales of notes that are
transfer restricted notes (as defined by the registration rights agreement), as
the case may be, during the periods specified in the registration rights
agreement, then the interest rate borne by the outstanding notes will be
increased 0.50% immediately following the occurrence of such registration
default, and will increase by an additional 0.50% per annum of the principal
amount of the notes for each subsequent 90-day period while a registration
default is continuing until all registration defaults have been cured, up to a
maximum amount of 1.0% of the principal amount of the notes. Following the cure
of a particular registration default, the accrual of additional interest with
respect to such registration default will cease.
Following the cure of any of the aforementioned registration defaults, the
interest rate borne by the outstanding notes from the date of such completion or
effectiveness, as the case may be, will be reduced to the original interest rate
if CapRock is otherwise in compliance with the above. However, if after any such
reduction in interest rate, a different event specified in clause (1), (2), (3)
or (4) in the prior paragraph occurs, the interest rate may again be increased
under the provisions described above.
Any amounts of additional interest due as described above will be payable
in cash on the same interest payments dates as the outstanding notes.
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<PAGE> 82
TERMS OF THE EXCHANGE OFFER
Upon the exchange offer registration statement being declared effective,
CapRock will offer the new notes in exchange for surrender of the outstanding
notes. CapRock 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 outstanding notes. CapRock has
agreed to use its best efforts to consummate the exchange offer within 35 days
after the exchange offer registration statement is declared effective.
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal which accompanies this prospectus, CapRock will
accept any and all outstanding notes validly tendered and not withdrawn prior to
5:00 p.m., New York City time, on the expiration date of the exchange offer.
CapRock will issue an equal principal amount of new notes in exchange for such
principal amount of outstanding notes accepted in the exchange offer. Holders
may tender some or all of their outstanding notes under the exchange offer.
Outstanding notes may be tendered only in integral multiples of $1,000.
The form and terms of the new notes will be the same as the form and terms
of the outstanding notes except that:
(1) the new notes will bear a different CUSIP number from the
outstanding notes,
(2) the new notes will have been registered under the Securities Act
and therefore will not bear legends restricting the transfer thereof, and
(3) the holders of the new notes will not be entitled to certain
rights under the registration rights agreement, which rights will terminate
when the exchange offer is completed.
The new notes will evidence the same debt as the outstanding notes and will
be entitled to the benefits of the indenture governing the outstanding notes.
In connection with the exchange offer, holders of outstanding notes do not
have any appraisal or dissenters' rights under the indenture governing the
outstanding notes or the Texas Business Corporation Act. CapRock 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.
CapRock shall be deemed to have accepted validly tendered outstanding notes
when, as and if CapRock has given oral or written notice of acceptance to Chase
Manhattan Trust Company, National Association, exchange agent for the exchange
offer. Chase Manhattan Trust Company, National Association will act as agent for
the tendering holders for the purpose of receiving the new notes from CapRock.
If any tendered outstanding notes are not accepted for exchange because of
an invalid tender, the occurrence of certain other events set forth in this
prospectus or otherwise, the certificates for the unaccepted outstanding notes
will be returned, without expense, to the tendering holder as promptly as
practicable after the expiration date of the exchange offer.
Holders who tender outstanding 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
outstanding notes in the exchange offer. CapRock will pay all charges and
expenses, other than certain applicable taxes, in connection with the exchange
offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The expiration date of the exchange offer is 5:00 p.m., New York City time,
on September 1, 1999, unless CapRock, in its sole discretion, extends the
exchange offer, in which case the expiration date shall be the latest date and
time to which the exchange offer is extended.
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<PAGE> 83
In order to extend the exchange offer, CapRock 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.
CapRock reserves the right, in its sole discretion, (1) to delay accepting
any outstanding notes, to extend the exchange offer or to terminate the exchange
offer if any of the conditions set forth below under "-- Conditions" shall not
have been satisfied, by giving written notice of the delay, extension or
termination to Chase Manhattan Trust Company, National Association or (2) 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.
INTEREST ON THE NEW NOTES
The exchange notes will bear interest at the rate of 11 1/2% per annum
which will be payable in cash semiannually on November 1 and May 1 of each year,
commencing November 1, 1999. Holders of exchange notes will receive interest on
November 1, 1999 from the initial issuance of the new notes, plus an amount
equal to the accrued interest on the old notes. Interest on the old notes
accepted for exchange will cease to accrue upon issuance of the new notes.
PROCEDURES FOR TENDERING
Only a holder of outstanding notes may tender the holder's outstanding
notes in the exchange offer. To tender in the exchange offer, a holder must do
the following:
- complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal,
- have the signatures thereon guaranteed if required by the letter of
transmittal, and
- except as discussed in "-- Guaranteed Delivery Procedures," mail or
otherwise deliver the letter of transmittal, or facsimile, together with
the outstanding notes and any other required documents, to Chase
Manhattan Trust Company, National Association prior to 5:00 p.m., New
York City time, on the expiration date of the exchange offer.
To be tendered effectively, the outstanding notes, letter of transmittal
and other required documents must be completed and received by Chase Manhattan
Trust Company, National Association at the address set forth below under
"-- Exchange Agent" prior to 5:00 p.m., New York City time, on the expiration
date. Delivery of the outstanding notes may be made by book-entry transfer in
accordance with the procedures described below under "Book-Entry; Delivery and
Form." Confirmation of any book-entry transfer must be received by Chase
Manhattan Trust Company, National Association prior to the expiration date.
By executing a letter of transmittal, each holder will make to CapRock the
representations set forth above in the fourth paragraph under the heading
"-- Resale of the New Notes."
The tender by a holder and the acceptance of the tender by CapRock will
constitute the agreement between the holder and CapRock in accordance with the
terms and subject to the conditions set forth in this prospectus and in the
letter of transmittal.
The method of delivery of outstanding notes and the letter of transmittal
and all other requires documents to Chase Manhattan Trust Company, National
Association is at the election and sole risk of the holder. As an alternative to
delivery by mail, holders may wish to consider overnight or hand delivery
service. In all cases, holders should allow sufficient time to assure delivery
to Chase Manhattan Trust Company, National Association before the expiration
date. No letter of transmittal or outstanding notes should be sent to CapRock.
Holders may request their respective brokers, dealers, commercial banks, trust
companies or nominees to effect the above transactions on their behalf.
Any beneficial owner whose outstanding 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 it to
tender on the beneficial owner's behalf. See "Instruction to Registered
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Holder and/or Book-Entry Transfer Participant from Beneficial Owner" included
with the letter of transmittal.
Signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed by an eligible guarantor institution (within the meaning of Rule
17Ad-5 under the Exchange Act) unless the old notes are tendered:
- by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal, or
- for the account of an eligible guarantor institution.
If signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, the guarantee must be by a member
firm of a registered national securities exchange or of the National Association
of Securities Dealers, Inc., a commercial bank or trust company having an office
or correspondent in the United States or an eligible guarantor institution.
If a letter of transmittal is signed by a person other than the registered
holder of any old notes listed in the letter of transmittal, the old notes must
be endorsed or accompanied by a properly completed bond power and signed by the
registered holder as the registered holder's name appears on the old notes.
If a letter of transmittal or any old 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 CapRock, evidence
satisfactory to CapRock of their authority to so act must be submitted with the
letter of transmittal.
Promptly after the date of this prospectus, the exchange agent will
establish a new account or utilize an existing account with respect to the old
notes at the book-entry transfer facility, The Depository Trust Company, for the
purpose of facilitating the exchange offer. Subject to the establishment of the
accounts, any financial institution that is a participant in the book-entry
transfer facility's system may make book-entry delivery of old notes by causing
the book-entry transfer facility to transfer the old notes into the exchange
agent's account with respect to the old notes in accordance with that facility's
procedures. Although delivery of the old notes may be effected through
book-entry transfer into the exchange agent's account at the book-entry transfer
facility, an appropriate letter of transmittal properly completed and duly
executed or an agent's message with any required signature guarantee and all
other required documents the exchange agent at its address listed below on or
before the expiration date of the exchange offer, or, if the guaranteed delivery
procedures described below are complied with, within the time period provided
under such procedures. Delivery of documents to the book-entry transfer facility
does not constitute delivery to the exchange agent.
The term "agent's message" means a message transmitted by The Depositary
Trust Company to, and received by, the exchange agent, which states that The
Depository Trust Company has received an express acknowledgment from the
participant in The Depository Trust Company tendering the old notes stating:
- the aggregate principal amount of old notes which have been tendered by
such participant,
- that such participant has received and agrees to be bound by the term of
the letter of transmittal, and
- that CapRock may enforce such agreement against the participant.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered old notes and withdrawal of tendered old notes
will be determined by CapRock in its sole discretion, which determination will
be final and binding. CapRock reserves the absolute right to reject any and all
old notes not properly tendered or any old notes CapRock's acceptance of which
would, in the opinion of counsel for CapRock, be unlawful. CapRock also reserves
the right to waive any defects, irregularities or conditions of tender as to
particular old notes. CapRock's interpretation of the terms and conditions of
the exchange
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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 old notes must be cured within a period of time that
CapRock shall determine.
Neither CapRock, the exchange agent nor any other person shall incur any
liability for failure to give notice of any defect or irregularity with respect
to any tender of old notes. Tenders of old notes will not be deemed to have been
made until such defects or irregularities mentioned above have been cured or
waived. Any old notes received by the exchange agent that are not properly
tendered and as to which the defects 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 of the exchange offer.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their old notes and (1) whose old notes are not
immediately available or (2) who cannot deliver their old notes, the letter of
transmittal or any other required documents to the exchange agent prior to the
expiration date, may effect a tender if:
- the tender is made through an eligible guarantor institution,
- prior to the expiration date, the exchange agent receives from such
eligible guarantor 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 old notes and the principal amount of old
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 old 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 guarantor institution with
the exchange agent, and
- such properly completed and executed letter of transmittal (or facsimile
thereof), as well as the certificate(s) representing all physically
tendered old 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 old notes
according to the guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, tenders of outstanding
notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on
the expiration date of the exchange offer.
To withdraw a tender of outstanding notes in the exchange offer, a letter
or facsimile transmission notice of withdrawal must be received by Chase
Manhattan Trust Company, National Association at its address set forth below
prior to 5:00 p.m., New York City time, on the expiration date. Any notice of
withdrawal must:
- specify the name of the person having deposited the outstanding notes to
be withdrawn,
- identify the outstanding notes to be withdrawn (including the certificate
number(s) and principal amount of such outstanding notes or, in the case
of outstanding notes transferred by book-entry transfer, the name and
number of the account at the book-entry transfer facility to be credited)
and include a statement that such holder is withdrawing such holder's
election to have such outstanding notes exchanged,
- be signed by the holder in the same manner as the original signature on
the letter of transmittal by which the outstanding notes were tendered
(including any required signature guarantees) or be
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accompanied by documents of transfer sufficient to have the trustee under
the indenture governing the outstanding notes register the transfer of
the outstanding notes into the name of the person withdrawing the tender,
and
- specify the name in which any such outstanding notes are to be
registered, if different from that of the person who deposited the notes.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by CapRock, whose determination
shall be final and binding on all parties. Any outstanding notes so withdrawn
will be deemed not to have been validly tendered for purposes of the exchange
offer, and no new notes will be issued with respect thereto unless the
outstanding notes so withdrawn are validly retendered. Any outstanding notes
which have been tendered but which are not accepted for exchange will be
returned to the holder of the notes without cost to the holder as soon as
practicable after withdrawal, rejection of tender or termination of the exchange
offer. Properly withdrawn outstanding notes may be retendered by following one
of the procedures described above under "-- Procedures for Tendering" at any
time prior to the expiration date.
CONDITIONS
Notwithstanding any other term of the exchange offer, CapRock shall not be
required to accept for exchange, or exchange new notes for, any old notes, and
may terminate the exchange offer as provided herein before the acceptance of
such old notes, if:
(1) 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 CapRock, might materially impair the ability
of CapRock to proceed with the exchange offer, or
(2) 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 CapRock determines in its sole and absolute discretion that any of the
conditions are not satisfied, CapRock may (1) refuse to accept any old notes and
return all tendered old notes to the tendering holders, (2) extend the exchange
offer and retain all old notes tendered prior to the expiration of the exchange
offer, subject, however, to the rights of holders to withdraw such old notes
(see "-- Withdrawal of Tenders" above) or (3) waive such unsatisfied conditions
with respect to the exchange offer and accept all properly tendered old notes
which have not been withdrawn. If such waiver constitutes a material change to
the exchange offer, CapRock will promptly disclose such waiver by means of a
prospectus supplement that will be distributed to the holders, and CapRock 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 old notes being tendered for exchange.
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EXCHANGE AGENT
Chase Manhattan Trust Company, 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
transmittal and requests for notice of guaranteed delivery should be directed to
Chase Manhattan Trust Company, National Association addressed as follows:
<TABLE>
<S> <C>
By Hand/Overnight Delivery or by (For Eligible Institutions Only):
Registered or Certified Mail: By Facsimile:
Chase Manhattan Trust Company, Chase Manhattan Trust Company,
National Association National Association
1650 Market Street (215) 568-1449
Suite 5210 Confirm by telephone:
Philadelphia, PA 19103 (215) 988-1320
Attn: Stephen Schaaf
Corporate Trust Department
</TABLE>
Originals of all documents sent by facsimile should be sent promptly by
registered or certified mail, by hand, or by overnight delivery service.
Delivery to an address or transmission of instructions via facsimile other than
as set forth above will not constitute a valid delivery.
Chase Manhattan Trust Company, National Association also acts as trustee
under the indenture governing the notes.
FEES AND EXPENSES
CapRock will bear the expenses of soliciting tenders. The principal
solicitation is being made by mail. However, additional solicitation may be made
by telegraph, telecopy, telephone or in person by officers and regular employees
of CapRock and its affiliates.
CapRock 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. CapRock, however, will pay Chase Manhattan
Trust Company, National Association reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection with providing the services.
The cash expenses to be incurred in connection with the exchange offer will
be paid by CapRock. Such expenses includes fees and expenses of Chase Manhattan
Trust Company, National Association as exchange agent and as trustee under the
indenture governing the notes, accounting and legal fees and printing costs,
among others. CapRock will pay all transfer taxes, if any, applicable to the
exchange of old notes pursuant to the exchange offer. If, however, certificates
representing new notes or old 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 old notes tendered, or if
tendered old 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 old 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 new notes will be recorded at the same carrying value as the
outstanding notes as reflected in CapRock's accounting records on the date of
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by CapRock. The expenses of the exchange offer will be amortized over
the term of the notes.
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CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of outstanding notes who are eligible to participate in the
exchange offer but who do not tender their outstanding notes will not have any
further registration rights, and their outstanding notes will continue to be
subject to restrictions on transfer. Accordingly, such outstanding notes may be
resold only:
- to CapRock, upon redemption thereof or otherwise,
- so long as the outstanding notes are eligible for resale pursuant to Rule
144A under the Securities Act, to a person inside the United States whom
the seller reasonably believes is a qualified institutional buyer within
the meaning of Rule 144A in a transaction meeting the requirements of
Rule 144A,
- in accordance with Rule 144 under the Securities Act, or pursuant to
another exemption from the registration requirements of the Securities
Act, and based upon an opinion of counsel reasonably acceptable to
CapRock,
- outside the United States to a foreign person in a transaction meeting
the requirements of Rule 904 under the Securities Act, or
- pursuant to an effective registration statement under the Securities Act,
in each case in accordance with any applicable securities laws of any
state of the United States.
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<PAGE> 89
DESCRIPTION OF THE NOTES
The new notes, like the old notes, will be issued under the indenture,
dated May 18, 1999, between CapRock and Chase Manhattan Trust Company, National
Association, as trustee. Upon the effectiveness of the registration statement,
of which this prospectus is a part, the indenture will be subject to and
governed by the Trust Indenture Act of 1939, as that act may have been amended.
The new notes are the same as the old notes except that the new notes:
- will not bear legends restricting their transfer, and
- will not contain certain terms providing for an increase in the interest
rate under the circumstances described in the registration rights
agreement.
The indenture and the registration rights agreement contain the full legal
text of the matters described in this section. A copy of the indenture and the
registration rights agreement have been filed with the commission as part of our
Registration Statement. See "Where You Can Find More Information" for
information on how to obtain copies.
Because this section is a summary, it does not describe every aspect of the
notes. This summary is subject to and qualified in its entirety by reference to
all the provisions of the indenture and the registration rights agreement,
including definitions of some terms used in the indenture. For example, in this
section we use capitalized words to signify defined terms that have been given
special meaning in the indenture. We describe the meaning for only the more
important terms, under "-- Certain Definitions." We also include references in
parentheses to certain sections of the indenture. Whenever we refer to
particular sections or defined terms of the indenture in this prospectus, these
sections or defined terms are incorporated by reference into this prospectus.
BRIEF DESCRIPTION OF THE NOTES
The notes:
- will be unsecured unsubordinated obligations of CapRock;
- will be limited to $210 million aggregate principal amount;
- will mature on May 1, 2009; and
- will bear interest at the rate of 11 1/2% per annum.
Interest will be paid semi-annually on May 1 and November 1 of each year,
commencing November 1, 1999, to the registered holder at the close of business
on the preceding April 15 or October 15.
Interest on the notes will be computed on the basis of a 360 day year of
twelve 30 day months. Principal of, premium, if any, and interest on the notes
will be payable, and the notes may be exchanged or transferred, at the office or
agency of CapRock in the Borough of Manhattan, The City of New York; provided
that, at the option of CapRock, payments of interest may be made by check mailed
to the holders at their addresses as they appear in the Security Register.
The 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 notes, but CapRock may require
payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith.
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OPTIONAL REDEMPTION
The notes are redeemable, at CapRock's option, in whole or in part, at any
time or from time to time, on or after May 1, 2004 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 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 May 1 of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---- ----------------
<S> <C>
2004................................................ 105.750%
2005................................................ 103.834%
2006................................................ 101.917%
2007 and thereafter................................. 100.000%
</TABLE>
In addition, at any time or from time to time on or prior to May 1, 2002,
CapRock may, other than in any circumstances resulting in a Change of Control,
redeem, at its option, up to 35% of the aggregate principal amount of the notes
with the proceeds of one or more additional Public Equity Offerings or Strategic
Equity Investments resulting in aggregate gross proceeds to CapRock of at least
$25 million, at any time or from time to time in part, at a Redemption Price
(expressed as a percentage of principal amount) of 111.50%, plus accrued and
unpaid interest to the Redemption Date (subject to the right of holders of
record on the relevant record date that is prior to the Redemption Date to
receive interest due on an Interest Payment Date); provided that at least 65% of
the aggregate principal amount of notes originally issued remain outstanding
after each such redemption. Any such redemption shall be made within 60 days
after the consummation of such Public Equity Offering or Strategic Equity
Investment upon not less than 30 nor more than 60 days' prior notice.
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 CapRock 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 ranks pari passu in right of
payment with all existing and future unsecured senior indebtedness of CapRock
and senior in right of payment to all existing and future indebtedness of
CapRock expressly subordinated in right of payment to the notes. As of March 31,
1999, on an as adjusted basis after giving effect to the offering of the May
1999 senior notes, CapRock would have had outstanding debt of approximately
$346.0 million, none of which would have ranked senior in
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right of payment to the notes. As of the same date, CapRock's subsidiaries had
no outstanding debt (other than trade payables). CapRock will be dependent upon
access to the cash flow or assets of its subsidiaries to make payments on the
notes, and CapRock's ability to obtain such access may be limited by law. See
"Risk Factors -- We are a holding company and holders of the notes offered
hereby will be structurally subordinated."
CapRock and its subsidiaries are permitted to incur additional
Indebtedness, including Indebtedness under one or more Credit Facilities 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 one or more Credit Facilities 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.
CERTAIN COVENANTS
The indenture contains, among others, the following covenants:
Limitation on Indebtedness. The Indenture provides that CapRock will not,
and will not permit any of its Restricted Subsidiaries to, Incur any
Indebtedness (including Acquired Indebtedness) other than Permitted
Indebtedness; provided that CapRock 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 CapRock 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," CapRock, 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 CapRock 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) CapRock 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 CapRock, whose determination shall be conclusive and evidenced
by a Board Resolution) made after the 1998 Senior Notes Issue 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 1998 Senior Notes Issue 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
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(2) the aggregate Net Cash Proceeds received by CapRock after the 1998
Senior Notes Issue Date, from a capital contribution from, or the issuance
and sale permitted by the Indenture to, a Person who is not a Subsidiary of
CapRock 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 CapRock or a Restricted Subsidiary that has been exchanged
for or converted into Capital Stock of CapRock (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 CapRock 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 CapRock 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 CapRock (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
CapRock of, shares of Capital Stock (other than Redeemable Stock) of
CapRock (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
CapRock 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 CapRock of,
shares of the Capital Stock (other than Redeemable Stock) of CapRock (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 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 CapRock;
(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)
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does not exceed the sum of (x) $85 million plus (y) the amount of Net Cash
Proceeds received by CapRock after the 1998 Senior Notes Issue Date as a
capital contribution or from the sale of Capital Stock (other than
Redeemable Stock) of CapRock (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 CapRock, 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 CapRock to the extent necessary, in the
judgment of the Board of Directors of CapRock, to prevent the loss or
secure the renewal or reinstatement of any license or franchise held by
CapRock 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 CapRock, or options, warrants or other
rights to purchase such shares, held by directors, employees, or former
directors or employees of CapRock 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 CapRock or
a Restricted Subsidiary or (y) in exchange for Capital Stock (other than
Redeemable Stock) of CapRock (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 CapRock 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, CapRock 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 $25 million.
The actions described in clauses (i), (v), (vi), (vii), (viii), (x) and
(xi) of the immediately preceding paragraph are Restricted Payments that are
permitted in accordance with the immediately preceding paragraph but 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.
The actions
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described in clauses (ii), (iii), (iv) and (ix) of the immediately preceding
paragraph are Restricted Payments that are permitted in accordance with the
immediately preceding paragraph and do 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 CapRock 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 CapRock or any other
Restricted Subsidiary, (ii) pay any Indebtedness owed to CapRock or any other
Restricted Subsidiary, (iii) make loans or advances to CapRock or any other
Restricted Subsidiary or (iv) transfer any of its property or assets to CapRock
or any other Restricted Subsidiary.
The foregoing provisions do not restrict any encumbrances or restrictions:
(i) in the 1998 Senior Notes Indenture, the Indenture or any other
agreements in effect on the 1998 Senior Notes Issue 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 CapRock 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 CapRock 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 CapRock or any Restricted
Subsidiary in any manner material to CapRock 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 CapRock 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
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Facility prohibit distributions to CapRock 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 prevents CapRock 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 CapRock 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 CapRock 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 CapRock 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 CapRock 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, or
(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.
Limitation on Issuances of Guarantees by Restricted Subsidiaries. The
Indenture provides that CapRock will not permit any Restricted Subsidiary,
directly or indirectly, to Guarantee any Indebtedness of CapRock 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 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
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against CapRock or any other Restricted Subsidiary as a result of any
payment by such Restricted Subsidiary under its Subsidiary Guarantee;
Provided that this paragraph does not apply 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 CapRock, of all of CapRock'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 CapRock 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 CapRock
or with any Affiliate of CapRock or any Restricted Subsidiary, except (a) in
writing (other than the payment of salaries or bonuses to officers of CapRock 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 CapRock 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 CapRock 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
CapRock, or in the event there is only one Disinterested Director, by such
Disinterested Director, or (2) CapRock 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 CapRock or such Subsidiary from a financial point of view.
The foregoing limitation does not limit, and does not apply to:
(i) any transaction solely between CapRock 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 CapRock who are not employees of CapRock;
(iii) any payments or other transactions pursuant to any tax-sharing
agreement between CapRock and any other Person with which CapRock files a
consolidated tax return or with which CapRock is part of a consolidated
group for tax purposes;
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(iv) any Restricted Payments not prohibited by the "Limitation on
Restricted Payments" covenant; or
(v) 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 CapRock 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
CapRock 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 CapRock 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 CapRock 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 CapRock and any Wholly Owned
Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or
(iv) CapRock 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 CapRock will not,
and will not permit any Restricted Subsidiary to, consummate any Asset Sale,
unless (i) the consideration received by CapRock 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 CapRock 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 CapRock or any of its Restricted
Subsidiaries from one or more Asset Sales occurring on or after the 1998 Senior
Notes Issue 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 CapRock and its Subsidiaries has been filed with
the Commission or provided to the trustee pursuant to the "Commission Reports
and Reports to Holders" covenant), then CapRock 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 CapRock 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 CapRock 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
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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, CapRock 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, CapRock 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 CapRock or a
Restricted Subsidiary is required under the terms of Indebtedness of CapRock or
such Restricted Subsidiary which is pari passu with, or (in the case of any
secured Indebtedness) senior with respect to such collateral to, the notes with
any proceeds which constitute Excess Proceeds under the Indenture, CapRock shall
make a pro rata offer to the holders of all other pari passu Indebtedness
(including the notes) with such proceeds. If the aggregate principal amount of
notes and other pari passu Indebtedness surrendered by holders thereof exceeds
the amount of such Excess Proceeds, the trustee shall select the notes and other
pari passu Indebtedness to be purchased on a pro rata basis. To the extent that
the aggregate purchase price for the notes tendered pursuant to an Offer to
Purchase is less than the Excess Proceeds, CapRock 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 May 18, 1999, in either case, whether or not
CapRock is then required to file reports with the Commission, CapRock shall file
with the Commission (if permitted by Commission practice and applicable law and
regulations) 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. CapRock 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 CapRock 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
May 18, 1999, CapRock 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. 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, CapRock shall supply to such holder or such
prospective purchaser the information required under Rule 144A under the
Securities Act.
Limitation on Restrictive Covenants. Notwithstanding any other provisions
of the Indenture, the restrictive covenants set forth therein, including,
without limitation, those described under "Limitation on Restricted Payments,"
"Limitation on Dividend and other Payments Restrictions Affecting Restricted
Subsidiaries," "Limitation on the Issuance and Sale of Capital Stock of
Restricted Subsidiaries," "Limitation on Transactions with Stockholders and
Affiliates," "Limitation on Liens," "Limitation on Sale-Leaseback Transactions"
and "Limitation on Asset Sales" are limited and are deemed limited to the extent
necessary so that the creation, existence and effectiveness of such restrictive
covenants did not result
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in a breach of the covenants of the 1998 Senior Notes Indenture relating to
"Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries."
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 CapRock 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.
CapRock shall commence such Offer to Purchase within 30 days following the
occurrence of such Change of Control.
There can be no assurance that CapRock 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 CapRock which might be outstanding at the
time). The foregoing covenant requiring CapRock to repurchase the notes will,
unless consents are obtained, require CapRock 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 will be 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 CapRock or mandatory redemption, or the
failure to make or consummate an Offer to Purchase in accordance with 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 CapRock 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 CapRock 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 CapRock 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 CapRock 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
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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 (i) relief in respect of CapRock or any Restricted Subsidiary in
an involuntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, (ii) appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official
of CapRock or any Restricted Subsidiary or for all or substantially all of
the property and assets of CapRock or any Restricted Subsidiary or (iii)
the winding up or liquidation of the affairs of CapRock 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; or
(h) CapRock or any Restricted Subsidiary (i) 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, (ii) consents to the appointment of
or taking possession by a receiver, liquidator, assignee, custodian,
trustee, sequestrator or similar official of CapRock or any Restricted
Subsidiary or for all or substantially all of the property and assets of
CapRock or any Restricted Subsidiary or (C) effects any general assignment
for the benefit of creditors.
If an Event of Default (other than an Event of Default specified in clauses
(g) or (h) above that occurs with respect to CapRock) 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 CapRock
(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 CapRock 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 clauses (g) or (h) above occurs
with respect to CapRock, 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 CapRock 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 CapRock 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 CapRock and its Restricted Subsidiaries
and the performance of CapRock and its Restricted Subsidiaries under the
Indenture and that CapRock 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. CapRock is also be
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 CapRock 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 CapRock, unless:
(i) CapRock shall be the continuing Person, or the Person (if other
than CapRock) formed by such consolidation or into which CapRock is merged
or that acquired or leased such property and assets of CapRock 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 CapRock 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, CapRock, 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
CapRock (or a Person that owns directly or indirectly all of the Capital
Stock of the surviving Person or CapRock 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 CapRock or other Person) shall be issued
or distributed to the stockholders of CapRock; and
(iv) CapRock 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 CapRock, whose
determination shall be evidenced by
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a Board Resolution, the principal purpose of such transaction is to change
the state of incorporation of CapRock; 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 CapRock 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) CapRock 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) CapRock 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
CapRock'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 CapRock or any of its
Subsidiaries is a party or by which CapRock or any of its Subsidiaries is bound,
and (D) if at such time the notes are listed on a national securities exchange,
CapRock 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 CapRock 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 CapRock
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, CapRock will remain
liable for such payments.
MODIFICATION AND WAIVER
From time to time, CapRock, when authorized by trustee, without the consent
of the holders, may amend, waive or supplement the Indenture and the notes for
certain specified purposes, including, among other things, curing ambiguities,
defects or inconsistencies, to provide for the assumption of CapRock'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 of 1939, as amended
(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 may be made by CapRock 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, or
(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.
GOVERNING LAW
The Indenture provides that the Indenture and the notes are governed by and
construed in accordance with the laws of the State of New York without giving
effect to principles of conflicts of law.
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 CapRock, to obtain payment of claims in certain cases or to
realize on certain property received by it in respect of any such claims, as
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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.
"1998 Senior Notes Indenture" means the Indenture dated as of July 16,
1998, among CapRock, CapRock Telecommunications Corp., CapRock Fiber Network,
Ltd. and IWL Communications, Incorporated and PNC Bank, N.A. (now known as Chase
Manhattan Trust Company, National Association), as trustee, providing for the
issuance of the 1998 Senior Notes in the aggregate principal amount of
$150,000,000, as such instrument may be amended and supplemented from time to
time.
"1998 Senior Notes Issue Date" means the date on which the 1998 Senior
Notes were originally issued under the 1998 Senior Notes Indenture.
"1998 Senior Notes" means CapRock's 12% Senior Notes due 2008 issued
pursuant to the 1998 Senior Notes Indenture, as such instrument may be amended
or supplemented from time to time.
"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 CapRock 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 CapRock and its Restricted Subsidiaries for such period
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 CapRock 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 CapRock 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 CapRock or any Restricted Subsidiary to such Person
during such period;
(ii) the net income (or loss) of any Person acquired by CapRock 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;
(vi) any gain or loss, net of taxes, realized upon the termination of
any employee benefit plan; and
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(vii) any compensation or other expense paid or payable solely with
Capital Stock (other than Redeemable Stock) of CapRock or any options,
warrants or other rights to acquire such Capital Stock.
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of CapRock 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
CapRock 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 CapRock 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 CapRock 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
CapRock or any of its Restricted Subsidiaries; provided that such Person's
primary business is related, ancillary or complementary to the businesses of
CapRock and its Restricted Subsidiaries on the date of such investment or (ii)
an acquisition by CapRock or any of its Restricted Subsidiaries of the property
and assets of any Person other than CapRock 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 CapRock and its Restricted
Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by CapRock or any
of its Restricted Subsidiaries (other than to CapRock 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 CapRock or any of its Restricted Subsidiaries.
"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 CapRock
or any of its Restricted Subsidiaries to any Person other than CapRock 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 CapRock or any of its Restricted Subsidiaries
or
(iii) any other property and assets of CapRock or any of its
Restricted Subsidiaries outside the ordinary course of business of CapRock
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 by the
provisions of the Indenture applicable to mergers, consolidations and sales of
all or substantially all of the assets of CapRock; 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,
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(b) contemporaneous exchanges by CapRock 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 CapRock or such Restricted Subsidiary have at least substantially equal
fair market value to the Telecommunications Assets disposed of, or
(c) sales, transfers or other dispositions of assets that have become
uneconomic, obsolete or worn-out.
"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 CapRock 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:
(i) the sale, conveyance, transfer or lease of all or substantially
all of the assets of CapRock 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 CapRock (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 CapRock
(together with any directors whose election or appointment by the Board of
Directors of CapRock or whose nomination for election by the stockholders
of CapRock 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
CapRock then in office or
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(iv) the merger, amalgamation or consolidation of CapRock with or into
another Person or the merger of another Person with or into CapRock shall
have occurred, and the securities of CapRock that are outstanding
immediately prior to such transaction and which represent 100% of the
aggregate voting power of the Voting Stock of CapRock 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 May 18, 1999.
"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 or the offering of the
1998 Senior Notes and expensed by CapRock 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 CapRock 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 CapRock 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;
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(iv) Preferred Stock dividends of CapRock'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 CapRock 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
CapRock 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, the 1998 Senior Notes and the 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 CapRock 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 CapRock have been filed with
the Commission or provided to the trustee pursuant to the "Commission Reports
and Reports to Holders" covenant described above (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 CapRock 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 CapRock 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 CapRock 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.
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"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 CapRock 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.
"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 CapRock 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 CapRock) 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 1998 Senior Notes Issue 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.
"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."
"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.
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"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
(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 CapRock or any Restricted Subsidiary, and
(F) Indebtedness shall not include overdrafts.
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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 CapRock 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 CapRock 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 CapRock 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.
"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 CapRock, CapRock
Telecommunications Corp., CapRock Fiber Network, Ltd. and IWL Communications,
Incorporated and certain other parties thereto, as amended through the 1998
Senior Notes Issue Date and thereafter in accordance with the terms of the 1998
Senior Notes 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 CapRock 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 CapRock and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation
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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 CapRock 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 CapRock 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.
(i) "Offer to Purchase" means an offer by CapRock to purchase notes
from the holders commenced by mailing a notice to the trustee and each
holder stating:
(ii) 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;
(iii) 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);
(iv) that any note not tendered will continue to accrue interest
pursuant to its terms;
(v) that, unless CapRock 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;
(vi) 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;
(vii) 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
(viii) 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, CapRock 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 CapRock. 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 nonequal 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. CapRock will publicly
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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. CapRock 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 CapRock 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.
"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 CapRock pursuant to the notes and the Indenture;
(ii) Indebtedness owed (A) to CapRock 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 CapRock 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 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 CapRock 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 CapRock or any
Restricted Subsidiary in accordance with the policies issued to CapRock 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 CapRock 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
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credit, surety bonds or performance bonds securing any obligations of
CapRock 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 CapRock or any Restricted Subsidiary in connection
with such disposition;
(v) Indebtedness of CapRock, to the extent the net proceeds thereof
are promptly used to purchase notes tendered in an Offer to Purchase made
as a result of a Change of Control or Indebtedness of CapRock 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 CapRock
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 CapRock not to exceed, at any one time
outstanding, two times the Net Cash Proceeds received by CapRock after the
1998 Senior Notes Issue Date 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 CapRock 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) CapRock 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 CapRock after the 1998
Senior Notes Issue Date 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 CapRock 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 CapRock not to exceed, at any one time outstanding, 100% of the fair
market value of property (other than cash and cash equivalents) received by
CapRock after the 1998 Senior Notes Issue Date 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 CapRock 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 CapRock and its Restricted Subsidiaries as of the
last fiscal quarter for which financial statements are prepared or
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(y) $175 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;
(xi) Capitalized Lease Obligations in an aggregate principal amount
outstanding at any time not to exceed $25 million; and
(xii) Indebtedness of CapRock (in addition to Indebtedness permitted
under clauses (i) through (xi) above) in the aggregate principal amount
outstanding at any time not to exceed $75 million, less any amount of such
Indebtedness permanently repaid as provided under the "Limitation on Asset
Sales" covenant described above.
"Permitted Investment" means any of the following:
(i) an Investment in CapRock 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, CapRock or a Restricted Subsidiary;
provided that such Person's primary business is related, ancillary or
complementary to the businesses of CapRock 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 CapRock 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);
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(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 CapRock 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 CapRock or any Restricted Subsidiary; provided that such Lien does not
extend to any property or assets of CapRock 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 CapRock 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 CapRock 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 CapRock or any Restricted
Subsidiary other than the property or assets acquired and any proceeds
thereof;
(xii) Liens in favor of CapRock or any Restricted Subsidiary;
(xiii) Liens arising from the rendering of a final judgment or order
against CapRock 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 CapRock 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
CapRock or any of its Restricted Subsidiaries in the ordinary course of
business in accordance with the past practices of CapRock and its
Restricted Subsidiaries;
(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 CapRock or any Restricted Subsidiary securing
Indebtedness in effect at the Closing Date;
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(xxiii) Liens granted after the Closing Date on any assets or Capital
Stock of CapRock 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 CapRock or a Wholly Owned
Restricted Subsidiary to secure Indebtedness owing to CapRock 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 CapRock or any Restricted
Subsidiary other than the property or assets securing the Indebtedness
being refinanced;
(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.
"Public Equity Offering" means an underwritten primary public offering of
Common Stock (other than Redeemable Stock) of CapRock or a Restricted Subsidiary
pursuant to an effective registration statement filed under the Securities Act
(excluding registration statements on Form S-8).
"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 CapRock'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 CapRock's Capital Stock (other than (x)
dividends or distributions payable solely in shares of CapRock'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 CapRock or any Wholly Owned Restricted Subsidiary),
(ii) a payment made by CapRock or any Restricted Subsidiary used to
purchase, redeem, retire or otherwise acquire for value any shares of
Capital Stock of (A) CapRock or an Unrestricted Subsidiary (including
options, warrants or other rights to acquire such shares of Capital Stock)
held
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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 CapRock (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 CapRock (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 CapRock
or in options, warrants or other rights to acquire shares of such Capital
Stock and (y) payments payable to CapRock 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 CapRock 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.
"Restricted Subsidiary" means any Subsidiary of CapRock other than an
Unrestricted Subsidiary.
"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.
"Strategic Equity Investments" means the issuance and sale of Capital Stock
(other than Redeemable Stock) to a Person that has an equity market
capitalization, a net asset value or annual revenues of at least $1.0 billion
and owns and operates businesses primarily in a Telecommunications Business;
provided that such Telecommunications Business may be located anywhere in the
world.
"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 CapRock 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 CapRock pursuant to the Indenture. The determination of what
constitutes Telecommunications Assets shall be made by the Board of Directors of
CapRock 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 CapRock.
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"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
CapRock) 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,
which were consummated on August 26, 1998.
"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 CapRock, as provided below) and (b) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors of CapRock may designate any
Subsidiary (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary so long as (i) neither CapRock 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 CapRock 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
CapRock 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 CapRock, and (v)
neither CapRock 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 CapRock
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shall be evidenced to the trustee by filing a Board Resolution with the trustee
giving effect to such designation. The Board of Directors of CapRock 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 CapRock 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 CapRock
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 CapRock 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.
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BOOK-ENTRY; DELIVERY AND FORM
The new notes initially will be represented by one or more permanent global
certificates in definitive, fully registered form. This global note will be
deposited upon issuance with The Depositary Trust Company, New York, New York
and registered in the name of a nominee of the Depository Trust Company.
THE GLOBAL NOTE.
We expect that pursuant to procedures established by The Depository Trust
Company
-- upon the issuance of the global note, The Depository Trust Company
or its custodian will credit, on its internal system, the principal amount
of the individual beneficial interests represented by the global note to
the respective accounts of persons who have accounts with such depositary
and
-- ownership of beneficial interests in the global note will be shown
on, and the transfer of ownership will be effected only through, records
maintained by The Depository Trust Company or its nominee, with respect to
interests of participants, and the records of participants, with respect to
interests of persons other than participants.
Ownership of beneficial interests in the global notes will be limited to
persons who have accounts with The Depository Trust Company or persons who hold
interests through participants.
So long as The Depository Trust Company or its nominee is the registered
owner or holder of the new notes, The Depository Trust Company (or the nominee)
will be considered the sole owner or holder of the new notes represented by the
global note for all purposes under the indenture. No beneficial owner of an
interest in the global note will be able to transfer that interest except in
accordance with The Depository Trust Company's procedures.
Payments of interest, principal and other amounts due on the global note
will be made to The Depository Trust Company or its nominee as the registered
owner. None of CapRock, the trustee or any paying agent 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 this
beneficial ownership interest.
We expect that The Depository Trust Company or its nominee, upon receipt of
any payment of interest, principal or other amounts due on the global note, will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the global note as shown on the records of
The Depository Trust Company. We also expect 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 the case
with securities held for the accounts of customers registered in the names of
nominees for those customers. These payments will be the responsibility of the
participants.
Transfers between participants in The Depository Trust Company will be
effected in the ordinary way through The Depository Trust Company's settlement
system in accordance with The Depository Trust Company rules and will be settled
in same day funds.
The Depository Trust Company has advised us that it will take any action
permitted to be taken by a holder of new notes, including the presentation of
new notes for exchange as described below, only at the direction of a
participant to whose account The Depository Trust Company interests in the
global note are credited. Further, The Depository Trust Company will take action
only as to such portion of the notes as to which the participant has given such
direction. However, if there is an Event of Default under the indenture, the
Depository Trust Company will exchange the global note for certificated notes,
which it will distribute to its participants.
The Depository Trust Company has advised us as follows: The Depository
Trust Company is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code and a
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"Clearing Agency" registered under to the provisions of Section 17A of the
Exchange Act. The Depository Trust Company was created to hold securities for
its participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the Depository Trust Company system is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a participant, either directly or
indirectly.
Although the Depository Trust Company has agreed to the foregoing
procedures in order to facilitate transfers of interests in the global note
among participants of the Depository Trust Company, it is under no obligation to
perform those procedures, and those procedures may be discontinued at any time.
Neither CapRock nor the trustee will have any responsibility of the performance
by the Depository Trust Company or its participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations.
CERTIFICATED SECURITIES.
If (1) the Depository Trust Company is at any time unwilling or unable to
continue as a depositary for the global note and a successor depositary is not
appointed by CapRock within 90 days or (2) an event of default under the
indenture has occurred and is continuing with respect to the notes, certificated
notes will be issued in exchange for the global note.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
CapRock has outstanding $150.0 million of its 1998 Senior Notes bearing
interest at the rate of 12% per annum. The 1998 Senior Notes are subject to the
terms and conditions of an indenture dated July 16, 1998 between CapRock and
Chase Manhattan Trust Company, National Association (formerly known as PNC Bank,
N.A.), as Trustee. The 1998 Senior Notes are subject to all of the terms and
conditions of the indenture governing the 1998 Senior Notes. The following
summary highlights some provisions of the indenture.
The 1998 Senior Notes will mature on July 15, 2008. Interest on the 1998
Senior Notes is payable semiannually in cash on January 15 and July 15 of each
year, commencing January 15, 1999. The 1998 Senior Notes are general senior
unsecured obligations of CapRock, and as such, rank pari passu in right of
payment with all existing and future unsecured and unsubordinated indebtedness
of CapRock, including CapRock's senior notes issued in May 1999.
The 1998 Senior Notes are redeemable at CapRock's option, in whole or in
part, at any time on or after July 15, 2003 at the redemption prices set forth
in the indenture governing the 1998 Senior Notes.
Upon a change of control, each holder of 1998 Senior Notes may require
CapRock to make an offer to purchase all outstanding 1998 Senior 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. There can be no
assurance that CapRock will have available, or will be able to acquire from
alternative sources of financing, funds sufficient to repurchase the 1998 Senior
Notes in the event of a change of control.
The indenture governing the 1998 Senior Notes contains covenants that,
among other things, limit or prohibit us from engaging in certain transactions
including the following:
- borrowing additional money,
- paying dividends or making other distributions to our shareholders,
- limiting the ability of subsidiaries to make payments to us,
- making certain investments,
- 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.
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DESCRIPTION OF CAPITAL STOCK
The following summaries highlight certain provisions of our Articles of
Incorporation and Bylaws, as amended. Copies of our Articles and Bylaws are
available from us upon request. See "Where You Can Find More Information."
AUTHORIZED CAPITAL STOCK
Under our Articles, the total number of shares of all classes of stock that
we have authority to issue is 220,000,000 shares. Each share has a par value of
$.01 per share. Of the authorized amount, 200,000,000 of the shares are Common
Stock and 20,000,000 are shares of Preferred Stock. As of May 31, 1999, there
were 33,022,059 shares of Common Stock issued and outstanding, and no shares of
Preferred Stock were issued or outstanding.
COMMON STOCK
Each share of 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 our shareholders and are entitled to one vote for
each share of Common Stock held.
Subject to the prior rights and preferences, if any, applicable to shares
of Preferred Stock or any series of Preferred Stock, the holders of Common Stock
are entitled to receive such dividends, payable in cash, stock or otherwise, as
may be declared by the Board out of any funds legally available for the payment
of dividends.
If CapRock voluntarily or involuntarily liquidates, dissolves or winds-up,
the holders of Common Stock will be entitled to receive after distribution in
full of the preferential amounts, if any, to be distributed to the holders of
Preferred Stock or any series of Preferred Stock, all of the remaining assets
available for distribution ratably in proportion to the number of shares of
Common Stock held by them.
Holders of Common Stock will have no preferences or any preemptive,
conversion or exchange rights.
PREFERRED STOCK
The Board is authorized to provide for the issuance of shares of CapRock
Preferred Stock in one or more series, and to fix for each series, 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 shown in a resolution
providing for the issuance of such series adopted by the Board. The Board may
authorize the issuance of shares of 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-current market price of such shares. As of the date hereof,
no shares of Preferred Stock are outstanding and the Board has no present
intention to issue any shares of Preferred Stock.
PREEMPTIVE RIGHTS
No holder of any shares of our stock has 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 our Common Stock is American
Securities Transfer & Trust, Inc.
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CERTAIN ANTI-TAKEOVER EFFECTS
As of May 31, 1999, there were 166,977,941 authorized and unissued shares
of Common Stock and 20,000,000 authorized and unissued shares of Preferred
Stock. The Board of Directors can authorize the issuance of authorized but
unissued shares of its stock to render more difficult or to discourage an
attempt to obtain control of our company by means of a merger, tender offer,
proxy solicitation or otherwise. We are also subject to prior regulatory
approval by the FCC and various state regulatory agencies for a transfer of
control or for the assignment of our (or our 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 we (and our
subsidiaries) hold FCC authority to provide international service, the FCC will
scrutinize an ownership interest in our company of greater than 25%, or a
controlling interest at any level, by a dominant foreign carrier. International
carriers, such as we are, 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 for our senior notes provides for a
mandatory purchase of the senior notes upon a change of control and we expect
that the credit facility that we are currently negotiating will provide that an
event of default or redemption event thereunder will occur if all or a
controlling interest in our capital stock is sold, assigned or otherwise
transferred. See "Description of Certain Indebtedness." 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 us.
WARRANTS AND REGISTRATION RIGHTS
As part of its initial public offering, IWL Communications, one of our
predecessor companies, issued warrants to purchase up to 145,000 shares of IWL
Communications common stock at an exercise price of $7.20 per share to
Cruttenden Roth, Incorporated or its designees for nominal consideration.
Following our business combination in August 1998, the Cruttenden warrants were
converted on a one-to-one ratio to warrants to purchase shares of our Common
Stock and are exercisable until July 16, 2002. Cruttenden Roth has certain
demand and piggyback registration rights associated with our Common Stock to be
issued upon the exercise of the warrants.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the principal United States
federal income tax consequences of an exchange of old notes for new notes and
the ownership and disposition of the new 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
CapRock believes that the exchange of old notes for new notes pursuant to
the exchange offer will not be treated as an "exchange" for federal income tax
purposes because the new notes will not be considered to differ materially in
kind or extent from the old notes. Rather, the new notes received by a holder
will be treated as a continuation of the old notes in the hands of such holder.
As a result, there will be no federal income tax consequences to holders
exchanging old notes for new 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 an old note or a new 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.
Sale or Exchange of Notes (Other than in the Exchange Offer). Upon a sale,
redemption (including pursuant to an offer by CapRock), retirement or other
disposition of an old note or a new 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
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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. 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. 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
CapRock or any agent of CapRock 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 CapRock entitled to vote, (2) the Non-U.S. Holder is
not (A) a controlled foreign corporation that is related to CapRock through
stock ownership, or (B) 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 CapRock 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 CapRock 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; and
(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 CapRock 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.
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.
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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 (A) the certification described in
paragraph (i)(3) above be provided by the partners and (B) 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
an old note for a new 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 CapRock 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 CapRock nor its agent has actual knowledge that the holder
is a United States person. CapRock or its agent may, however, report (on IRS
Form 1042-S) 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, 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
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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.
PLAN OF DISTRIBUTION
Any broker-dealer that acquired old notes for its own account as a result
of market-making activities or other trading activities may be deemed to be an
"underwriter" under the Securities Act. Each broker-dealer that receives new
notes for its own account in exchange for old notes, where such old notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of such new
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 the new notes received in
exchange for old notes where such old notes were acquired by such broker-dealer
as a result of market-making or other trading activities. CapRock has agreed
that, for a period of 180 days after the expiration date of the exchange offer,
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).
CapRock will not receive any proceeds from any sale of new notes by
broker-dealer or others. New 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 new 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 new notes. Any broker-dealer
that resells new 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 new notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of new 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.
For a period of 180 days from the expiration date, CapRock 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. CapRock 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 new notes). CapRock 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 new notes will be passed upon for CapRock by Munsch
Hardt Kopf & Harr, P.C., Dallas, Texas.
128
<PAGE> 130
EXPERTS
The consolidated financial statements of CapRock Communications Corp. as of
December 31, 1997 and 1998 and for each of the years in the three year period
ended December 31, 1998 are included in this prospectus in reliance upon the
reports of KPMG LLP and Burds, Reed & Mercer, P.C., independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firms as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and, therefore, we file reports, proxy statements,
information statements and other information with the Securities and Exchange
Commission. You may inspect and copy this information (at prescribed rates) at
the Commission's public reference facilities at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, and at the regional offices of the Commission
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York
10048. Please call the Commission at 1-800-SEC-0330 for more information on its
public reference rooms. The Commission also maintains an Internet Website at
http://www.sec.gov that contains reports, proxy statements, registration
statements, information statements and other information regarding registrants,
including us, that file electronically with the Commission. Our Common Stock is
quoted on the Nasdaq National Market. Reports, proxy statements, information
statements and other information about us may also be inspected at the office of
the National Association of Securities Dealers, Inc., located at 1735 K Street,
N.W., Washington, D.C. 20006.
We have also filed with the Commission a registration statement on Form S-4
to register this exchange offer. This prospectus, which forms part of the
registration statement, does not contain all of the information included in that
registration statement. For further information about CapRock and the new notes
offered in this prospectus, you should refer to the registration statement and
its exhibits. Statements contained in this prospectus as to the contents of any
contract or any other document referred to are not necessarily complete, and, in
each instance, if such contract or document is filed as an exhibit, reference is
made to the copy of such contract or document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference to such exhibit. The registration statement, including exhibits
and schedules thereto, is available as shown in the previous paragraph.
129
<PAGE> 131
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report of KPMG LLP.................... F-2
Independent Auditors' Reports of Burds, Reed and Mercer,
P.C....................................................... F-3, F-4
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-5
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998.......................... F-6
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the years ended December 31,
1996, 1997 and 1998....................................... F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.......................... F-8
Notes to Consolidated Financial Statements.................. F-9
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).....
Condensed Consolidated Balance Sheets as of December 31,
1998 and March 31, 1999 (unaudited)....................... F-26
Condensed Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 1998 and 1999........ F-27
Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 1998 and 1999........ F-28
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... F-29
</TABLE>
F-1
<PAGE> 132
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CapRock Communications Corp.
(formerly IWL Holdings Corp.):
We have audited the accompanying consolidated balance sheets of CapRock
Communications Corp. and subsidiaries, as of December 31, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1998. 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 did
not audit the 1996 financial statements of certain consolidated subsidiaries,
which statements reflect total assets constituting 56 percent and total revenues
constituting 45 percent of the related 1996 consolidated totals. Those financial
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts of these consolidated
subsidiaries, is based solely on the report 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.
In our opinion, based on our audits and the report of the other auditors,
the 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, 1997 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Dallas, Texas
February 19, 1999
F-2
<PAGE> 133
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CapRock Telecommunications Corp.:
(formerly CapRock Communications Corp.)
We have audited the 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 year then
ended (not presented separately herein). 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 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, 1996, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
BURDS, REED AND MERCER, P.C.
Dallas, Texas
May 28, 1997
F-3
<PAGE> 134
INDEPENDENT AUDITORS' REPORT
The Partners of
CapRock Fiber Network, Ltd.:
We have audited the 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 year then ended (not presented separately herein). 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, 1996, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
BURDS, REED AND MERCER, P.C.
Dallas, Texas
March 19, 1997
F-4
<PAGE> 135
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
ASSETS
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 3,520,017 $ 293,860
Marketable securities..................................... -- 97,019,789
Accounts receivable and unbilled services, less allowance
for doubtful accounts of $1,781,355 and $709,941 at
December 31, 1997 and 1998, respectively............... 15,143,525 19,936,214
Income tax receivable..................................... -- 1,405,000
Costs and estimated earnings in excess of billings........ -- 7,238,402
Inventory................................................. 1,022,927 1,301,726
Prepaid expenses and other................................ 1,022,319 706,775
Deferred income taxes..................................... 731,845 1,989,250
----------- ------------
Total current assets.............................. 21,440,633 129,891,016
Property, plant and equipment, net.......................... 27,340,599 59,606,752
Other assets................................................ 608,219 2,468,000
----------- ------------
Total assets...................................... $49,389,451 $191,965,768
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 8,116,424 $ --
Accounts payable and accrued expenses..................... 11,851,945 26,850,525
Accrued commitment and guarantor fees..................... 406,010 --
Current installments of obligations under capital
leases................................................. 239,672 --
Income taxes payable...................................... 589,514 --
Unearned revenue.......................................... 542,441 551,341
----------- ------------
Total current liabilities......................... 21,746,006 27,401,866
Long-term debt, excluding current portion................... 12,338,341 --
Senior notes, net of unamortized debt issuance costs........ -- 145,187,039
Deferred income taxes....................................... 851,307 3,314,568
Obligations under capital lease, excluding current
installments.............................................. 367,493 --
----------- ------------
Total liabilities................................. 35,303,147 175,903,473
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, 28,677,743 and
28,932,395 shares at December 31, 1997 and 1998,
respectively........................................... 286,777 289,377
Additional paid-in capital................................ 8,810,627 10,521,713
Retained earnings......................................... 5,385,144 5,608,237
Accumulated other comprehensive income.................... -- 8,878
Unearned compensation..................................... (396,244) (329,070)
Treasury stock, at cost................................... -- (36,840)
----------- ------------
Total stockholders' equity........................ 14,086,304 16,062,295
----------- ------------
Total liabilities and stockholders' equity........ $49,389,451 $191,965,768
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 136
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Carriers' carrier.................................. $22,405,158 $41,804,704 $ 72,165,460
Integrated services................................ 1,980,393 8,640,427 17,978,115
Systems services................................... 16,030,586 21,958,772 31,630,566
Product resales.................................... 10,553,846 2,945,563 --
----------- ----------- ------------
Total revenues............................. 50,969,983 75,349,466 121,774,141
Costs of services and product resales:
Services........................................... 29,684,388 50,124,257 83,221,102
Product resales.................................... 9,672,078 2,347,060 --
----------- ----------- ------------
Gross profit............................... 11,613,517 22,878,149 38,553,039
Operating expenses:
Selling, general and administrative................ 8,983,394 14,073,691 23,528,038
Merger related expenses............................ -- -- 2,312,973
Depreciation and amortization...................... 1,535,880 3,345,819 4,887,157
----------- ----------- ------------
Total operating expenses................... 10,519,274 17,419,510 30,728,168
----------- ----------- ------------
Operating income..................................... 1,094,243 5,458,639 7,824,871
Interest expense..................................... (630,952) (1,735,156) (9,458,895)
Interest income...................................... 46,300 132,634 3,017,816
Other income......................................... 41,148 219,211 105,789
----------- ----------- ------------
Income before income taxes................. 550,739 4,075,328 1,489,581
Income tax expense................................... 227,148 1,513,561 1,266,488
----------- ----------- ------------
Net income................................. $ 323,591 $ 2,561,767 $ 223,093
=========== =========== ============
Earnings per common share:
Basic.............................................. $ 0.01 $ 0.09 $ 0.01
Diluted............................................ $ 0.01 $ 0.09 $ 0.01
Weighted average shares outstanding:
Basic.............................................. 27,145,920 27,983,504 28,899,449
Diluted............................................ 27,156,471 28,480,968 30,027,569
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 137
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK TREASURY STOCK ADDITIONAL OTHER
--------------------- ----------------- PAID IN RETAINED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS INCOME
---------- -------- ------ -------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995.... 27,145,713 $271,457 -- $ -- $ 1,041,596 $2,239,378 $ --
Issuance of common stock...... 2,808 28 -- -- 9,968 -- --
Net income.................... -- -- -- -- -- 323,591 --
---------- -------- ------ -------- ----------- ---------- ------
Balance at December 31, 1996.... 27,148,521 271,485 -- -- 1,051,564 2,562,969 --
Issuance of common stock...... 79,222 792 -- -- 777,058 -- --
Proceeds from initial public
common stock offering, net
of expenses (note 12)....... 1,450,000 14,500 -- -- 6,982,005 -- --
Deferred compensation from
compensatory stock option
grants (note 12)............ -- -- -- -- -- -- --
Amortization of deferred
compensation................ -- -- -- -- -- -- --
Net income.................... -- -- -- -- -- 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 --
---------- -------- ------ -------- ----------- ---------- ------
Balance at December 31, 1997.... 28,677,743 286,777 -- -- 8,810,627 5,385,144 --
Issuance of common shares
under stock option plans and
restricted stock awards..... 52,641 527 -- -- 135,345 -- --
Acquisition of treasury shares
under stock option plans.... -- -- (5,255) (36,840) -- -- --
Issuance of stock relating to
acquisition (note 16)....... 207,266 2,073 -- -- 1,575,741 -- --
Amortization of deferred
compensation................ -- -- -- -- -- -- --
Comprehensive income:
Net income.................... -- -- -- -- -- 223,093 --
Currency translation
adjustment.................. -- -- -- -- -- -- 8,878
---------- -------- ------ -------- ----------- ---------- ------
Total comprehensive
income................ -- -- -- -- -- 223,093 8,878
---------- -------- ------ -------- ----------- ---------- ------
Balance at December 31, 1998.... 28,937,650 $289,377 (5,255) $(36,840) $10,521,713 $5,608,237 $8,878
========== ======== ====== ======== =========== ========== ======
<CAPTION>
CONSOLIDATED
UNEARNED STOCKHOLDERS'
COMPENSATION EQUITY
------------ -------------
<S> <C> <C>
Balance at December 31, 1995.... $ -- $ 3,552,431
Issuance of common stock...... -- 9,996
Net income.................... -- 323,591
--------- -----------
Balance at December 31, 1996.... -- 3,886,018
Issuance of common stock...... -- 777,850
Proceeds from initial public
common stock offering, net
of expenses (note 12)....... -- 6,996,505
Deferred compensation from
compensatory stock option
grants (note 12)............ (417,100) (417,100)
Amortization of deferred
compensation................ 20,856 20,856
Net income.................... -- 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
--------- -----------
Balance at December 31, 1997.... (396,244) 14,086,304
Issuance of common shares
under stock option plans and
restricted stock awards..... (32,500) 103,372
Acquisition of treasury shares
under stock option plans.... -- (36,840)
Issuance of stock relating to
acquisition (note 16)....... -- 1,577,814
Amortization of deferred
compensation................ 99,674 99,674
Comprehensive income:
Net income.................... -- 223,093
Currency translation
adjustment.................. -- 8,878
--------- -----------
Total comprehensive
income................ -- 231,971
--------- -----------
Balance at December 31, 1998.... $(329,070) $16,062,295
========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 138
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 323,591 $ 2,561,767 $ 223,093
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 1,535,880 3,345,819 4,887,157
Amortization of discount on notes payable............. 7,338 7,338 --
Gain on sale of assets................................ (67,021) (105,048) (51,361)
Deferred income taxes................................. (98,088) 384,247 1,205,856
Equity earnings of unconsolidated joint venture....... 25,873 (115,107) (46,075)
Amortization of debt issuance costs, included in
interest expense.................................... -- -- 202,158
Allowance for doubtful accounts....................... 356,223 1,382,119 1,649,773
Changes in operating assets and liabilities:
Accounts receivable and unbilled services........... (5,384,642) (7,876,944) (6,442,462)
Inventory........................................... (253,022) 1,631,929 (278,799)
Costs and earnings in excess of billings............ (132,794) 83,265 (7,238,402)
Prepaid expenses and other.......................... (275,987) (911,597) 407,325
Accounts payable and accrued liabilities............ 4,746,639 3,378,009 14,592,570
Income taxes payable................................ 37,418 553,739 (1,994,514)
Other............................................... (40,507) (207,851) 8,900
------------ ------------ -------------
Net cash provided by operating activities........ 780,901 4,111,685 7,125,219
Cash flows from investing activities:
Purchases of property, plant and equipment.............. (10,211,878) (13,630,464) (36,854,766)
Purchase of marketable securities....................... -- -- (145,000,000)
Proceeds from sale of marketable securities............. -- -- 47,980,211
Proceeds from note receivable........................... 659,972 -- --
Proceeds from disposal of property, plant and
equipment............................................. 201,550 643,836 303,805
Investment in unconsolidated subsidiary................. -- -- (169,166)
Purchase of ICEL........................................ -- -- (609,822)
------------ ------------ -------------
Net cash used in investing activities............ (9,350,356) (12,986,628) (134,349,738)
Cash flows from financing activities:
Proceeds from issuance of senior notes, net of debt
issuance.............................................. 15,395,225 20,553,869 144,984,881
Principal payments on notes payable..................... (8,307,785) (14,608,429) (19,302,437)
Proceeds from line of credit............................ 18,564,432 40,742,755 44,717,209
Principal payments on line of credit.................... (17,750,010) (40,404,848) (45,869,537)
Loan fees paid under long-term note agreement........... (135,749) (346,935) --
Net change in bank overdraft............................ 957,497 (957,497) --
Purchase of treasury stock.............................. -- -- (36,840)
Proceeds from issuance of common stock.................. 9,996 7,347,258 103,373
Principal payments under capital lease obligations...... (128,324) (212,695) (607,165)
------------ ------------ -------------
Net cash provided by financing activities........ 8,605,282 12,113,478 123,989,484
Effect of exchange rate on cash and cash equivalents...... -- -- 8,878
------------ ------------ -------------
Net increase (decrease) in cash and cash equivalents...... 35,827 3,238,535 (3,226,157)
Cash and cash equivalents at beginning of year............ 325,103 281,482 3,520,017
------------ ------------ -------------
Cash and cash equivalents at end of year.................. $ 360,930 $ 3,520,017 $ 293,860
============ ============ =============
Supplemental disclosure of cash flow information:
Cash paid for interest.................................. $ 550,332 $ 1,760,777 $ 1,344,441
============ ============ =============
Cash paid for income taxes.............................. $ 150,866 $ 801,124 $ 1,861,656
============ ============ =============
Non-cash investing activity:
Issuance of stock for ICEL acquisition.................. $ -- $ -- $ 1,577,814
============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 139
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(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 ("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 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 16). The equity method is
used to account for unconsolidated investments in companies in which CapRock
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).
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, Arkansas, New Mexico,
Oklahoma and Arizona. 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.
(b) Cash Equivalents and Short-Term Investments Available for Sale
The Company considers all cash in bank accounts as cash equivalents.
Marketable securities consist of U.S. government, money market and commercial
paper securities, with maturities of less than one year. Marketable securities
are stated at cost and are adjusted for discount accretion and premium
amortization, which approximate fair value. The Company's short-term investment
objectives are safety, liquidity and yield.
(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 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. 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.
F-9
<PAGE> 140
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the process of building out its fiber network, the Company may enter
into Indefeasible Right to Use contracts ("IRUs") 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 IRUs for its own
use while performing the construction services. This additional conduit is
capitalized proportionately with the number of conduits placed, and depreciation
begins for these costs as the specific fiber segment is placed in service.
(e) Revenues and Cost of Revenues
The Company recognizes revenue from the following sources: Carriers'
Carrier, Integrated Services, System Services and Product Resale.
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 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.
The Company accounts 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. 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.
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.
The Company records revenues for these telecommunications services at the time
of customer usage. The cost of revenues associated with 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. The cost of revenues for local services also includes payments to
local exchange carriers and interexchange carriers for access and transport
charges. Commissions paid to sales representatives or agents to acquire customer
call traffic are expensed in the period when associated call revenues are
recognized.
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 revenues associated with the
leasing and sale of voice and data systems products are recorded as the services
are provided. The revenue associated with the design and installation of voice
and data systems products primarily relates to communication system contracts
involving the engineering and integration of telecommunications systems and
sales, service and maintenance of telecommunications equipment. These
F-10
<PAGE> 141
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
In 1997, the Company provided services to a subsidiary of Shell, which
included the resale of a significant amount of Alcatel products. The Company
sold $2.9 million to the Shell subsidiary in 1997, relating to Alcatel products
and other equipment and hardware. The Shell project was substantially completed
in May 1997 and, therefore, is not expected to contribute in a material manner
to 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 carriers, retail and commercial customers. The Company
extends credit to customers on an unsecured basis with the risk of loss limited
to outstanding amounts.
(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.
(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 included in accumulated
other comprehensive income, a 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 16). Goodwill represents the
excess of the purchase price over fair value of identifiable
F-11
<PAGE> 142
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
net assets acquired and 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. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved.
(k) Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of. The Statement requires that
long-lived assets and certain identifiable intangibles be assessed 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. As of December 31, 1998, the
estimated fair value and the carrying amount of the Company's 12% Senior Notes
due 2008 was $144 million and $145.2 million, respectively.
(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 1997, the Company adopted the Financial Accounting Standards Board
Statement No. 128 ("SFAS No. 128"), Earnings Per Share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to SFAS No. 128 requirements. All data in the table below is in
thousands, except for per share data.
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Numerator:
Net income............................................ $ 324 $ 2,562 $ 223
Denominator:
Denominator for basic earnings per share-weighted
average shares outstanding......................... 27,146 27,984 28,899
Effect of dilutive securities:
Employee stock options................................ 10 497 1,129
------- ------- -------
Denominator for diluted earnings per share-weighted
average shares outstanding............................ 27,156 28,481 30,028
======= ======= =======
Basic and diluted earnings per share.................... $ 0.01 $ 0.09 $ 0.01
======= ======= =======
</TABLE>
F-12
<PAGE> 143
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(o) Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income consists of net income and
currency translation adjustments and is presented in the consolidated statements
of stockholder's equity and comprehensive income. The Statement requires only
additional disclosures in the consolidated financial statements; it does not
affect the Company's financial position or results of operations. Prior to 1998,
the Company's comprehensive income only consisted of net income.
(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
with Telecommunications, Partnership and IWL. Accordingly, the Consolidated
Balance Sheets as of December 31, 1997 and 1998 and the Consolidated Statements
of Operations, Stockholders' Equity and Comprehensive Income and Cash Flows for
each of the years in the three year period ended December 31, 1998 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 28,910,221 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 shares of 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 year ended December 31, 1997 and 1998 combine
the operating activity for all three entities for these years. The Consolidated
Statement of Operations for 1996 combine IWL's operating activity for the year
ended June 30, 1996 with Telecommunications and the Partnership operating
activity for the year ended December 31, 1996. The net income of IWL for the six
month period ended December 31, 1996 was excluded from the Consolidated
Statement of Operations for the year ended December 31, 1996 in the amount of
approximately $260,000 as a result of the non-conforming year ends for such
period. This amount was included as an adjustment to retained earnings in the
Consolidated Statement of Stockholders' Equity. IWL's cash flow for this six
month period was added to the 1997 beginning balance in the 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.
(3) MARKETABLE SECURITIES
Investments in marketable securities at December 31, 1998 consist of money
market investments of $46,666,281 and commercial paper securities of
$50,353,508.
At December 31, 1998, the estimated fair value of the Company's money
market instruments and commercial paper securities approximated cost, and the
gross unrealized gains were not significant.
F-13
<PAGE> 144
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including assets acquired under capital
leases of $1,732,000 as of December 31, 1997 (no capital leases as of December
31, 1998), is comprised of the following:
<TABLE>
<CAPTION>
USEFUL LIVES 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
Land.......................................... -- $ 51,289 $ 299,752
Buildings..................................... 20-31 982,484 1,188,812
Leasehold improvements........................ Lease Term 330,468 1,191,277
Office equipment, furniture and other......... 5-7 4,264,606 9,706,840
Telecommunications network.................... 5-20 13,501,993 21,148,362
Equipment for rent/lease...................... 7-10 12,003,374 16,658,582
Construction in progress...................... -- 4,373,499 21,774,422
----------- -----------
Total property, plant and
equipment......................... 35,507,713 71,968,047
Less accumulated depreciation, including
amounts applicable to assets acquired under
capital leases of $721,667 and $0 as of
December 31, 1997 and 1998, respectively.... 8,167,114 12,361,295
----------- -----------
Net property, plant and equipment............. $27,340,599 $59,606,752
=========== ===========
</TABLE>
(5) COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS
<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
Costs incurred on uncompleted contracts..................... $381,074 $3,479,846
Estimated earnings.......................................... 281,869 6,119,136
-------- ----------
662,943 9,598,982
Less: billings to date...................................... 662,943 2,360,580
-------- ----------
$ -- $7,238,402
======== ==========
</TABLE>
(6) INVESTMENT IN KENWOOD SYSTEMS GROUP
In September 1997, the Company sold its 50% ownership in Kenwood Systems
Group, Inc. ("KSG"), a California corporation. The remaining 50% of the voting
common stock is 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 recorded
a gain on the sale of KSG of $66,226 in 1997.
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 (losses)/earnings for the years ended December 31,
1996 and 1997 were $(25,873) and $115,107, respectively.
The Company received a management fee of $58,253 and $76,995 from KSG for
the years ended December 31, 1996 and 1997, respectively. Billings by the
Company to 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.
F-14
<PAGE> 145
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) LEASES
The Company leases equipment, office space, communication services and land
and buildings (used for transmission sites) under operating leases. Future
minimum lease payments under these lease agreements for each of the next five
years are summarized as follows:
<TABLE>
<S> <C>
Year ending December 31,
1999................................................. $ 3,810,959
2000................................................. 4,181,258
2001................................................. 4,063,546
2002................................................. 3,147,298
2003................................................. 2,514,350
Thereafter........................................... 1,813,588
-----------
Total minimum lease payments................. $19,530,999
</TABLE>
As operating leases expire, it is expected that they will be replaced with
similar leases. Rent expense under operating leases totaled $768,108, $1,419,812
and $1,027,651 for each of the years ended December 31, 1996, 1997 and 1998,
respectively.
(8) DEBT
A summary of the lines of credit and the notes payable is as follows:
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Senior notes, 12%, due 2008............................... $ -- $145,187,039
Lines of credit, variable rates, 8.12% to 10.5%........... 5,275,608 --
Notes to banks, variable rates, 8.12%..................... 2,274,590 --
Notes to banks, fixed rates, 8.5% to 9.0%................. 1,968,674 --
Term construction loan, variable rate, 8.5%............... 9,550,892 --
Notes to financing companies, variable rates.............. 180,328 --
Notes to financing companies, fixed rates................. 1,026,733 --
Shareholder notes, 5.8% imputed rate...................... 128,167 --
Other..................................................... 49,773 --
----------- ------------
Total........................................... 20,454,765 145,187,039
Less: current portion of long-term debt................... 8,116,424 --
----------- ------------
Long-term debt.................................. $12,338,341 $145,187,039
=========== ============
</TABLE>
In July 1998, the Company issued, through a private placement under Rule
144A under the Securities Act of 1998, as amended, $150 million aggregate
principal amount of its 12% Senior Notes due 2008 (the "Senior Notes"), which
closed on July 16, 1998. Interest on the Senior Notes is 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 Senior Notes are presented net of
unamortized debt issuance costs of $4,821,961. The amortization of debt issuance
cost is recorded to interest expense and such amount was $202,000 in 1998. The
net proceeds from the offering were used to repay existing debt obligations.
Such proceeds for debt payoffs totaled $26.8 million. The proceeds will be used
to fund 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 have been invested in high-grade liquid securities.
The Senior Notes contain certain covenants which provide for limitations on
indebtedness, dividends, asset sales and certain other transactions and
effectively prohibits the payment of cash dividends.
F-15
<PAGE> 146
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1996, the Company entered into a revolving credit facility with a
bank for borrowings up to $15 million. In December 1997, the Company entered
into an amended agreement that provided for borrowings up to $25 million. The
line of credit was amended in June 1998 and was increased to $7.0 million. The
balance outstanding as of December 31, 1997 under the line of credit was
$1,152,329. The line of credit was paid off in August 1998 with the proceeds
from the Senior 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. These lines of credit were paid off in August 1998
with the proceeds from the Senior Notes.
The Company had a loan agreement with a bank ("Term Construction Loan")
whereby it borrowed $10.0 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 balance outstanding for this loan as of
December 31, 1997 was $9,550,892 and the loan was paid off in August 1998 with
the proceeds from the Senior Notes.
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. The guarantors were also paid a loan guaranty
fee by the Company equal to 7% of the amount of the lesser of $8.0 million or
the average outstanding daily principal of the loan. The bank released the
guaranty requirement in April 1997 for certain limited partners. The total
accrued commitment fees and loan guarantor fees as of December 31, 1997 were
approximately $406,000. All commitment and guarantee fees were paid in full in
August 1998 with the proceeds from the Senior Notes. Such payments totaled
approximately $430,000.
In 1994, the Company entered into note payable agreements with three
officers of the Company ("Shareholder Notes") relating to stock repurchased by
the Company. The unamortized discount was $21,834 as of December 31, 1997. The
Shareholder Notes were repaid in August 1998 with the proceeds from the Senior
Notes.
(9) RELATED PARTIES
In 1996 the Company entered into an agreement with a related party to
manage the construction of the fiber optic network build out 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.
The Company currently leases private line services from affiliated
companies. Total payments to these affiliated companies for services totaled
$765,000 in 1997 and $1,176,000 in 1998. The Company believes that the prices
charged for such services do not exceed prices charged by unrelated parties.
The Company's billing and back office systems are being developed by
RiverRock Systems, Ltd. ("RiverRock"), a limited partnership formed in July
1998. The Company owns a 49% interest in the limited partnership and David E.
Thompson owns a 50% limited partnership interest. Thompson Technology, Inc.
(which is owned by David Thompson, a brother of Jere W. Thompson, Jr. -- CEO of
CapRock Communications Corp.) is the general partner and owns a 1% general
partnership interest. The Company contributed a total of $170,000 in 1998 for
the development of the systems and had committed to fund up to a total of
$700,000, as capital contributions to RiverRock. The investment balance of
$86,000 as of December 31, 1998 was included in other assets.
F-16
<PAGE> 147
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) ALLOWANCE FOR DOUBTFUL ACCOUNTS
The activity in the allowance for doubtful accounts for the years ended
December 31, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
Allowance for doubtful accounts at beginning of year........ $ 399,216 $ 1,781,335
Additions charged to bad debt expense....................... 1,382,119 1,649,773
Write-downs charged against the allowance, net of
recoveries................................................ -- (2,721,167)
---------- -----------
Allowance for doubtful accounts at end of year.............. $1,781,335 $ 709,941
========== ===========
</TABLE>
(11) 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.
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 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,
1998.
<TABLE>
<S> <C>
Year ending December 31:
1999.................................................. $ 8,051,952
2000.................................................. 7,243,418
2001.................................................. 4,569,128
2002.................................................. 3,622,862
2003.................................................. 3,182,282
Thereafter............................................ 5,244,940
-----------
Total......................................... $31,914,582
===========
</TABLE>
(12) 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
F-17
<PAGE> 148
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
combination (note 2) in conformance with the provisions of their Agreement and
Plan of Merger dated February 16, 1998. The Company issued 28,910,221 common
shares in exchange for the outstanding common shares of Telecommunications,
Partnership and IWL.
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 Telecommunications Plan authorized
grants of options to purchase up to 10% of the common shares outstanding. All
Telecommunications stock options have a ten-year term and cannot be exercised
prior to September 1, 1998. The options vest in 20% increments over a five-year
period. All options expire August 31, 2007. Upon consummation of the merger, the
outstanding stock options under this plan were converted at the exchange factor
(note 2) into options to purchase shares of CapRock common stock.
In 1997, Telecommunications granted 380,899 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 over the vesting period. As of December 31,
1998, 34,501 of the options previously granted were forfeited and canceled,
17,504 options were exercised and 328,894 options were outstanding.
IWL Incentive Stock Option Plan
In 1996, IWL adopted an Employee Incentive Stock Option Plan ("IWL
Incentive Plan"). The option price per share could 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 IWL Incentive Plan on or prior to the IPO date, June
12, 1997, vested in full on the offering date. IWL granted 342,214 options under
the plan. The stock options expire ten years from the date of grant. Upon
consummation of the merger, the outstanding stock options under this plan were
converted at a one to one ratio to purchase shares of CapRock common stock.
As of December 31, 1998, 24,000 of the options previously granted were
forfeited, 50,141 options were exercised and 268,073 options were outstanding.
No additional options are available for grant under the IWL Incentive Plan.
Warrants
The Company issued to its investment bankers warrants to purchase up to
145,000 shares of common stock, at an exercise price equal to 120% of the IPO
price. Upon consummation of the merger, the outstanding warrants were converted
at a one to one ratio to purchase shares of CapRock common stock. All of the
warrants were outstanding as of December 31, 1998.
The warrants have certain demand and "piggy-back" registration rights that
may require the Company to register for resale the shares of Common Stock
issuable under the warrants. The warrants are exercisable for a period of four
years, beginning June 12, 1998.
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 share 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 awards under the
F-18
<PAGE> 149
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Plan may take the form of stock options, stock appreciation rights, restricted
stock awards, deferred stock, stock reload options, stock appreciation rights,
restricted stock awards, deferred stock, stock related 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 the fair value of a
share of the common stock on the date of grant (and not less than 110% of the
fair market value of a share of the common stock on the date of grant). 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).
During 1998, the Company granted 1,681,600 options under this plan and
these options vest over five years. As of December 31, 1998, 48,700 of the
options granted were forfeited and canceled, none of the options granted had
been exercised and 1,632,900 of the options were outstanding.
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"). 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 CapRock Director Plan. Each
option will expire ten years from the date of grant and the options vest over
three years. Outstanding options will expire earlier if an optionee terminates
service as a director before the end of the first ten-year term. As of December
31, 1998, the Company granted 30,000 options under this plan and all were
outstanding as of December 31, 1998.
The remaining options available for future grant as of December 31, 1998
are 3,363,586 options under the CapRock Plan and 370,000 under the CapRock
Director Plan.
A summary of options activity under the plans described above is as
follows:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER AVERAGE
OF OPTIONS EXERCISE PRICE
---------- --------------
<S> <C> <C>
Balance at December 31, 1996............................... 160,614 $3.62
Options granted.......................................... 552,499 2.25
Options exercised........................................ (13,919) 3.56
Options forfeited........................................ (8,275) .56
--------- -----
Balance at December 31, 1997............................... 690,919 2.56
Options granted.......................................... 1,721,600 6.58
Options exercised........................................ (53,726) 3.04
Options forfeited........................................ (98,926) 4.80
--------- -----
Balance at December 31, 1998............................... 2,259,867 $5.51
========= =====
</TABLE>
F-19
<PAGE> 150
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of options outstanding as of December 31, 1998 is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE NUMBER OF
EXERCISE OPTIONS REMAINING OPTIONS
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
----- ----------- ---------------- -----------
<S> <C> <C> <C>
$ .56........................................ 328,894 8.77 52,241
3.56........................................ 109,918 6.92 109,918
4.49........................................ 10,555 7.36 10,555
6.00........................................ 132,600 8.40 28,167
6.25........................................ 5,000 8.63 1,000
6.50........................................ 1,662,900 9.79 --
20.25........................................ 10,000 9.22 --
--------- ---- -------
2,259,867 9.40 201,881
========= ==== =======
</TABLE>
The Company applied the intrinsic value method prescribed by APB Opinion
No. 25 in accounting for its plans. SFAS No. 123 requires disclosure of the
compensation cost for stock-based incentives granted 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>
1996 1997 1998
-------- ---------- ---------
<S> <C> <C> <C> <C>
Net income (loss)............... As reported $323,591 $2,561,767 $ 223,093
Pro forma 319,000 2,385,000 (762,238)
Basic EPS....................... As reported $ 0.01 $ 0.09 $ 0.01
Pro forma 0.01 0.09 (0.03)
Diluted EPS..................... As reported $ 0.01 $ 0.09 $ 0.01
Pro forma 0.01 0.08 (0.03)
</TABLE>
The fair value of each option grant was estimated using the Black-Scholes
option pricing model with the following assumptions: risk free interest rates of
5.8%, 5.8% and 5.75%; expected option lives of 2.5, 2.5 and 3 years; expected
volatility of 55%, 55% and 52%, and no expected dividend yield, in 1996, 1997
and 1998, respectively.
F-20
<PAGE> 151
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) INCOME TAXES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------
U.S. FEDERAL FOREIGN STATE TOTAL
------------ -------- -------- ----------
<S> <C> <C> <C> <C>
Current........................... $ 175,404 $149,832 $ -- $ 325,236
Deferred........................ (87,737) -- (10,351) (98,088)
---------- -------- -------- ----------
Total................... $ 87,667 $149,832 $(10,351) $ 227,148
========== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------
U.S. FEDERAL FOREIGN STATE TOTAL
------------ -------- -------- ----------
<S> <C> <C> <C> <C>
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>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------
U.S. FEDERAL FOREIGN STATE TOTAL
------------ -------- -------- ----------
<S> <C> <C> <C> <C>
Current........................... $ -- $ -- $ 60,632 $ 60,632
Deferred........................ 896,739 134,442 174,675 1,205,856
---------- -------- -------- ----------
Total................... $ 896,739 $134,442 $235,307 $1,266,488
========== ======== ======== ==========
</TABLE>
Foreign income taxes results from taxes withheld on sales related to
Russian operations. Operating income (loss) from such operations for the years
ended December 31, 1996, 1997 and 1998 were $436,000 and $555,000 and
$(441,000), respectively.
Income tax expense differs from the amount computed by applying the federal
income tax rate of 34% to earnings before taxes, as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- ---------- ----------
<S> <C> <C> <C>
Income tax provision at 34%....................... $187,251 $1,385,612 $ 506,458
Merger expenses not deductible for tax purposes... -- -- 612,000
Expenses not deductible for tax purposes.......... 11,990 33,094 28,488
State income tax expense, net of federal effect... (10,351) 89,206 155,303
Effect of foreign operations, including foreign
tax
credits......................................... (53,071) (49,326) --
Exclusion of Partnership income tax benefit....... 84,000 39,000 --
Other............................................. 7,329 15,975 (35,761)
-------- ---------- ----------
Total................................... $227,148 $1,513,561 $1,266,488
======== ========== ==========
</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 pro forma tax benefit in 1996 and 1997 was approximately $84,000 and
$39,000, respectively, if the partnership would have been taxed as a C
corporation in those years.
F-21
<PAGE> 152
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1997 1998
---------------------- ------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Effect on deferred taxes of
carryforwards......................... $116,958 $ -- $2,035,899 $ --
Foreign tax credit...................... 25,600 -- 207,235 --
Allowance for doubtful accounts......... 654,875 -- 245,263 --
Unearned compensation................... 7,717 -- -- 16,864
Deferred revenue........................ 7,142 -- -- 1,906,520
Accrued vacation pay.................... 27,200 -- 39,560 --
Property, plant and equipment........... -- 968,265 -- 1,960,602
Other................................... 9,311 -- 30,711 --
-------- -------- ---------- ----------
Total deferred taxes.......... $848,803 $968,265 $2,558,668 $3,883,986
======== ======== ========== ==========
</TABLE>
A net operating loss of $5,278,132 was generated in 1998 and the operating
loss will be used to offset future taxable income. The net operating loss
carryforward will expire in year 2013; however, management believes that this
carryforward will be utilized prior to expiration. No valuation allowance for
deferred taxes at December 31, 1997 and 1998 is 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.
(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.
The Company entered into a volume purchase commitment of $13 million
relating to the purchase of telecommunications equipment. In the event the $13
million commitment is not fulfilled by CapRock, the Company shall pay the vendor
a penalty ranging from 3%-13% of the purchase commitment. The Company believes
that no penalties will be incurred under this contract.
(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, 1996, 1997 and 1998 were $23,367, $30,287 and $81,086,
respectively.
(16) 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
F-22
<PAGE> 153
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 as goodwill and $300,000 was
allocated to contracts as a result of the transaction.
The following summarizes the unaudited consolidated data as though the
acquisition of ICEL occurred as of the January 1, 1997:
<TABLE>
<CAPTION>
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>
(17) SUBSEQUENT EVENTS
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 conduit ducts 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.
(18) SEGMENT REPORTING AND CONCENTRATION OF CUSTOMERS
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, Disclosures about Segments of an Enterprise and Related Information, which
the Company has 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 include 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 include 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 and the merger related expenses of $2.3 million, which
comprise the segment operating loss of $3.5 million in 1998. The general and
administrative expenses were allocated to each of the respective divisions prior
to 1998. Information regarding operating segments is as follows (amounts are in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------
TELECOMMUNICATIONS FIBER SERVICES CORPORATE CONSOLIDATED
------------------ ------- -------- --------- ------------
<S> <C> <C> <C> <C> <C>
Revenue from external customers....... $23,174 $ -- $27,796 $ 50,970
Depreciation and amortization......... 479 54 1,003 -- 1,536
Operating income...................... 44 (228) 1,278 -- 1,094
Total assets.......................... 7,356 8,757 12,409 -- 28,522
</TABLE>
F-23
<PAGE> 154
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------------------
TELECOMMUNICATIONS FIBER SERVICES CORPORATE CONSOLIDATED
------------------ ------- -------- --------- ------------
<S> <C> <C> <C> <C> <C>
Revenue from external customers....... $46,745 $ 1,945 $26,659 $ 75,349
Depreciation and amortization......... 694 902 1,750 -- 3,346
Operating income...................... 3,226 671 1,562 -- 5,459
Total assets................ 13,327 9,779 26,283 -- 49,389
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------------
TELECOMMUNICATIONS FIBER SERVICES CORPORATE CONSOLIDATED
------------------ ------- -------- --------- ------------
<S> <C> <C> <C> <C> <C>
Revenue from external customers....... $75,768 $11,930 $34,798 $ (722) $121,774
Depreciation and amortization......... 1,113 744 2,993 37 4,887
Operating income...................... 3,280 8,128 (55) (3,528) 7,825
Total assets................ 26,929 39,175 34,064 91,798 191,966
</TABLE>
All significant transactions and agreements of the Company, with the
exception of the operations of ICEL (Scotland) are generated in U.S. dollars.
The pertinent data relating to foreign operations is as follows (amounts are in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------
U.S. MEXICO RUSSIA INTERNATIONAL CONSOLIDATED
------- ------ ------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue to external customers............. $44,285 $1,761 $2,281 $2,643 $50,970
Operating income (loss)................... 451 273 436 (66) 1,094
Long-lived assets......................... 15,901 -- -- -- 15,901
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------
U.S. MEXICO RUSSIA INTERNATIONAL CONSOLIDATED
------- ------ ------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue to external customers............. $57,706 $6,495 $1,905 $9,243 $75,349
Operating income.......................... 3,464 1,216 555 224 5,459
Long-lived assets......................... 27,341 -- -- -- 27,341
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------------------------
U.S. MEXICO INDIA RUSSIA SCOTLAND INTERNATIONAL CONSOLIDATED
------- ------- ------ ------ -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue to external
customers............. $79,185 $16,611 $4,766 $2,312 $5,207 $13,693 $121,774
Operating income
(loss)................ 3,766 1,920 415 (441) 8 2,157 7,825
Long-lived assets....... 58,893 -- -- -- 2,508 -- 61,401
</TABLE>
All revenue was derived from unaffiliated customers. For the years ended
December 31, 1996 and 1997 one customer provided $11,681,000 (or 23%) and
$9,349,000 (or 12%) of the Company's revenue, respectively. For the year ended
December 31, 1998, one customer provided $13,985,000 (or 11%) and another
customer provided $12,344,000 (or 10%) of the Company's revenue.
F-24
<PAGE> 155
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(19) QUARTERLY RESULTS
The Company's unaudited quarterly results are as follows (amounts are in
thousands, except share data):
<TABLE>
<CAPTION>
FOR THE 1997 QUARTER ENDED
---------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenue....................................... $17,022 $18,649 $19,039 $20,640
Gross profit.................................. 4,197 5,631 6,109 6,941
Net income.................................... 115 721 970 756
Basic and diluted earnings per share.......... -- 0.03 0.03 0.03
</TABLE>
<TABLE>
<CAPTION>
FOR THE 1998 QUARTER ENDED
---------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenue....................................... $24,412 $27,008 $35,284 $35,070
Gross profit.................................. 8,183 9,202 9,309 11,860
Net income (loss)............................. 1,358 1,515 (1,650) (1,000)
Basic and diluted earnings (loss) per share... 0.05 0.05 (0.06) (0.03)
</TABLE>
F-25
<PAGE> 156
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ------------
(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 condensed consolidated financial statements
(unaudited).
F-26
<PAGE> 157
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED 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 condensed consolidated financial statements
(unaudited).
F-27
<PAGE> 158
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(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 condensed consolidated financial statements
(unaudited).
F-28
<PAGE> 159
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation and Nature of Business
The condensed 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 condensed consolidated financial statements, which should
be read in conjunction with the consolidated financial statements and footnotes
included in this Prospectus, 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 Telecommunica-
F-29
<PAGE> 160
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
tions were converted at the above exchange factors into options to purchase
shares of 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>
F-30
<PAGE> 161
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(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) 644,111
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.
F-31
<PAGE> 162
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(6) SUBSEQUENT EVENTS
(a) 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.
(b) Senior Note Offering
In May 1999, the Company sold 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 closed on May 18, 1999.
The net proceeds to the Company after deducting the initial purchasers' discount
and estimated offering expenses were 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 have been invested in high-grade liquid securities
classified as available for sale. The Company is required under the indenture to
file a registration statement to register the Senior Notes within 90 days of the
closing of the transaction.
(c) Fiber Network Expansion
In June 1999, the Company publicly announced that it extended the planned
build out of its fiber network to include Arizona. When completed, this
expansion will increase the Company's fiber network by approximately 600 route
miles to approximately 6,100 route miles and connect Phoenix and Tucson, Arizona
with El Paso, Texas and the Company's previously planned five-state network. The
Company anticipates completion of the Arizona portion of its network in the
first half of 2000.
F-32
<PAGE> 163
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[CAPROCK COMMUNICATIONS LOGO]
CAPROCK COMMUNICATIONS CORP.
-------------------------
PROSPECTUS
-------------------------
$210,000,000
OFFER TO EXCHANGE 11 1/2% SENIOR
NOTES DUE 2009, SERIES B
THAT HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933
FOR OUTSTANDING 11 1/2% SENIOR
NOTES DUE 2009, SERIES A
AUGUST 4, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 164
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 Purchase Agreement (Exhibit 10.63 hereto) relating to the Registrant's
May 1999 equity offering provides for indemnification by the underwriters
specified therein of the Registrant and its officers and directors, and by the
Registrant of the underwriters specified therein, for certain liabilities
arising under the Securities Act or otherwise.
The Registration Rights Agreement (Exhibit 4.3 hereto) relating to the 1998
Senior Notes provides for indemnification by each of the initial purchasers
specified therein, their successors, assigns and direct and indirect
transferees, and participating broker-dealers, in specified circumstances, of
the Registrant, the other initial purchasers, underwriters and the other selling
holders, and each of their respective directors and officers and controlling
parties, and by the Registrant of the initial purchasers specified therein,
their successors, assigns and direct and indirect transferees, and participating
broker-dealers, 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.
II-1
<PAGE> 165
The Note Purchase Agreement (Exhibit 10.43 hereto) relating to the 1998
Senior Notes provides for indemnification by the initial purchasers specified
therein of the Registrant and its officers and directors, and by the Registrant
of the initial purchasers specified therein, for certain liabilities arising
under the Securities Act or otherwise.
The Registration Rights Agreement (Exhibit 4.7 hereto) relating to the 1999
Senior Notes provides for indemnification by each of the initial purchasers
specified therein, their successors, assigns and direct and indirect
transferees, and participating broker-dealers, in specified circumstances, of
the Company, the other initial purchasers, underwriters and the other selling
holders specified therein, and each of their respective directors and officers
and controlling parties, and by the Company of the initial purchasers specified
therein, their successors, assigns and direct and indirect transferees, and
participating broker-dealers, 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 10.61 hereto) relating to the 1999
Senior 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.
ITEM 21. EXHIBITS
The following exhibits are filed herewith.
<TABLE>
<C> <S>
2.1 -- Agreement and Plan of Merger and Plan of Exchange, dated
as of February 16, 1998, by and among the Registrant, IWL
Communications, Incorporated ("IWL"), IWL Acquisition
Corp., CapRock Communications Corp. (n/k/a CapRock
Telecommunications Corp. ("CapRock Telecommunications")),
CapRock Acquisition Corp., and CapRock Fiber Network,
Ltd. ("CapRock Fiber" and collectively, the "Parties").
The schedules to the Agreement and Plan of Merger and
Plan of Exchange and the appendices thereto have been
omitted. The Registrant 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 the Registrant, 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 the
Registrant, 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 the
Registrant, 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 the
Registrant, 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 the
Registrant, File No. 333-57365.)
3.2 -- Bylaws of the Registrant. (Incorporated by reference to
Exhibit 3.2 to the Registration Statement on Form S-4, as
amended, of the Registrant, File No. 333-64699.)
</TABLE>
II-2
<PAGE> 166
<TABLE>
<C> <S>
4.1 -- Specimen Certificate for the Common Stock of the
Registrant (Incorporated by reference to Exhibit 4.3 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365).
4.2 -- Indenture dated as of July 16, 1998, among the
Registrant, CapRock Telecommunications, CapRock Fiber,
IWL and PNC Bank, National Association, Trustee.
(Incorporated by reference to Exhibit 4.1 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-64699.)
4.3 -- Registration Rights Agreement dated July 16, 1998, among
the Registrant, CapRock Telecommunications, CapRock
Fiber, 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
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-64699.)
4.4 -- Form of Warrant Agreement between IWL and Cruttenden Roth
Incorporated. (Incorporated by reference to Exhibit 1.2
to the Registration Statement on Form S-1 of IWL, 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 the Registrant, 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 the
Registrant, File No. 333-57365.)
4.7 -- Registration Rights Agreement dated May 18, 1999, among
the Registrant, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Chase Securities Inc., Bear, Stearns & Co.
Inc., Donaldson, Lufkin & Jenrette Securities Corporation
and Goldman, Sachs & Co.+
4.8 -- Indenture dated as of May 18, 1999, between the
Registrant and Chase Manhattan Trust Company, National
Association, Trustee.+
5.1 -- Opinion of Munsch Hardt Kopf & Harr, P.C. regarding
validity of securities being registered.
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 the
Registrant, 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 the
Registrant, 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
the Registrant, 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 the
Registrant, 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
the Registrant, 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
the Registrant, File No. 333-57365.)
</TABLE>
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<PAGE> 167
<TABLE>
<C> <S>
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
the Registrant, 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
the Registrant, 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
the Registrant, 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
the Registrant, 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
the Registrant, 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
the Registrant, 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 the Registration Statement
on Form S-1, as amended, of IWL, 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 the
Registration Statement on Form S-1, as amended, of IWL,
File No. 333-22801.)#
10.16 -- Form of Service Agreement (Incorporated by reference to
Exhibit 10.16 to the Registration Statement on Form S-1,
as amended, of the Registrant, File No. 333-74735.)
10.17 -- Lease Agreement dated November 18, 1996, by and between
IWL and CLG, Inc. (Incorporated by reference to Exhibit
10.13 to the Registration Statement on Form S-1, as
amended, of IWL, File No. 333-22801.)
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 the Registration
Statement on Form S-1, as amended, of IWL, 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 the
Registration Statement on Form S-1, as amended, of IWL,
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
the Registration Statement on Form S-1, as amended, of
IWL, 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 the Registration Statement on Form S-1, as
amended, of IWL, File No. 333-22801.)
</TABLE>
II-4
<PAGE> 168
<TABLE>
<C> <S>
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 the Form
10K for the year ending June 30, 1997 of IWL, 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 the Form 10K of IWL 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 the Form 10-K of IWL 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 the Form 10K of IWL 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 the Form 10K of IWL 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 the Form 10K of IWL 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 the Form
10K of IWL 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 the Form
10K of IWL 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 the Form 10K of IWL 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 the Form
10K of IWL for the year ending June 30, 1997, File No.
0-22293.)#
10.32 -- Sublease dated November 22, 1994 by and between CapRock
Telecommunications and Arkwright Mutual Insurance
Company. (Incorporated by reference to Exhibit 10.35 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.33 -- Loan and Security Agreement dated March 14, 1996 by and
between CapRock Telecommunications and Bank One, as
amended. (Incorporated by reference to Exhibit 10.36 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.34 -- Sixth Renewal Extension $2,500,000 Promissory Note dated
December 31, 1997 payable by CapRock Telecommunications
to Bank One. (Incorporated by reference to Exhibit 10.37
to the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
</TABLE>
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<PAGE> 169
<TABLE>
<C> <S>
10.35 -- Form of CapRock Communications Corp. Commercial
Application. (Incorporated by reference to Exhibit 10.41
to the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.36 -- Form of CapRock Communications Corp. Commercial Agent
Application. (Incorporated by reference to Exhibit 10.42
to the Registration Statement on Form S-4, as amended, of
the Registrant, 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 the Registrant,
File No. 333-57365.)
10.38 -- Loan Agreement dated July 1, 1996 by and between CapRock
Fiber and Bank One. (Incorporated by reference to Exhibit
10.44 to the Registration Statement on Form S-4, as
amended, of the Registrant, File No. 333-57365.)
10.39 -- $10,000,000 Promissory Note dated July 1, 1996 by and
between CapRock Fiber and Bank One. (Incorporated by
reference to Exhibit 10.45 to the Registration Statement
on Form S-4, as amended, of the Registrant, 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 the Registrant, 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
the Registrant, 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 the Registrant, 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 the Registrant,
File No. 333-57365.)
10.44 -- Form of Contribution Agreement by the General Partner of
CapRock Fiber. (Incorporated by reference to Exhibit
10.50 to the Registration Statement on Form S-4, as
amended, of the Registrant, File No. 333-57365.)
10.45 -- First Amendment to Loan Agreement dated July 1, 1996 by
and between CapRock Fiber and Bank One. (Incorporated by
reference to Exhibit 10.51 to the Registration Statement
on Form S-4, as amended, of the Registrant, File No.
333-57365.)
10.46 -- Second Amendment to Loan Agreement dated April 29, 1998
by and between CapRock Fiber and Bank One. (Incorporated
by reference to Exhibit 10.52 to the Registration
Statement on Form S-4, as amended, of the Registrant,
File No. 333-57365.)
10.47 -- License Agreement dated June 16, 1998 by and between
CapRock Telecommunications and RiverRock Systems, Ltd.
(Incorporated by reference to Exhibit 10.53 to the
Registration Statement on Form S-4, as amended, of the
Registrant, 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 the Registrant, 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 the Registrant, File No. 333-57365.)
</TABLE>
II-6
<PAGE> 170
<TABLE>
<C> <S>
10.50 -- Eighth Amendment to Loan and Security Agreement dated as
of June 18, 1998 by and between CapRock
Telecommunications and Bank One. (Incorporated by
reference to Exhibit 10.56 to the Registration Statement
on Form S-4, as amended, of the Registrant, File No.
333-57365.)
10.51 -- Renewal and Extension Promissory Note dated as June 18,
1998 executed by CapRock Telecommunications 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 the Registrant, File No. 333-57365.)
10.52 -- Intercompany Promissory Note dated as of June 18, 1998
originally executed by CapRock Fiber payable to the order
of Telecommunications in the principal amount of
$2,500,000.00 and endorsed by CapRock Telecommunications
in favor of Bank One. (Incorporated by reference to
Exhibit 10.58 to the Registration Statement on Form S-4,
as amended, of the Registrant, File No. 333-57365.)
10.53 -- Ninth Amendment to Loan and Security Agreement dated as
July 9, 1998 by and between CapRock Telecommunications
and Bank One. (Incorporated by reference to Exhibit 10.59
to the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.54 -- Third Amendment to Loan Agreement dated as of June 18,
1998 by and between CapRock Fiber and Bank One.
(Incorporated by reference to Exhibit 10.60 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
10.55 -- Fourth Amendment to Loan Agreement dated as of July 9,
1998, by and between CapRock Fiber and Bank One.
(Incorporated by reference to Exhibit 10.61 to the
Registration Statement on Form S-4, as amended, of the
Registrant, 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 the Registrant, File No. 333-57365.)
10.57 -- Form of Exchange Agent Agreement by and between the
Registrant and PNC Bank, National Association.
(Incorporated by reference to Exhibit 10.57 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-64699.)
10.58 -- Addison Circle One Office Lease Agreement between
Champion Addison One Limited Partnership, a limited
partnership, as Landlord and the Registrant, as Tenant
(Incorporated by reference to Exhibit 10.58 to the
Registration Statement on Form S-1, as amended, of the
Registrant, File No. 333-74735.)
10.59 -- Form of Carrier Agreement. (Incorporated by reference to
Exhibit 10.59 to the Registration Statement on Form S-1,
as amended, of the Registrant, File No. 333-74735.)
10.60 -- 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.)
10.61 -- Note Purchase Agreement dated May 13, 1999 by and among
the Registrant and various initial purchasers.+
10.62 -- Form of Exchange Agent Agreement by and between the
Registrant and Chase Manhattan Trust Company, National
Association, Trustee.
</TABLE>
II-7
<PAGE> 171
<TABLE>
<C> <S>
10.63 -- Form of Purchase Agreement (Incorporated by reference to
Exhibit 1.1 to the Registration Statement on Form S-1, as
amended, of the Registrant, File No. 333-74735.)
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 the Registrant, File No.
333-57365.)
21.1 -- Subsidiaries of the Registrant. (Incorporated by
reference to Exhibit 21.1 to the Registration Statement
on Form S-1, as amended, of the Registrant, File No.
333-74735.)
23.1 -- Consent of KPMG LLP.
23.2 -- Consent of Burds Reed & Mercer, P.C.
23.3 -- Consent of Munsch Hardt Kopf & Harr, P.C. (Included in
the opinion filed as Exhibit 5.1 to this Registration
Statement.)
24.1 -- Power of Attorney+
25.1 -- Statement of Eligibility and Qualification on Form T-1
under the Trust Indenture Act of 1939 of Chase Manhattan
Trust Company, National Association, as Trustee of the
Indenture relating to the 11 1/2% Senior Notes due 2009,
Series B.+
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 Identification
Number on substitute Form W-9.+
</TABLE>
- ---------------
# Confidential treatment was granted.
+ Previously filed
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of this section
do not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed by the
registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Registration
Statement.
II-8
<PAGE> 172
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) 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 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.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Registration Statement,
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
this Registration Statement through the date of responding to the request.
(e) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each ruling of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement 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-9
<PAGE> 173
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to 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 30th day of July, 1999.
CAPROCK COMMUNICATIONS CORP.
By: /s/ JERE W. THOMPSON, JR.
----------------------------------
Jere W. Thompson, Jr.
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JERE W. THOMPSON, JR. Chief Executive Officer, July 30, 1999
- ----------------------------------------------------- Chairman of the Board, and
Jere W. Thompson, Jr. Director (Principal
Executive Officer)
/s/ KEVIN W. MCALEER Senior Vice President and July 30, 1999
- ----------------------------------------------------- Chief Financial Officer
Kevin W. McAleer (Principal Financial
Officer)
* President, Vice Chairman of July 30, 1999
- ----------------------------------------------------- the Board, and Director
Ignatius W. Leonards
* Executive Vice President and July 30, 1999
- ----------------------------------------------------- Director
Timothy W. Rogers
* Corporate Controller July 30, 1999
- ----------------------------------------------------- (Principal Accounting
Matthew M. Kingsley Officer)
* Director July 30, 1999
- -----------------------------------------------------
Mark Langdale
* Director July 30, 1999
- -----------------------------------------------------
Christopher J. Amenson
* Director July 30, 1999
- -----------------------------------------------------
John R. Harris
* Director July 30, 1999
- -----------------------------------------------------
Richard G. Ellenberger
*By: /s/ JERE W. THOMPSON, JR.
------------------------------------------------
Jere W. Thompson, Jr.
Attorney-in-fact
</TABLE>
II-10
<PAGE> 174
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Merger and Plan of Exchange, dated
as of February 16, 1998, by and among the Registrant, IWL
Communications, Incorporated ("IWL"), IWL Acquisition
Corp., CapRock Communications Corp. (n/k/a CapRock
Telecommunications Corp. ("CapRock Telecommunications")),
CapRock Acquisition Corp., and CapRock Fiber Network,
Ltd. ("CapRock Fiber" and collectively, the "Parties").
The schedules to the Agreement and Plan of Merger and
Plan of Exchange and the appendices thereto have been
omitted. The Registrant 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 the Registrant, 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 the
Registrant, 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 the
Registrant, 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 the
Registrant, 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 the
Registrant, File No. 333-57365.)
3.2 -- Bylaws of the Registrant. (Incorporated by reference to
Exhibit 3.2 to the Registration Statement on Form S-4, as
amended, of the Registrant, File No. 333-64699.)
4.1 -- Specimen Certificate for the Common Stock of the
Registrant (Incorporated by reference to Exhibit 4.3 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365).
4.2 -- Indenture dated as of July 16, 1998, among the
Registrant, CapRock Telecommunications, CapRock Fiber,
IWL and PNC Bank, National Association, Trustee.
(Incorporated by reference to Exhibit 4.1 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-64699.)
4.3 -- Registration Rights Agreement dated July 16, 1998, among
the Registrant, CapRock Telecommunications, CapRock
Fiber, 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
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-64699.)
4.4 -- Form of Warrant Agreement between IWL and Cruttenden Roth
Incorporated. (Incorporated by reference to Exhibit 1.2
to the Registration Statement on Form S-1 of IWL, as
amended, File No. 333-22801.)
</TABLE>
<PAGE> 175
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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 the Registrant, 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 the
Registrant, File No. 333-57365.)
4.7 -- Registration Rights Agreement dated May 18, 1999, among
the Registrant, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Chase Securities Inc., Bear, Stearns & Co.
Inc., Donaldson, Lufkin & Jenrette Securities Corporation
and Goldman, Sachs & Co.+
4.8 -- Indenture dated as of May 18, 1999, between the
Registrant and Chase Manhattan Trust Company, National
Association, Trustee.+
5.1 -- Opinion of Munsch Hardt Kopf & Harr, P.C. regarding
validity of securities being registered.
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 the
Registrant, 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 the
Registrant, 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
the Registrant, 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 the
Registrant, 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
the Registrant, 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
the Registrant, 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
the Registrant, 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
the Registrant, 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
the Registrant, 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
the Registrant, File No. 333-57365.)
</TABLE>
<PAGE> 176
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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
the Registrant, 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
the Registrant, 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 the Registration Statement
on Form S-1, as amended, of IWL, 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 the
Registration Statement on Form S-1, as amended, of IWL,
File No. 333-22801.)#
10.16 -- Form of Service Agreement (Incorporated by reference to
Exhibit 10.16 to the Registration Statement on Form S-1,
as amended, of the Registrant, File No. 333-74735.)
10.17 -- Lease Agreement dated November 18, 1996, by and between
IWL and CLG, Inc. (Incorporated by reference to Exhibit
10.13 to the Registration Statement on Form S-1, as
amended, of IWL, File No. 333-22801.)
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 the Registration
Statement on Form S-1, as amended, of IWL, 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 the
Registration Statement on Form S-1, as amended, of IWL,
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
the Registration Statement on Form S-1, as amended, of
IWL, 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 the Registration Statement on Form S-1, as
amended, of IWL, 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 the Form
10K for the year ending June 30, 1997 of IWL, 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 the Form 10K of IWL 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 the Form 10-K of IWL for the year ending June 30,
1997, File No. 0-22293.)
</TABLE>
<PAGE> 177
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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 the Form 10K of IWL 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 the Form 10K of IWL 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 the Form 10K of IWL 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 the Form
10K of IWL 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 the Form
10K of IWL 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 the Form 10K of IWL 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 the Form
10K of IWL for the year ending June 30, 1997, File No.
0-22293.)#
10.32 -- Sublease dated November 22, 1994 by and between CapRock
Telecommunications and Arkwright Mutual Insurance
Company. (Incorporated by reference to Exhibit 10.35 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.33 -- Loan and Security Agreement dated March 14, 1996 by and
between CapRock Telecommunications and Bank One, as
amended. (Incorporated by reference to Exhibit 10.36 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.34 -- Sixth Renewal Extension $2,500,000 Promissory Note dated
December 31, 1997 payable by CapRock Telecommunications
to Bank One. (Incorporated by reference to Exhibit 10.37
to the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.35 -- Form of CapRock Communications Corp. Commercial
Application. (Incorporated by reference to Exhibit 10.41
to the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.36 -- Form of CapRock Communications Corp. Commercial Agent
Application. (Incorporated by reference to Exhibit 10.42
to the Registration Statement on Form S-4, as amended, of
the Registrant, 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 the Registrant,
File No. 333-57365.)
</TABLE>
<PAGE> 178
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.38 -- Loan Agreement dated July 1, 1996 by and between CapRock
Fiber and Bank One. (Incorporated by reference to Exhibit
10.44 to the Registration Statement on Form S-4, as
amended, of the Registrant, File No. 333-57365.)
10.39 -- $10,000,000 Promissory Note dated July 1, 1996 by and
between CapRock Fiber and Bank One. (Incorporated by
reference to Exhibit 10.45 to the Registration Statement
on Form S-4, as amended, of the Registrant, 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 the Registrant, 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
the Registrant, 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 the Registrant, 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 the Registrant,
File No. 333-57365.)
10.44 -- Form of Contribution Agreement by the General Partner of
CapRock Fiber. (Incorporated by reference to Exhibit
10.50 to the Registration Statement on Form S-4, as
amended, of the Registrant, File No. 333-57365.)
10.45 -- First Amendment to Loan Agreement dated July 1, 1996 by
and between CapRock Fiber and Bank One. (Incorporated by
reference to Exhibit 10.51 to the Registration Statement
on Form S-4, as amended, of the Registrant, File No.
333-57365.)
10.46 -- Second Amendment to Loan Agreement dated April 29, 1998
by and between CapRock Fiber and Bank One. (Incorporated
by reference to Exhibit 10.52 to the Registration
Statement on Form S-4, as amended, of the Registrant,
File No. 333-57365.)
10.47 -- License Agreement dated June 16, 1998 by and between
CapRock Telecommunications and RiverRock Systems, Ltd.
(Incorporated by reference to Exhibit 10.53 to the
Registration Statement on Form S-4, as amended, of the
Registrant, 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 the Registrant, 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 the Registrant, File No. 333-57365.)
10.50 -- Eighth Amendment to Loan and Security Agreement dated as
of June 18, 1998 by and between CapRock
Telecommunications and Bank One. (Incorporated by
reference to Exhibit 10.56 to the Registration Statement
on Form S-4, as amended, of the Registrant, File No.
333-57365.)
</TABLE>
<PAGE> 179
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.51 -- Renewal and Extension Promissory Note dated as June 18,
1998 executed by CapRock Telecommunications 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 the Registrant, File No. 333-57365.)
10.52 -- Intercompany Promissory Note dated as of June 18, 1998
originally executed by CapRock Fiber payable to the order
of Telecommunications in the principal amount of
$2,500,000.00 and endorsed by CapRock Telecommunications
in favor of Bank One. (Incorporated by reference to
Exhibit 10.58 to the Registration Statement on Form S-4,
as amended, of the Registrant, File No. 333-57365.)
10.53 -- Ninth Amendment to Loan and Security Agreement dated as
July 9, 1998 by and between CapRock Telecommunications
and Bank One. (Incorporated by reference to Exhibit 10.59
to the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.54 -- Third Amendment to Loan Agreement dated as of June 18,
1998 by and between CapRock Fiber and Bank One.
(Incorporated by reference to Exhibit 10.60 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
10.55 -- Fourth Amendment to Loan Agreement dated as of July 9,
1998, by and between CapRock Fiber and Bank One.
(Incorporated by reference to Exhibit 10.61 to the
Registration Statement on Form S-4, as amended, of the
Registrant, 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 the Registrant, File No. 333-57365.)
10.57 -- Form of Exchange Agent Agreement by and between the
Registrant and PNC Bank, National Association.
(Incorporated by reference to Exhibit 10.57 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-64699.)
10.58 -- Addison Circle One Office Lease Agreement between
Champion Addison One Limited Partnership, a limited
partnership, as Landlord and the Registrant, as Tenant
(Incorporated by reference to Exhibit 10.58 to the
Registration Statement on Form S-1, as amended, of the
Registrant, File No. 333-74735.)
10.59 -- Form of Carrier Agreement. (Incorporated by reference to
Exhibit 10.59 to the Registration Statement on Form S-1,
as amended, of the Registrant, File No. 333-74735.)
10.60 -- 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.)
10.61 -- Note Purchase Agreement dated May 13, 1999 by and among
the Registrant and various initial purchasers.+
10.62 -- Form of Exchange Agent Agreement by and between the
Registrant and Chase Manhattan Trust Company, National
Association, Trustee.
10.63 -- Form of Purchase Agreement (Incorporated by reference to
Exhibit 1.1 to the Registration Statement on Form S-1, as
amended, of the Registrant, File No. 333-74735.)
</TABLE>
<PAGE> 180
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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 the Registrant, File No.
333-57365.)
21.1 -- Subsidiaries of the Registrant. (Incorporated by
reference to Exhibit 21.1 to the Registration Statement
on Form S-1, as amended, of the Registrant, File No.
333-74735.)
23.1 -- Consent of KPMG LLP.
23.2 -- Consent of Burds Reed & Mercer, P.C.
23.3 -- Consent of Munsch Hardt Kopf & Harr, P.C. (Included in
the opinion filed as Exhibit 5.1 to this Registration
Statement.)
24.1 -- Power of Attorney.+
25.1 -- Statement of Eligibility and Qualification on Form T-1
under the Trust Indenture Act of 1939 of Chase Manhattan
Trust Company, National Association, as Trustee of the
Indenture relating to the 11 1/2% Senior Notes due 2009,
Series B.+
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 Identification
Number on substitute Form W-9.+
</TABLE>
- ---------------
# Confidential treatment was granted.
+ Previously filed.
<PAGE> 1
[LETTERHEAD]
EXHIBIT 5.1
July 30, 1999
CapRock Communications Corp.
15601 Dallas Parkway, Suite 700
Dallas, TX 75248
Ladies and Gentlemen:
This firm has acted as counsel to CapRock Communications Corp., a Texas
corporation (the "Company"), in connection with its Registration Statement
(Registration No. 333-82557) on Form S-4 (as amended, the "Registration
Statement"), dated July 9, 1999, as same may be amended, filed with the
Securities and Exchange Commission relating to the proposed offering of up to
$210,000,000 in aggregate principal amount of 11 1/2% Senior Notes Due 2009 (the
"Exchange Notes") in exchange for up to $210,000,000 in aggregate principal
amount of the Company's outstanding 11 1/2% Senior Notes Due 2009 (the "Private
Notes"). This opinion letter is furnished to you at your request to enable you
to fulfill the requirements of Item 601(b)(5) of Regulation S-K, 17 C.F.R.
Section 229.601(b)(5), in connection with the Registration Statement.
For purposes of this opinion letter, we have examined copies of the
following documents:
1. A copy of the Registration Statement.
2. An executed copy of the Indenture dated as of May 18, 1999 (the
"Indenture"), by and between, among others, the Company and Chase
Manhattan Trust Company, National Association, including the form of
Exchange Note to be issued pursuant thereto, as filed as Exhibit 4.8 to
the Registration Statement.
3. The Articles of Incorporation of the Company, as amended, as certified
by the Secretary of State of the State of Texas on July 28, 1999 and as
certified by an officer of the Company on the date hereof as being
complete, accurate and in effect.
4. The Bylaws of the Company, as amended, as certified by an officer of
the Company on the date hereof as being complete, accurate and in
effect.
5. Resolutions of the Board of Directors of the Company adopted on May 11,
1999 and July 9, 1999, each as certified by an officer of the Company
on the date hereof as being complete, accurate and in effect, relating
to the issuance and sale of the Exchange Notes and arrangements in
connection therewith.
6. An executed opinion of Swidler Berlin Shereff Friedman, LLP addressed
to the Company dated July 30, 1999.
<PAGE> 2
CapRock Communications Corp.
July 30, 1999
Page 2
We are licensed to practice law solely in the State of Texas and we
express no opinion herein as to any other laws, statutes, ordinances, rules or
regulations of any other jurisdiction, except, however, to the extent the
Exchange Notes are governed by New York law, we have, with the permission of
Swidler Berlin Shereff Friedman, LLP, relied solely upon their opinion for
purpose of application of New York law and as a result our opinion is subject to
the qualifications and assumptions set forth therein.
This opinion letter incorporates by reference and shall be interpreted
in accordance with the Legal Opinion Accord (the "Accord") of the ABA Section of
Business Law (1991) and the Report (the "Texas Report") of the Legal Opinion
Committee Regarding Legal Opinions in Business Transactions of the Business Law
Section of the State Bar of Texas (1992). As a consequence, this opinion letter
is subject to the qualifications, exceptions, definitions and limitations set
forth in the Accord and the Texas Report including the general qualifications of
the Accord and the Other Common Texas Qualifications contained in the Texas
Report.
Subject to and based upon the foregoing, and subject to the further
qualifications set forth below, it is our opinion that (following the
effectiveness of the Registration Statement and receipt by the Company of the
Private Notes in exchange for the Exchange Notes and assuming due execution of
the Exchange Notes, exchange of the Private Notes in the manner provided in the
Registration Statement and authentication, issuance and delivery of the Exchange
Notes in the manner provided in the Indenture), the Exchange Notes will be
validly issued and will constitute valid and binding obligations of the Company
enforceable against the Company in accordance with the terms of the Indenture.
We assume no obligation to advise you of any changes in the foregoing
subsequent to the delivery of this opinion letter. This opinion letter has been
prepared solely for your use in connection with the filing of the Registration
Statement on the date of this opinion letter may not be relied upon by you for
any other purpose without the prior written consent of our firm and should not
be quoted in whole or in part or otherwise referred to, nor filed with or
furnished to any governmental agency or other person or entity, without the
prior written consent of the firm.
We hereby consent to the filing of this opinion letter as Exhibit 5.1
to the Registration Statement and to the reference to this firm under the
caption "Legal Matters" in the prospectus constituting a part of the
Registration Statement. In giving this consent, we do not thereby admit that we
are within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended, or the rules or regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
MUNSCH HARDT KOPF & HARR, P.C.
<PAGE> 1
EXHIBIT 10.62
July 30, 1999
Chase Manhattan Trust Company, National Association
1650 Market Street, Suite 5210
Philadelphia, PA 19103
Attention: Corporate Trust Department
Ladies and Gentlemen:
CapRock Communications Corp. (the "Company") is making an offer to
exchange up to $210,000,000 in principal amount of its registered 11 1/2% Senior
Notes due 2009 (the "New Notes") for $210,000,000 in principal amount of its
outstanding unregistered 11 1/2% Senior Notes due 2009 (the "Old Notes"), upon
the terms and subject to the conditions set forth in the Prospectus dated August
4, 1999 (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 May 18, 1999 by and
between the Company and Chase Manhattan Trust Company, 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 August 4, 1999 (the "Commencement
Date"), and will expire at 5:00 p.m., New York City time, on September 1, 1999,
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
<PAGE> 2
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").
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,
<PAGE> 3
(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
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)
982-9500; facsimile: (972) 788-4243) at the Company and A. Michael Hainsfurther
(telephone: (214) 855-7567; facsimile: (214) 978-4356) at Munsch Hardt Kopf &
Harr, 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.
<PAGE> 4
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.
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.
<PAGE> 5
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
<PAGE> 6
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;
(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:
Chase Manhattan Trust Company, National Association
1650 Market St., Suite 5210
Philadelphia, PA 19103
Attn: Stephen Schaaf,
Corporate Trust Department
Telephone: 215-988-1320
Facsimile: 215-568-1449
<PAGE> 7
To the Company:
CapRock Communications Corp.
15601 Dallas Parkway
Suite 700
Dallas, TX 75248
Attn: Mr. Kevin W. McAleer
Telephone: (972) 982-9500
Facsimile: (972) 788-4243
With copy to:
A. Michael Hainsfurther, Esq.
Munsch Hardt Kopf & Harr, 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) January 31, 2000, 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.
<PAGE> 8
Please acknowledge receipt of this Agreement and confirm the
arrangements herein provided by signing and returning the enclosed copy.
CAPROCK COMMUNICATIONS CORP.
By: /s/ KEVIN W. MCALEER
-------------------------------
Kevin W. McAleer
Chief Financial Officer
Accepted as of July 30, 1999
Chase Manhattan Trust Company, National Association,
as Exchange Agent
By: /s/ STEPHEN SCHAAF
---------------------------------------------
Name: Stephen Schaaf
Title: Vice President
<PAGE> 9
EXHIBIT A
SAMPLE REPORT LETTER
DATE:
---------------------------
REPORT NUMBER:
------------------
AS OF DATE:
---------------------
RE: Offer of CapRock Communications Corp. to Exchange 11 1/2% Senior Notes
Due 2009 of the Company ("New Notes") for Outstanding 11 1/2% Senior
Notes Due 2009 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 August 4, 1999), 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,
Chase Manhattan Trust Company, National
Association, as Exchange Agent
By:
-------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
<PAGE> 10
EXHIBIT B
FEE SCHEDULE
CapRock Communications Corp.
15601 Dallas Parkway
Suite 700
Dallas, TX 75248
Attn: Mr. Kevin W. McAleer
RE: CapRock Communications Corp. proposed $210,000,000 11 1/2% Senior Notes
due 2009 Registered Exchange Offering
<TABLE>
<CAPTION>
DATE DESCRIPTION AMOUNT
- ---- ----------- ------
<S> <C> <C>
, 1999 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, Chase Manhattan Trust Company, National Association,
Corporate Trust, 1650 Market Street, Suite 5210, Philadelphia, PA 19103, Attn:
Stephen Schaaf.
To make payment by wire transfer, the following information is
necessary: ABA# 113000609, Account Name - Trust Wire Clearing - Philadelphia,
PA, account to be credited 76609060682, advise by phone to Stephen Schaaf at
(215) 988-1320.
<PAGE> 11
EXHIBIT 1
THE PROSPECTUS
<PAGE> 12
EXHIBIT 2
FORM OF LETTER OF TRANSMITTAL
<PAGE> 13
EXHIBIT 3
FORM OF THE NOTICE OF GUARANTEED DELIVERY
<PAGE> 14
EXHIBIT 4
FORM OF NEW NOTE
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
CapRock Communications Corp.
(formerly IWL Holdings Corp.):
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG LLP
Dallas, Texas
July 29, 1999
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
CapRock Communications Corp.
We consent to the use of our reports related to CapRock Telecommunications
Corp. and CapRock Fiber Network, Ltd. included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
Burds, Reed and Mercer, P.C.
Dallas, Texas
July 30, 1999
