<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File Number: 0-24581
CAPROCK COMMUNICATIONS CORP.
(Exact name of registrant as specified in its charter)
TEXAS 75-2765572
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
15601 DALLAS PARKWAY, SUITE 700
DALLAS, TEXAS 75248
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 982-9500
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
The number of shares of the registrant's Common Stock outstanding as
of July 31, 1999 was 33,038,600.
<PAGE> 2
CAPROCK COMMUNICATIONS CORP.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART 1. FINANCIAL INFORMATION................................................................ 1
Item 1. Financial Statements................................................................. 1
Consolidated Balance Sheets at December 31, 1998 and June 30, 1999 (unaudited)....... 1
Consolidated Statements of Operations (unaudited) for the Three Months and Six
Months Ended June 30, 1998 and 1999.................................................. 2
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended
June 30, 1998 and 1999............................................................... 3
Notes to Consolidated Financial Statements........................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 21
PART II. OTHER INFORMATION.................................................................... 22
Item 1. Legal Proceedings.................................................................... 22
Item 2. Changes in Securities and Use of Proceeds............................................ 22
Item 4. Submission of Matters to a Vote of Security Holders.................................. 23
Item 6. Exhibits and Reports on Form 8-K..................................................... 24
SIGNATURE PAGE....................................................................... 26
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------- -------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 293,860 $ 11,085,572
Marketable securities 97,019,789 307,433,933
Accounts receivable and unbilled services, less allowance for doubtful
accounts of $709,941 and $2,733,070 at December 31, 1998
and June 30, 1999, respectively 19,936,214 45,996,119
Income tax receivable 1,405,000 1,405,000
Costs and estimated earnings in excess of billings 7,238,402 333,268
Inventory 1,301,726 1,249,583
Prepaid expenses and other 706,775 1,887,027
Deferred income taxes 1,989,250 3,495,423
------------- -------------
Total current assets 129,891,016 372,885,925
Property, plant and equipment 71,968,047 112,921,619
Accumulated depreciation (12,361,295) (15,561,603)
------------- -------------
Property, plant and equipment, net 59,606,752 97,360,016
Other assets 2,468,000 9,286,924
------------- -------------
Total assets $ 191,965,768 $ 479,532,865
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 26,850,525 $ 31,864,111
Billings in excess of costs and earnings -- 2,848,647
Unearned revenue 551,341 617,879
------------- -------------
Total current liabilities 27,401,866 35,330,637
Senior notes, net of unamortized debt issuance costs 145,187,039 347,011,552
Deferred income taxes 3,314,568 2,251,295
------------- -------------
Total liabilities 175,903,473 384,593,484
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 33,027,190 shares at December 31, 1998 and
June 30, 1999, respectively 289,377 330,375
Additional paid-in capital 10,521,713 93,044,803
Retained earnings 5,608,237 2,001,768
Accumulated other comprehensive income 8,878 (5,293)
Unearned compensation (329,070) (271,108)
Treasury stock, at cost (36,840) (161,164)
------------- -------------
Total stockholders' equity 16,062,295 94,939,381
------------- -------------
Total liabilities and stockholders' equity $ 191,965,768 $ 479,532,865
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------- ---------------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Carriers' carrier $ 15,678,344 $ 25,310,226 $ 28,441,449 $ 49,762,391
Integrated services 3,855,662 4,643,366 8,124,550 9,147,678
Systems services 7,473,680 7,606,334 14,854,049 15,686,148
------------ ------------ ------------ ------------
Total revenues 27,007,686 37,559,926 51,420,048 74,596,217
Cost of services 17,805,618 22,538,163 34,035,363 44,919,231
------------ ------------ ------------ ------------
Gross profit 9,202,068 15,021,763 17,384,685 29,676,986
Operating expenses:
Selling, general and administrative 5,124,429 12,461,013 9,559,679 25,011,962
Depreciation and amortization 1,186,691 1,857,185 2,250,368 3,337,348
------------ ------------ ------------ ------------
Total operating expenses 6,311,120 14,318,198 11,810,047 28,349,310
------------ ------------ ------------ ------------
Operating income 2,890,948 703,565 5,574,638 1,327,676
Interest expense (476,312) (5,880,292) (958,327) (10,135,767)
Interest income 7,247 2,156,543 38,951 3,001,594
Other income (expense) 104,376 (115,596) 104,924 (135,015)
------------ ------------ ------------ ------------
Income (loss) before income taxes 2,526,259 (3,135,780) 4,760,186 (5,941,512)
Income tax expense (benefit) 1,011,539 (1,234,623) 1,887,318 (2,335,043)
------------ ------------ ------------ ------------
Net income (loss) $ 1,514,720 $ (1,901,157) $ 2,872,868 $ (3,606,469)
============ ============ ============ ============
Earnings (loss) per common share:
Basic $ 0.05 $ (0.06) $ 0.10 $ (0.12)
Diluted $ 0.05 $ (0.06) $ 0.10 $ (0.12)
Weighted average shares outstanding:
Basic 28,863,014 31,700,270 28,849,504 30,321,420
Diluted 29,481,602 31,700,270 29,465,246 30,321,420
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------
1998 1999
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,872,868 $ (3,606,469)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,250,368 3,337,348
Gain on sale of assets (23,990) (3,314)
Deferred income taxes 657,509 (2,569,446)
Equity earnings (loss) of unconsolidated joint venture (83,750) 98,291
Compensation expense related to stock option grants 41,712 --
Amortization of debt issuance costs, included in interest expense -- 392,594
Changes in operating assets and liabilities:
Accounts receivable and unbilled services (2,131,659) (26,059,905)
Inventory (69,544) 52,143
Costs and earnings in excess of billings (1,355,000) 6,905,134
Prepaid expenses and other (1,405,769) (1,371,682)
Accounts payable and accrued liabilities 3,270,013 5,013,586
Income taxes receivable (332,238) --
Billings in excess of costs and estimated earnings 211,997 2,848,647
Unearned revenue (215,107) 66,538
------------ -------------
Net cash provided by (used in) operating activities 3,687,410 (14,896,535)
Cash flows from investing activities:
Purchases of property, plant and equipment (8,654,989) (45,716,670)
Purchase of marketable securities -- (283,613,169)
Proceeds from sale of marketable securities -- 73,199,025
Proceeds from disposal of property, plant and equipment 201,365 4,749,200
Investment in unconsolidated subsidiary -- (6,787,651)
Purchase of ICEL (609,822) --
------------ -------------
Net cash used in investing activities (9,063,446) (258,169,265)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 9,978,143 --
Principal payments on notes payable (8,782,224) --
Proceeds from issuance of senior notes, net of debt issuance -- 201,431,919
Proceeds from line of credit 31,611,788 --
Principal payments on line of credit (30,162,438) --
Purchase of treasury stock -- (124,324)
Proceeds from issuance of common stock 61,790 82,564,088
Principal payments under capital lease obligations (116,253) --
------------ -------------
Net cash provided by financing activities 2,590,806 283,871,683
Effect of exchange rate on cash and cash equivalents 6,892 (14,171)
------------ -------------
Net increase (decrease) in cash and cash equivalents (2,778,338) 10,791,712
Cash and cash equivalents at beginning of period 3,520,017 293,860
------------ -------------
Cash and cash equivalents at end of period $ 741,679 $ 11,085,572
============ =============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 943,377 $ 8,950,000
============ =============
Cash paid for income taxes $ 1,250,000 $ --
============ =============
Non-cash investing activity:
Issuance of stock for ICEL acquisition $ 1,577,814 $ --
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation and Nature of Business
The consolidated financial statements include CapRock Communications Corp.
("CapRock" or the "Company") and its majority owned subsidiaries. The Company
was formed on February 3, 1998, to serve as a holding company for the
operations of CapRock Telecommunications Corp., a Texas corporation
("Telecommunications"), CapRock Fiber Network Ltd., a Texas limited partnership
("CapRock Fiber"), and IWL Communications, Incorporated, a Texas corporation,
doing business as CapRock Services Corp. ("CapRock Services") 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, CapRock Fiber, CapRock
Services 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, New Mexico and Arizona. Additionally, the Company, through
its wholly owned subsidiary - CapRock Services, provides communications
solutions to customers with operations in remote, difficult-access regions. The
Company markets its services through its internal sales representatives and a
network of independent agents.
The accompanying consolidated financial statements, which should be read
in conjunction with the consolidated financial statements and footnotes
included in the Company's 1998 Annual Report on Form 10-K, have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. Accounting measurements at interim dates
inherently involve greater reliance on estimates than at year-end. The results
of operations for the six months ended June 30, 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, CapRock Fiber and CapRock
Services. Accordingly, the Consolidated Balance Sheets as of December 31, 1998
and June 30, 1999 and the Consolidated Statements of Operations and
Consolidated Statements of Cash Flows for the six months ended June 30, 1998
and 1999 include Telecommunications, CapRock Fiber and CapRock Services as
though these entities had always been a part of CapRock.
Upon the consummation of the Combination, all previously outstanding
shares of CapRock Services 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 CapRock
Fiber interests issued and outstanding was exchanged for 63,194.54 shares of
CapRock common stock. The Company issued
4
<PAGE> 7
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
28,910,221 common shares in the Combination. Additionally, outstanding employee
stock options of CapRock Services 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, CapRock Services changed its fiscal year end to coincide with
the fiscal years of CapRock, Telecommunications and CapRock Fiber. The
Consolidated Statement of Operations for the six months ended June 30, 1998 and
1999 combine the operating activity for all three entities for these periods.
The transactions between Telecommunications, CapRock Services and CapRock
Fiber have been eliminated for all respective periods presented. Certain
reclassifications were made to CapRock Services' 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 SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1998 1998
------------ -----------
<S> <C> <C>
Net sales:
Telecommunications $ 16,446,136 $32,223,086
CapRock Fiber 1,970,442 2,551,337
CapRock Services 8,591,108 16,645,625
------------ -----------
Combined $ 27,007,686 $51,420,048
============ ===========
Net income (loss):
Telecommunications $ 888,033 $ 1,785,274
CapRock Fiber 799,982 870,304
CapRock Services (173,295) 217,290
------------ -----------
Combined $ 1,514,720 $ 2,872,868
============ ===========
</TABLE>
3) 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 underwriter's discount and the
expenses associated with offering from the sale of the stock were approximately
$82.0 million.
4) SENIOR NOTE OFFERING
On May 18, 1999, the Company issued $210 million aggregate principal
amount of private senior notes (the "1999 Senior Notes") due May 1, 2009.
Interest on the 1999 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. The Company received net proceeds from the offering, after
deducting the initial purchasers' discount and expenses, of approximately
$201.4 million. The 1999 Senior Notes are senior unsecured obligations and as
such rank pari passu in right of payment with the Company's existing senior
notes issued in July 1998 (the "1998 Senior Notes") and with all the Company's
future unsecured and unsubordinated indebtedness. The indenture governing the
1999 Senior Notes has restrictions similar to those which currently exist for
the Company's 1998 Senior Notes. The proceeds have been, and will be,
5
<PAGE> 8
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
In July 1999, the Company filed an Exchange Offer Registration Statement
with the SEC for the registration of $210 million of principal amount of its
registered senior notes due May 1, 2009 (the "Exchange Notes") to be offered in
exchange for the 1999 Senior Notes (the "Exchange Offer"). The Exchange Offer
Registration Statement was declared effective by the SEC on July 30, 1999 and
the Exchange Offer has commenced. The Exchange Offer expires on September 1,
1999, unless extended. The terms of the Exchange Notes will be identical in all
material respects to the 1999 Senior Notes except that the Exchange Notes have
been registered under the Securities Act of 1933, as amended.
5) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1998 1999 1998 1999
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 1,514,720 $ (1,901,157) $ 2,872,868 $ (3,606,469)
Denominator:
Denominator for basic earnings (loss)
per share-weighted average shares
outstanding 28,863,014 31,700,270 28,849,504 30,321,420
Effect of dilutive securities:
Employee stock options 618,588 -- 615,742 --
----------- ------------ ----------- ------------
Denominator for diluted earnings (loss)
per share-weighted average shares
outstanding 29,481,602 31,700,270 29,465,246 30,321,420
=========== ============ =========== ============
Basic and diluted earnings (loss) per share $ 0.05 $ (0.06) $ .10 $ (.12)
=========== ============ =========== ============
</TABLE>
6
<PAGE> 9
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6) 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>
THREE MONTHS ENDED JUNE 30, 1998
-------------------------------------------------------------------------------------------
TELECOMMUNICATIONS FIBER SERVICES CORPORATE CONSOLIDATED
------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 16,452,774 $ 1,963,804 $ 8,591,108 $ -- $ 27,007,686
Depreciation and amortization 252,941 211,926 721,824 -- 1,186,691
Operating income 1,516,842 1,500,059 (125,953) -- 2,890,948
Total assets 16,593,523 13,724,448 29,728,156 2,000 60,048,127
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
-------------------------------------------------------------------------------------------
TELECOMMUNICATIONS FIBER SERVICES CORPORATE CONSOLIDATED
------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 18,245,203 $ 11,708,389 $ 7,606,334 $ -- $ 37,559,926
Depreciation and amortization 802,803 286,184 768,198 -- 1,857,185
Operating income (5,666,467) 9,266,669 28,671 (2,925,308) 703,565
Total assets 38,193,619 81,443,332 27,964,220 331,931,694 479,532,865
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
-------------------------------------------------------------------------------------------
TELECOMMUNICATIONS FIBER SERVICES CORPORATE CONSOLIDATED
------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 32,223,086 $ 2,551,337 $ 16,645,625 $ -- $ 51,420,048
Depreciation and amortization 484,361 396,853 1,369,154 -- 2,250,368
Operating income 3,077,841 1,824,007 672,790 -- 5,574,638
Total assets 16,593,523 13,724,448 29,728,156 2,000 60,048,127
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
-------------------------------------------------------------------------------------------
TELECOMMUNICATIONS FIBER SERVICES CORPORATE CONSOLIDATED
------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 35,549,874 $ 23,360,195 $ 15,686,148 $ -- $ 74,596,217
Depreciation and amortization 1,335,406 494,184 1,507,758 -- 3,337,348
Operating income (8,354,002) 16,964,543 372,540 (7,655,405) 1,327,676
Total assets 38,193,619 81,443,332 27,964,220 331,931,694 479,532,865
</TABLE>
All revenue was derived from unaffiliated customers.
7
<PAGE> 10
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7) 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.
8) 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.
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
CapRock's consolidated financial statements and notes thereto for the year
ended December 31, 1998. The Company believes that all necessary adjustments
(consisting of normal recurring adjustments) have been included in the amounts
stated below to present fairly the following quarterly information. Accounting
measurements at interim dates inherently involve greater reliance on estimates
than at year-end. The results for interim periods are not necessarily
indicative of results to be expected for the year. In this Form 10-Q, the
"Company," "CapRock," "we," "us" and "our" refer to CapRock and its
subsidiaries, including Telecommunications, CapRock Fiber and CapRock Services,
which are our three predecessor companies, as well as CapRock Network Services,
L.P., CapRock Telecommunications Leasing Corp. and CapRock Design Services,
L.P., unless the context otherwise requires.
FORWARD LOOKING INFORMATION
This Quarterly Report on Form 10-Q includes forward-looking statements. We
have based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements are subject
to risks, uncertainties and assumptions about CapRock, including:
o our anticipated growth strategies,
o anticipated trends in our business, including trends in technology
and the growth of communications network products and services,
o future expenditures for capital projects, and
o our ability to continue to control costs and maintain quality.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including risks
related to, among other things, building a fiber network (including obtaining
the necessary rights-of-way, permits and regulatory approvals), supply and
demand for data services, competition, the need for additional capital, debt
and interest payment obligations, restrictions in our senior note indenture,
rapid growth, dependence on local telephone companies and long distance
carriers, our information systems, retention of key personnel, dependence on
major customers, year 2000 problems, the continued integration of our
predecessor companies, service interruptions, potential liability as an
internet service provider and protection of our intellectual property.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Because of these risks, uncertainties and assumptions, the
forward-looking events discussed in this Form 10-Q might not occur.
OVERVIEW
We own and operate a scalable long-haul fiber network which upon
completion is expected to cover approximately 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., Telecommunications, CapRock Fiber and CapRock Services) 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
9
<PAGE> 12
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.
RESULTS OF OPERATIONS
CapRock recognizes revenue from the following sources: carriers' carrier,
integrated services and systems services.
Carriers' Carrier. Carriers' carrier revenue includes all carrier revenues
generated from the sale of domestic and international switched services, from
the sale of T-1 and DS-3 broadband capacity and from the sale and lease of dark
fiber. The revenue generated from the international switched services represent
minutes of long distance traffic terminating in foreign countries, but
generated by domestic U.S.-based long distance carriers. Such revenues are
recognized when the services are provided. The cost of revenues associated with
these services is based primarily on the direct costs associated with owned and
leased transmission capacity and the cost of transmitting and terminating
traffic on other carriers' facilities. Commissions paid to sales
representatives or agents to acquire customer call traffic are expensed in the
period when associated call revenues are recognized.
We account for long-term construction contracts relating to the
development of telecommunications networks for customers using the
percentage-of-completion method, which would include the sale of fiber usage
rights through IRUs and the related construction services associated with
building the fiber network specified in the IRUs. Our revenues from IRUs are
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.
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<PAGE> 13
Integrated Services. Integrated services revenue includes all revenues
generated from the sale of telecommunications products to business and
residential customers. These products include local, long distance, Internet,
data and private line services.
Systems Services. Systems services revenue includes revenues generated
from the design, installation, leasing and sale of voice and data systems and
products, primarily to companies in the oil and gas industry.
The following table represents the various sources of revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Carrier's carrier $15,678,344 $25,310,226 $28,441,449 $49,762,391
Integrated services 3,855,662 4,643,366 8,124,550 9,147,678
Systems services 7,473,680 7,606,334 14,854,049 15,686,148
----------- ----------- ----------- -----------
Total revenues $27,007,686 $37,559,926 $51,420,048 $74,596,217
=========== =========== =========== ===========
</TABLE>
The following table sets forth, for the periods indicated, CapRock's
statement of operations as a percentage of its operating revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Cost of services 66% 60% 66% 60%
-------- -------- -------- --------
Gross profit 34% 40% 34% 40%
Operating expenses:
Selling, general and administrative 19% 33% 19% 34%
Depreciation and amortization 4% 5% 4% 4%
-------- -------- -------- --------
Total operating expenses 23% 38% 23% 38%
-------- -------- -------- --------
Operating income 11% 2% 11% 2%
Interest expense (2)% (16)% (2)% (14)%
Interest income --% 6% --% 4%
Other income (expense) --% --% --% --%
-------- -------- -------- --------
Income (loss) before income taxes 9% (8)% 9% (8)%
Income tax expense (benefit) 4% (3)% 4% (3)%
-------- -------- -------- --------
Net income (loss) 5% (5)% 5% (5)%
======== ======== ======== ========
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Revenues. Total revenues increased $10.6 million, or 39%, from $27.0
million during the three months ended June 30, 1998 to $37.6 million during the
three months ended June 30, 1999. This increase was attributable to increases
of 61% in carriers' carrier, 20% in integrated services and 2% in systems
services revenue for the comparable periods.
Carriers' carrier revenue increased $9.6 million from $15.7 million during
the three months ended June 30, 1998 to $25.3 million during the three months
ended June 30, 1999. The 61% increase resulted primarily from the sale of IRUs
and dark fiber leases. Fiber related revenues, attributed to dark fiber leases
or IRUs, increased $9.7 million from $2.0 million during the three months ended
June 30, 1998 to $11.7 million during the three months ended June 30, 1999. The
Company anticipates recurring fiber related revenue relating to IRUs and dark
fiber leases to continue through the remainder of the year. However,
period-to-period fluctuations can be expected as this type of revenue is
affected by the negotiation and
11
<PAGE> 14
terms of these contracts and the build out of our network. The Company derived
approximately $5.1 million and $6.5 million or 19% and 17% of its revenue from
traffic terminated to international countries for the three months ended June
30, 1998 and 1999, respectively. Revenue per minute for a majority of the
international countries, particularly Mexico, continues to decrease as a result
of deregulation in the countries and competition. We anticipate this pricing
trend for international traffic to continue.
Integrated services revenue increased $788,000 from $3.8 million during
the three months ended June 30, 1998 to $4.6 million during the three months
ended June 30, 1999. The 20% 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. The
Company anticipates increased revenue from integrated services as its sales
force for this revenue segment continues to grow.
Systems services revenue increased $133,000 from $7.5 million during the
three months ended June 30, 1998 to $7.6 million during the three months ended
June 30, 1999. The 2% increase was attributable to moderate growth associated
with the leasing and sale of voice and data systems products and projects
involving the engineering and integration of telecommunications systems and
sales, service and maintenance of telecommunications equipment. The Company
anticipates quarterly systems services revenue for the remainder of the year to
remain at comparable levels.
Costs of Services. Cost of services increased $4.7 million, or 27%, from
$17.8 million during the three months ended June 30, 1998 to $22.5 million
during the three months ended June 30, 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 June 30, 1999 was partially offset by lower margins attributable to
Mexico and other international traffic, which carry a lower gross margin
percentage. Gross margins may vary in future periods as a result of these and
other factors.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") include salaries, benefits, occupancy costs,
commissions, sales and marketing expenses and administrative expenses. SG&A
increased $7.3 million, or 143%, from $5.1 million during the three months
ended June 30, 1998 to $12.4 million during the three months ended June 30,
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 $670,000, or 57%, from $1.2 million during the three months
ended June 30, 1998 to $1.9 million during the three months ended June 30,
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 $5.4 million from $476,000
during the three months ended June 30, 1998 to $5.9 million during the three
months ended June 30, 1999. The increase resulted from interest expense related
to the Company's senior notes. See "-- Liquidity and Capital Resources."
Interest Income. Interest income increased $2.2 million from $7,000 during
the three months ended June 30, 1998 to $2.2 million during the three months
ended June 30, 1999. The increase was attributable to the interest and
investment accretion associated with the marketable securities purchased with
the proceeds from the Company's senior notes issued in July 1998 and May 1999.
See " -- Liquidity and Capital Resources."
Income Taxes (Benefits). During the three months ended June 30, 1998, the
Company incurred income tax expense of $1.0 million compared to an income tax
benefit of $1.2 million for the three months ended June 30, 1999. The expense
or benefit resulted from the income or loss for the respective periods. The
effective tax rate for both periods was approximately 40%.
12
<PAGE> 15
Net Income (Loss). Net income decreased $3.4 million from a net income of
$1.5 million during the three months ended June 30, 1998 to a net loss of $1.9
million during the three months ended June 30, 1999 as a result of the factors
discussed above.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Revenues. Total revenues increased $23.2 million, or 45%, from $51.4
million during the six months ended June 30, 1998 to $74.6 million during the
six months ended June 30, 1999. This increase was attributable to increases of
75% in carriers' carrier, 13% in integrated services and 6% in systems services
revenue for the comparable periods.
Carriers' carrier revenue increased $21.3 million from $28.4 million
during the six months ended June 30, 1998 to $49.7 million during the six
months ended June 30, 1999. The 75% increase resulted primarily from the sale
of IRUs and dark fiber leases. Fiber related revenues, attributed to dark fiber
leases or IRUs, increased $20.8 million from $2.6 million during the six months
ended June 30, 1998 to $23.4 million during the six months ended June 30, 1999.
The Company anticipates recurring fiber related revenue relating to IRUs and
dark fiber leases to continue through the remainder of the year. However,
period-to-period fluctuations can be expected as this type of revenue is
affected by the negotiation and terms of these contracts and the build out of
our network. The Company derived approximately $10.7 million and $12.1 million
or 21% and 16% of its revenue from traffic terminated to international
countries for the six months ended June 30, 1998 and 1999, respectively.
Revenue per minute for a majority of the international countries, particularly
Mexico, continues to decrease as a result of deregulation in the countries and
competition. We anticipate this pricing trend for international traffic to
continue.
Integrated services revenue increased $1.0 million from $8.1 million
during the six months ended June 30, 1998 to $9.1 million during the six months
ended June 30, 1999. The 13% 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. The
Company anticipates increased revenue from integrated services as its sales
force for this revenue segment continues to grow.
Systems services revenue increased $832,000 from $14.9 million during the
six months ended June 30, 1998 to $15.7 million during the six months ended
June 30, 1999. The 6% increase was attributable to moderate growth associated
with the leasing and sale of voice and data systems products and projects
involving the engineering and integration of telecommunications systems and
sales, service and maintenance of telecommunications equipment. The Company
anticipates quarterly systems services revenue for the remainder of the year to
remain at comparable levels.
Costs of Services. Cost of services increased $10.9 million, or 32%, from
$34.0 million during the six months ended June 30, 1998 to $44.9 million during
the six months ended June 30, 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 six months
ended June 30, 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 increased $15.5
million, or 162%, from $9.5 million during the six months ended June 30, 1998
to $25.0 million during the six months ended June 30, 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 $1.0 million, or 48%, from $2.3 million during the six months
ended June 30, 1998 to $3.3 million during the six months ended June 30, 1999.
This increase resulted primarily from purchases of additional equipment and
other fixed assets to accommodate CapRock's growth. CapRock expects that
depreciation and
13
<PAGE> 16
amortization expense will continue to increase in subsequent periods as CapRock
continues to expand its facilities.
Interest Expense. Interest expense increased $9.2 million from $958,000
during the six months ended June 30, 1998 to $10.1 million during the six
months ended June 30, 1999. The increase resulted from interest expense related
to the Company's senior notes issued in July 1998 and May 1999. See "--
Liquidity and Capital Resources."
Interest Income. Interest income increased $3.0 million from $39,000
during the six months ended June 30, 1998 to $3.0 million during the six months
ended June 30, 1999. The increase was attributable to the interest and
investment accretion associated with the marketable securities purchased with
the proceeds from the Company's senior notes issued in July 1998 and May 1999.
See " -- Liquidity and Capital Resources."
Income Taxes (Benefits). During the six months ended June 30, 1998, the
Company incurred income tax expense of $1.9 million compared to an income tax
benefit of $2.3 million for the six months ended June 30, 1999. The expense or
benefit resulted from the income or loss for the respective periods. The
effective tax rate for both periods was approximately 40%.
Net Income (Loss). Net income decreased $6.5 million from net income of
$2.9 million during the six months ended June 30, 1998 to a net loss of $3.6
million during the six months ended June 30, 1999 as a result of the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
CapRock had cash and cash equivalents of $294,000 at December 31, 1998, as
compared with $11.1 million at June 30, 1999 and marketable securities of $97.0
million at December 31, 1998 as compared to $307.4 million at June 30, 1999.
CapRock had working capital of $102.5 million at December 31, 1998 as compared
to working capital of $337.6 million at June 30, 1999. The increase in working
capital was attributable to the Company's debt and equity offerings completed
during the second quarter of 1999, discussed in more detail later in this
section. This increase was partially offset by the utilization of working
capital for the build out of the fiber optic network and increase in corporate
overhead to support the Company's growth.
CapRock's cash flow provided from operating activities for the six months
ended June 30, 1998 was $3.7 million as compared to $14.9 million used in
operating activities during the six months ended June 30, 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. IRU transactions typically have
longer payment terms than other accounts receivable activity due to contractual
milestones that must be met before payments are made.
Cash used in investing activities during the six months ended June 30,
1998 was $9.1 million as compared to cash used in investing activities during
the six months ended June 30, 1999 of $258.2 million. Capital resources used
for the purchase of property, plant and equipment increased $37.0 million from
$8.7 million during the six months ended June 30, 1998 to $45.7 million during
the six months ended June 30, 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 six months ended June 30, 1999, the
Company used $283.6 million to invest in marketable securities while it
received $73.2 million from the sale of marketable securities as compared to no
such investments or sales during the six months ended June 30, 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.
14
<PAGE> 17
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, which
commenced 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 the Company's fiber optic network,
switching equipment and other capital expenditures 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. 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 SEC on May 6, 1999 and closed on
May 12, 1999. CapRock received net proceeds, after deducting underwriting
discounts and expenses payable by CapRock, of approximately $82.0 million from
the sale of its common stock.
On May 18, 1999, the Company issued $210 million aggregate principal
amount of its 1999 Senior Notes. Interest on the 1999 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. The Company received net
proceeds from the offering, after deducting the initial purchasers' discount
and estimated expenses, of approximately $201.4 million. The 1999 Senior Notes
are senior unsecured obligations and as such rank pari passu in right of
payment with the Company's existing 1998 Senior Notes and with all the
Company's future unsecured and unsubordinated indebtedness. 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. The indenture governing
the 1999 Senior Notes has restrictions and covenants similar to those which
currently exist for the Company's 1998 Senior Notes. 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.
In July 1999, the Company filed an Exchange Offer Registration Statement
with the SEC for the registration of $210 million of principal amount of its
Exchange Notes to be offered in exchange for the 1999 Senior Notes. The
Exchange Offer Registration Statement was declared effective by the SEC on July
30, 1999 and the Exchange Offer has commenced. The Exchange Offer expires on
September 1, 1999, unless extended. The terms of the Exchange Notes will be
identical in all material respects to the 1999 Senior Notes except that the
Exchange Notes have been registered under the Securities Act of 1933, as
amended.
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.
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
15
<PAGE> 18
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, 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 earnings before interest, income taxes, depreciation
and amortization ("EBITDA") was $7.8 million for the six months ended June 30,
1998 and EBITDA was $4.7 million for the six months ended June 30, 1999. EBITDA
for the three months ended June 30, 1998 and 1999 was $4.1 million and $2.6
million, respectively.
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, 2000. The adoption of SFAS 133 will not have an impact on
CapRock's results of operations, financial position or cash flow.
CONTINGENCIES
CapRock is party to ordinary litigation incidental to its business. No
currently pending litigation is expected to have a material adverse effect on
our results of operations, financial condition or cash flow.
YEAR 2000
The year 2000 problem is the inability of a meaningful portion of the
world's computers, software applications and embedded semiconductor chips to
cope with the change of the year from 1999 to 2000. This issue can be traced to
the infancy of computing, when computer data and programs were designed to save
disk space by truncating the date field to just six digits (two for the day,
two for the month and two for the year). Therefore, information applications
automatically assumed that the two-digit year field
16
<PAGE> 19
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.............................. 6/98-8/99
Identification, assessment, remediation and testing regarding desktop and individual
system issues..................................................................... 6/98-8/99
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. CapRock will continue seeking alternate vendors in advance of
December 31, 1999 in the event satisfactory responses are not received.
17
<PAGE> 20
CapRock has evaluated its systems and has identified the following systems
and functions as mission critical:
o switching systems,
o network operations and fiber,
o satellite/microwave transmission equipment and satellite service
providers,
o billing and call record collection systems, and
o supply chain (vendor provider of switched services).
Switching Systems:
Switching equipment is used to connect calls to their destination, while
performing other advanced features and recording call record information for
future billing. The switch opens or closes circuits or selects the paths or
circuits to be used for the transmission of information. CapRock currently owns
seven switches, three of which are physically located in Dallas, Texas (two are
calling card platforms), two in Houston, Texas, one in Victoria, Texas and one
in Phoenix, Arizona. CapRock also manages a switch in Jersey City, New Jersey.
CapRock has completed the assessment and certain test procedures relating to
the 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 June 30,
1999. The switches which have not been placed in service will be subject to
integrated test procedures prior to being placed in service. The test will
incorporate the call collection processes and the interfaces with the billing
system. The test will involve simulating date changes with the switch, such
that the call records will be processed, rated and properly captured in the
billing system as a billable transaction.
The test procedures consist of the following:
o process flow analysis,
o documentation of overall integrated test strategy,
o documentation and test case plans at an individual component level,
o committee agreement regarding the test plan,
o execution of the integrated test plan, and
o documentation regarding the results of test procedures.
Network Operations and Fiber:
CapRock currently owns and operates a 1,200-route mile fiber optic
network, which was substantially completed by June 30, 1999. Approximately 400
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.
18
<PAGE> 21
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
19
<PAGE> 22
relating to traffic terminating in certain developing third world countries,
which have not adequately prepared for the year 2000. CapRock relies upon
certain vendors to supply international services and the possibility exists
that some of the traffic in these developing third world countries may not be
able to be completed. The estimated loss of revenue, if any, has not been
determined, and we may not be able to identify the amount of any loss by the
year 2000. Depending on the systems affected, the failure of any contingency
plans developed by CapRock, if implemented, could have a material adverse
effect on CapRock's financial condition and results of operations.
CONTINGENCY PLANS
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.
20
<PAGE> 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
CapRock is exposed to market risk from changes in marketable securities
(which consist of money market and commercial paper). At June 30, 1999,
marketable securities of CapRock were recorded at a fair value of approximately
$307 million, with an overall weighted average return of approximately 5% and
an overall weighted average life of less than 1 year. The marketable securities
held by CapRock have exposure to price risk, which is estimated as the
potential loss in fair value due to a hypothetical change of 50 basis points
(10% of CapRock's overall average return on marketable securities) in quoted
market prices. This hypothetical change would have an immaterial effect on the
recorded value of the marketable securities.
CapRock is not exposed to material future earnings or cash flow
fluctuations from changes in interest rates on long-term debt since 100% of its
long-term debt is at a fixed rate as of June 30, 1999. The fair value of
CapRock's long-term debt at June 30, 1999 was estimated to be $366.6 million
based on the overall rate of the long-term debt of 11.71% and an overall
maturity of 9.5 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 117 basis points in interest rates (ten percent of CapRock's
overall borrowing rate). Such an increase in interest rates would result in
approximately a $22.6 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.
21
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information pertaining to this item is incorporated herein from Part I.
Financial Information (Item 2-Management's Discussion and Analysis of Financial
Condition and Results of Operations-Contingencies).
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 6, 1999 (the "Effective Date"), the Company's Registration
Statement on Form S-1 (Registration No. 333-74735) relating to its public
offering (the "Offering") was declared effective and the offering of up to
4,600,000 shares of the Company's Common Stock covered by such Registration
Statement commenced. The Offering was managed by Merrill Lynch & Co., as the
representative (the "Representative") of the several underwriters (the
"Underwriters") of the Offering. Pursuant to the Offering, 4,000,000 shares
were sold on May 12, 1999 (the "Offering Date"). From the Effective Date of the
Offering until June 30, 1999, total expenses of approximately $6.0 million were
incurred for the Company's account in connection with the Common Stock sold in
the Offering, which expenses consisted of: (i) $5.3 million representing
underwriters discounts and commissions paid to the Underwriters; and (ii) other
offering expenses, including without limitation attorney's fees, accountant's
fees, printing costs and filing fees, of approximately $750,000. None of such
expense payments were direct or indirect payments to directors or officers of
the Company or their associates or to persons owning 10 percent or more of any
class of equity securities of the Company or to affiliates of the Company. The
net offering proceeds of the 4,000,000 shares sold by the Company in the
Offering, after deducting such expenses, was approximately $82.0 million
through June 30, 1999. As of June 30, 1999, the Company had expended $10.2
million on infrastructure, property, plant and equipment. The remaining $71.8
was invested in high-grade liquid securities classified as available for sale
pending application of such proceeds by the Company.
Information pertaining to working capital restrictions and other
limitations upon the payment of dividends is incorporated herein from Part I.
Financial Information (Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources).
22
<PAGE> 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 3, 1999. At the
meeting, the shareholders voted in favor of electing as directors the seven
nominees named in the Proxy Statement dated April 20, 1999. Also at the
meeting, the shareholders voted in favor of ratifying the appointment of KPMG
LLP as the Company's independent accountants for the 1999 fiscal year. The
number of votes cast for each item was as follows:
I. Election of Directors
<TABLE>
<CAPTION>
NAME OF NOMINEE FOR WITHHELD
--------------- ---------- --------
<S> <C> <C>
Jere W. Thompson, Jr. 23,659,997 --
Ignatius W. Leonards 23,659,997 --
Timothy W. Rogers 23,659,997 --
Mark Langdale 23,659,997 --
Christopher J. Amenson 23,659,997 --
John R. Harris 23,659,997 --
Richard G. Ellenberger 23,659,997 --
</TABLE>
II. Ratification of KPMG LLP as Independent Accountants
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
---------- ------- -------
<S> <C> <C>
23,659,997 -- --
</TABLE>
23
<PAGE> 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation of the Company (incorporated by reference
to Exhibit 3.1 to the Registration Statement on Form S-4, as
amended, SEC Registration No. 333-57365 (the "Merger Form S-4")).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to
the Registration Statement on Form S-4, as amended, SEC Registration
No. 333-64699 (the "1998 Exchange Offer Form S-4")).
4.1 Specimen certificate for the Common Stock of the Company
(incorporated by reference to Exhibit 4.3 to the Merger Form S-4).
4.2 Indenture dated as of July 16, 1998, among CapRock Communications
Corp., CapRock Telecommunications Corp., CapRock Fiber Network,
Ltd., IWL (defined below), and PNC Bank, National Association,
Trustee (incorporated by reference to Exhibit 4.1 to the 1998
Exchange Offer Form S-4).
4.3 Registration Rights Agreement dated July 16, 1998, among CapRock
Communications Corp., CapRock Telecommunications Corp., CapRock
Fiber Network, Ltd., and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation
and BancOne Capital Markets, Inc. (incorporated by reference to
Exhibit 4.2 to the 1998 Exchange Offer Form S-4).
4.4 Form of Warrant Agreement between IWL and Cruttenden Roth
Incorporated (incorporated by reference to Exhibit 1.2 to the IWL
Communications, Incorporated ("IWL") Registration Statement on Form
S-1, as amended, SEC Registration No. 333-22801).
4.5 Registration Rights Agreement dated January 22, 1998 between IWL and
Nera Limited (incorporated by reference to Exhibit 4.5 to the Merger
Form S-4).
4.6 Registration Rights Agreement dated January 22, 1998 by and among
IWL, Thomas Norman Blair and Margaret Helen Blair (incorporated by
reference to Exhibit 4.6 to the Merger Form S-4).
4.7 Registration Rights Agreement dated May 18, 1999 among the Company,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Chase Securities
Inc., Bear, Stearns & Co. Inc., Donaldson, Lufkin & Jenrette
Securities Corporation and Goldman, Sachs & Co. (incorporated by
reference to Exhibit 4.7 to the Registration Statement on Form S-4,
as amended, SEC Registration No. 333-82557 (the "1999 Exchange Offer
Registration Statement")).
4.8 Indenture dated as of May 18, 1999 between the Company and Chase
Manhattan Trust Company, National Association, Trustee (incorporated
by reference to Exhibit 4.8 to the 1999 Exchange Offer Registration
Statement).
10.1 Note Purchase Agreement dated May 13, 1999 by and among the Company
and various initial purchasers (incorporated by reference to Exhibit
10.61 to the 1999 Exchange Offer Registration Statement).
10.2 Form of Exchange Agent Agreement by and between the Company and
Chase Manhattan Trust Company, National Association, Trustee
(incorporated by reference to Exhibit 10.62 to the 1999 Exchange
Offer Registration Statement).
24
<PAGE> 27
10.3 Form of Purchase Agreement for May 1999 equity offering
(incorporated by reference to Exhibit 1.1 to the Registration
Statement on Form S-1, as amended, of the Company, File No.
333-74735).
+27.1 Financial Data Schedule.
- ----------------------
+ Filed herewith.
(b) Reports on Form 8-K
Current Report on Form 8-K dated June 11, 1999 regarding expansion of
fiber network.
25
<PAGE> 28
CAPROCK COMMUNICATIONS CORP.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPROCK COMMUNICATIONS CORP.
By: /s/ MATTHEW M. KINGSLEY
-----------------------------------
Matthew M. Kingsley
Corporate Controller
(Principal Accounting Officer)
Date: August 4, 1999
26
<PAGE> 29
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 Articles of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Registration Statement on Form S-4, as amended, SEC
Registration No. 333-57365 (the "Merger Form S-4")).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-4, as amended, SEC Registration No.
333-64699 (the "1998 Exchange Offer Form S-4")).
4.1 Specimen certificate for the Common Stock of the Company (incorporated
by reference to Exhibit 4.3 to the Merger Form S-4).
4.2 Indenture dated as of July 16, 1998, among CapRock Communications
Corp., CapRock Telecommunications Corp., CapRock Fiber Network, Ltd.,
IWL (defined below), and PNC Bank, National Association, Trustee
(incorporated by reference to Exhibit 4.1 to the 1998 Exchange Offer
Form S-4).
4.3 Registration Rights Agreement dated July 16, 1998, among CapRock
Communications Corp., CapRock Telecommunications Corp., CapRock Fiber
Network, Ltd., and Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation and BancOne
Capital Markets, Inc. (incorporated by reference to Exhibit 4.2 to the
1998 Exchange Offer Form S-4).
4.4 Form of Warrant Agreement between IWL and Cruttenden Roth Incorporated
(incorporated by reference to Exhibit 1.2 to the IWL Communications,
Incorporated ("IWL") Registration Statement on Form S-1, as amended,
SEC Registration No. 333-22801).
4.5 Registration Rights Agreement dated January 22, 1998 between IWL and
Nera Limited (incorporated by reference to Exhibit 4.5 to the Merger
Form S-4).
4.6 Registration Rights Agreement dated January 22, 1998 by and among IWL,
Thomas Norman Blair and Margaret Helen Blair (incorporated by
reference to Exhibit 4.6 to the Merger Form S-4).
4.7 Registration Rights Agreement dated May 18, 1999 among the Company,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Chase Securities
Inc., Bear, Stearns & Co. Inc., Donaldson, Lufkin & Jenrette
Securities Corporation and Goldman, Sachs & Co. (incorporated by
reference to Exhibit 4.7 to the Registration Statement on Form S-4, as
amended, SEC Registration No. 333-82557 (the "1999 Exchange Offer
Registration Statement")).
4.8 Indenture dated as of May 18, 1999 between the Company and Chase
Manhattan Trust Company, National Association, Trustee (incorporated
by reference to Exhibit 4.8 to the 1999 Exchange Offer Registration
Statement).
10.1 Note Purchase Agreement dated May 13, 1999 by and among the Company
and various initial purchasers (incorporated by reference to Exhibit
10.61 to the 1999 Exchange Offer Registration Statement).
10.2 Form of Exchange Agent Agreement by and between the Company and Chase
Manhattan Trust Company, National Association, Trustee (incorporated
by reference to Exhibit 10.62 to the 1999 Exchange Offer Registration
Statement).
10.3 Form of Purchase Agreement for May 1999 equity offering (incorporated
by reference to Exhibit 1.1 to the Registration Statement on Form S-1,
as amended, of the Company, File No. 333-74735).
+27.1 Financial Data Schedule.
</TABLE>
- ----------------------
+ Filed herewith.
(b) Reports on Form 8-K
Current Report on Form 8-K dated June 11, 1999 regarding expansion of
fiber network.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 11,086
<SECURITIES> 307,434
<RECEIVABLES> 48,729
<ALLOWANCES> 2,733
<INVENTORY> 1,250
<CURRENT-ASSETS> 372,886
<PP&E> 112,922
<DEPRECIATION> 15,562
<TOTAL-ASSETS> 479,533
<CURRENT-LIABILITIES> 35,331
<BONDS> 347,012
0
0
<COMMON> 330
<OTHER-SE> 94,609
<TOTAL-LIABILITY-AND-EQUITY> 479,533
<SALES> 0
<TOTAL-REVENUES> 74,596
<CGS> 0
<TOTAL-COSTS> 44,919
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,240
<INTEREST-EXPENSE> 10,136
<INCOME-PRETAX> (5,942)
<INCOME-TAX> (2,335)
<INCOME-CONTINUING> (3,606)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,606)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
