<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 16, 1999
REGISTRATION NO. 333-74735
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------------
CAPROCK COMMUNICATIONS CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TEXAS 1731 75-2765572
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
</TABLE>
CAPROCK COMMUNICATIONS CORP.
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)
----------------------
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)
----------------------
Copies to:
<TABLE>
<S> <C>
A. MICHAEL HAINSFURTHER WILLIAM F. SCHWITTER
MARK A. KOPIDLANSKY KNUTE J. SALHUS
MUNSCH HARDT KOPF & HARR, P.C. PAUL, HASTINGS, JANOFSKY & WALKER LLP
1445 ROSS AVENUE, 4000 FOUNTAIN PLACE 399 PARK AVENUE
DALLAS, TEXAS 75202-2790 NEW YORK, NEW YORK 10022
(214) 855-7500 (212) 318-6000
</TABLE>
----------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
----------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, 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, please 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(c)
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 the Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
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 WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED APRIL 16, 1999
PROSPECTUS
6,500,000 SHARES
[CAPROCK COMMUNICATIONS LOGO]
CAPROCK COMMUNICATIONS CORP.
COMMON STOCK
----------------------
CapRock Communications Corp. is selling 5,000,000 shares of its Common
Stock and certain of our shareholders are selling collectively 1,500,000 shares
of their Common Stock. We will not receive any proceeds from the sale of shares
by the selling shareholders. Our Common Stock is traded on the Nasdaq National
Market under the symbol "CPRK." The last reported sales price of the Common
Stock on the Nasdaq National Market on April 14, 1999 was $28 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS, WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price...................................... $ $
Underwriting Discount...................................... $ $
Proceeds, before expenses, to CapRock...................... $ $
Proceeds, before expenses, to the selling shareholders..... $ $
</TABLE>
The selling shareholders have granted the Underwriters the right to
purchase up to an additional 975,000 shares of Common Stock at the public
offering price, less the underwriting discount, to cover over-allotments. The
Underwriters are offering the shares when, as and if they purchase them. They
have the right to reject orders from potential investors in whole or in part.
The Common Stock will be ready for delivery to investors on or about
, 1999.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------------
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
GOLDMAN, SACHS & CO.
CRUTTENDEN ROTH INCORPORATED
----------------------
The date of this Prospectus is , 1999
<PAGE> 3
INSIDE COVER
[MAP OF SOUTHWEST REGION SHOWING EXISTING AND PROPOSED NETWORK]
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-Looking Statements.................................. 1
Summary..................................................... 3
Risk Factors................................................ 7
Use Of Proceeds............................................. 15
Market Information And Dividend Policy...................... 16
Capitalization.............................................. 17
Selected Consolidated Financial Data........................ 18
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations................................. 20
Business.................................................... 31
Regulation And Licenses..................................... 45
Management.................................................. 54
Certain Transactions........................................ 64
Principal And Selling Shareholders.......................... 66
Description Of Certain Indebtedness......................... 69
Description Of Capital Stock................................ 70
Shares Eligible For Future Sale............................. 71
Underwriting................................................ 73
Legal Matters............................................... 75
Experts..................................................... 75
Where You Can Find More Information......................... 76
Index To Consolidated Financial Statements.................. F-1
</TABLE>
----------------------
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 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.
1
<PAGE> 5
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, and the Underwriters
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 Common Stock of CapRock. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are not, and the Underwriters are not, making an offer to sell these
securities in any jurisdiction where the 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 any sale of these securities. 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 such 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. Neither we, nor any of the Underwriters, represents that any such
information is accurate.
We are a Texas corporation. 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, Inc. ("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.
In addition, "Common Stock" refers to our common stock, $.01 par value per
share. See "Description of Capital Stock." Unless otherwise stated, all
information contained in this Prospectus assumes no exercise of the
Underwriters' over-allotment option to purchase up to 975,000 shares of Common
Stock from the selling shareholders. 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.
2
<PAGE> 6
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 investing in our Common Stock. 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 5,500 route miles throughout the Southwest
region, which includes Texas, Louisiana, Arkansas, Oklahoma and New Mexico. This
fiber network supports the voice, data, bandwidth and dark fiber services we
provide to our carrier and retail customers. 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. 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 100 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 5,000 small
and medium-sized businesses on a single bundled bill. Lastly, our systems
services revenues represent the voice and data systems and services we provide
primarily to the oil and gas industry offshore in and along the Gulf of Mexico.
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 telecommunication 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,
3
<PAGE> 7
- pursue acquisitions and strategic alliances,
- 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 5,500 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 1,870 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 5,500 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 5,500 route miles. We also increased the
number of conduits being deployed along each route from three to four.
In addition to our extensive fiber network, our network facilities also
include seven local and long distance switches (six which we own and one which
we manage), with another four local switches scheduled to be installed in the
second and third quarters 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 in the second and third quarters of 1999 ten asynchronous transfer mode,
or ATM, data switches to support our Internet, frame relay and ATM services.
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.
4
<PAGE> 8
THE OFFERING
Common Stock offered:
By CapRock............... 5,000,000 shares
By the selling
shareholders............... 1,500,000 shares
Total............ 6,500,000 shares
Common Stock to be
outstanding after the
offering(1).............. 33,939,627 shares
Use of proceeds............ The net proceeds received by CapRock from this
offering (after deducting the underwriting
discounts and commissions and estimated offering
expenses) will be approximately $130,350,000. We
intend to use these net proceeds to fund the
development and growth of our business and for
potential business acquisitions, working capital
and general corporate purposes.
Risk factors............... See "Risk Factors" and other information included
in this Prospectus for a discussion of factors you
should carefully consider before deciding to invest
in our Common Stock.
Nasdaq National Market
symbol..................... CPRK
- ---------------
(1) If the Underwriters exercise the option granted to them in this offering to
purchase additional shares of our Common Stock to cover over-allotments,
then the total number of shares to be offered would be increased by up to
975,000 shares, all of which would be sold by the selling shareholders. The
number of shares outstanding excludes options that have been granted or may
be granted under our employee and director stock option plans. As of
February 28, 1999, 2,425,602 options were outstanding under our employee and
director stock option plans.
5
<PAGE> 9
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. 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, 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.
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 YEAR ENDED DECEMBER 31,
------------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $21,159 $29,407 $50,970 $ 75,349 $ 121,774
Cost of services and product resales........................ 15,295 21,185 39,357 52,471 83,221
------- ------- ------- -------- ---------
Gross profit........................................ 5,864 8,222 11,613 22,878 38,553
Operating expenses:
Selling, general and administrative....................... 5,565 7,326 8,983 14,074 23,528
Merger related expenses................................... -- -- -- -- 2,313
Depreciation and amortization............................. 631 1,186 1,536 3,346 4,887
------- ------- ------- -------- ---------
Total operating expenses............................ 6,196 8,512 10,519 17,420 30,728
------- ------- ------- -------- ---------
Operating income (loss)..................................... (332) (290) 1,094 5,458 7,825
Interest expense, net....................................... (224) (484) (585) (1,603) (6,441)
Other income................................................ 256 151 42 220 106
------- ------- ------- -------- ---------
Income (loss) before income taxes and extraordinary item.... (300) (623) 551 4,075 1,490
Income taxes................................................ 77 48 227 1,513 1,267
------- ------- ------- -------- ---------
Income (loss) before extraordinary item..................... (377) (671) 324 2,562 223
Extraordinary item -- extinguishment of debt................ -- 645 -- -- --
------- ------- ------- -------- ---------
Net income (loss)................................... $ (377) $ (26) $ 324 $ 2,562 $ 223
======= ======= ======= ======== =========
Pro forma net income (loss):
Income (loss) before income taxes and extraordinary
item.................................................... $ (300) $ (623) $ 551 $ 4,075 $ 1,490
Pro forma income taxes, as if CapRock Fiber were a C
corporation............................................. (131) (211) 143 1,475 1,267
------- ------- ------- -------- ---------
Income (loss) before extraordinary item................... (169) (412) 408 2,600 223
Extraordinary item, net of taxes.......................... -- 397 -- -- --
------- ------- ------- -------- ---------
Pro forma net income (loss)......................... $ (169) $ (15) $ 408 $ 2,600 $ 223
======= ======= ======= ======== =========
Historical and pro forma income (loss) per common share:
Income (loss) before extraordinary item................... $ (0.01) $ (.002) $ 0.01 $ 0.09 $ 0.01
Extraordinary item, net of tax............................ -- .002 -- -- --
------- ------- ------- -------- ---------
Basic and diluted......................................... $ (0.01) $ -- $ 0.01 $ 0.09 $ 0.01
======= ======= ======= ======== =========
Weighted average shares outstanding:
Basic..................................................... 25,715 25,926 27,146 27,984 28,899
Diluted................................................... 25,715 25,936 27,156 28,481 30,028
OPERATING DATA:
EBITDA(1)................................................... $ 299 $ 896 $ 2,630 $ 8,804 $ 15,025
Cash flows provided by (used in) operations................. (593) 827 781 4,112 7,125
Cash flows used in investing activities..................... (1,366) (1,919) (9,350) (12,987) (134,350)
Cash flows provided by financing activities................. 2,324 903 8,605 12,113 123,989
Capital expenditures........................................ (1,822) (2,282) (10,212) (13,630) (36,855)
BALANCE SHEET DATA:
Working capital (deficit)................................... $ (441) $ (797) $(2,153) $ (305) $ 102,489
Property, plant and equipment, net.......................... 2,935 6,705 15,901 27,341 59,607
Total assets................................................ 9,596 13,198 28,522 49,389 191,966
Long-term debt and capital lease obligations................ 1,221 2,443 13,254 21,062 145,187
Stockholders' equity........................................ 2,829 3,552 3,886 14,086 16,062
</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.
6
<PAGE> 10
RISK FACTORS
You should carefully consider the following risk factors and warnings
before making a decision to invest in our Common Stock. 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. In such case, the trading price of our Common Stock could decline, and
you may lose all or part of your investment. You should also refer to the other
information shown in this Prospectus, including our consolidated financial
statements and the related notes.
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 add
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
7
<PAGE> 11
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 $160 million for 2000. We believe
that the estimated net proceeds from this offering and a credit facility that we
are currently negotiating, together with cash flow from operations, other
borrowings, sales of dark fiber and other sources of financing, 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 working capital for, among other purposes:
- expansion 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, and
- additional and increased marketing expenses.
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.
WE HAVE SIGNIFICANT INDEBTEDNESS AND INTEREST PAYMENT OBLIGATIONS
We are highly leveraged and have a significant amount of debt outstanding.
At December 31, 1998, we had approximately $145.2 million of long-term debt, net
of $4.8 million of unamortized debt issuance costs, and our debt-to-equity ratio
was approximately 9 to 1. See "Capitalization." This degree of leverage may have
important consequences to our shareholders, such as limiting our ability to
finance our future operations, to compete effectively against better capitalized
companies, to be flexible in planning for and reacting to changes in our
business, to withstand downturns in our business or the economy generally, and
to pursue business opportunities.
Our ability to pay the principal and interest on our debt will depend upon
our future performance and the successful implementation of our business
strategy, which is subject to several uncertainties, many of
8
<PAGE> 12
which are beyond our control. We cannot assure you that we will have enough cash
flow in the future to let us meet our anticipated debt service requirements,
including with respect to our senior notes in the aggregate principal amount of
$150.0 million that we issued in 1998. If we fail to generate sufficient cash
flow may impair our ability to obtain additional equity or debt financing or to
meet our debt service requirements, including the payment of principal and
interest on our senior notes. In such circumstances, we may be required to
renegotiate the terms of our long-term debt or refinance all or a portion of our
long-term debt. We cannot assure you that we would be able to renegotiate
successfully those terms or refinance our debt when required or that the terms
of the refinancing or of any new financings would be acceptable to management.
If we are unable to refinance our debt or obtain new financing under these
circumstances, we would have to consider other options, such as the sale of
certain assets to meet our debt service obligations, the sale of equity, or
negotiations with our lenders to restructure our debt.
THE RESTRICTIONS IN OUR SENIOR NOTE INDENTURE LIMIT OUR ABILITY TO EFFECT
TRANSACTIONS AND RESTRICT OUR OPERATIONS
The indenture for our senior notes imposes significant operating and
financial restrictions on us and our subsidiaries. These restrictions may
significantly 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,
- 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.
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 indenture 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.
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
9
<PAGE> 13
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
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 INCUMBENT 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 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."
10
<PAGE> 14
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 telecommunication 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 in the fiscal year
ended December 31, 1998. 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.
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
11
<PAGE> 15
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 computers 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 and Dallas, Texas and manage a switch
in Jersey City, New Jersey. A switch in Phoenix, Arizona is planned to be
operational in April 1999. A substantial portion of our long distance voice
traffic currently passes through the Dallas switch, and thus we are heavily
reliant 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 do not yet have complete
back-up equipment for these facilities. 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 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
12
<PAGE> 16
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. 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.
OUR STOCK PRICE CONSTANTLY CHANGES
A public market for our Common Stock has existed since August 27, 1998 on
the Nasdaq National Market, under the ticker symbol "CPRK." The price for our
stock on that trading market constantly changes. We expect that the market price
of our Common Stock will continue to change. The fluctuation in our stock price
is caused by a number of factors, some of which are beyond our control,
including:
- quarterly variations in operating results,
- changes in financial estimates by securities analysts,
- changes in market valuations of information technology service and
telecommunications companies,
- announcements by us of significant contracts, acquisitions, strategic
partnerships, joint ventures, or capital commitments,
- the loss or acquisition of major customers,
- additions or departures of key personnel, and
- sales of Common Stock.
In addition, the stock market, in general, experiences significant price
fluctuations, which may materially and adversely affect the market price of our
stock.
OUR OFFICERS AND DIRECTORS WILL OWN ENOUGH SHARES TO CONTROL CAPROCK AFTER THE
OFFERING
After this offering, our officers and directors together will beneficially
own approximately 67% of the outstanding shares of our Common Stock. As a
result, they will be 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.
13
<PAGE> 17
COMMUNICATIONS LAWS AND STATE CORPORATE LAWS MAY MAKE IT HARDER FOR SOMEONE TO
ACQUIRE CONTROL OF CAPROCK
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 certain limits on foreign ownership of domestic
long distance carriers. 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."
WE MAY NOT PAY DIVIDENDS
We do not expect to pay any cash dividends on our Common Stock in the
foreseeable future. We intend to retain any earnings for use in our business.
THE SALE OF SIGNIFICANT AMOUNTS OF OUR COMMON STOCK COULD ADVERSELY AFFECT ITS
MARKET PRICE
After consummation of this offering, 33,939,627 shares of Common Stock will
be outstanding. The shares of Common Stock which we are offering through this
Prospectus will be eligible for immediate resale in the public market without
restriction, unless any such shares are acquired by one or more of our
affiliates.
Following this offering, there will be approximately 5,000,000 additional
shares of Common Stock outstanding, excluding options outstanding to acquire
2,425,602 shares of Common Stock with a weighted average exercise price of
$5.61, 199,616 of which are currently exercisable with a weighted average
exercise price of $3.22. We believe that substantially all of these shares of
Common Stock and shares of Common Stock issuable upon the exercise of such
options will be freely tradeable under federal securities laws following this
offering, subject to some limitations. These limitations include vesting
provisions in option and restricted stock agreements, restrictions in lock-up
agreements and volume and manner-of-sale restrictions under Rule 144. The future
sale of a substantial number of shares of Common Stock in the public market
following this offering, or the perception that such sales could occur, could
adversely affect the prevailing market price of our Common Stock.
Shareholders holding collectively more than 89.9% of the outstanding Common
Stock and currently exercisable options to purchase Common Stock have executed
lock-up agreements that limit their ability to sell Common Stock. These
shareholders have agreed not to sell or otherwise dispose of any shares of
Common Stock for a period of at least 120 days after the date of this Prospectus
without the prior written approval of the managing underwriter and us. The
managing underwriter and we may, in our sole discretion and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements. See "Shares Eligible for Future Sale."
THERE MAY BE SOME DILUTION FOR PURCHASERS OF OUR COMMON STOCK IN THIS OFFERING
To the extent options to purchase our Common Stock under our employee and
director stock option plans are exercised, investors participating in this
offering will incur dilution. If the net proceeds of this offering, together
with available funds and cash generated from operations, are insufficient to
satisfy our cash needs, we may be required to sell additional equity or
convertible debt securities. The sale of additional equity or convertible debt
securities could result in additional dilution to our shareholders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
14
<PAGE> 18
USE OF PROCEEDS
We estimate that the net proceeds that we will receive from the sale of the
Common Stock offered by us will be approximately $130,350,000, after deducting
the underwriting discounts and commissions and estimated offering expenses and
other related fees that we will pay. We will not receive any of the proceeds
from the sale of Common Stock by the selling shareholders.
We currently intend to use the net proceeds from this 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 this offering will be invested in short-term, high grade investment
securities.
15
<PAGE> 19
MARKET INFORMATION AND DIVIDEND POLICY
Our Common Stock has traded on the Nasdaq National Market under the symbol
"CPRK" since August 27, 1998, the day after the business combination of our
predecessor companies was completed. The following table sets forth, for the
periods indicated, the range of high and low sales prices for our common stock
as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
----------------
HIGH LOW
------- ------
<S> <C> <C>
1998:
Third Quarter (beginning on August 27, 1998).............. $10.00 $ 6.38
Fourth Quarter............................................ $ 8.75 $ 4.75
1999:
First Quarter............................................. $20.13 $ 7.25
Second Quarter (through April 14, 1999)................... $28.75 $18.25
</TABLE>
On April 14, 1999, the last reported closing sales price of the common
stock was $28 per share. As of April 14, 1999, there were approximately 60
shareholders of record of our Common Stock.
Of the approximately 28.9 million shares of our Common Stock currently
outstanding, only approximately 2.9 million shares are held by non-affiliates
and thus freely tradeable without restrictions under the Securities Act of 1933.
Substantially all of these freely tradeable shares represent shares of Common
Stock issued to former shareholders of IWL Communications in connection with the
combination. We believe that the historical trading prices of our Common Stock
have been affected by the relatively limited number of shares, or "float,"
available in the open market to our existing and prospective investors. The
additional shares of Common Stock available to the public upon consummation of
this offering will represent more than two times the number of currently freely
tradeable shares. Accordingly, we believe that such increased float may result
in changes in our stock trading levels (both in terms of volume and price).
Since our company became a public company, we have not paid cash dividends
on our Common Stock. We currently anticipate that all of our earnings will be
retained for development of our business and do not anticipate paying any cash
dividends in the foreseeable future. Any future determination as to the payment
of dividends will be made in the discretion of our Board of Directors and will
depend upon our operating results, financial condition, capital requirements,
general business conditions and such other factors as the Board of Directors
deems relevant. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
16
<PAGE> 20
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998
on an actual basis and on an as adjusted basis to give effect to our sale and
issuance of 5,000,000 shares of Common Stock at a public offering price of $28,
after deducting the underwriting discounts and commissions and estimated
offering expenses and fees totaling $9,650,000. 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>
DECEMBER 31, 1998
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and marketable securities............ $ 97,314 $227,664
======== ========
Long-term debt:
12% Senior Notes, due 2008................................ $145,187 $145,187
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value; 20,000,000 shares
authorized; none issued................................ -- --
Common stock, $.01 par value; 200,000,000 shares
authorized; 28,932,395 shares issued and outstanding,
actual and 33,932,395 shares issued and outstanding, as
adjusted(1)............................................ 289 339
Additional paid-in capital................................ 10,522 140,822
Retained earnings......................................... 5,608 5,608
Currency translation adjustments.......................... 9 9
Unearned compensation..................................... (329) (329)
Treasury stock, at cost................................... (37) (37)
-------- --------
Total stockholders' equity........................ 16,062 146,412
-------- --------
Total capitalization.............................. $161,249 $291,599
======== ========
</TABLE>
- ---------------
(1) Excludes (1) 2,259,867 shares of Common Stock issuable upon exercise of
options outstanding on December 31, 1998, with a weighted average exercise
price of $5.51 per share, (2) 3,733,586 shares available for future issuance
under our employee and director stock option plans as of December 31, 1998
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.
17
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our summary financial data as of and for the
years ended December 31, 1994, 1995, 1996, 1997 and 1998. 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
Financial Statements include our three predecessor companies (i.e., CapRock
Telecommunications, CapRock Fiber and IWL Communications) as though these
entities were always a part of CapRock.
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.
IWL Communications' cash flow for this period was added to the 1997 beginning
balance in the Consolidated Statement of Cash Flows.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $21,159 $29,407 $50,970 $75,349 $121,774
Cost of services and product resales...... 15,295 21,185 39,357 52,471 83,221
------- ------- ------- ------- --------
Gross profit.................... 5,864 8,222 11,613 22,878 38,553
Operating expenses:
Selling, general and administrative..... 5,565 7,326 8,983 14,074 23,528
Merger related expenses................. -- -- -- -- 2,313
Depreciation and amortization........... 631 1,186 1,536 3,346 4,887
------- ------- ------- ------- --------
Total operating expenses........ 6,196 8,512 10,519 17,420 30,728
------- ------- ------- ------- --------
Operating income (loss)................... (332) (290) 1,094 5,458 7,825
Interest expense, net..................... (224) (484) (585) (1,603) (6,441)
Other income.............................. 256 151 42 220 106
------- ------- ------- ------- --------
Income (loss) before income taxes and
extraordinary item...................... (300) (623) 551 4,075 1,490
Income taxes.............................. 77 48 227 1,513 1,267
------- ------- ------- ------- --------
Income (loss) before extraordinary item... (377) (671) 324 2,562 223
Extraordinary item -- extinguishment of
debt.................................... -- 645 -- -- --
------- ------- ------- ------- --------
Net income (loss)............... $ (377) $ (26) $ 324 $ 2,562 $ 223
======= ======= ======= ======= ========
Pro forma net income (loss):
Income (loss) before income taxes and
extraordinary item................... $ (300) $ (623) $ 551 $ 4,075 $ 1,490
Pro forma income taxes, as if CapRock
Fiber were a C corporation........... (131) (211) 143 1,475 1,267
------- ------- ------- ------- --------
Income (loss) before extraordinary
item................................. (169) (412) 408 2,600 223
Extraordinary item, net of taxes........ -- 397 -- -- --
------- ------- ------- ------- --------
Pro forma net income (loss)..... $ (169) $ (15) $ 408 $ 2,600 $ 223
======= ======= ======= ======= ========
</TABLE>
18
<PAGE> 22
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Historical and pro forma income (loss) per
common share:
Income (loss) before extraordinary
item................................. $ (0.01) $ (.002) $ 0.01 $ 0.09 $ 0.01
Extraordinary item, net of tax.......... -- .002 -- -- --
------- ------- ------- ------- --------
Basic and diluted....................... $ (0.01) $ -- $ 0.01 $ 0.09 $ 0.01
======= ======= ======= ======= ========
Weighted average shares outstanding:
Basic................................... 25,715 25,926 27,146 27,984 28,899
Diluted................................. 25,715 25,936 27,156 28,481 30,028
OPERATING DATA:
EBITDA(1)................................. $ 299 $ 896 $ 2,630 $ 8,804 $ 15,025
Cash flows provided by (used in)
operations.............................. (593) 827 781 4,112 7,125
Cash flows used in investing activities... (1,366) (1,919) (9,350) (12,987) (134,350)
Cash flows provided by financing
activities.............................. 2,324 903 8,605 12,113 123,989
Capital expenditures...................... (1,822) (2,282) (10,212) (13,630) (36,855)
BALANCE SHEET DATA:
Working capital (deficit)................. $ (441) $ (797) $(2,153) $ (305) $102,489
Property, plant and equipment, net........ 2,935 6,705 15,901 27,341 59,607
Total assets.............................. 9,596 13,198 28,522 49,389 191,966
Long-term debt and capital lease
obligations............................. 1,221 2,443 13,254 21,062 145,187
Stockholders' equity...................... 2,829 3,552 3,886 14,086 16,062
</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.
19
<PAGE> 23
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 5,500 route miles throughout the Southwest
region, which includes Texas, Louisiana, Arkansas, Oklahoma and New Mexico. This
fiber network supports the voice, data, bandwidth and dark fiber services we
provide to our carrier and retail customers.
In August 1998, we announced that we had completed a business combination
transaction in which our predecessor companies combined to form our company as
it exists today. The combination was accounted for as a pooling of interests.
Accordingly, our consolidated results include our three predecessor companies
(i.e., 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 100 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 5,000 small
and medium-sized businesses on a single bundled bill. Lastly, our systems
services revenues represent the voice and data systems and services we provide
primarily to the oil and gas industry offshore in and along the Gulf of Mexico.
Our proximity to Mexico allows us to directly connect to the fiber networks
of multiple Mexican telecommunications carriers. Subject to compliance with
certain regulatory requirements, we are capable of providing dark fiber to these
carriers at several border crossings enabling them to close open fiber rings in
Mexico by using CapRock fiber on the U.S. side of the border. Additionally, our
direct connect agreements with foreign carriers position us to capture increased
levels of growing international traffic.
In addition, we recently announced our 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.
20
<PAGE> 24
RESULTS OF OPERATIONS
CapRock recognizes revenue from the following sources: carriers' carrier,
integrated services, system 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 communications 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>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Carriers' carrier............................ $22,405 $41,805 $ 72,165
Integrated services.......................... 1,980 8,640 17,978
Systems services............................. 16,031 21,959 31,631
------- ------- --------
Total service revenue................ 40,416 72,404 121,774
Product resales.............................. 10,554 2,945 --
------- ------- --------
Total revenues....................... $50,970 $75,349 $121,774
======= ======= ========
Gross margin percent:
Gross margin -- service revenue.............. 27% 31% 32%
======= ======= ========
Gross margin -- product resales.............. 8% 20% --%
======= ======= ========
Gross margin -- total........................ 23% 30% 32%
======= ======= ========
</TABLE>
21
<PAGE> 25
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 YEAR ENDED
DECEMBER 31,
----------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues.............................................. 100% 100% 100%
Cost of services...................................... 58% 67% 68%
Cost of product resales............................... 19% 3% --%
--- --- ---
Gross profit.......................................... 23% 30% 32%
Operating expenses:
Selling, general and administrative................. 18% 19% 19%
Merger related expenses............................. --% --% 2%
Depreciation and amortization....................... 3% 4% 4%
--- --- ---
Total operating expenses.............................. 21% 23% 25%
--- --- ---
Operating income...................................... 2% 7% 6%
Interest expense...................................... (1)% (2)% (8)%
Interest income....................................... --% --% 2%
Other income.......................................... --% --% --%
--- --- ---
Income before income taxes............................ 1% 5% 1%
Income tax expense.................................... --% 2% 1%
--- --- ---
Net income............................................ 1% 3% --%
=== === ===
</TABLE>
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.
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.
22
<PAGE> 26
Selling, General and Administrative Expenses. 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. 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.
23
<PAGE> 27
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's total assets increased $142.6 million, or 289%, from $49.4
million at December 31, 1997 to $192.0 million at December 31, 1998. The
increase was attributable to internal growth, build out of the fiber optic
network and the receipt of the proceeds from the senior notes issued in July
1998. CapRock had cash and cash equivalents of $3.5 million at December 31,
1997, as compared with $294,000 at December 31, 1998 and marketable securities
of $97.0 million at December 31, 1998 as compared to no marketable securities at
December 31, 1997. CapRock had a working capital deficit of $305,000 at December
31, 1997 as compared to working capital of $102.5 million at December 31, 1998.
The increase in the working capital was attributable to the issuance of the
senior notes and the repayment of CapRock's existing notes, which were repaid
using a portion of the proceeds from the senior notes.
CapRock's cash flow from operations in 1997 and 1998 was $4.1 million and
$7.1 million, respectively. The increase of $3.0 million, or 73%, was primarily
attributable to overall growth. Additionally, accounts payable and accrued
expenses increased $15.0 million from $11.9 million at December 31, 1997 to
$26.9 million at December 31, 1998. The increase was primarily attributable to
increased expenditures and amounts due to vendors relating to the fiber optic
network build out.
Cash used in investing activities in 1997 and 1998 was $13.0 million and
$134.3 million, respectively. The increase of $121.4 million, or 935%, primarily
relates to the net investment in marketable securities of $97.0 million from the
proceeds of the senior notes, the purchase of telecommunications equipment and
costs incurred with the build out of the fiber optic network.
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.
24
<PAGE> 28
In July 1998, CapRock issued $150.0 million aggregate principal amount of
its senior notes. Interest on the senior notes is payable semi-annually in
arrears on January 15 and July 15 of each year, commencing January 15, 1999, at
the rate of 12% per year. A portion of the net proceeds from the offering of the
senior notes was used to repay all existing debt obligations of CapRock
Telecommunications, CapRock Fiber and IWL Communications, our predecessor
companies. The proceeds used for the debt payoffs totaled $26.8 million. The
remaining proceeds, net of transaction costs, have been, or will be, used to
fund additional capital expenditures for the construction of CapRock's fiber
optic network, switching equipment and other capital expenditures to expand its
sales offices, for potential acquisitions and for general working capital
purposes. The funds are invested in high-grade liquid securities classified as
available for sale. The indenture governing the issuance of the senior notes
contains certain restrictive operating and financial covenants, including
restrictive covenants relating to borrowing additional money, paying dividends
or making other distributions to our shareholders, 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. See "Risk Factors."
CapRock expects to require significant financing for future capital
expenditure and working capital requirements. By the end of the year 2000,
CapRock intends to build out its fiber optic network to approximately 5,500
route miles throughout the Southwest region. CapRock intends to use advanced
fiber capable of supporting dense wave division multiplexing with an OC-48
backbone scalable to OC-192, and intends to install 96 fibers throughout most of
its network and intends to retain on average 24 fiber strands. CapRock is
burying three to four conduits throughout its network. CapRock currently
estimates that its aggregate capital requirements will total approximately
$250.0 million for 1999 and approximately $160.0 million for 2000, including
expenditures to be made under the joint build arrangement with Enron
Communications. CapRock expects to make substantial capital expenditures
thereafter. Capital expenditures will be required to (1) fund the construction
and operation of the fiber optic network, including the portion to be
constructed through the joint build arrangement with Enron Communications; (2)
fund the installation of voice and data switches, and (3) open sales offices and
add sales support and customer service personnel in markets throughout Texas,
Louisiana, Oklahoma, Arkansas and New Mexico.
CapRock believes that its cash and marketable securities, cash flow from
operations and sales of dark fiber, together with either the expected net
proceeds from this offering or the bank credit facility that it is currently
negotiating, will be sufficient to fund its capital expenditures and working
capital requirements for at least the next 12 months. More specifically, with
CapRock's cash and marketable securities, cash flow from operations, and the
expected net proceeds from this offering, the planned completion of the network
through the end of 1999 will be fully funded, and CapRock believes that those
sources of capital together with vendor financings, borrowings under the credit
facility that it is currently negotiating, and anticipated sales of dark fiber
will be sufficient to fully fund completion of the network as planned. However,
no assurances can be made as to when or whether the credit facility will be
completed. If CapRock is unable to complete the credit facility, CapRock will
seek alternate sources of financing and, if 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 is currently cash flow positive, with
EBITDA of $8.8 million in 1997 and EBITDA of $15.0 million in 1998 (exclusive of
merger related expenses).
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
25
<PAGE> 29
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.
CREDIT FACILITY
CapRock is currently negotiating with a bank to obtain a senior credit
facility in the amount of $100 million. The final terms and conditions of the
credit facility will depend on negotiation of definitive documentation for the
credit facility, however the credit facility is expected to have a five-year
term and is expected to contain standard and customary restrictive covenants,
including financial covenants. As our network build out proceeds and our
customer base expands, we will consider refinancing a portion of our borrowings
under the credit facility with long-term indebtedness.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, CapRock adopted Statement of Accounting Standard No.
130 ("SFAS No. 130"), "Reporting Comprehensive Income." 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 stockholders' equity and comprehensive income. This
Statement requires changes in disclosure only and it does not affect results of
operations or financial position. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which CapRock adopted in 1998. CapRock identified operating segments based upon
how management allocated resources and assesses performance. SFAS No. 131
requires changes in disclosure only and does not affect results of operations or
financial position. Prior year comparative information has been restated to
conform to the requirements of SFAS No. 131.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activity" ("SFAS 133") which requires that all
derivatives be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. In addition, all hedging
relationships must be designated, reassessed and documented pursuant to the
provisions of SFAS No. 133. SFAS 133 is effective for fiscal years beginning
after June 15, 1999. The adoption of SFAS 133 will not have an impact on
CapRock's results of operations, financial position or cash flow.
CONTINGENCIES
CapRock is party to ordinary litigation incidental to its business. No
currently pending litigation is expected to have a material adverse effect on
our results of operations, financial condition or cash flow.
YEAR 2000
The year 2000 problem is the inability of a meaningful portion of the
world's computers, software applications and embedded semiconductor chips to
cope with the change of the year from 1999 to 2000. This issue can be traced to
the infancy of computing, when computer data and programs were designed to save
disk space by truncating the date field to just six digits (two for the day, two
for the month and two for the year). Therefore, information applications
automatically assumed that the two-digit year field represented a year within
the 1900's. As a result of this, systems could fail to operate or fail to
produce correct results when dates roll over to the year 2000.
26
<PAGE> 30
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 to be year 2000 compliant. CapRock currently
estimates that the year 2000 identification, assessment, remediation and testing
efforts will be substantially complete by June 30, 1999 and that such efforts
will be completed before any currently anticipated impact on its computer
equipment and software. CapRock has substantially completed the identification
and assessment process. CapRock estimates that it currently has completed
approximately 70% 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 30% of the initiative are in
process and are expected to be completed on or about June 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.... 6/98-4/99
Identification, assessment, remediation and testing
regarding desktop and individual system issues............ 6/98-6/99
Identification and assessment regarding non-IT system
issues.................................................... 8/98-4/99
Remediation and testing regarding non-IT systems............ 11/98-6/99
</TABLE>
CapRock has mailed questionnaires to its significant vendors, service
providers and customers with whom CapRock's systems electronically interface to
determine the extent to which such interfaces and system processes are
vulnerable to year 2000 issues and whether the products and services of such
entities are year 2000 compliant. Substantially all of the parties have
responded to the request and no significant matters were noted from these
responses. However, the information contained in a number of the responses was
generic in nature and did not specifically address the stage of their year 2000
initiatives. CapRock will continue seeking alternate vendors in advance of
December 31, 1999 in the event satisfactory responses are not received.
CapRock has evaluated its systems and has identified the following systems
and functions as mission critical:
- 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).
27
<PAGE> 31
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
six switches, three of which are physically located in Dallas, Texas (two are
calling card platforms), two in Houston, 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 can be remediated
through software upgrades. The upgrades are currently available by the
respective manufacturer of the switches and have been installed.
The remainder of the testing procedures for the switching equipment is
substantially completed for all switches which are currently operational. 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 an 800-route mile fiber optic network,
which was substantially completed by December 31, 1998. Approximately 260 route
miles were completed and placed in service in January 1997. The network is
currently being expanded to 5,500 route miles (which CapRock expects to be
completed by the end of the year 2000). The fiber optic network is designed to
be scalable and will include network-advanced fiber, which is capable of
supporting dense wave division multiplexing with an OC-48 backbone scalable to
OC-192. The fiber optic network will include electronic equipment, which
regenerates and transports the voice, data and other information. A detailed
assessment of the network operations and fiber equipment has been performed and
no significant non-compliant issues have been identified.
Satellite/Microwave Transmission Equipment and Satellite Service Providers:
CapRock utilizes satellite service providers to provide communications
services to certain customers in remote locations. CapRock has sent
correspondence to each of the three vendors supplying the satellite services.
Each of the satellite service providers has responded. None of them noted any
significant non-compliant issues. CapRock is continuing to pursue additional
information and test data from these providers and will seek new providers, if
necessary.
Billing and Call Record Collection Systems:
CapRock handles its provisioning, customer care, billing and traffic
reporting functions on a proprietary software platform developed by RiverRock
Systems, Ltd., a Texas limited partnership in which CapRock has a 49% ownership
interest. These operations support systems, or OSS systems, and other back
office systems are used to enter, schedule and track a customer's order from the
point of sale to the
28
<PAGE> 32
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
immaterial). Such expenditures represent less than 1% of 1999 projected capital
expenditures and will be funded out of cash flow from operations.
RISKS
CapRock has begun, but not yet completed, a comprehensive analysis of the
problems and costs, including loss of revenues, that would be reasonably likely
to result from the failure by CapRock or certain third parties to complete the
efforts necessary to achieve year 2000 compliance on a timely basis.
CapRock has not yet completed its identification of the most likely worst
case scenario. However, CapRock believes that the most reasonably likely worst
case scenario would involve loss of revenues relating to traffic terminating in
certain developing third world countries, which have not adequately prepared for
the year 2000. CapRock relies upon certain vendors to supply international
services and the possibility exists that some of the traffic in these developing
third world countries may not be able to be completed. The estimated loss of
revenue, if any, has not been determined, and we may not be able to identify the
amount of any loss by the year 2000. Depending on the systems affected, the
failure of any contingency plans developed by CapRock, if implemented, could
have a material adverse effect on CapRock's financial condition and results of
operations.
CONTINGENCY PLANS
The contingency plans include a proactive analysis of countries that are
actively pursuing year 2000 remediation. CapRock is using outside consultants to
assist with an analysis of countries that are not actively pursuing year 2000
compliance and remediation. Contingency plans include identifying these
countries noted with substantial risk and potentially redirecting the sales and
marketing efforts to other countries less likely to be affected by year 2000
problems.
29
<PAGE> 33
CapRock is still formulating contingency plans relating to the use of the
satellite service providers. CapRock continues to actively pursue receiving test
data and procedures from these service providers regarding year 2000 compliance.
CapRock will consider utilizing other service providers if the current service
providers cannot demonstrate compliance to CapRock's satisfaction by June 30,
1999.
CapRock is still formulating contingency plans regarding significant
suppliers of telecommunication services, which may suffer a year 2000-related
failure. CapRock utilizes a number of different service providers and the
contingency plan will include re-routing traffic from a vendor which experiences
a year 2000 systems failure to one or more other vendors.
DISCLAIMER
The discussion of CapRock's efforts, and management's expectations,
relating to year 2000 compliance are forward-looking statements and the dates on
which CapRock believes it will complete such efforts are based upon management's
best estimates. These estimates were derived using numerous assumptions
regarding future events, including the continued availability of certain
resources and other factors. We cannot assure you that these estimates will
prove to be accurate, and our actual results could differ materially from those
currently anticipated. Specific factors that could cause such material
differences include, but are not limited to the availability and cost of
personnel trained in year 2000 issues, the ability to identify, assess,
remediate and test all relevant computer codes and embedded technology and
similar uncertainties. In addition, variability of definitions of "compliance
with year 2000" relating to products and services sold by CapRock may lead to
claims whose impact on CapRock is currently not estimable. We cannot assure you
that the aggregate cost of defending and resolving such claims, if any, will not
materially adversely affect our results of operations.
MARKET RISK
CapRock is exposed to market risk from changes in marketable securities
(which consist of money market and commercial paper). At December 31, 1998,
marketable securities of CapRock were recorded at a fair value of approximately
$97 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 of December 31, 1998. The fair value of
CapRock's long-term debt at December 31, 1998 was estimated to be $144 million
based on the overall rate of the long-term debt of 12% 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 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 $9.6
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.
30
<PAGE> 34
BUSINESS
CapRock owns and operates a scalable long-haul fiber network which upon
completion is expected to cover approximately 5,500 route miles throughout the
Southwest region, which includes Texas, Louisiana, Arkansas, Oklahoma and New
Mexico. This fiber network supports the voice, data, bandwidth and dark fiber
services we provide to our carrier and retail customers. Our 1998 revenues were
$121.8 million and EBITDA (exclusive of merger related expenses of $2.3 million)
was $15.0 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 100 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 5,000 small
and medium-sized businesses on a single bundled bill. Lastly, our systems
services revenues represent the voice and data systems and services we provide
primarily to the oil and gas industry offshore in and along the Gulf of Mexico.
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 telecommunication 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 each
route. 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 1,870 route miles under construction and expect to have
approximately 3,000 route miles completed by the end of 1999, with the remainder
of the 5,500 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 seven local and long distance switches (six which we own and one which
we manage) with another four local switches scheduled to be installed in the
second and third quarters 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 in the second and third quarters of
1999 ten ATM data switches to support our Internet, frame relay and ATM
services.
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
31
<PAGE> 35
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. After the offering, our
management team will continue to beneficially own approximately 67% of our
common stock.
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
32
<PAGE> 36
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.
33
<PAGE> 37
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 5,500 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 approximately 4,300 route miles to approximately
5,500 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
34
<PAGE> 38
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 February 28, 1999, our direct sales
force consisted of 100 account executives and managers in Dallas, Ft.
Worth, Houston, San Antonio, Austin and Victoria, Texas, as well as
Lafayette, Louisiana. In addition, we had 115 sales agents located
throughout Texas. We intend to recruit, train and deploy approximately an
additional 100 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
35
<PAGE> 39
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 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 5,500 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 1,870 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 5,500 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
approximately 4,300 route miles to approximately 5,500 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 seven local and long distance
switches (six which we own and one which we manage), with another four local
switches scheduled to be installed in the second and third quarters 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 in the second and third quarters of 1999 ten ATM data switches to support
our Internet, frame relay and ATM services.
We estimate total gross capital expenditures of approximately $410 million
to complete our planned regional network build out, including fiber,
transmission electronics, voice and data switches and corporate capital
expenditures.
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
36
<PAGE> 40
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 100 carriers, including AT&T, IXC, MCI WorldCom, Qwest and
Sprint, and including regional independents such as Century Telephone
Enterprises, 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.
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
37
<PAGE> 41
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 5,500 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 800 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.
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.
38
<PAGE> 42
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 February 28, 1999, our direct sales force consisted of 100 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 100 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 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
39
<PAGE> 43
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 115 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 65 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."
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
40
<PAGE> 44
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 5,500 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 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
41
<PAGE> 45
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") and GTE Operating Companies
("GTOCs") to enter the long distance market in the future. 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.
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
42
<PAGE> 46
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.
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 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 February 28, 1999, we employed approximately 390 people, including
approximately 116 in sales and marketing, approximately 110 in engineering and
technical services and approximately 164 in management, customer care,
provisioning, administration and finance. At that date, we also had an agent
sales force numbering approximately 115 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
43
<PAGE> 47
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 180,000 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........................ 80,000 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.
44
<PAGE> 48
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
45
<PAGE> 49
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.
46
<PAGE> 50
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
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. 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 and we are in the process of resolving that complaint. 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 on us. 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 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 contacts, 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
47
<PAGE> 51
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,
- 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 enacted certain changes in its rules designed to permit alternative
arrangements outside of its ISPY as a means of encouraging competition and
lower, cost-based accounting rates. As a part of implementing the ISPY, the FCC
maintains a private line resale policy that prohibits carriers from reselling
international private leased circuits to provide switched services to or from a
country unless the FCC has found that the country affords U.S. carriers
equivalent resale opportunities to engage in similar activities in that country.
The FCC revised this and other policies to accommodate the 1997 WTO Agreement on
basic services, a compact that addresses market access, foreign investment, and
procompetitive regulatory principles in areas currently generating a vast
majority of the world's telecommunications revenue. Currently, the FCC's rules
permit U.S. carriers to provide switched service over international leased lines
or facilities-based private lines between the U.S. and WTO countries where the
local telecommunications provider generally charges U.S. carriers at or below an
FCC-determined rate for terminating the U.S. carriers' traffic or equivalent
resale opportunities are available.
The FCC has adopted measures intended to overhaul the system of
international settlements by, among other things, establishing lower ceilings
("Benchmarks") for the rates that U.S. carriers will pay foreign carriers for
the termination of international services. The FCC's authority to establish such
Benchmarks was recently affirmed in federal court. Under the FCC's "Flexibility
Policy," the FCC will also permit alternative arrangements with foreign carriers
on a case by case basis. The FCC has recently proposed additional reforms to the
ISPY to eliminate or reduce unnecessary regulatory requirements governing
arrangements between U.S. and foreign carriers in competitive situations. The
FCC 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 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."
48
<PAGE> 52
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.
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
49
<PAGE> 53
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.
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.
50
<PAGE> 54
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. 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.
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
51
<PAGE> 55
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.
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.
52
<PAGE> 56
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 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.
53
<PAGE> 57
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors, officers and key employees as of February 28, 1999 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......... 48 Senior Vice President, Chief Financial Officer,
Treasurer and Secretary
Byron M. Allen........... 51 Executive Vice President of International and
Director
Timothy W. Rogers........ 36 Executive Vice President of Retail Sales and
Network Operations and Director
Timothy M. Terrell....... 36 Executive Vice President of Carrier Sales
Scott L. Roberts......... 37 Executive Vice President of International Sales
Matthew M. Kingsley...... 34 Corporate Controller
Mark Langdale............ 44 Director
Christopher J. Amenson... 48 Director
John R. Harris........... 50 Director
Richard G. Ellenberger... 46 Director Nominee
</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 April 1998 and as Treasurer and Secretary
since August 1998. From 1996 to 1998, Mr. McAleer served as Chief Financial
Officer, Secretary and as a member of the Executive Management Committee of
American Pad and Paper Co., one of the largest manufacturers and marketers of
paper-based office products in North America. From 1990 to 1996, Mr. McAleer
served as Executive Vice President, Chief Financial Officer and as a member of
the Executive Management Committee of Rexene Corporation, which manufactures
plastic film and plastic resins. From 1985 to 1990, Mr. McAleer served as Senior
Vice President-Administration, Chief Financial Officer, Secretary and Treasurer,
and as a member of the Executive Management Committee and the Board of Directors
of Varo, Inc., which manufactures electronics supplied primarily to U.S.
military agencies, such as proprietary night vision systems, high-reliability
power systems and airborne missile launchers. From 1981 to 1985, Mr. McAleer
served as Vice President-Finance, Chief Financial Officer, Secretary and
Treasurer, and as a member of the Executive Management Committee of Tocom, Inc.,
which designs and manufactures high-technology communica-
54
<PAGE> 58
tions 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
and a Director of CapRock since its formation in February 1998. Mr. Allen 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
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
55
<PAGE> 59
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 agreed in April 1999 to serve as a director of
CapRock, if elected at CapRock's 1999 Annual Meeting of Shareholders to be held
in May 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 has declined to stand for
re-election as a director at CapRock's 1999 Annual Meeting of Shareholders to be
held in May 1999, and Richard Ellenberger, if elected, is expected to fill such
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 and John R. Harris.
The Audit Committee consists of Christopher J. Amenson, John R. Harris and Mark
Langdale. All members of the Compensation Committee and Audit 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 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.
56
<PAGE> 60
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.
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>
57
<PAGE> 61
- ---------------
(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
--------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL 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.
(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.
58
<PAGE> 62
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 Incentive Plan are forfeited or
terminated, these shares will again be available for distribution of Awards
subsequently granted. We have granted 1,681,600 options under the Plan and these
options generally vest over five years. As of December 31, 1998, 48,700 of the
options granted were forfeited and canceled and 1,632,900 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 December 31, 1998 was 3,363,586.
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.
59
<PAGE> 63
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 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
60
<PAGE> 64
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 Plan. As of December
31, 1998, 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 December 31, 1998.
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.
61
<PAGE> 65
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.
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, consisting of
Messrs. Amenson and Harris, effective upon consummation of our business
combination (which occurred in August 1998). 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
62
<PAGE> 66
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.
63
<PAGE> 67
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, CapRock contributed a total of $170,000
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 were $1,176,000. 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 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
64
<PAGE> 68
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 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 $50,000 from January 1999
through February 1999 to Summit Communications, Inc., which is owned by Sherwood
Allen, a brother of Bryon M. Allen. Byron Allen is an Executive Vice President
and Director of CapRock.
65
<PAGE> 69
PRINCIPAL AND SELLING SHAREHOLDERS
The following table shows information concerning the beneficial ownership
of our Common Stock as of February 28, 1999 and after giving effect to the sale
of the 6,500,000 shares of Common Stock in this offering and assuming no
exercise of the Underwriters' over-allotment option, 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>
NUMBER OF
SHARES PERCENT OF PERCENT OF
OF COMMON SHARES OF NUMBER OF SHARES SHARES OF
STOCK COMMON STOCK SHARES OF OF COMMON STOCK COMMON STOCK
BENEFICIALLY OUTSTANDING COMMON STOCK BENEFICIALLY OUTSTANDING
OWNED BEFORE BEFORE BEING OFFERED OWNED AFTER AFTER
NAME AND ADDRESS OFFERING (1) OFFERING(1) IN THE OFFERING OFFERING(2) OFFERING(2)
- ---------------- ------------ ------------ --------------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Jere W. Thompson, Jr.(3).... 10,775,218 37.2% -- 10,775,218 31.7%
Ignatius W. Leonards(4)..... 1,897,528 6.6% 125,000 1,772,528 5.2%
Timothy W. Rogers(5)........ 2,883,628 10.0% 125,000 2,758,628 8.1%
Scott L. Roberts............ 2,883,628 10.0% 125,000 2,758,628 8.1%
Timothy M. Terrell.......... 2,883,628 10.0% 125,000 2,758,628 8.1%
Byron M. Allen(6)........... 214,200 * -- 214,200 *
Kevin W. McAleer............ -- -- -- -- --
Mark Langdale(7)............ 11,224,352 38.8% 800,000 10,424,352 30.7%
5950 Berkshire, Suite 990
Dallas, TX 75225
Christopher J. Amenson(8)... 5,333 * -- 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 * -- 7,000 *
4225 Versailles Avenue
Dallas, TX 75205
Richard G. Ellenberger...... -- -- -- -- --
c/o Cincinnati Bell, Inc.
201 East Fourth Street
Cincinnati, Ohio 45201
Jere W. Thompson, Sr.(9).... 10,647,930 36.8% 200,000 10,447,930 30.8%
Two Turtle Creek Village
3838 Oak Lawn Ave., Suite
1850
Dallas, TX 75219
Greenway Holdings,
L.P.(3)................... 2,014,082 7.0% -- 2,014,082 5.9%
CapRock Investors(3)........ 8,650,884 29.9% -- 8,650,884 25.5%
All executive officers and
directors as a group(8)
(eleven persons).......... 24,014,699 83.0% -- 22,714,699 66.9%
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of the class.
(1) Based upon 28,939,627 shares of Common Stock issued and outstanding as of
February 28, 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 February 28, 1999 are
66
<PAGE> 70
treated as outstanding only when determining the amount and percentage of
Common Stock owned by such individual or group. All information with respect
to the beneficial ownership of any principal shareholder was furnished by
such principal shareholder and 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) The numbers in the above table assume no exercise of the Underwriters'
over-allotment option to acquire an additional 975,000 shares of Common
Stock from the selling shareholders listed below. If the over-allotment
option is exercised in full, Greenway Holdings, L.P. will sell 100,000
shares and will beneficially own after the offering 1,914,082 shares or 5.6%
of the total shares outstanding, Ignatius W. Leonards will sell an
additional 75,000 shares and will beneficially own after the offering
1,697,528 shares or 5.0% of the total shares outstanding, Timothy W. Rogers
will sell an additional 75,000 shares and will beneficially own after the
offering 2,683,628 shares or 7.9% of the total shares outstanding, Scott L.
Roberts will sell an additional 75,000 shares and will beneficially own
after the offering 2,683,628 shares or 7.9% of the total shares outstanding,
Timothy M. Terrell will sell an additional 75,000 shares and will
beneficially own after the offering 2,683,628 shares or 7.9% of the total
shares outstanding, Mark Langdale will sell an additional 525,000 shares
that he owns in his individual capacity and will beneficially own after the
offering 9,899,352 shares or 29.2% of the total shares outstanding, and Jere
W. Thompson, Sr. will sell an additional 50,000 shares that he owns in his
individual capacity and will beneficially own after the offering 10,397,930
shares or 30.6% of the total shares outstanding. If the Underwriters
over-allotment option is exercised in full, then after giving effect to the
sale by Greenway Holdings, L.P., Jere W. Thompson, Jr. will beneficially own
after the offering 10,675,218 shares or 31.5% of the total shares
outstanding. If the Underwriters over-allotment option is exercised in full,
all executive officers and directors as a group will beneficially own after
the offering 21,789,699 shares or 64.2% of the total shares outstanding.
(3) 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.
(4) Includes 20,166 shares held by Ignatius W. Leonards as custodian for minor
children.
(5) 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.
(6) 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.
(7) 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.
(8) Includes 3,333 shares subject to currently exercisable options.
(9) 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
67
<PAGE> 71
result he has shared voting, investment, and dispositive power with respect
to the 1,302,283 shares held by The Williamsburg Corporation.
68
<PAGE> 72
DESCRIPTION OF CERTAIN INDEBTEDNESS
CapRock has outstanding $150.0 million of senior notes due 2008 bearing
interest at the rate of 12% per annum. The senior notes are subject to the terms
and conditions of an indenture dated July 10, 1998 between CapRock and PNC Bank,
as Trustee. The senior notes are subject to all of the terms and conditions of
the indenture. The following summary highlights some provisions of the
indenture.
The senior notes will mature on July 15, 2008. Interest on the senior notes
is payable semiannually in cash on January 15 and July 15 of each year,
commencing January 15, 1999. The 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.
The senior notes are effectively subordinated in right of payment to all secured
indebtedness of CapRock to the extent of the value of the assets securing such
indebtedness. In addition, CapRock is a holding company, and the senior notes
are effectively subordinated to all existing and future indebtedness and other
liabilities (including trade payables) of CapRock's subsidiaries.
The 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 shown in the
indenture together with accrued and unpaid interest, if any, to the date of
redemption.
Upon a change of control, each holder of senior notes may require CapRock
to make an offer to purchase all outstanding 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 senior notes in the event of a
change of control.
The indenture 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,
- 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.
The covenants also require CapRock to make an offer to purchase specified
amounts of senior notes in the event of certain asset sales. There can be no
assurance that CapRock will have sufficient funds to complete any purchase of
senior notes upon such a sale of assets.
69
<PAGE> 73
DESCRIPTION OF CAPITAL STOCK
The following summaries highlight certain provisions of our Articles of
Incorporation and By-Laws, 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 February 28, 1999,
there were 28,939,627 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.
70
<PAGE> 74
CERTAIN ANTI-TAKEOVER EFFECTS
As of February 28, 1999, there were 171,060,373 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. Cruttenden Roth has waived their
registration rights with respect to this offering.
SHARES ELIGIBLE FOR FUTURE SALE
After the offering, we will have 33,939,627 shares of Common Stock
outstanding, assuming no exercise of outstanding options or warrants to purchase
Common Stock after February 28, 1999. All of these shares and any shares issued
upon exercise of outstanding stock options (there were 2,425,602 stock options
outstanding as of February 28, 1999) will be freely tradeable without
restriction or further registration under the Securities Act of 1933, as amended
(the "Securities Act"), except that any shares held by an "affiliate" of ours,
as that term is defined in Rule 144 under the Securities Act ("Rule 144"), may
generally only be sold in compliance with the limitations of Rule 144 described
below. We do not currently have outstanding any shares of Common Stock that are
"restricted securities" within the meaning of Rule 144 in that they have not
been registered under the Securities Act but we may in the future. These
restricted securities will generally be available for sale in the open market
after the offering, subject to the Lock-up Agreements (defined below) and the
applicable requirements of Rule 144.
In general, Rule 144 provides that after one year has elapsed between the
later of the date the restricted securities were acquired from us and the date
they were acquired from an affiliate of ours, the holder of such restricted
securities (including an affiliate) is entitled to sell a number of shares
within any
71
<PAGE> 75
three-month period that does not exceed the greater of (1) one percent of the
then outstanding shares of the Common Stock or (2) the average weekly reported
volume of trading of the Common Stock during the four calendar weeks preceding
such sale. Sales under Rule 144 also are subject to certain requirements
pertaining to the manner of such sales, notice of such sales and the
availability of current public information concerning us. Affiliates may sell
shares not constituting restricted securities in accordance with the foregoing
volume limitations and other requirements of Rule 144 but without regard to the
one year holding period. Under Rule 144(k), after a period of two years has
elapsed between the later of the date on which restricted securities were
acquired from us and the date on which they were acquired from an affiliate, a
holder of such restricted securities who is not an affiliate of ours at the time
of the sale and has not been an affiliate for at least three months before the
sale would be entitled to sell the shares immediately without regard to the
volume limitations and other conditions of Rule 144 described above.
The selling shareholders will be required to enter into agreements with the
underwriters (the "Lock-up Agreements"). These agreements will provide that,
until the expiration of 120 days after the date of this Prospectus, they will
not offer, sell, contract to sell or otherwise dispose of, any shares of Common
Stock or any securities of CapRock that are substantially similar to the Common
Stock or which are convertible into or exchangeable for, or represent the right
to receive, Common Stock without the prior written consent of the managing
underwriter. In addition, we have agreed not to sell or otherwise dispose of any
shares of Common Stock during the 120-day period following the date of the
Prospectus, except we may issue, and grant options to purchase, shares of Common
Stock under our Equity Incentive Plan and Director Stock Option Plan. In
addition, we may issue shares of Common Stock as part of any acquisition of
another company if the terms of such issuance provide that such Common Stock
will not be resold before the expiration of the 120-day period referenced in the
preceding sentence.
We assumed all of the outstanding options to acquire the common stock of
our predecessor companies pursuant to our business combination in August 1998,
and all of such options are covered by an effective Registration Statement on
Form S-8. In addition, we filed a Registration Statement on Form S-8 to register
the 5,400,000 shares of stock issuable under our Equity Incentive Plan and our
Director Stock Option Plan. The shares covered by the Registration Statements on
Form S-8 are currently or upon grant will be eligible for sale in the public
markets, subject to the Rule 144 limitations applicable to our "affiliates" as
well as to the limitations on sale and vesting described above. In addition,
Cruttenden Roth received demand and "piggy-back" registration rights under its
warrants. Registration of such shares under the Securities Act would result in
such shares becoming freely tradeable without restriction under the Securities
Act (except for shares purchased by affiliates) immediately upon the effective
date of such registration. If the holder or holders of the Cruttenden warrants
exercise a demand registration right, such sales could have an adverse effect on
the market price for CapRock's Common Stock. If we were to include in a
CapRock-initiated registration such shares pursuant to the exercise of
piggy-back registration rights, such sales may have an adverse effect on our
ability to raise additional capital. The Cruttenden warrants are currently
exercisable.
72
<PAGE> 76
UNDERWRITING
GENERAL
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co.
Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Goldman, Sachs & Co.
and Cruttenden Roth Incorporated are acting as representatives of each of the
Underwriters named below. Subject to the terms and conditions set forth in a
purchase agreement among us, the selling shareholders and the Underwriters, we
and the selling shareholders have agreed to sell to the Underwriters, and each
of the Underwriters severally and not jointly has agreed to purchase from us and
the selling shareholders, the number of shares of Common Stock shown opposite
its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Bear, Stearns & Co. Inc.....................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Goldman, Sachs & Co.........................................
Cruttenden Roth Incorporated................................
---------
Total............................................. 6,500,000
=========
</TABLE>
In the purchase agreement, the several Underwriters have agreed, subject to
the terms and conditions shown therein, to purchase all of the shares being sold
pursuant to such agreement if any of the shares of Common Stock being sold
pursuant to such agreement are purchased. In the event of a default by an
Underwriter, the purchase agreement provides that, in certain circumstances, the
commitments of non-defaulting Underwriters may be increased or the purchase
agreement may be terminated.
We and the selling shareholders have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act, or
to contribute to payments the Underwriters may be required to make in respect of
those liabilities.
The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part.
COMMISSIONS AND DISCOUNTS
The representatives have advised us and the selling shareholders that the
Underwriters propose initially to offer the shares to the public at the public
offering price shown on the cover page of this prospectus, and to certain
dealers at such price less a concession not in excess of $. per share. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $. per share on sales to certain other dealers. After the public
offering, the public offering price, concession and discount may be changed.
73
<PAGE> 77
The following table shows the per share and total underwriting discount to
be paid by us and the selling shareholders to the Underwriters. This information
is presented assuming either no exercise or full exercise by the Underwriters of
the over-allotment option.
<TABLE>
<CAPTION>
TOTAL TOTAL
WITHOUT WITH
PER SHARE OPTION OPTION
--------- -------- --------
<S> <C> <C> <C>
Public offering price........................... $ $ $
Underwriting discount...........................
Proceeds, before expenses, to CapRock...........
Proceeds to selling shareholders................
</TABLE>
We will not receive any of the proceeds from the sale of shares by the
selling shareholders. The expenses of the offering are estimated at $
and are payable by us.
OVER-ALLOTMENT OPTION
The selling shareholders have granted an option to the Underwriters,
exercisable for 30 days after the date of this Prospectus, to purchase up to an
aggregate of 975,000 additional shares at the public offering price shown on the
cover page of this Prospectus, less the underwriting discount. The Underwriters
may exercise this option solely to cover over-allotments, if any, made on the
shares offered hereby. To the extent that the Underwriters exercise this option,
each Underwriter will be obligated, subject to certain conditions, to purchase a
number of additional shares proportionate to such Underwriter's initial amount
reflected in the foregoing table.
NO SALES OF SIMILAR SECURITIES
Each of our officers and directors and all the selling shareholders have
entered into lock-up agreements with the Underwriters which provide that, until
the expiration of 120 days after the date of this Prospectus, they will not
offer, sell, contract to sell or otherwise dispose of, any shares of Common
Stock or any of our other securities that are substantially similar to the
Common Stock or which are convertible into or exchangeable for, or represent the
right to receive, Common Stock without the prior written consent of Merrill
Lynch. In addition, we have agreed not to sell or otherwise dispose of any
shares of Common Stock during the 120-day period following the date of the
Prospectus, except we may issue, and grant options to purchase, shares of Common
Stock under our stock option plans.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares is completed, rules of the Securities
and Exchange Commission may limit the ability of the Underwriters and certain
selling group members to bid for and purchase Common Stock. As an exception to
these rules, the representatives are permitted to engage in certain transactions
that stabilize the price of the Common Stock. Such transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.
If the Underwriters create a short position in the Common Stock in the
offerings, i.e., if they sell more shares than are shown on the cover page of
this Prospectus, the representatives may reduce that short position by
purchasing shares in the open market. The representatives may also elect to
reduce any short position by exercising all or part of the over-allotment option
described above.
The representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the representatives purchase
shares in the open market to reduce the underwriters' short position or to
stabilize the price of the Common Stock, they may reclaim the amount of the
selling concession from the Underwriters and selling group members who sold
those shares as part of the offering.
In general, purchase of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The
74
<PAGE> 78
imposition of a penalty bid might also have an effect on the price of the Common
Stock to the extent that it discourages resales of the shares.
Neither we nor any of the selling shareholders or Underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the price of the Common Stock. In
addition, neither we nor any of the selling shareholders or Underwriters makes
any representation that the representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without notice.
PASSIVE MARKET MAKING
In connection with this offering, certain Underwriters and selling group
members may engage in passive market making transactions in the Common Stock on
the Nasdaq National Market in accordance with Regulation M under the Securities
Exchange Act of 1934, as amended, during a period before the commencement of
offers or sales of the Common Stock hereunder.
OTHER RELATIONSHIPS
Some of the Underwriters have provided investment banking services to us in
the past and are likely to do so in the future. They receive customary fees and
commissions for these services. Both Merrill Lynch and Donaldson, Lufkin &
Jenrette Securities Corporation acted as initial purchasers in the offering of
our senior notes in July 1998 and received customary discounts and commissions
in connection therewith.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby will be passed upon for us and the selling shareholders by
Munsch Hardt Kopf & Harr, P.C., Dallas, Texas. Certain legal matters relating to
the offering will be passed upon for the Underwriters by Paul, Hastings,
Janofsky & Walker LLP.
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.
75
<PAGE> 79
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 filed with the Securities and Exchange Commission, Washington,
D.C., 20549, a Registration Statement on Form S-1 under the Securities Act of
1933, as amended, with respect to the Common Stock offered with this Prospectus.
This Prospectus does not contain all of the information shown in the
Registration Statement and the exhibits and schedules to the Registration
Statement. Certain items are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to us and
the Common Stock offered with this Prospectus, reference is made to the
Registration Statement and the exhibits and schedules files as a part of the
Registration Statement. 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.
76
<PAGE> 80
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
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
</TABLE>
F-1
<PAGE> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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 and
Oklahoma. 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> 89
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> 90
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> 91
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.
F-12
<PAGE> 92
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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>
(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
F-13
<PAGE> 93
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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>
F-14
<PAGE> 94
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
(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.
F-15
<PAGE> 95
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
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.
F-16
<PAGE> 96
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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.
F-17
<PAGE> 97
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-18
<PAGE> 98
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-19
<PAGE> 99
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
A summary of options outstanding as of December 31, 1998 is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE NUMBER OF
EXERCISE OPTIONS REMAINING CONTRACTUAL OPTIONS
PRICE OUTSTANDING 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>
F-20
<PAGE> 100
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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.
F-21
<PAGE> 101
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-22
<PAGE> 102
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-23
<PAGE> 103
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
<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>
F-24
<PAGE> 104
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<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.
(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 0.10 (0.06) (0.03)
</TABLE>
F-25
<PAGE> 105
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,500,000 SHARES
[CAPROCK COMMUNICATIONS LOGO]
CAPROCK COMMUNICATIONS CORP.
COMMON STOCK
----------------------
PROSPECTUS
----------------------
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
GOLDMAN, SACHS & CO.
CRUTTENDEN ROTH INCORPORATED
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 106
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following sets forth the estimated expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the issuance and distribution of the securities registered hereby:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 35,722
NASD filing fee............................................. $ 13,350
NASDAQ -- NMS listing fee................................... $ 17,500
Printing and engraving costs................................ *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue Sky fees and expenses.................................. *
Miscellaneous............................................... *
--------
Total............................................. $ *
========
</TABLE>
- ---------------
* To be provided by amendment
ITEM 14. 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."
II-1
<PAGE> 107
The Texas Business Corporation Act permits, and in some cases requires,
corporations to indemnify officers, directors, agents and employees who are or
have been a party to or are threatened to be made a party to litigation against
judgments, penalties (including excise and similar taxes), fines, settlements
and reasonable expenses under certain circumstances.
The Registration Rights Agreement (Exhibit 4.3 hereto) provides for
indemnification by each of the Initial Purchasers of the Private Notes (as
defined therein), their successors, assigns and direct and indirect transferees,
and participating broker-dealers holding Exchange Notes (as defined therein), in
specified circumstances, of the Registrant, the other Initial Purchasers,
underwriters and the other selling holders of the Private Notes, and each of
their respective directors and officers and controlling parties, and by the
Registrant of Initial Purchasers of the Private Notes, their successors, assigns
and direct and indirect transferees, and participating broker-dealers holding
Exchange Notes, underwriters, and each person, if any controlling any such
underwriter or holder, in specified circumstances, for certain liabilities
arising under the Securities Act or otherwise.
The Note Purchase Agreement (Exhibit 10.43 hereto) 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.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth information regarding all sales of unregistered
securities of the Registrant or its predecessors during the past three years.
All such shares were issued in reliance upon an exemption from registration
under the Securities Act by reason of Section 4(2) or 3(b) of the Securities Act
and/or the rules and regulations promulgated thereunder. In connection with each
of these transactions, the shares were sold to a very limited number of persons,
such persons were provided access to all relevant information regarding the
Registrant or represented to the Registrant that they were "sophisticated"
investors, and such persons represented to the Registrant that the shares were
purchased for investment purposes only and with no view toward distribution.
On July 15, 1998, the Registrant issued an aggregate principal amount of
$150,000,000 of 12% Senior Notes due 2008 to certain investors. Such notes were
offered and issued pursuant to Section 4(2) and Rule 144A under the Securities
Act.
On June 12, 1997, IWL Communications, Incorporated ("IWL"), a predecessor
company to the Registrant, issued to Cruttenden Roth Incorporated, warrants to
purchase 145,000 shares of its Common Stock at an exercise price of $7.20 per
share.
In June 1996, Kelly Dean, an employee of IWL, purchased 2,808 shares of
Common Stock of IWL for $3.56 shares for an aggregate purchase price of
approximately $10,000.
In November 1996, Keith Johnson, Vice President -- Marketing of IWL,
purchased 2,808 shares of Common Stock of IWL for $3.56 per share for an
aggregate purchase price of approximately $10,000.
II-2
<PAGE> 108
ITEM 16. EXHIBITS
The following exhibits are filed herewith.
<TABLE>
<C> <S>
1.1 -- Form of Purchase Agreement.
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>
II-3
<PAGE> 109
<TABLE>
<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.)
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.)
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.)
</TABLE>
II-4
<PAGE> 110
<TABLE>
<C> <S>
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.
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.)
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.)
</TABLE>
II-5
<PAGE> 111
<TABLE>
<C> <S>
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.)
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.)
</TABLE>
II-6
<PAGE> 112
<TABLE>
<C> <S>
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.)
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.)
</TABLE>
II-7
<PAGE> 113
<TABLE>
<C> <S>
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.+
10.59 -- Form of Carrier Agreement.
10.60 -- Amendment to Addison Circle One Office Lease Agreement.
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.
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.+
24.2 -- Power of Attorney for Matthew M. Kingsley (included in
the signature page hereto).
27.1 -- Financial Data Schedule for 1996 and 1998.+
27.2 -- Amended Financial Data Schedule for 1997.+
99.1 -- Consent of Richard G. Ellenberger.
</TABLE>
- ---------------
# Confidential treatment was granted.
+ Previously filed.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant (the "Registrant") hereby undertakes to
provide to the Underwriters, at the closing specified in the Purchase Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act 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 Securities Act
and is, therefore, unenforceable. If a claim for indemnification against such
liabilities (other than 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 or 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 precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-8
<PAGE> 114
(c) The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus 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> 115
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas on
the 15th day of April, 1999.
CAPROCK COMMUNICATIONS CORP.
By: /s/ JERE W. THOMPSON, JR.
----------------------------------
Jere W. Thompson, Jr.
Chief Executive Officer
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JERE W. THOMPSON, JR. Chief Executive Officer, Chairman of April 15, 1999
- ----------------------------------------------------- the Board, and Director (Principal
Jere W. Thompson, Jr. Executive Officer)
/s/ KEVIN W. MCALEER Senior Vice President and Chief April 15, 1999
- ----------------------------------------------------- Financial Officer (Principal
Kevin W. McAleer Financial Officer)
* President, Vice Chairman of the April 15, 1999
- ----------------------------------------------------- Board, and Director
Ignatius W. Leonards
* Executive Vice President and Director April 15, 1999
- -----------------------------------------------------
Timothy W. Rogers
* Executive Vice President and Director April 15, 1999
- -----------------------------------------------------
Byron M. Allen
/s/ MATTHEW M. KINGSLEY Corporate Controller (Principal April 15, 1999
- ----------------------------------------------------- Accounting Officer)
Matthew M. Kingsley**
* Director April 15, 1999
- -----------------------------------------------------
Mark Langdale
* Director April 15, 1999
- -----------------------------------------------------
Christopher J. Amenson
* Director April 15, 1999
- -----------------------------------------------------
John R. Harris
*By: /s/ JERE W. THOMPSON, JR.
-------------------------------------------------
Jere W. Thompson, Jr.
Attorney-in-Fact
</TABLE>
II-10
<PAGE> 116
POWER OF ATTORNEY
Matthew M. Kingsley hereby constitutes and appoints Jere W. Thompson, Jr.
and Kevin W. McAleer, and each of them, with full power to act without the other
and with full power of substitution and resubstitution, his true and lawful
attorneys-in-fact with full power to execute in his name and behalf in the
capacities indicated below any and all amendments (including post-effective
amendments and amendments thereto) to this Registration Statement, requests to
accelerate the effectiveness of this Registration Statement, and any
registration statement for the same offering that is to be effective under Rule
462(b) of the Securities Act, and to file the same, with all exhibits thereto
and other documents in connection therewith with the Securities and Exchange
Commission and hereby ratify and confirm all that such attorneys-in-fact, or
either of them, or their substitutes shall lawfully do or cause to be done by
virtue hereof.
II-11
<PAGE> 117
EXHIBITS INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
1.1 -- Form of Purchase Agreement.
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> 118
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<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.)
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.)
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.)
</TABLE>
<PAGE> 119
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
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.
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.)
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.)
</TABLE>
<PAGE> 120
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
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.)
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.)
</TABLE>
<PAGE> 121
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
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.)
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.)
</TABLE>
<PAGE> 122
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
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.+
10.59 -- Form of Carrier Agreement.
10.60 -- Amendment to Addison Circle One Office Lease Agreement.
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.
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.+
24.2 -- Power of Attorney for Matthew M. Kingsley (included in
the signature page hereto).
27.1 -- Financial Data Schedule for 1996 and 1998.+
27.2 -- Amended Financial Data Schedule for 1997.+
99.1 -- Consent of Richard G. Ellenberger.
</TABLE>
- ---------------
# Confidential treatment was granted.
+ Previously filed.
<PAGE> 1
EXHIBIT 1.1
================================================================================
CAPROCK COMMUNICATIONS CORP.
(a Texas corporation)
6,500,000 Shares of Common Stock
FORM OF PURCHASE AGREEMENT
Dated: April __, 1999
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PURCHASE AGREEMENT......................................................................................1
SECTION 1. Representations and Warranties....................................................... 2
(a) Representations and Warranties by the Company........................................ 2
(i) Compliance with Registration Requirements.................................. 3
(ii) Independent Accountants.................................................... 3
(iii) Financial Statements....................................................... 3
(iv) No Material Adverse Change in Business..................................... 4
(v) Good Standing of the Company............................................... 4
(vi) Good Standing of Subsidiaries.............................................. 4
(vii) Capitalization............................................................. 4
(viii) Authorization of Agreement................................................. 5
(ix) Authorization and Description of Securities................................ 5
(x) Absence of Defaults and Conflicts.......................................... 5
(xi) Absence of Labor Dispute................................................... 6
(xii) Absence of Proceedings..................................................... 6
(xiii) Accuracy of Exhibits....................................................... 6
(xiv) Possession of Intellectual Property........................................ 6
(xv) Absence of Further Requirements............................................ 6
(xvi) Possession of Licenses and Permits......................................... 7
(xvii) Compliance with Laws and Regulations....................................... 7
(xviii) Required Filings........................................................... 7
(xix) No Adverse Judgments or Other Orders....................................... 8
(xx) Title to Property.......................................................... 8
(xxi) Compliance with Cuba Act................................................... 8
(xxii) Investment Company Act..................................................... 8
(xxiii) Tax Returns................................................................ 8
(xxiv) ERISA...................................................................... 9
(xxv) Insurance.................................................................. 9
(xxvi) Environmental Laws......................................................... 9
(xxvii) Registration Rights....................................................... 10
(b) Representations and Warranties by the Selling Shareholders.......................... 10
(i) Accurate Disclosure....................................................... 10
(ii) Authorization of Agreements............................................... 10
(iii) Good and Marketable Title................................................. 10
(iv) Due Execution of Power of Attorney and
Custody Agreement..................................................... 11
(v) Absence of Manipulation................................................... 11
(vi) Absence of Further Requirements........................................... 11
(vii) Restriction on Sale of Securities......................................... 11
(viii) Certificates Suitable for Transfer........................................ 12
(ix) No Association with NASD.................................................. 12
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
(c) Officer's Certificates.............................................................. 12
SECTION 2. Sale and Delivery to Underwriters; Closing.......................................... 12
(a) Initial Securities.................................................................. 12
(b) Option Securities................................................................... 12
(c) Payment............................................................................. 13
(d) Denominations; Registration......................................................... 13
SECTION 3. Covenants of the Company............................................................ 14
(a) Compliance with Securities Regulations and Commission
Requests........................................................................ 14
(b) Filing of Amendments................................................................ 14
(c) Delivery of Registration Statements................................................. 14
(d) Delivery of Prospectuses............................................................ 15
(e) Continued Compliance with Securities Laws........................................... 15
(f) Blue Sky Qualifications............................................................. 15
(g) Rule 158............................................................................ 16
(h) Use of Proceeds..................................................................... 16
(i) Listing............................................................................. 16
(j) Restriction on Sale of Securities................................................... 16
(k) Reporting Requirements.............................................................. 16
SECTION 4. Payment of Expenses................................................................. 17
(a) Expenses............................................................................ 17
(b) Expenses of the Selling Shareholders................................................ 17
(c) Termination of Agreement............................................................ 17
(d) Allocation of Expenses.............................................................. 17
SECTION 5. Conditions of Underwriters' Obligations............................................. 18
(a) Effectiveness of Registration Statement............................................. 18
(b) Opinion of Counsel for Company...................................................... 18
(c) Opinion of Counsel for the Selling Shareholders..................................... 18
(d) Opinion Of Counsel for Underwriters................................................. 18
(e) Officers' Certificate............................................................... 19
(f) Certificate of Selling Shareholders................................................. 19
(g) Accountant's Comfort Letter......................................................... 19
(h) Bring down Comfort Letter........................................................... 19
(i) Approval of Listing................................................................. 20
(j) No Objection........................................................................ 20
(k) Lock up Agreements.................................................................. 20
(l) Conditions to Purchase of Option Securities......................................... 20
(i) Officers' Certificate..................................................... 20
(ii) Certificate of Selling Shareholders....................................... 20
(iii) Opinion of Counsel of Company............................................. 20
(iv) Opinion of Counsel for Selling Shareholders............................... 20
(v) Opinion of Counsel for Underwriters....................................... 21
(vi) Bring down Comfort Letter................................................. 21
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C>
(m) Additional Documents................................................................ 21
(n) Termination of Agreement............................................................ 21
SECTION 6. Indemnification..................................................................... 21
(a) Indemnification of Underwriters..................................................... 21
(b) Indemnification of Company, Directors and Officers and
Selling Shareholders............................................................ 23
(c) Actions against Parties; Notification............................................... 23
(d) Settlement without Consent if Failure to Reimburse.................................. 24
(e) Other Agreements with Respect to Notification....................................... 24
SECTION 7. Contribution........................................................................ 24
SECTION 8. Representations, Warranties and Agreements to Survive Delivery...................... 26
SECTION 9. Termination of Agreement............................................................ 26
(a) Termination; General................................................................ 26
(b) Liabilities......................................................................... 26
SECTION 10. Default by One or More of the Underwriters.......................................... 26
SECTION 11. Default by One or More of the Selling Shareholders or the
Company............................................................................. 27
SECTION 12. Notices............................................................................. 28
SECTION 13. Parties............................................................................. 28
SECTION 14. Governing Law and Time.............................................................. 28
SECTION 15. Effect of Headings.................................................................. 29
SCHEDULES
Schedule A - List of Underwriters........................................................ Sch A-1
Schedule B - List of Selling Shareholders................................................ Sch B-1
Schedule C - Pricing Information......................................................... Sch C-1
Schedule D - List of Persons Subject to Lock-up.......................................... Sch D-1
EXHIBITS
Exhibit A-1 - Form of Opinion of Company's Counsel to be Delivered
Pursuant to Section 5(b)....................................................Exh A-1
</TABLE>
-iii-
<PAGE> 5
<TABLE>
<S> <C> <C>
Exhibit A-2 - Form of Opinion of Company's State Regulatory Counsel
to be Delivered Pursuant to Section 5(b).............................. Exh A-2
Exhibit A-3 - Form of Opinion of Company's Federal Regulatory Counsel to be
Delivered Pursuant to Section 5(b).................................... Exh A-3
Exhibit B - Form of Opinion of Counsel for the Selling Shareholder(s)
to be Delivered Pursuant to Section 5(c).............................. Exh B-1
Exhibit C - Form of Lock-Up from Directors, Officers or Other Stockholders
to be Delivered Pursuant to Section 5(i).............................. Exh C-1
</TABLE>
-iv-
<PAGE> 6
Draft
CAPROCK COMMUNICATIONS CORP.
(a Texas corporation)
6,500,000 Shares of Common Stock
(Par Value $.01 Per Share)
PURCHASE AGREEMENT
April __, 1999
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
CRUTTENDEN ROTH INCORPORATED
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281- 1209
Ladies and Gentlemen:
CapRock Communications Corp., a Texas corporation (the "Company"), and
the persons listed in Schedule B hereto (the "Selling Shareholders") confirm
their respective agreements with Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") and each of the other Underwriters
named in Schedule A hereto (collectively, the "Underwriters," which term shall
also include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch, Bear Stearns & Co. Inc., Donaldson, Lufkin &
Jenrette Securities Corporation, Goldman, Sachs & Co. and Cruttenden Roth
Incorporated are acting as Representatives (in such capacity, the
"Representatives"), with respect to (i) the sale by the Company and the Selling
Shareholders, acting severally and not jointly, and the purchase by the
Underwriters, acting severally and not jointly, of the respective numbers of
shares of Common Stock, par value $.01 per share, of the Company ("Common
Stock") set forth in said Schedules A and B hereto, and (ii) the grant by the
Selling Shareholders to the Underwriters, acting severally and not jointly, of
the option described in Section 2(b) hereof to purchase all or any part of
975,000 additional shares of Common Stock to cover over-allotments, if any. The
aforesaid 6,500,000 shares of Common Stock (the "Initial Securities") to be
purchased by the Underwriters and
<PAGE> 7
all or any part of the 975,000 shares of Common Stock subject to the option
described in Section 2(b) hereof (the "Option Securities") are hereinafter
called, collectively, the "Securities."
The Company and the Selling Shareholders understand that the
Underwriters propose to make a public offering of the Securities as soon as the
Representatives deem advisable after this Agreement has been executed and
delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-74735) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The
information included in such prospectus or in such Term Sheet, as the case may
be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto and schedules thereto at the time it
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final prospectus in the form first furnished to the
Underwriters for use in connection with the offering of the Securities is herein
called the "Prospectus." If Rule 434 is relied on, the term "Prospectus" shall
refer to the preliminary prospectus dated __________, 1999 together with the
Term Sheet and all references in this Agreement to the date of the prospectus
shall mean the date of the Term Sheet. For purposes of this Agreement, all
references to the Registration Statement, any preliminary prospectus, the
Prospectus or any Term Sheet or any amendment or supplement to any of the
foregoing shall be deemed to include the copy filed with the Commission pursuant
to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company
represents and warrants to each Underwriter as of the date hereof, as of the
Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery
(if any) referred to in Section 2(b) hereof, and agrees with each Underwriter,
as follows:
(i) Compliance with Registration Requirements. Each of the
Registration Statement and any Rule 462(b) Registration Statement has become
effective under the 1933 Act and no stop order suspending the effectiveness of
the Registration Statement or any Rule 462(b)
-2-
<PAGE> 8
Registration Statement has been issued under the 1933 Act and no proceedings for
that purpose have been instituted or are pending or, to the knowledge of the
Company, are contemplated by the Commission, and any request on the part of the
Commission for additional information has been complied with.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any Option Securities are purchased,
at the Date of Delivery), the Registration Statement, the Rule 462(b)
Registration Statement and any amendments and supplements thereto complied and
will comply in all material respects with the requirements of the 1933 Act and
the 1933 Act Regulations and did not and will not contain an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading. Neither the
Prospectus nor any amendments or supplements thereto at the time the Prospectus
or any such amendment or supplement was issued and at the Closing Time (and, if
any Option Securities are purchased, at the Date of Delivery), included or will
include an untrue statement of a material fact or omitted or will omit to state
a material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading. If Rule 434 is
used, the Company will comply ,with the requirements of Rule 434 and the
Prospectus shall not be "materially different," as such term is used in Rule
434, from the prospectus included in the Registration Statement at the time it
became effective. The representations and warranties in this subsection shall
not apply to statements in or omissions from the Registration Statement or
Prospectus made in reliance upon and in conformity with information furnished to
the Company in writing by any Underwriter through Merrill Lynch expressly for
use in the Registration Statement or Prospectus.
Each preliminary prospectus and the prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment thereto,
or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all
material respects with the 1933 Act Regulations and each preliminary prospectus
and the Prospectus delivered to the Underwriters for use in connection with this
offering was identical to the electronically transmitted copies thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(ii) Independent Accountants. The accountants who certified the
financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933 Act and the
1933 Act Regulations.
(iii) Financial Statements. The financial statements included in the
Registration Statement and the Prospectus, together with the related schedules
and notes, present fairly the financial position of the Company and its
consolidated subsidiaries at the dates indicated and the statement of
operations, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries for the periods specified; said financial statements
have been prepared in conformity with generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the periods involved. The
supporting schedules included in the Registration Statement present fairly in
accordance with GAAP the information required to be stated therein. The selected
financial data and the summary financial information included in the Prospectus
present fairly the information shown therein and have been compiled on a basis
consistent with that of the audited financial statements included in the
Registration Statement.
-3-
<PAGE> 9
(iv) No Material Adverse Change in Business. Since the respective dates
as of which information is given in the Registration Statement and the
Prospectus, except as otherwise stated therein, (A) there has been no material
adverse change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Company and its subsidiaries
considered as one enterprise, whether or not arising in the ordinary course of
business (a "Material Adverse Effect"), (B) there have been no transactions
entered into by the Company or any of its subsidiaries, other than those in the
ordinary course of business, which are material with respect to the Company and
its subsidiaries considered as one enterprise, and (C) there has been no
dividend or distribution of any kind declared, paid or made by the Company on
any class of its capital stock.
(v) Good Standing of the Company. The Company has been duly organized
and is validly existing as a corporation in good standing under the laws of the
State of Texas and has corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the Prospectus and to
enter into and perform its obligations under this Agreement; and the Company is
duly qualified as a foreign corporation to transact business and is in good
standing in each other jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good standing would
not result in a Material Adverse Effect.
(vi) Good Standing of Subsidiaries. Each of CapRock Telecommunications
Corp., IWL Communications, Incorporated and CapRock Fiber Network, Inc. (each a
"Subsidiary" and, collectively, the "Subsidiaries") has been duly organized and
is validly existing as a corporation or limited partnership, as the case may be,
in good standing under the laws of the jurisdiction of its formation, has
corporate or partnership power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus and is
duly qualified as a foreign entity to transact business and is in good standing
in each jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of business, except where
the failure so to qualify or to be in good standing would not result in a
Material Adverse Effect; except as otherwise disclosed in the Registration
Statement, all of the issued and outstanding capital stock or partnership
interest of each such Subsidiary has been duly authorized and validly issued, is
fully paid and non-assessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge, lien,
encumbrance, claim or equity; none of the outstanding shares of capital stock or
partnership interest of any Subsidiary was issued in violation of the preemptive
or similar rights of any securityholder of such Subsidiary. Except for the
Subsidiaries, the Company has no "significant subsidiary" as that term is
defined in Rule 1-02(w) of Regulation S-X.
(vii) Capitalization. The authorized, issued and outstanding shares of
capital stock of the Company is as set forth in the Prospectus in the column
entitled "Actual" under the caption "Capitalization" (except for subsequent
issuances, if any, pursuant to this Agreement, pursuant to reservations,
agreements or employee benefit plans referred to in the Prospectus or pursuant
to the exercise of convertible securities or options referred to in the
Prospectus). The shares of issued and outstanding capital stock of the Company,
including the Securities to be purchased by the Underwriters from the Selling
Shareholders, have been duly authorized and validly issued and are fully paid
and non-assessable; none of the outstanding shares of capital stock of the
Company, including the Securities to be purchased by the Underwriters from the
Selling Shareholders, was issued in violation of the preemptive or other similar
rights of any securityholder of the Company.
-4-
<PAGE> 10
(viii) Authorization of Agreement. This Agreement has been duly
authorized, executed and delivered by the Company.
(ix) Authorization and Description of Securities. The Securities have
been duly authorized for issuance and sale to the Underwriters pursuant to this
Agreement and, when issued and delivered by the Company pursuant to this
Agreement against payment of the consideration set forth herein, will be validly
issued and fully paid and non-assessable; the Common Stock conforms to all
statements relating thereto contained in the Prospectus and such description
conforms to the rights set forth in the instruments defining the same; no holder
of the Securities will be subject to personal liability solely by reason of
being such a holder; and the issuance of the Securities is not subject to the
preemptive or other similar rights of any securityholder of the Company.
(x) Absence of Defaults and Conflicts. Neither the Company nor any of
its subsidiaries is in violation of its charter or by-laws or in default in the
performance or observance of any obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, deed of trust, loan or credit
agreement, note, lease or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which it or any of them may be bound,
or to which any of the property or assets of the Company or an Subsidiary is
subject (collectively, "Agreements and Instruments") except for such violations
or defaults that would not result in a Material Adverse Effect; and the
execution, delivery, and performance of this Agreement and the consummation of
the transactions contemplated herein and in the Registration Statement
(including the issuance and sale of the Securities and the use of the proceeds
from the sale of the Securities as described in the Prospectus under the caption
"Use of Proceeds") and compliance by the Company with its obligations hereunder
have being duly authorized by a necessary corporate action and do not and will
not, whether with or without the giving of notice or passage of time or both,
constitute a breach of, or default or Repayment Event (as defined below) under,
or result in the creation or imposition of any lien, charges or encumbrance upon
any property or assets of the Company or any Subsidiary pursuant to, the
Agreements and Instruments (except for such breaches or defaults or liens,
charges, Repayment Events or encumbrances that would not result in a Material
Adverse Effect), nor will such action result in any violation of the provisions
of the articles of incorporation or by-laws of the Company or any Subsidiary or
any applicable law, statute, ordinance, rule, regulation, judgment, order,
decision, writ or decree of any government, government instrumentality or court,
domestic or foreign, having jurisdiction over the Company or any Subsidiary or
any of their assets, properties or operations. As used herein, a "Repayment
Event" means any event or condition which gives the holder of any note,
debenture or other evidence of indebtedness (or any person acting on such
holder's behalf) the right to require the repurchase, redemption or repayment of
all or a portion of such indebtedness by the Company or any Subsidiary.
(xi) Absence of Labor Dispute. No labor dispute with the employees of
the Company or any Subsidiary exists or, to the knowledge of the Company, is
imminent, and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its or any Subsidiary's principal
suppliers, manufacturers, customers or contractors, which, in either case, may
reasonably be expected to result in a Material Adverse Effect.
(xii) Absence of Proceedings. Except as is disclosed in the
Registration Statement, there is no action, suit, complaint proceeding, inquiry
or investigation before or brought by any court or governmental agency or body,
domestic or foreign, now pending, or, to the knowledge
-5-
<PAGE> 11
of the Company, threatened, against or affecting the Company or any Subsidiary
or any of their Governmental Licenses (as hereinafter defined), which is
required to be disclosed in the Registration Statement (other than as disclosed
therein), or which might reasonably be expected to result in a Material Adverse
Effect, or which might reasonably be expected to materially and adversely affect
the properties or assets thereof or the consummation of the transactions
contemplated in this Agreement or the performance by the Company of its
obligations hereunder; the aggregate of all pending legal or governmental
proceedings to which the Company or any Subsidiary is a party or of which any of
their respective property or assets is the subject which are not described in
the Registration Statement, including ordinary routine litigation incidental to
the business, could not, reasonably be expected to result in a Material Adverse
Effect.
(xiii) Accuracy of Exhibits. There are no contracts or documents which
are required to be described in the Registration Statement or the Prospectus or
to be filed as exhibits thereto which have not been so described and filed as
required.
(xiv) Possession of Intellectual Property. Except as is set forth in
the Registration Statement, the Company and its subsidiaries own or possess, or
can acquire on reasonable terms. adequate patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other, unpatented
and/or unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks. trade names or other intellectual
property (collectively, "Intellectual Property") necessary to carry on the
business now operated by them, and neither the Company nor any of its
subsidiaries has received any notice or is otherwise aware of any infringement
of or conflict with asserted rights of others with respect to any Intellectual
Property or of any facts or circumstances which would render any Intellectual
Property invalid or inadequate to protect the interest of the Company or any of
its subsidiaries therein, and which infringement or conflict (if the subject of
any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly
or in the aggregate, would result in a Material Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or Authorization,
approval, consent, license, order, registration, qualification or decree of, any
court or governmental authority or agency (including, without limitation, the
Federal Communications Commission (the "FCC") or any state agency or
governmental authority having jurisdiction over intrastate communication) is
necessary or required for the performance by the Company of its obligations
hereunder, in connection with the offering, issuance or sale of the Securities
hereunder or the consummation of the transactions contemplated by this
Agreement, except such as have been already obtained or as may, be required
under the 1933 Act or the 1933 Act Regulations or state securities laws.
(xvi) Possession of Licenses and Permits. The Company and its
subsidiaries possess such permits, licenses, certificates, registrations,
approvals, consents and other authorizations (collectively, "Governmental
Licenses") issued by the appropriate federal, state, local or foreign regulatory
agencies or bodies necessary or required to conduct the business now operated by
them including, but not limited to, any licenses, certificates, authorizations
or registrations issued by the FCC or from state agencies having jurisdiction
over interstate or intrastate telecommunications except to the extent that any
failure to so possess such Governmental Licenses, either singly or in the
aggregate, would not have a Material Adverse Effect; the Company and its
subsidiaries are in compliance with the terms and conditions of all such
Governmental Licenses except where failure so
-6-
<PAGE> 12
to comply would not have a Material Adverse Effect; all of the Governmental
Licenses are valid and in full force and effect, neither the Company nor any of
its subsidiaries has received any notice of proceedings relating to the
revocation, suspension or modification of any such Governmental Licenses which,
singly or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would result in a Material Adverse Effect; neither the Company nor any
of its subsidiaries has failed to obtain and maintain in effect, any
Governmental License required or necessary for the ownership or lease of its
property or the conduct of its business except for those whose failure to obtain
do not or will not result in a Material Adverse Effect; all Governmental
Licenses held by the Company and its subsidiaries have been duly and validly
issued to the Company and its subsidiaries, and such Governmental Licenses are
not subject to any conditions outside of the ordinary course; no event has
occurred which permits (nor has an event occurred which with notice or lapse of
time or both would permit) the revocation, suspension or termination of such
Governmental Licenses which would result in a Material Adverse Effect or the
imposition of any material adverse restriction or condition thereon which might
result in a Material Adverse Effect.
(xvii) Compliance with Laws and Regulations. The Company and its
subsidiaries have operated in compliance with, and are not in violation of
(except for such noncompliance or such violations which do not or will not
result in a Material Adverse Effect), all statutes (including, but not limited
to, the Communications Act of 1934, as amended, including the Telecommunications
Act of 1996) laws, ordinances, rules, regulations, judgments, orders, decisions
or decrees of any court, regulatory body, administrative body, administrative
agency, governmental body, arbitrator or other authority having jurisdiction
over the Company or its subsidiaries or any of their assets or properties, as
applicable, including, but not limited to, the FCC and any state authority
having jurisdiction over the Company or its subsidiaries or over their
respective assets or properties.
(xviii) Required Filings. The Company and its subsidiaries have filed
with all administrative bodies, administrative agencies, governmental bodies,
arbitrators or other authorities having jurisdiction over the Company or its
subsidiaries or any of their assets or its properties, as applicable, all
applications, statements, reports, tariffs, information, forms, or any other
documents or materials required under all statutes, laws, ordinances, rules,
regulations, judgments, orders, decisions or decrees, except where the failure
to file would not have a Material Adverse Effect on the Company's or any of its
subsidiaries' ability to provide its services as described in the Registration
Statement. To the Company's knowledge, such filings or submissions were in
compliance with applicable laws or regulations when filed or submitted and no
deficiencies have been asserted by any administrative bodies, administrative
agencies, governmental bodies, arbitrators or other authorities with respect to
such filings or submissions, except where the deficiency is of such a nature
that failure to cure any such deficiency would not have a Material Adverse
Effect on the Company's ability to provide its services as described in the
Registration Statement. To the Company's knowledge, the information contained in
such filings or submissions was and continues to be in all material respects,
accurate, complete and up-to-date at the time the filings or submissions were
made.
(xix) No Adverse Judgments or Other Orders. There is no outstanding
adverse judgment, injunction, decision, decree or order that has been issued by
any court, regulatory body, administrative agency, governmental body, arbitrator
or other foreign, federal, state or local authority having jurisdiction over any
of the Company or its subsidiaries or any of their properties or assets, as
applicable, which, either singly or in the aggregate, would have a Material
Adverse Effect.
-7-
<PAGE> 13
(xx) Title to Property. The Company and its subsidiaries have good and
marketable title to all real property owned by the Company and its subsidiaries
and good title to all other properties owned by them, in each case, free and
clear of all mortgages, pledges, liens, security interests, claims, restrictions
or encumbrances of any kind except such as (a) are described in the Prospectus
or (b) do not, singly or in the aggregate, materially affect the value of such
property and do not interfere with the use made and proposed to be made of such
property by the Company or any of its subsidiaries; and all of the leases and
subleases material to the business of the Company and its subsidiaries,
considered as one enterprise, and under which the Company or any of its
subsidiaries holds properties described in the Prospectus, are in full force and
effect, and neither the Company nor any Subsidiary has any notice of any
material claim of any sort that has been asserted by anyone adverse to the
rights of the Company or any Subsidiary under any of the leases or subleases
mentioned above, or affecting or questioning the rights of the Company or such
Subsidiary to the continued possession of the leased or subleased premises under
any such lease or sublease.
(xxi) Compliance with Cuba Act. The Company has complied with, and is
and will be in compliance with, the provisions of that certain Florida act
relating to disclosure of doing business with Cuba, codified as Section 517.075
of the Florida statutes, and the rules and regulations thereunder (collectively,
the "Cuba Act") or is exempt therefrom.
(xxii) Investment Company Act. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the application
of the net proceeds therefrom as described in the Prospectus will not be, an
"investment company" or an entity "controlled" by an "investment company" as
such terms are defined in the Investment Company Act of 1940, as amended (the
"1940 Act").
(xxiii) Tax Returns. The Company and its subsidiaries have filed all
federal, state, local and foreign tax returns that are required to be filed or
have duly requested extensions thereof and have paid all taxes required to be
paid by any of them and any related assessments, fines or penalties, except for
any such tax, assessment, fine or penalty that is being contested in good faith
and by appropriate proceedings; and adequate charges, accruals and reserves have
been provided for in the financial statements referred to in Section 1(a)(iii)
above in respect of all federal, state, local and foreign taxes for all periods
as to which the tax liability of the Company or any of its subsidiaries has not
been finally determined or remains open to examination by applicable taxing
authorities.
(xxiv) ERISA. To the Company's best knowledge after due inquiry, the
Company and each of its subsidiaries are in compliance in all material respects
with all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA") except where such noncompliance would not
have a Material Adverse Effect. No "reportable event" (as defined in ERISA) has
occurred with respect to any "pension plan" (as defined in ERISA) for which the
Company or any of its respective subsidiaries would have any liability. The
Company and each of its subsidiaries have not incurred and do not expect to
incur liability under (A) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (B) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and published
interpretations thereunder (the "Code"). Each "pension plan" for which any of
the Company and each of its subsidiaries would have liability that is intended
to be qualified under Section 401(a) of the Code is so qualified in all material
respects
-8-
<PAGE> 14
and nothing has occurred, whether by action or by failure to act, which would
cause the loss of such qualification.
(xxv) Insurance. The Company and each of its subsidiaries carry, or are
covered by, insurance in such amounts and covering such risks as is adequate for
the conduct of their respective businesses and the value of their respective
properties and is customary for companies engaged in similar businesses in
similar industries.
(xxvi) Environmental Laws. Except as described in the Registration
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any of its subsidiaries is
in violation of any federal, state, local or foreign statute, law, rule,
regulation, ordinance, code, policy or rule of common law or any judicial or
administrative interpretation thereof, including any judicial or administrative
order, consent, decree or judgment, relating to pollution or protection of human
health, the environment (including, without limitation, ambient air, surface
water, groundwater, land surface or subsurface strata) or wildlife, including,
without limitation, laws and regulations relating to the release or threatened
release of chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum or petroleum products (collectively, "Hazardous
Materials") or to the manufacture, processing, distribution use, treatment,
storage, disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), (B) to the best knowledge of the Company and its
Subsidiaries after due inquiry, the Company and its Subsidiaries each have all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements, (C) to
the best knowledge of the Company and its Subsidiaries after due inquiry, there
are no pending or threatened administrative, regulatory or judicial actions,
suits, demands, demand letters, claims, liens, notices of noncompliance or
violation, investigation or proceedings relating to any Environmental Law
against the Company or any of its subsidiaries and (D) to the best knowledge of
the Company and its Subsidiaries after due inquiry, there are no events or
circumstances that might reasonably be expected to form the basis of an order
for clean-up or remediation, or an action, suit or proceeding by any private
party or governmental body or agency, against or affecting the Company or any of
its subsidiaries relating to Hazardous Materials or any Environmental Laws.
(xxvii) Registration Rights. There are no persons with registration
rights or other similar rights to have any securities registered pursuant to the
Registration Statement or otherwise registered by the Company under the 1933 Act
(other than the registration rights held by Cruttenden Roth Incorporated which
have been waived).
(b) Representations and Warranties by the Selling Shareholders. Each
Selling Shareholder severally represents and warrants to each Underwriter as of
the date hereof, as of the Closing Time, and, if the Selling Shareholder is
selling Option Securities on a Date of Delivery, as of each such Date of
Delivery, and agrees with each Underwriter, as follows:
(i) Accurate Disclosure. To the best knowledge of such Selling
Shareholder, the representations and warranties of the Company contained in
Section 1(a) hereof are true and correct; such Selling Shareholder has reviewed
and is familiar with the Registration Statement and the Prospectus and neither
the Prospectus nor any amendments or supplements thereto includes any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; such Selling
-9-
<PAGE> 15
Shareholder is not prompted to sell the Securities to be sold by such Selling
Shareholder hereunder by any information concerning the Company or any
Subsidiary of the Company which is not set forth in the Prospectus.
(ii) Authorization of Agreements. Such Selling Shareholder has the
full right, power and authority to enter into this Agreement and a Power of
Attorney and Custody Agreement (the "Power of Attorney and Custody Agreement")
and to sell, transfer and deliver the Securities to be sold by such Selling
Shareholder hereunder. The execution and delivery of this Agreement and the
Power of Attorney and Custody Agreement and the sale and delivery of the
Securities to be sold by such Selling Shareholder and the consummation of the
transactions contemplated herein and compliance by such Selling Shareholder with
its obligations hereunder have been duly authorized by such Selling Shareholder
and do not and will not, whether with or without the giving of notice or passage
of time or both, conflict with or constitute a breach of, or default under, or
result in the creation or imposition of any tax, lien, charge or encumbrance
upon the Securities to be sold by such Selling Shareholder or any property or
assets of such Selling Shareholder pursuant to any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, license, lease or other
agreement or instrument to which such Selling Shareholder is a party or by which
such Selling Shareholder may be bound, or to which any of the property or assets
of such Selling Shareholder is subject, nor will such action result in any
violation of the provisions of the charter or by-laws or other organizational
instrument of such Selling Shareholder, if applicable, or any applicable treaty,
law, statute, rule, regulation, judgment, order, writ or decree of any
government, government instrumentality or court, domestic or foreign, having
jurisdiction over such Selling Shareholder or any of its properties.
(iii) Good and Marketable Title. Such Selling Shareholder has and will
at the Closing Time and, if any Option Securities are purchased, on the Date of
Delivery have good and marketable title to the Securities to be sold by such
Selling Shareholder hereunder, free and clear of any security interest,
mortgage, pledge, lien, charge, claim, equity or encumbrance of any kind, other
than pursuant to this Agreement; and upon delivery of such Securities and
payment of the purchase price therefor as herein contemplated, assuming each
such Underwriter has no notice of any adverse claim [and is a protected
purchaser under Section 8.303 of the Texas Business and Commerce Code.], each of
the Underwriters will receive good and marketable title to the Securities
purchased by it from such Selling Shareholder, free and clear of any security
interest, mortgage, pledge, lien, charge, claim, equity or encumbrance of any
kind.
(iv) Due Execution of Power of Attorney and Custody Agreement. Such
Selling Shareholder has duly executed and delivered, in the form heretofore
furnished to the Representative(s), the Power of Attorney and Custody Agreement
with Kevin W. McAleer and Jere W. Thompson, Jr. as attorney(s)-in-fact (the
"Attorney(s)-in-Fact") and the Company as custodian (the "Custodian"); the
Custodian is authorized to deliver the Securities to be sold by such Selling
Shareholder hereunder and to accept payment therefor; and each Attorney-in-Fact
is authorized to execute and deliver this Agreement and the certificate referred
to in Section 5(f) or that may be required pursuant to Section(s) 5(l) and 5(m)
on behalf of such Selling Shareholder, to sell, assign and transfer to the
Underwriters the Securities to be sold by such Selling Shareholder hereunder, to
determine the purchase price to be paid by the Underwriters to such Selling
Shareholder, as provided in Section 2(a) hereof, to authorize the delivery of
the Securities to be sold by such Selling Shareholder hereunder, to accept
payment therefor, and otherwise to act on behalf of such Selling Shareholder in
connection with this Agreement.
-10-
<PAGE> 16
(v) Absence of Manipulation. Such Selling Shareholder has not taken,
and will not take, directly or indirectly, any action which is designed to or
which has constituted or which might reasonably be expected to cause or result
in stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities.
(vi) Absence of Further Requirements. No filing with, or consent,
approval, authorization, order, registration, qualification or decree of, any
court or governmental authority or agency, domestic or foreign, is necessary or
required for the performance by each Selling Shareholder of its obligations
hereunder or in the Power of Attorney and Custody Agreement, or in connection
with the sale and delivery of the Securities hereunder or the consummation of
the transactions contemplated by this Agreement, except such as may have
previously been made or obtained or as may be required under the 1933 Act or the
1933 Act Regulations or state securities laws.
(vii) Restriction on Sale of Securities. During a period of 120 days
from the date of the Prospectus, such Selling Shareholder will not except (i)
for transfers to the Underwriters as part of the Offering; (ii) for transfers to
an immediate family member or to a trust for such family member's benefit; or
(iii) surrender of any Common Stock or option exercisable for Common Stock as
complete or partial payment for the shares to be acquired upon exercise of an
option granted to such person, without the prior written consent of Merrill
Lynch, (i) offer, pledge, sell, contract to sell, sell any option or contract to
purchaser, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or indirectly,
any share of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or file any registration statement under the 1933
Act with respect to any of the foregoing or (ii) enter into any swap or any
other agreement or any transaction that transfers, in whole or in part, directly
or indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to the Securities to be sold
hereunder.
(viii) Certificates Suitable for Transfer. Certificates for all of the
Securities to be sold by such Selling Shareholder pursuant to this Agreement, in
suitable form for transfer by delivery or accompanied by duly executed
instruments of transfer or assignment in blank with signatures guaranteed, have
been placed in custody with the Custodian with irrevocable conditional
instructions to deliver such Securities to the Underwriters pursuant to this
Agreement.
(ix) No Association with NASD. Neither such Selling Stockholder nor any
of his/her affiliates directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
or has any other association with (within the meaning of Article I, Section 1(m)
of the By-laws of the National Association of Securities Dealers, Inc.), any
member firm of the National Association of Securities Dealers, Inc.
(c) Officer's Certificates. Any certificate signed by any officer of the
Company or any of its subsidiaries delivered to the Representatives or to
counsel for the Underwriters shall be deemed a representation and warranty by
the Company to each Underwriter as to the matters covered thereby; and any
certificate signed by or on behalf of the Selling Shareholders as such and
delivered to the Representatives or to counsel for the Underwriters pursuant to
the terms of this Agreement shall be
-11-
<PAGE> 17
deemed a representation and warranty by such Selling Shareholder to the
Underwriters as to the matter covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company and each Selling Shareholder, severally and not jointly,
agree to sell to each Underwriter, severally and not jointly, and each
Underwriter, severally and not jointly, agrees to purchase from the Company and
each Selling Shareholder, at the price per share set forth in Schedule C, that
proportion of the number of Initial Securities set forth in Schedule B opposite
the name of the Company or such Selling Shareholder, as the case may be, which
the number of Initial Securities set forth in Schedule A opposite the name of
such Underwriter, plus any additional number of Initial Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof, bears to the total number of Initial Securities, subject, in
each case to such adjustments among the Underwriters as the Representatives in
their sole discretion shall make to eliminate any sales or purchases of
fractional securities.
(b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Selling Shareholders, acting severally and not jointly, hereby
grant an option to the Underwriters, severally and not jointly, to purchase up
to an additional 975,000 shares of Common Stock, as set forth in Schedule B, at
the price per share set forth in Schedule C, less an amount per share equal to
any dividends or distributions declared by the Company and payable on the
Initial Securities but not payable on the Option Securities. The option hereby
granted will expire 30 days after the date hereof and may be exercised in whole
or in part from time to time only for the purpose of covering over-allotments
which may be made in connection with the offering and distribution of the
Initial Securities upon notice by the Representatives to the Selling
Shareholders setting forth the number of Option Securities as to which the
several Underwriters are then exercising the option and the time and date of
payment and delivery for such Option Securities. Any such time and date of
delivery (a "Date of Delivery") shall be determined by the Representatives, but
shall not be later than seven full business days after the exercise of said
option, nor in any event prior to the Closing Time, as hereinafter defined. If
the option is exercised as to all or any portion of the Option Securities, each
of the Underwriters, acting severally and not jointly, will purchase that
proportion of the total number of Option Securities then being purchased which
the number of Initial Securities set forth in Schedule A opposite the name of
such Underwriter bear to the total number of Initial Securities, subject in each
case to such adjustments as the Representatives in their discretion shall make
to eliminate any sales or purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Paul,
Hastings, Janofsky & Walker LLP, 399 Park Avenue, New York, New York, or at such
other place as shall be agreed upon by the Representatives and the Company and
the Selling Shareholders, at 9:00 A.M. (Eastern time) on the third (fourth, if
the pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day
after the date hereof (unless postponed in accordance with the provisions of
Section 10), or such other time not later than ten business days after such date
as shall be agreed upon by the Representatives and the Company and
-12-
<PAGE> 18
the Selling Shareholders (such time and date of payment and delivery being
herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by the Representatives
and the Company and the Selling Shareholders, on each Date of Delivery as
specified in the notice from the Representatives to the Company and the Selling
Shareholders.
Payment shall be made to the Company and the Selling Shareholders by
wire transfer of immediately available funds to bank accounts designated by the
Company and the Custodian pursuant to each Selling Shareholder's Power of
Attorney and Custody Agreement, as the case may be, against delivery to the
Representatives for the respective accounts of the Underwriters of certificates
for the Securities to be purchased by them. It is understood that each
Underwriter has authorized the Representatives, for its account, to accept
delivery of, receipt for, and make payment of the purchase price for, the
Initial Securities and the Option Securities, if any, which it has agreed to
purchase. Merrill Lynch, individually and not as representative of the
Underwriters, may (but shall not be obligated to) make payment of the purchase
price for the Initial Securities or, the Option Securities, if any, to be
purchased by any Underwriter whose funds have not been received by the Closing
Time or the relevant Date of Delivery, as the case may be, but such payment
shall not relieve such Underwriter from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial
Securities and the Option Securities, if any, shall be in such denominations and
registered in such names as the Representatives may request in writing at least
one full business day before the Closing Time or the relevant Date of Delivery,
as the case may be, The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Representatives in The City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time or the relevant Date of Delivery,
as the case may be.
SECTION 3. Covenants of the Company.
The Company covenants with each Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests.
The Company, subject to Section 3(b), will comply with the requirements
of Rule 430A or Rule 434, as applicable, and will notify the
Representatives immediately, and confirm the notice in writing, (i)
when any post-effective amendment to the Registration Statement shall
become effective, or any supplement to the Prospectus or any amended
Prospectus shall have been filed, (ii) of the receipt of any comments
from the Commission, (iii) of any request by the Commission for any
amendment to the Registration Statement or any amendment or supplement
to the Prospectus or for additional information, and (iv) of the
issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing
or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Securities for offering or sale
in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes. The Company will promptly effect
the filings necessary pursuant to Rule 424(b) and will take such steps
as it
-13-
<PAGE> 19
deems necessary to ascertain promptly whether the form of prospectus
transmitted for filing under Rule 424(b) was received for filing by the
Commission and, in the event that it was not, it will promptly file
such prospectus. The Company will make every reasonable effort to
prevent the issuance of any stop order and, if any stop order is
issued, to obtain the lifting thereof at the earliest possible moment.
(b) Filing of Amendments. The Company will give the
Representatives notice of its intention to file or prepare any
amendment to the Registration Statement (including any filing under
Rule 462(b)), any Term Sheet or any amendment, supplement or revision
to either the prospectus included in the Registration' Statement at the
time it became effective or to the Prospectus will furnish the
Representatives with copies of any such documents a reasonable amount
of time prior to such proposed filing or use, as the case may be, and
will not file or use any such document to which the Representatives or
counsel for the Underwriters shall object.
(c) Delivery of Registration Statements. The Company has
furnished or will deliver to the Representatives and counsel for the
Underwriters, without charge, signed or conformed copies of the
Registration Statement as originally filed and of each amendment
thereto (including exhibits filed therewith or incorporated by
reference therein) and signed or conformed copies of all consents and
certificates of experts, and will also deliver to the Representatives,
without charge, a conformed copy of the Registration Statement as
originally filed and of each amendment thereto (without exhibits) for
each of the Underwriters. The copies of the Registration Statement and
each amendment thereto furnished to the Underwriters will be identical
to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(d) Delivery of Prospectuses. Company has delivered to each
Underwriter, without charge, as many copies of each preliminary
prospectus as such Underwriter reasonably requested, and the Company
hereby consents to the use of such copies for purposes permitted by the
1933 Act. The Company will furnish to each Underwriter, without charge,
during the period when the Prospectus is required to be delivered under
the 1933 Act or the Securities Exchange Act of 1934 (the "1934 Act"),
such number of copies of the Prospectus (as amended or supplemented) as
such Underwriter may reasonably request. The Prospectus and any
amendments or supplements thereto furnished to the Underwriters will be
identical to the electronically transmitted copies thereof filed with
the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company
will comply with the 1933 Act and the 1933 Act Regulations so as to
Permit the completion of the distribution of the Securities as
contemplated in this Agreement and in the Prospectus. If at any time
when a prospectus is required by the 1933 Act to be delivered in
connection with sales of the Securities, any event shall occur or
condition shall exist as a result of which it is necessary, in the
opinion of counsel for the Underwriters or for the Company, to amend
the Registration Statement or amend or supplement the Prospectus in
order that the Prospectus will not include any untrue statements of a
material fact or omit to state a material fact necessary in order to
make the statements therein not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, or
if it shall be necessary, in
-14-
<PAGE> 20
the opinion of such counsel, at any such time to amend the Registration
Statement or amend or supplement the Prospectus in order to comply with
the requirements of the 1933 Act or the 1933 Act Regulations, the
Company will promptly prepare and file with the Commission, subject to
Section 3(b), such amendment or supplement as may be necessary to
correct such statement or omission or to make the Registration
Statement or the Prospectus comply with such requirements, and the
Company will furnish to the Underwriters such number of copies of such
amendment or supplement as the Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use commercially
reasonable efforts, in cooperation with the Underwriters, to qualify
the Securities for offering and sale under the applicable securities
laws of such states and other jurisdictions (domestic or foreign) as
the Representatives may designate and to maintain such qualifications
in effect for a period of not less than one year from the later of the
effective date of the Registration Statement and any Rule 462(b)
Registration Statement; provided, however, that the Company shall not
be obligated to file any general consent to service of process or to
qualify as a foreign corporation or as a dealer in securities in any
jurisdiction in which it is not so qualified or to subject itself to
taxation in respect of doing business in any jurisdiction in which it
is not otherwise so subject. In each jurisdiction in which the
Securities have been so qualified, the Company will file such
statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for a period of
not less than one year from the effective date of the Registration
Statement and any Rule 462(b) Registration Statement.
(g) Rule 158. The Company will timely file such reports
pursuant to the 1934 Act as are necessary in order to make generally
available to its securityholders as soon as practicable an earnings
statement for the purposes of, and to provide the benefits contemplated
by, the last paragraph of Section 11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified
in the Prospectus under "Use of Proceeds."
(i) Listing. The Company will use commercially reasonable
efforts to effect and maintain the quotation of the Securities on the
Nasdaq National Market (or on any national securities exchange) and
will file with the Nasdaq National Market all documents and notices
required by the Nasdaq National Market of companies that have
securities that are traded in the over-the-counter market and
quotations for which are reported by the Nasdaq National Market.
(j) Restriction on Sale of Securities. During a period of 120
days from the date of the Prospectus, the Company will not, without the
prior written consent of Merrill Lynch, directly or indirectly, (i)
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any
share of Common Stock or any securities convertible into or exercisable
or exchangeable for Common Stock or file any registration statement
under the 1933 Act with respect to any of the foregoing or (ii) enter
into any swap or any other agreement or any transaction that transfers,
in whole or in part, directly or indirectly, the economic consequence
of ownership of the Common Stock, whether any such
-15-
<PAGE> 21
swap or transaction described in clause (i) or (ii) above is to be
settled by delivery of Common Stock or such other securities, in cash
or otherwise. The foregoing sentence shall not apply to (A) the
Securities to be sold hereunder, (B) any shares of Common Stock issued
by the Company upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof and referred to
in the Prospectus, (C) any shares of Common Stock issued or options to
purchase Common Stock granted pursuant to existing employee benefit
plans of the Company referred to in the Prospectus, (D) any shares of
Common Stock issued pursuant to any non-employee director stock plan or
dividend reinvestment plan or (E) Common Stock issued in connection
with an acquisition by the Company of the securities or assets of
another entity, provided that any person or entity acquiring such
Common Stock agrees, in writing, to be subject to the same
restrictions.
(k) Reporting Requirements. The Company, during the period
when the Prospectus is required to be delivered under the 1933 Act or
the 1934 Act, will file all documents required to be filed, with the
Commission pursuant to the 1934 Act within the time periods required by
the 1934 Act and the rules and regulations of the Commission
thereunder.
SECTION 4. Payment of Expenses.
(a) Expenses. The Company will pay or cause to be paid all expenses
incident to the performance of its Obligations and the Selling Shareholders'
Obligations, except as set forth in Section 4(b) below under this Agreement,
including (i) the preparation, printing and filing of the Registration Statement
(including financial statements and exhibits) as originally filed and of each
amendment thereto, (ii) the preparation, printing and delivery to the
Underwriters of this Agreement, any Agreement among Underwriters and such other
documents as may be required in connection with the offering, purchase, sale,
issuance or delivery of the Securities, (iii) the preparation, issuance and
delivery of the certificates for the Securities to the Underwriters, including
any stock or other transfer taxes and any stamp or other duties payable upon the
sale, issuance or delivery of the Securities to the Underwriters, (iv) the fees
and disbursements of the Company's counsel (and one counsel for the Selling
Shareholders), accountants and other advisors, (v) the qualification of the
Securities under securities laws in accordance with the provisions of Section
3(f) hereof, including filing fees and the reasonable fees and disbursements of
counsel for the Underwriters in connection therewith and in connection with the
preparation of the Blue Sky Survey and any supplement thereto, not to exceed
$5,000, (vi) the printing and delivery to the Underwriters of copies of each
preliminary prospectus, any Term Sheets and of the Prospectus and any amendments
or supplements thereto, (vii) the preparation, printing and delivery to the
Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii)
the fees and expenses of any transfer agent or registrar for the Securities and
(ix) the filing fees incident to, and the reasonable fees and disbursements of
counsel to the Underwriters in connection with, the review by the National
Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of
the Securities) and (x) the fees and expenses incurred in connection with the
inclusion of the Securities in the Nasdaq National Market.
(b) Expenses of the Selling Shareholders. The Selling Shareholders,
jointly and severally, will pay all expenses incident to the performance of
their respective obligations under, and the consummation of the transactions
contemplated by this Agreement, including (i) any stamp duties, capital duties
and stock transfer taxes, if any, payable upon the sale of the Securities to the
-16-
<PAGE> 22
Underwriters, and their transfer between the Underwriters pursuant to an
agreement between such Underwriters, and (ii) the fees and disbursements of
their respective personal counsel and accountants.
(c) Termination of Agreement. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5, Section 9(a)(i)
or Section 11 hereof, the Company shall reimburse the Underwriters for all of
their out-of- pocket expenses, including the reasonable fees and disbursements
of counsel for the Underwriters.
(d) Allocation of Expenses. The provisions of this Section shall not
affect any agreement that the Company and the Selling Shareholders may make for
the sharing of such costs and expenses.
SECTION 5. Conditions of Underwriters' Obligations.
The obligations of the several underwriters hereunder are subject to
the accuracy of the representations and warranties of the Company and the
Selling Shareholders contained in Section I hereof or in certificates of any
officer of the Company or any Subsidiary of the Company or on behalf of any
Selling Shareholder delivered pursuant to the provisions hereof, to the
performance by the Company of its covenants and other obligations hereunder, and
to the following further conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has
become; effective and at Closing Time no stop order suspending the
effectiveness of the Registration Statement shall have been issued
under the 1933 Act or proceedings therefor initiated or threatened by
the Commission, and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of counsel to the Underwriters. A prospectus containing
the Rule 430A Information shall have been filed with the Commission in
accordance with Rule 424(b) (or a post-effective amendment providing
such information shall have been filed and declared effective in
accordance with the requirements of Rule 430A) or, if the Company has
elected to rely upon Rule 434, a Term Sheet shall have been filed with
the Commission in accordance with Rule 424(b).
(b) Opinion of Counsel for Company. At Closing Time, the
Representatives shall have received the favorable opinions, dated as of
Closing Time, in form and substance satisfactory to counsel for the
Underwriters (together with signed or reproduced copies of such letter
for each of the other Underwriters) of (i) Munsch Hardt Kopf & Harr,
P.C., counsel for the Company, to the effect set forth in Exhibit A-1
hereto and to such further effect as counsel to the Underwriters may
reasonably request, and (ii) Swidler Berlin Shereff Friedman, LLP,
special regulatory counsel to the Company, to the effect of the
regulatory matters set forth in Exhibits A-2 and A-3 hereto and to such
further matters as counsel to the Underwriters may reasonably request.
(c) Opinion of Counsel for the Selling Shareholders. At
Closing Time, the Representatives shall have received the favorable
opinion, dated as of Closing Time, of Munsch Hardt Kopf & Harr, P.C.,
counsel for the Selling Shareholders, in form and substance
satisfactory to counsel for the Underwriters, together with signed or
reproduced copies of such letter for each of the other Underwriters to
the effect set forth in Exhibit B hereto and to such further effect as
counsel to the Underwriters may reasonably request.
-17-
<PAGE> 23
(d) Opinion Of Counsel for Underwriters. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of
Closing Time, of Paul, Hastings, Janofsky & Walker LLP, counsel for the
Underwriters, together with signed or reproduced copies of such letter
for each of the other Underwriters with respect to the matters set
forth in clauses (i), (ii), (v), (vii) (solely as to preemptive or
other similar rights arising by operation of law or under the charter
or by-laws of the Company), (ix) through (xi), inclusive, (xiii), (xv)
(solely as to the information in the Prospectus under "Description of
Capital Stock--Common Stock") and the penultimate paragraph of Exhibit
A hereto. In giving such opinion such counsel may rely, as to all
matters governed by the laws of jurisdictions other than the law of the
State of New York, the federal law of the United States and the General
Corporation Law of the State of Delaware, upon the opinions of counsel
satisfactory to the Representatives. Such counsel may also state that,
insofar as such opinion involves factual matters, they have relied, to
the extent they deem proper, upon certificates of officers of the
Company and its subsidiaries and certificates of public officials.
(e) Officers' Certificate. At Closing Time, there shall not
have been, since the date hereof or since the respective dates as of
which information is given in the Prospectus, any material adverse
change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in
the ordinary course of business, and the Representatives shall have
received a certificate of the President or a Vice President of the
Company and of the chief financial or chief accounting officer of the
Company, dated as of Closing Time, to the effect that (i) there has
been no such material adverse change, (ii) the representations and
warranties in Section 1(a) hereof are true and correct with the same
force and effect as though expressly made at and as of Closing Time,
(iii) the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to
Closing Time, and (iv) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or are contemplated by the
Commission.
(f) Certificate of Selling Shareholders. At Closing Time, the
Representatives shall have received a certificate of each Selling
Shareholder or an Attorney-in-Fact on behalf of each Selling
Shareholder, dated as of Closing Time, to the effect that (i) the
representations and warranties of each Selling Shareholder contained in
Section 1(b) hereof are true and correct in all respects with the same
force and effect as though expressly made at and as of Closing Time and
(ii) each Selling Shareholder has complied in all material respects
with all agreements and all conditions on its part to be performed
under this Agreement at or prior to Closing Time.
(g) Accountant's Comfort Letter. At the time of the execution
of this Agreement, the Representatives shall have received from KPMG
LLP a letter dated such date, in form and substance satisfactory to the
Representatives, together with signed or reproduced copies of such
letter for each of the other Underwriters containing statements and
information of the type ordinarily included in accountants' "comfort
letters" to underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement
and the Prospectus.
-18-
<PAGE> 24
(h) Bring-down Comfort Letter. At Closing Time, the
Representatives shall have received from KPMG Peat, Marwick, LLP a
letter, dated as of Closing Time, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (g) of
this Section, except that the specified date referred to shall be a
date not more than three business days, prior to Closing Time.
(i) Approval of Listing. At Closing Time, the Securities shall
have been approved for inclusion in the Nasdaq National Market, subject
only to official notice of issuance.
(j) No Objection. The NASD has confirmed that it has not
raised any objection with respect to the fairness and reasonableness of
the underwriting terms and arrangements.
(k) Lock-up Agreements. At the date of this Agreement, the
Representatives shall have received an agreement substantially in the
form of Exhibit C hereto signed by the persons listed on Schedule D
hereto.
(l) Conditions to Purchase of Option Securities. In the event
that the Underwriters exercise their option provided in Section 2(b)
hereof to purchase all or any portion of the Option Securities, the
representations and warranties of the Company and the Selling
Shareholders contained herein and the statements in any certificates
furnished by the Company, any Subsidiary of the Company and the Selling
Shareholders hereunder shall be true and correct as of each Date of
Delivery and, at the relevant Date of Delivery, the Representatives
shall have received:
(i) Officers' Certificate. A certificate, dated such
Date of Delivery, of the President or a Vice President of the
Company and of the chief financial or chief accounting officer
of the Company confirming that the certificate delivered at
the Closing Time pursuant to Section 5(d) hereof remains true
and correct as of such Date of Delivery.
(ii) Certificate of Selling Shareholders. A
certificate, dated such Date of Delivery, of each Selling
Shareholder or an Attorney-in-Fact on behalf of each Selling
Shareholder confirming that the certificate delivered at
Closing Time pursuant to Section 5(f) remains true and correct
as of such Date of Delivery.
(iii) Opinion of Counsel of Company. The favorable
opinion of Munsch Hardt Kopf & Harr, P.C., counsel for the
Company, together with the favorable opinion of Swidler Berlin
Shereff Friedman, LLP, special regulatory counsel to the
Company, each in form and substance satisfactory to counsel
for the Underwriters, dated such Date of Delivery, relating to
the Option Securities to be purchased on such Date of Delivery
and otherwise to the same effect as the opinions required by
Section 5(b) hereof.
(iv) Opinion of Counsel for Selling Shareholders.
The favorable opinion of Munsch Hardt Kopf & Harr, P.C.,
counsel for the Selling Shareholders, in form and substance
satisfactory to counsel for the Underwriters, dated such Date
of
-19-
<PAGE> 25
Delivery, relating to the Option Securities to be purchased on
such Date of Delivery and otherwise to the same effect as the
opinion required by Section 5(c) hereof.
(v) Opinion of Counsel for Underwriters. The
favorable opinion of Paul, Hastings, Janofsky & Walker LLP,
counsel for the Underwriters, dated such Date of Delivery,
relating to the Option Securities to be purchased on such Date
of Delivery and otherwise to the same effect as the opinion
required by Section 5(d) hereof in form and substance to the
Representatives and counsel for the Underwriters.
(vi) Bring-down Comfort Letter. a letter from KPMG
LLP, in form and substance satisfactory to the Representatives
and dated such Date of Delivery, substantially in the same
form and substance as the letter furnished to the
Representatives pursuant to Section 5(g) hereof, except that
the "specified date" in the letter furnished pursuant to this
paragraph shall be a date not more than five days prior to
such Date of Delivery.
(m) Additional Documents. At Closing Time and at each Date of
Delivery, counsel for the Underwriters shall have been furnished with
such documents and opinions as they may require for the purpose of
enabling them to pass upon the issuance and sale of the Securities as
herein contemplated, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the
conditions, herein contained; and all proceedings taken by the Company
and the Selling Shareholders in connection with the issuance and sale
of the Securities as herein contemplated shall be satisfactory in form
and substance to the Representatives and counsel for the Underwriters.
(n) Termination of Agreement. If any condition specified in
this Section shall not have been fulfilled when and as required to be
fulfilled, this Agreement, or, in the case of any condition to the
purchase of Option Securities, on a Date of Delivery which is after the
Closing Time, the obligations of the several Underwriters to purchase
the relevant Option Securities, may be terminated by the
Representatives by notice to the Company at any time at or prior to
Closing Time or such Date of Delivery, as the case may be, and such
termination shall be without liability of any party to any other party
except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of Underwriters. The Company and the Selling
Shareholders, jointly and severally, agree to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission
-20-
<PAGE> 26
therefrom of a material fact required to be stated therein or necessary
to make the statements therein not misleading or arising out of any
untrue statement or alleged untrue statement of a material fact
included in any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission; provided
that (subject to Section 6(d) below) any such settlement is effected
with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission to the extent that any such
expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through Merrill Lynch expressly for use in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto); and provided further that
the Company will not be liable to any Underwriter or to each person, if any, who
controls an Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act with respect to any Prospectus to the extent that the
Company shall sustain the burden of proving that any such loss, liability,
claim, damage or expense resulted from the fact that such Underwriter, in
contravention of a requirement of this Agreement or applicable law, sold
Securities to a person to whom such Underwriter failed to send or give, at or
prior to the Closing Date, a copy of the Final Prospectus, as then amended or
supplemented if: (i) the Company has previously furnished copies thereof
(sufficiently in advance of the Closing Date to allow for distribution by the
Closing Date) to the Underwriter and the loss, liability, claim, damage or
expense of such Underwriter resulted from an untrue statement or omission of a
material fact contained in or omitted from the Preliminary Prospectus which was
corrected in the Final Prospectus as, if applicable, amended or supplemented
prior to the Closing Date and such Final Prospectus was required by law to be
delivered at or prior to the written confirmation of sale to such person and
(ii) such failure to give or send such Final Prospectus by the Closing Date to
the party or parties asserting such loss, liability, claim, damage or expense
would have constituted a defense to the claim asserted by such person; and
provided further, that the liability of the Selling Shareholders under this
Indemnity Agreement shall be limited to the amount by which the net proceeds
received by such Selling Shareholders exceeds the amount of damages such Selling
Shareholder has otherwise been required to pay.
-21-
<PAGE> 27
(b) Indemnification of Company, Directors and Officers and Selling
Shareholders. Each Underwriter severally agrees to indemnify and hold harmless
the Company, its directors, each of its officers who signed the Registration
Statement, each person, if any, who controls the Company within the meaning of
Section 15 of the 1933 Act or Section 20 of the 1934 Act and each Selling
Shareholder against any and all loss, liability, claim, damage and expense
described in the indemnity contained in this Section, as incurred, but only with
respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or any amendment thereto),
including the Rule 430A Information and the Rule 434 Information, if applicable,
or any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Company by such Underwriter through Merrill Lynch expressly for use in
the Registration Statement (or any amendment thereto) or such preliminary
prospectus or the Prospectus (or any amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances; provided, however, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and parties shall reasonably conclude that there may be one
or more legal defenses available to one or more of such parties which are
different from or additional to those available to another party, the
indemnifying party or parties and such indemnified party shall have the right to
select separate counsel to defend such action on behalf of such indemnified
party or parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action, the indemnifying
party will not be liable to such indemnified party under this Section 6 for any
legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying party
shall not be liable for the expenses of more than one separate counsel (in
addition to local counsel) in any one action or separate but substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances, designated by the Representatives in the case of
paragraph (a) of this Section 6, representing the indemnified parties under such
paragraph (a) who are parties to such action or actions) or (ii) the
indemnifying party does not promptly retain counsel satisfactory to the
indemnified party or (iii) the indemnifying party has authorized the employment
of counsel for the indemnified party at the expense of the indemnifying party.
After such
-22-
<PAGE> 28
notice from the indemnifying party to the indemnified party, the indemnifying
party will not be liable for the costs and expenses of any settlement of such
action effected by such indemnified party without the consent of the
indemnifying party. No indemnifying party shall, without the prior written
consent of the indemnified parties, settle or compromise or consent to the entry
of any judgment with respect to any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened, or any
claim whatsoever in respect of which indemnification or contribution could be
sought under this Section 6 or Section 7 hereof (whether or not the indemnified
parties are actual or potential parties thereto), unless such settlement,
compromise or consent (i) includes an unconditional release of each indemnified
part from all liability arising out of such litigation. investigation,
proceeding or claim and (ii) does not include a statement as to or an admission
of fault, culpability or a failure to act by or on behalf of any indemnified
party.
(d) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying patty shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party for fees and expenses of counsel in accordance with such
request prior to the date of such settlement.
(e) Other Agreements with Respect to Notification. The provisions of
this Section shall not affect any agreement among the Company and the Selling
Shareholders with respect to indemnification.
SECTION 7. Contribution.
If the indemnification provided for in Section 6 hereof is for any
reason unavailable to or insufficient to hold harmless an indemnified party in
respect of any losses, liabilities, claims, damages or expenses referred to
therein, then each indemnifying party shall contribute to the aggregate amount
of such losses, liabilities, claims, damages and expenses incurred by such
indemnified party, as incurred, (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Selling
Shareholders on the one hand and the Underwriters on the other hand from the
offering of the Securities pursuant to this Agreement or (ii) if the allocation
provided by clause (i) is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company and the Selling
Shareholders on the one hand and of the Underwriters on the other hand in
connection with the statements or omissions which resulted in such losses,
liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations.
The relative benefits received by the Company and the Selling
Shareholders on the one hand and the Underwriters on the other hand in
connection with the offering of the Securities pursuant to, this Agreement shall
be deemed to be in the same respective proportions as the total net proceeds
from the offering of the Securities pursuant to this Agreement (before deducting
expenses) received by the Company and the Selling Shareholders and the total
underwriting discount received by the Underwriters, in each case as set forth on
the cover of the Prospectus, or, if Rule 434 is used, the
-23-
<PAGE> 29
corresponding location on the Term Sheet, bear to the aggregate initial public
offering price of the Securities as set forth on such cover.
The relative fault of the Company and the Selling Shareholders on the
one hand and the Underwriters on the other hand shall be determined by reference
to, among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or the Selling Shareholders or by the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company, the Selling Shareholders and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 7
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
7. The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 7 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue, statement or omission or alleged omission. Notwithstanding the
provisions of this Section 7, no Selling Shareholder shall be required to
contribute any amount in excess of the amount by which the net proceeds of the
offering received by such Selling Shareholder exceed the amount of damages such
Selling Shareholder has otherwise been required to pay.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the. meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Initial Securities set forth opposite their
respective names in Schedule A hereto and not joint.
The provisions of this Section shall not affect any agreement among the
Company and the Selling Shareholders with respect to contribution.
-24-
<PAGE> 30
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery.
All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries or the Selling Shareholders submitted pursuant hereto, shall remain
operative and in full force and effect, regardless of any investigation made by
or on behalf of any Underwriter or controlling person, or by or on behalf of the
Company or the Selling Shareholders, and shall survive delivery of the
Securities to the Underwriters.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Representatives may terminate this
Agreement, by notice to the Company and the Selling Shareholders, at any time at
or prior to Closing Time (i) if there has been, since the time of execution of
this Agreement or since the respective dates as of which information is given in
the Prospectus, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the Representatives, impracticable to market the Securities or to
enforce contracts for the sale of the Securities, or (iii) if trading in any
securities of the Company has been suspended or materially limited by the
Commission or the Nasdaq National Market, or if trading generally on the
American Stock Exchange or the New York Stock Exchange or in the Nasdaq National
Market has been suspended or materially limited, or minimum or maximum prices
for trading have been fixed, or maximum ranges for prices have been required, by
any of said exchanges or by such system or by order of the Commission, the
National Association of Securities Dealers, Inc. or any other governmental
authority, or (iv) if a banking moratorium has been declared by either Federal
or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. Default by One or More of the Underwriters.
If one or more of the Underwriters shall fail at Closing Time or a Date
of Delivery to purchase the Securities which it or they are obligated to
purchase under this Agreement (the "Defaulted Securities"), the Representatives
shall have the right, within 24 hours thereafter, to make arrangements for one
or more of the non- defaulting Underwriters, or any other underwriters, to
purchase all, but not less than all, of the Defaulted Securities in such amounts
as may be agreed upon and upon the terms herein set forth; if, however, the
Representatives shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10%
of the number of Securities to be purchased on such date, each of the
non-defaulting Underwriters shall be
-25-
<PAGE> 31
obligated, severally and not jointly, to purchase the full amount
thereof in the proportions that their respective underwriting
obligations hereunder bear to the underwriting obligations of all
non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of Securities to be purchased on such date, this Agreement or,
with respect to any Date of Delivery which occurs after the Closing
Time, the obligation of the Underwriters to purchase and of the Company
to sell the Option Securities to be purchased and sold on such Date of
Delivery shall terminate without liability on the part of any
non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement or, in the case of a Date of Delivery which is after the
Closing Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option Securities,
as the case may be, either the Representatives or the Company shall have the
right to postpone Closing Time or the relevant Date of Delivery, as the case may
be, for a period not exceeding seven days in order to effect any required
changes in the Registration Statement or Prospectus or in any other documents or
arrangements. As used herein, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 10.
SECTION 11. Default by One or More of the Selling Shareholders or the
Company.
(a) If a Selling Shareholder shall fail at Closing Time or at
a Date of Delivery to sell and deliver the number of Securities which
such Selling Shareholder or Selling Shareholders are obligated to sell
hereunder, and the remaining Selling Shareholders do not exercise the
right hereby granted to increase, pro rata or otherwise, the number of
Securities to be sold by them hereunder to the total number to be sold
by all Selling Shareholders as set forth in Schedule B hereto, then the
Underwriters may, at option of the Representatives, by notice from the
Representatives to the Company and the non-defaulting Selling
Shareholders, either (a) terminate this Agreement without any liability
on the fault of any non-defaulting party except that the provisions of
Sections 1, 4, 6, 7 and 8 shall remain in full force and effect or (b)
elect to purchase the Securities which the non-defaulting Selling
Shareholders and the Company have agreed to sell hereunder. No action
taken pursuant to this Section 11 shall relieve any Selling Shareholder
so defaulting from liability, if any, in respect of such default.
In the event of a default by any Selling Shareholder
as referred to in this Section 11, each of the Representatives, the
Company and the non-defaulting Selling Shareholders shall have the
right to postpone Closing Time or Date of Delivery for a period not
exceeding seven days in order to effect any required change in the
Registration Statement or Prospectus or in any other documents or
arrangements.
(b) If the Company shall fail at Closing Time or at the Date
of Delivery to sell the number of Securities that it is obligated to
sell hereunder, then this Agreement shall terminate without any
liability on the part of any non-defaulting party; provided, however,
-26-
<PAGE> 32
that the provisions of Sections 1, 4, 6, 7 and 8 shall remain in full
force and effect. No action taken pursuant to this Section 11 shall
relieve the Company from liability, if any, in respect of such default.
SECTION 12. Notices.
All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given if mailed or transmitted by any standard
form of telecommunication. Notices to the Underwriters shall be directed to the
Representatives at North Tower, World Financial Center, New York, New York
10291-1201, attention of ________________ with a copy to Paul, Hastings,
Janofsky & Walker LLP, 399 Park Avenue, 31st Floor, New York, New York 10022,
attention of William F. Schwitter; and notices to the Company shall be directed
to it at CapRock Communications Corp., 15601 Dallas Parkway, Suite 700, Dallas,
Texas 75248, attention of Jere W. Thompson, Jr., Chief Executive Officer with a
copy to Munsch Hardt Kopf & Harr, P.C., 4000 Fountain Place, 1445 Ross Avenue,
Dallas, Texas 75202 attention of A. Michael Hainsfurther; and notices to the
Selling Shareholders shall be directed to Pasados USA, Inc. 5950 Berkshire Suite
990 CB2 Dallas, Texas 75225, attention of Mark Langdale.
SECTION 13. Parties.
This Agreement shall each inure to the benefit of and be binding upon
the Underwriters, the Company and the Selling Shareholders and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriters, the Company and the Selling Shareholders and their respective
successors and the controlling persons and officers and directors referred to in
Sections 6 and 7 and their heirs and legal representatives, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained. This Agreement and all conditions and provisions
hereof are intended to be for the sole and exclusive benefit of the
Underwriters, the Company and the Selling Shareholders and their respective
successors, and said controlling persons and officers and directors and their
heirs and legal representatives, and for the benefit of no other person, firm or
corporation. No purchaser of Securities from any Underwriter shall be deemed to
be a successor by reason merely of such purchase.
SECTION 14. Governing Law and Time.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY
TIME.
SECTION 15. Effect of Headings.
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
-27-
<PAGE> 33
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Underwriters and the Company in accordance with its terms.
Very truly yours,
CAPROCK COMMUNICATIONS CORP.
By
----------------------------------
Title:
By
----------------------------------
As Attorney-in-Fact acting on
behalf of the Selling Shareholders
named in Schedule B hereto
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
CRUTTENDEN ROTH INCORPORATED
BY: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
--------------------------------------
Authorized Signatory
For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.
-28-
<PAGE> 34
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
NAME OF UNDERWRITER INITIAL SECURITIES
- ---------------------- ------------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated......................................
Bear, Stearns & Co. Inc.................................................................
Donaldson, Lufkin & Jenrette Securities Corporation.....................................
Goldman, Sachs & Co.....................................................................
Cruttenden Roth Incorporated............................................................
---------------
Total.......................................................................... 6,500,000
===============
</TABLE>
<PAGE> 35
SCHEDULE B
<TABLE>
<CAPTION>
Number of Initial Maximum Number of
Securities to Be Sold Option Securities to Be Sold
--------------------- ----------------------------
<S> <C> <C>
CapRock Communications Corp. 5,000,000 --
Ignatius W. Leonards 125,000 75,000
Timothy W. Rogers 125,000 75,000
Scott L. Roberts 125,000 75,000
Timothy M. Terrell 125,000 75,000
Mark Langdale 800,000 525,000
Jere W. Thompson, Sr. 200,000 50,000
Greenway Holdings, L.P. 100,000
Total.................................. 6,500,000 975,000
</TABLE>
<PAGE> 36
SCHEDULE C
CAPROCK COMMUNICATIONS CORP.
6,500,000 Shares of Common Stock
(Par Value $.01 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $____.
2. The purchase price per share for the Securities to be paid by the
several Underwriters shall be $___, being an amount equal to the initial public
offering price set forth above less $___ per share; provided that the purchase
price per share for any Option Securities purchased upon the exercise of the
over-allotment option described in Section 2(b) shall be reduced by an amount
per share equal to any dividends or distributions declared by the Company and
payable on the Initial Securities but not payable on the Option Securities.
<PAGE> 37
SCHEDULE D
List of persons and entities
subject to lock-up
Byron M. Allen
Christopher J. Amenson
John R. Harris
Mark Langdale
Ignatius W. Leonards
Scott L. Roberts
Timothy W. Rogers
Timothy M. Terrell
Jere W. Thompson, Jr.
Jere W. Thompson, Sr.
Greenway Holdings, L.P.
CapRock Investors
<PAGE> 38
Exhibit A
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Texas.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Purchase
Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a Material Adverse Effect.
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus in the column entitled "Actual" under
the caption "Capitalization" (except for subsequent issuances, if any, pursuant
to the Purchase Agreement or pursuant to reservations, agreements or employee
benefit plans referred to in the Prospectus or pursuant to the exercise of
convertible securities or options referred to in the Prospectus); the shares of
issued and outstanding capital stock of the Company have been duly authorized
and validly issued and are fully paid and non-assessable; and none of the
outstanding shares of capital stock of the Company was issued in violation of
the preemptive or other similar rights of any securityholder of the Company.
(v) The Securities have been duly authorized for issuance and sale to
the Underwriters pursuant to the Purchase Agreement and, when issued and
delivered by the Company pursuant to the Purchase Agreement against payment of
the consideration set forth in the Purchase Agreement, will be validly issued
and fully paid and non-assessable and no holder of the Securities is or will be
subject to personal liability by reason of being such a holder.
(vi) The Securities conform in all material respects to the
descriptions thereof in the Prospectus.
(vii) The issuance of the Securities is not subject to preemptive or
other similar rights of any securityholder of the Company.
(viii) Each Subsidiary has been duly incorporated and is validly
existing as a corporation or limited partnership in good standing under the laws
of the jurisdiction of its incorporation, has corporate power and authority to
own, lease and operate its properties and to conduct its business as described
in the Prospectus and is duly qualified as a foreign corporation or partnership
to transact business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a Material Adverse Effect; except as
Exh. A-1
<PAGE> 39
otherwise disclosed in the Registration Statement all of the issued and
outstanding capital stock of each Subsidiary has been duly authorized and
validly issued, is totally paid and non-assessable and, to the best of [our]
[my] knowledge, is owned of record by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge, lien,
encumbrance, claim or equity; none of the outstanding shares of capital stock of
any Subsidiary was issued in violation of the preemptive or similar rights of
any securityholder of such Subsidiary.
(ix) The Purchase Agreement has been duly authorized, executed and
delivered by the Company.
(x) The Registration Statement, including any Rule 462(b) Registration
Statement, has been declared effective under the 1933 Act; any required filing
of the Prospectus pursuant to Rule 424(b) has been made in the manner and within
the time period required by Rule 424(b); and, to the best of our knowledge based
solely upon telephone confirmation from the Staff of the Securities and Exchange
Commission, no stop order suspending the effectiveness of the Registration
Statement or any Rule 462(b) Registration Statement has been issued under the
1933 Act and no proceedings for that purpose have been instituted or are pending
or threatened by the Commission.
(xi) The Registration Statement, including any Rule 462(b) Registration
Statement, the Rule 430A Information and the Rule 434 Information, as
applicable, the Prospectus and each amendment or supplement to the Registration
Statement and Prospectus as of their respective effective or issue dates (other
than the financial statements including the notes thereto, auditors report
thereon and supporting schedules included therein or omitted therefrom, as to
which, we need express no opinion) complied as to form in all material respects
with the requirements of the Act and the regulations promulgated under the Act.
(xii) If Rule 434 has been relied upon, the Prospectus was not
"materially different," as such term is used in Rule 434, from the prospectus
included in the Registration Statement at the time it became effective.
(xiii) The form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory requirements,
with any applicable requirements of the articles of incorporation and by-laws of
the Company and the requirements of the Nasdaq National Market.
(xiv) To the best of our knowledge, there is not pending or threatened
any action, suit, proceeding, inquiry, complaint or investigation, to which the
Company or any Subsidiary is a party, or to which the assets or property of the
Company or any Subsidiary is subject, before or brought by any court or
governmental agency or body, domestic or foreign, which might reasonably be
expected to result in a Material Adverse Effect, or which might reasonably be
expected to materially and adversely affect the properties or assets thereof or
the consummation of the transactions contemplated in the Purchase Agreement or
the performance by the Company of its obligations thereunder.
(xv) The information in the Prospectus under "Description of Capital
Stock," (but only to the extent such information relates to provisions of the
articles of incorporation or bylaws of the Company) "Business--Properties,"
"Business--Legal Proceedings," and "Description of Certain Indebtedness," and in
the Registration Statement under Item 14, to the extent that it constitutes
matters of law, summaries of legal matters, the Company's charter and bylaws or
legal proceedings, or legal conclusions, has been reviewed by us and is correct
in all material respects.
Exh. A-2
<PAGE> 40
(xvi) To the best of [our] [my] knowledge, there are no statutes or
regulations that are required to be described in the Prospectus that are not
described as required.
(xvii) All descriptions in the Registration Statement of contracts and
other documents to which the Company or its subsidiaries are a party are
accurate in all material respects; to the best of our knowledge, there are no
franchises, contracts, indentures, mortgages, loan agreements, notes, leases or
other instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed or incorporated by reference as exhibits thereto,
and the descriptions thereof or references thereto are correct in all material
respects.
(xviii) To the best of our knowledge, neither the Company nor any
Subsidiary is in violation of its charter or by-laws or agreement of limited
partnership and no default by the Company or any Subsidiary exists in the due
performance or observance of any material obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan agreement, note,
lease or other agreement or instrument that is described or referred to in the
Registration Statement or the Prospectus or filed or incorporated by reference
as an exhibit to the Registration Statement except for those violations or
defaults that would not result in a Material Adverse Effect.
(xix) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the Act and the
regulations promulgated thereunder, which have been obtained, or as may be
required under the securities or blue sky laws of the various states and other
than as may be required by the Federal Communications Commission ("FCC") and any
state public utility commission or other similar authority ("State PUC") or
otherwise addressed in the opinion of special regulatory counsel delivered
pursuant to Section 5(b)(ii) of the Purchase Agreement, as to which we need
express no opinion) is necessary or required in connection with the due
authorization, execution and delivery of the Purchase Agreement or for the
offering, issuance or sale of the Securities.
(xx) The execution, delivery and performance of the Purchase Agreement
and the consummation of the transactions contemplated in the Purchase Agreement
and in the Registration Statement (including the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities as
described in the Prospectus under the caption "Use Of Proceeds") and compliance
by the Company with its obligations under the Purchase Agreement do not and will
not, whether with or without the giving of notice or lapse of time or both,
conflict with or constitute a breach of, or default or Repayment Event (as
defined in Section l(a)(x) of the Purchase Agreement) under or result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any Subsidiary pursuant to any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, lease or any other
agreement or instrument, known to [me] [us], to which the Company or any
Subsidiary is a party or by which it or any of them may be bound, or to which
any of the property or assets of the Company or any Subsidiary is subject
(except for such conflicts, breaches, defaults, Repayment Events or liens,
charges or encumbrances that would not have a Material Adverse Effect), nor will
such action result in any violation of the provisions of the charter or by-laws
(or equivalent organizational document) of the Company or any Subsidiary, or any
applicable law, statute, ordinance, rule, regulation, judgment, order, writ,
decision or decree, known to us, of any government, government instrumentality
or court, domestic or foreign, having jurisdiction over the Company or any
Subsidiary or any of their respective properties, assets or operations other
than those laws, statutes, rules, regulations, judgments, orders, writs or
decrees promulgated by or
Exh. A-3
<PAGE> 41
administered by the FCC or the State PUCs or otherwise addressed in the opinion
of special regulatory counsel delivered pursuant to Section 5(b)(ii) of the
Purchase Agreement.
(xxi) To the best of our knowledge, other than Cruttenden Roth
Incorporated, there are no persons with registration rights or other similar
rights to have any securities registered pursuant to the Registration Statement
or otherwise registered by the Company under the 1933 Act.
(xxii) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the 1940
Act.
In addition, we have participated in conferences with officers and
other representatives of the Company, the Underwriters, their counsel and the
independent certified public accountants of the Company, at which such
conferences the contents of the Prospectus and related matters were discussed,
and although we have not verified and do not assume responsibility for the
accuracy or completeness of the statements contained in the Prospectus (except
to the extent set forth in paragraph (xv) above), nothing has come to our
attention that would lead [us] [me] to believe that the Registration Statement
or any amendment thereto, including, the Rule 430A Information and Rule 434
Information (if applicable), (except for financial statements including the
notes thereto, the auditors' report thereon and schedules and other financial
data included therein or derived therefrom or omitted therefrom, and other than
the information contained in the Registration Statement under the captions "Risk
Factors -- Our ability to provide local telephone service is dependent on
incumbent local exchange carriers," "Risk Factors -- The regulatory environment
for telecommunications businesses creates risks," "Risk Factors -- We may incur
liability as an Internet service provider," "Risk Factors --We need
rights-of-way franchises and permits to build our fiber network," "Risk Factors
- -- Our ability to provide long distance service is dependent on other long
distance carriers," "Risk Factors --Communications laws and state corporate laws
may make it harder for someone to acquire control of CapRock (except for the
discussion of Article 13.03 of the Texas Business Corporation Act), and
"Regulation and Licenses." as to which we need make no statement), at the time
such Registration Statement or any such amendment became effective, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
or that the Prospectus or any amendment or supplement thereto (except for
financial statements including the notes thereto, the auditors' report thereon
and schedules and other financial data included therein or derived therefrom or
omitted therefrom, as to which we express no opinion), at the time the
Prospectus was issued, at the time any such amended or supplemented prospectus
was issued or at the Closing Time, included or includes an untrue statement of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
In rendering such opinion, such counsel may rely, as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials. Such
opinion shall not state that it is to be governed or qualified by, or that it is
otherwise subject to, any treatise, written policy or other document relating to
legal opinions, including, without limitation, the Legal Opinion Accord of the
ABA Section of Business Law (1991).
Exh. A-4
<PAGE> 42
Exhibit A-2
FORM OF OPINION OF COMPANY'S STATE REGULATORY COUNSEL TO BE
DELIVERED PURSUANT TO SECTION ___
____________, 1999
Based upon and subject to the foregoing, it is our opinion as of the
date hereof that:
1. Schedule A hereto accurately and completely lists all of the
licenses, permits, and authorizations issued by the [State] PUC (collectively,
the "Licenses") necessary for the Company and its subsidiaries to carry on their
business as described in the Prospectus and the Registration Statement. Schedule
A hereto accurately and completely lists all pending applications filed by the
Company and its subsidiaries with the [State] PUC. The Company and its
subsidiaries have all Licenses, consents, approvals and orders required under
the State Laws that are necessary for the Licensees to carry on their existing
business as described in the Prospectus and the Registration Statement.
2. To the best of our knowledge, (i) the Licenses are validly issued;
(ii) the Licenses are in full force and effect and are not subject to conditions
outside the ordinary course; and (iii) all express conditions in the Licenses
have been satisfied.
3. Except as set forth in Schedule B, no consent, approval, or
authorization, license or order of, or filing with, the [State] PUC, or
qualification with the [State] PUC, is necessary for either the execution and
delivery of any of the Transaction Documents by the Company and its
subsidiaries, or for the performance by the Company or its subsidiaries of its
respective obligations under any of the Transaction Documents.
4. Neither the execution and delivery of any Transaction Document by
the Company and its subsidiaries or the performance by the Company and its
subsidiaries of their respective obligations under any Transaction Document will
violate the state laws or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, or cause any forfeiture or
impairment of, any of the Licenses.
5. Nothing has come to the attention of those attorneys in the Firm who
regularly render service on behalf of the Company and its subsidiaries to cause
us to believe, and we have no reason to believe that, both as of the date of the
Prospectus and the Registration Statement and as of the Closing Time, the
statements in the Prospectus and the Registration Statement under the captions
"Summary - The Company," "Risk Factors - Risks Related to the Fiber Network,"
"Risk Factors Competition," "Risk Factors - Dependence on Other Long Distance
Carriers," "Risk Factors Dependence on Incumbent Local Exchange Carriers," "Risk
Factors - Regulation of Long Distance and Local Telephone Services," "Risk
Factors - Potential Liability of Internet Access Providers," "Risk Factors -
Certain Anti-Takeover Measures," "Business - Competition" and "Business
Regulation and Licenses" [CONFORM TO HEADINGS IN REGISTRATION STATEMENT] that
pertain to the State Laws or constitute a summary of the legal matters,
documents or proceedings referred to therein, contained or contains any untrue
statement of a material fact or omitted or omits
Exh. A-2-1
<PAGE> 43
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading.
6. All descriptions in the Prospectus and the Registration Statement
under the captions "Summary - The Company," "Risk Factors - Risks Related to the
Fiber Network," "Risk Factors - Competition," "Risk Factors - Dependence on
Other Long Distance Carriers," "Risk Factors - Dependence on Incumbent Local
Exchange Carriers," "Risk Factors - Regulation of Long Distance and Local
Telephone Services," "Risk Factors - Potential Liability of Internet Access
Providers," "Risk Factors - Certain Anti-Takeover Measures," "Business -
Competition" and "Business Regulation and Licenses" [CONFORM TO HEADINGS IN
REGISTRATION STATEMENT] of the State Laws or legal or governmental proceedings
of the [State] PUC with respect to telecommunications regulatory matters are
accurate and complete summaries of matters therein described.
7. The Company and its subsidiaries have (a) operated in compliance
with the State Laws, and (b) filed with the [State] PUC, or other designated
entities all applications, statements, reports, tariffs, information, forms, or
any other document required under the State Laws, except where the failure to so
file would not have a material adverse effect on their ability to provide their
respective services as described in the Prospectus and the Registration
Statement and, to the best of our knowledge, such filings or submissions were in
compliance with applicable laws or regulations when filed or submitted and no
deficiencies have been asserted by the [State] PUC, or any other designated
entity with respect to such filings or submissions except where the deficiency
is of such a nature that failure to cure any such deficiency would not have a
material adverse effect on the Company and its subsidiaries' ability to provide
their respective services as described in the Prospectus and the Registration
Statement and, to our knowledge, the information contained in such filings or
submissions was and continues to be in all material respects, accurate, complete
and up-to-date at the time the filings or submissions were made.
8. All regulatory tariffs applicable to the Company and its
subsidiaries' local exchange and/or exchange access and/or intrastate
interexchange operations in [States] (the "Tariffs") are in effect in accordance
with their terms, and there is no outstanding notice of suspension, cancellation
or termination or any threatened suspension, cancellation or termination with
respect to any Tariffs. Neither the Company nor any of its subsidiaries are
subject to any restrictions or conditions applicable to their Tariffs that limit
or would limit their operations (other than restrictions or conditions generally
applicable to tariffs of that type). Each such Tariff has been duly and validly
accepted by the [State] PUC. Neither the Company nor any of its subsidiaries are
in violation under the terms and conditions of any such Tariff, and there is no
basis for any claim of violation under any such Tariff.
9. Based upon a review of public files of the [State] PUC, appropriate
files of this firm and an inquiry of lawyers in this firm who have substantial
responsibility for the Company and its subsidiaries' legal matters handled by
this firm, we confirm that, except as disclosed in Schedule C:
(a) there is no unsatisfied adverse [State] PUC order, decree or ruling
outstanding against either the Company or any of its subsidiaries or
any of the Licenses;
Exh. A-2-2
<PAGE> 44
(b) there is no proceeding, complaint or investigation against the
Company or its subsidiaries or in respect of any of the Licenses
pending or threatened before the [State] PUC (including any pending
judicial review of such an action by the [State] PUC) except for
proceedings affecting the telecommunications industries generally to
which the Company or its subsidiaries are not a specific party;
(c) neither the Company nor its subsidiaries are a party to any
complaint, action or other proceeding at the [State] PUC, including
complaints against other licensees or applicants;
(d) neither the Company nor its subsidiaries have been the subject of
any final adverse order, decree or ruling of the [State] PUC (including
any notice of forfeiture which has been paid); and
(e) no action, suit, proceeding or investigation is pending or
threatened, and no judgement, order, decree or ruling has been entered,
against the Company or its subsidiaries in any court or before or by
any governmental authority (other than the [State] PUC) that gives us
reason to believe that any of the Licenses will be revoked or will not
be renewed in the ordinary course or would have any material adverse
affect on the Licenses.
Exh. A-2-3
<PAGE> 45
Exhibit A-3
FORM OF OPINION OF COMPANY'S FEDERAL REGULATORY COUNSEL TO BE
DELIVERED PURSUANT TO SECTION ___
____________, 1999
Based upon and subject to the foregoing, it is our opinion as of the
date hereof that:
1. Schedule A hereto accurately and completely lists all of the
licenses, permits, and authorizations issued by the FCC (collectively, the
"Licenses") necessary for the Company and its subsidiaries to carry on their
respective businesses as described in the Prospectus and the Registration
Statement. Schedule A hereto accurately and completely lists all pending
applications filed by either the Company or its subsidiaries with the FCC. The
Company and its subsidiaries have all Licenses, consents, approvals and orders
required under the Communications Act that are necessary for them to carry on
their existing businesses as described in the Prospectus and the Registration
Statement.
2. To the best of our knowledge, (i) the Licenses are validly issued;
(ii) the Licenses are in full force and effect and are not subject to conditions
outside the ordinary course; and (iii) all express conditions in the Licenses
have been satisfied.
3. Except as set forth in Schedule B, no consent, approval, or
authorization, license or order of, or filing with, the FCC is necessary for
either the execution and delivery of any of the Transaction Documents by the
Company or its subsidiaries or for the performance by the Company or its
subsidiaries of its respective obligations under any of the Transaction
Documents.
4. Neither the execution and delivery of any Transaction Document by
the Company or its subsidiaries nor the performance by the Company or its
subsidiaries of their respective obligations under any Transaction Document will
violate the Communications Act or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, or cause any forfeiture
or impairment of, any of the Licenses.
5. Nothing has come to the attention of those attorneys in the Firm who
regularly render service on behalf of the Company or its subsidiaries to cause
us to believe, and we have no reason to believe that, both as of the date of the
Prospectus and the Registration Statement and as of the Closing Time, the
statements in the Prospectus and the Registration Statement under the captions
"Summary - The Company," "Risk Factors - Risks Related to the Fiber Network,"
"Risk Factors Competition," "Risk Factors - Dependence on Other Long Distance
Carriers," "Risk Factors Dependence on Incumbent Local Exchange Carriers," "Risk
Factors - Regulation of Long Distance and Local Telephone Services," "Risk
Factors - Potential Liability of Internet Access Providers," "Risk Factors -
Certain Anti-Takeover Measures," "Business - Competition" and "Business
Regulation and Licenses" [CONFORM TO HEADINGS IN REGISTRATION STATEMENT] that
pertain to the Communications Act or constitute a summary of the legal matters,
documents or proceedings referred to therein, contained or contains any untrue
statement of a material fact or
Exh. A-3-1
<PAGE> 46
omitted or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading.
6. All descriptions in the Prospectus and the Registration Statement
under the captions "Summary - The Company," "Risk Factors - Risks Related to the
Fiber Network," "Risk Factors - Competition," "Risk Factors - Dependence on
Other Long Distance Carriers," "Risk Factors - Dependence on Incumbent Local
Exchange Carriers," "Risk Factors - Regulation of Long Distance and Local
Telephone Services," "Risk Factors - Potential Liability of Internet Access
Providers," "Risk Factors - Certain Anti-Takeover Measures," "Business -
Competition" and "Business Regulation and Licenses" [CONFORM TO HEADINGS IN
REGISTRATION STATEMENT] of the Communications Act or legal or governmental
proceedings of the FCC with respect to telecommunications regulatory matters are
accurate and complete summaries of matters therein described.
7. The Company and its subsidiaries have (a) operated in compliance
with the Communications Act and (b) filed with the FCC all applications,
statements, reports, tariffs, information, forms, or any other document required
under the Communications Act except where the failure to so file would not have
a material adverse effect on their ability to provide their respective services
as described in the Prospectus and the Registration Statement. and, to the best
of our knowledge, such filings or submissions were in compliance with applicable
laws or regulations when filed or submitted and no deficiencies have been
asserted by the FCC with respect to such filings or submissions except where the
deficiency is of such a nature that failure to cure any such deficiency would
not have a material adverse effect on the Company or its subsidiaries' ability
to provide their respective services as described in the Prospectus and the
Registration Statement and, to our knowledge, the information contained in such
filings or submissions was and continues to be in all material respects,
accurate, complete and up-to-date at the time the filings or submissions were
made.
8. All regulatory tariffs applicable to each of the Company and its
subsidiaries' interstate interexchange and international operations, (the
"Tariffs") are in full force and effect in accordance with their terms, and
there is no outstanding notice of suspension, cancellation or termination or any
threatened suspension, cancellation or termination with respect to any Tariffs.
Neither the Company nor any of its subsidiaries are subject to any restrictions
or conditions applicable to their Tariffs that limit or would limit their
operations (other than restrictions or conditions generally applicable to
tariffs of that type). Each such Tariff has been duly and validly accepted by
the FCC. Neither the Company nor any of its subsidiaries are in violation under
the terms and conditions of any such Tariff, and there is no basis for any claim
of violation under any such Tariff.
9. Based upon a review of public files of the FCC, appropriate files of
this firm and an inquiry of lawyers in this firm who have substantial
responsibility for any of the Company or its subsidiaries' legal matters handled
by this firm, we confirm that, except as disclosed in Schedule C:
(a) there is no unsatisfied adverse FCC order, decree or ruling
outstanding against any of the Company or its subsidiaries or any of
the Licenses;
(b) there is no proceeding, complaint or investigation against the
Company or its subsidiaries or in respect of any of the Licenses
pending or threatened before the FCC (including any pending judicial
review of such an action by the FCC) except for proceedings
Exh. A-3-2
<PAGE> 47
affecting the telecommunications industries generally to which the
Company or its subsidiaries are not specific parties;
(c) neither the Company nor any of its subsidiaries are a party to any
complaint, action or other proceeding at the FCC including complaints
against other licensees or applicants;
(d) neither the Company nor any of its subsidiaries have been the
subject of any final adverse order, decree or ruling of the FCC
(including any notice of forfeiture which has been paid); and
(e) no action, suit, proceeding or investigation is pending or
threatened, and no judgement, order, decree or ruling has been entered,
against the Company or its subsidiaries in any court or before or by
any governmental authority (other than the FCC) that gives us reason to
believe that any of the Licenses will be revoked or will not be renewed
in the ordinary course or would have any material adverse affect on the
Licenses.
Exh. A-3-3
<PAGE> 48
Exhibit B
FORM OF OPINION OF COUNSEL FOR THE SELLING SHAREHOLDER(S)
TO BE DELIVERED PURSUANT TO SECTION 5(c)
(i) No filing with, or consent, approval, authorization, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than the issuance of the order
of the Commission declaring the Registration Statement effective and such
authorizations, approvals or consent as may be necessary under state securities
laws, as to which [I] [we] need express no opinion), is necessary or required to
be obtained by the Selling Shareholder(s) for the performance by [each/the]
Selling Shareholder of its obligations under the Purchase Agreement or in the
Power of Attorney and Custody Agreement, or in connection with the offer, sale
or delivery of the Securities.
(ii) [Each/The] Power of Attorney and Custody Agreement has been duly
executed and delivered by the [respective] Selling Shareholder(s) [named
therein] and constitutes the legal, valid and binding agreement of [such/the]
Selling Shareholder.
(iii) The Purchase Agreement has been duly authorized, executed and
delivered by or on behalf of [each/the] Selling Shareholder.
(iv) [Each/The] Attorney-in-Fact has been duly authorized by the
Selling Shareholder(s) to deliver the Securities on behalf of the Selling
Shareholder(s) in accordance with the terms of the Purchase Agreement.
(v) The execution, delivery and performance of the Purchase Agreement
and the Power of Attorney and Custody Agreement and the sale and delivery of the
Securities and the consummation of the transactions contemplated in the Purchase
Agreement and in the Registration Statement and compliance by the Selling
Shareholder(s) with [its] [their] obligations under the Purchase Agreement have
been duly authorized by all necessary action on the part of the Selling
Shareholder(s) and do not and will not, whether with or without the giving of
notice or passage of time or both, conflict with or constitute a breach of, or
default under or result in the creation or imposition of any tax, lien, charge
or encumbrance upon the Securities or any property or assets of the Selling
Shareholder(s) pursuant to, any contract, indenture, mortgage, deed of trust,
loan or credit agreement, note, license, lease or other instrument or agreement
to which [any/the] Selling Shareholder is a party or by which [his/her/it/they]
may be bound, or to which any of the property or assets of the Selling
Shareholder(s) may be subject nor will such action result in any violation of
the provisions of the charter or by-laws of the Selling Shareholder(s), if
applicable, or any law, administrative regulation, judgment or order of any
governmental agency or body or any administrative or court decree having
jurisdiction over [such/the] Selling Shareholder or any of its properties.
(vi) To the best of [our] [my] knowledge, [each/the] Selling
Shareholder has valid and marketable title to the Securities to be sold by
[such/the] Selling Shareholder pursuant to the Purchase Agreement, free and
clear of any pledge, lien, security interest, charge, claim, equity or
encumbrance of any kind, and has full right, power and authority to sell,
transfer and deliver such Securities pursuant to the Purchase Agreement. By
delivery of a certificate or certificates therefor [such/the]
Exh. B-1
<PAGE> 49
Selling Shareholder will transfer to the Underwriters who have purchased such
Securities pursuant to the Purchase Agreement (without notice of any defect in
the title of [such/the] Selling Shareholder and who are otherwise bona fide
purchasers for purposes of the Uniform Commercial Code) valid and marketable
title to such Securities, free and clear of any pledge, lien, security interest,
charge, claim, equity or encumbrance of any kind.
(vii) Nothing has come to [our] [my] attention that would lead [us]
[me] to believe that the Registration Statement or any amendment thereto,
including the Rule 430A Information and Rule 434 Information (if applicable),
(except for financial statements and schedules and other financial date included
or incorporated by reference therein or omitted therefrom, as to which [we] [I]
need make no statement], at the time such Registration Statement or any such
amendment became effective, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus or any
amendment or supplement thereto (except for financial statements and schedules
and other financial data included or incorporated by reference therein or
omitted therefrom, as to which [we] [I] need to make no statement), at the time
the Prospectus was issued, at the time any such amended or supplemented
prospectus was issued or at the Closing Time, included or includes an untrue
statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
Exh. B-2
<PAGE> 50
Exhibit C
FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS
PURSUANT TO SECTION 5(i)
______________, 1999
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
GOLDMAN, SACHS & CO.
CRUTTENDEN ROTH INCORPORATED
as Representatives of the several
Underwriters to be named in the
within-mentioned Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281- 1209
Re: Proposed Public Offering by CapRock Communications Corp.
Dear Sirs:
The undersigned, a stockholder [and an officer and/or director] of
CapRock Communications Corp., a Texas corporation (the "Company"), understands
that Merrill Lynch & Co., Merrill Lynch. Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and Bear, Stearns & Co. Inc., Donaldson, Lufkin & Jenrette,
Goldman, Sachs & Co. and Cruttenden Roth Incorporated propose(s) to enter into a
Purchase Agreement (the "Purchase Agreement") with the Company providing for the
public offering of shares (the "Securities") of the Company's common stock, par
value $[.01] per share (the "Common Stock"). In recognition of the benefit that
such an offering will confer upon the undersigned as a stockholder [and an
officer and/or director] of the Company, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
undersigned agrees with each underwriter to be named in the Purchase Agreement
that, during a period of 120 days from the date of the Purchase Agreement [and
Prospectus], the undersigned will not, without the prior written consent of
Merrill Lynch, directly or indirectly, (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of any shares of the Company's Common Stock or any securities
convertible into or exchangeable or exercisable for Common Stock, whether now
owned or hereafter acquired by the undersigned or with respect to which the
undersigned has or hereafter acquires the power of disposition, or file any
registration statement under the Securities Act of 1933, as amended, with
respect to any of the foregoing or (ii) enter into any swap or any other
agreement
Exh. C-1
<PAGE> 51
or any transaction that transfers, in whole or in part, directly or indirectly.
the economic consequence of ownership of the Common Stock, whether any such swap
or transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or other securities, in cash or otherwise.
Very truly yours,
Signature:
----------------------------
Print Name:
---------------------------
Exh. C-2
<PAGE> 1
EXHIBIT 5.1
[MUNSCH HARDT KOPF & HARR, P.C. LETTERHEAD]
April 16, 1999
CapRock Communications Corp.
15601 Dallas Parkway, Suite 700
Dallas, Texas 75248
Re: Registration of up to 7,475,000 shares of Common Stock, par
value $.01 per share, pursuant to a Registration Statement on
Form S-1
Gentlemen:
At the request of CapRock Communications Corp., a Texas corporation
(the "Company"), this opinion is being furnished to the Company for filing as
Exhibit 5.1 to the Registration Statement on Form S-1 (the "Registration
Statement") to be filed by the Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Act"), relating to up to 7,475,000 shares (the "Shares") of the Common Stock,
par value $.01 per share, of the Company to be sold as described in the
Registration Statement.
In our capacity as counsel to the Company and for the purpose of
rendering the opinions hereinafter expressed, we have relied solely upon the
documents, certificates and other items described on Exhibit A attached hereto
and have made no other investigation or inquiry.
This opinion letter is governed by, and shall be interpreted in
accordance with, the Legal Opinion Accord (the "Accord") of the ABA Section of
Business Law (1991). As a consequence, it is subject to a number of
qualifications, exceptions, definitions, limitations on coverage and other
limitations, all as more particularly described in the Accord, and this opinion
letter should be read in conjunction therewith. The general qualifications of
the Accord apply to all of the opinions set forth herein.
Based solely upon the foregoing, and subject to the qualifications,
limitations, and assumptions set forth in the Accord and set forth below, we are
of the opinion that (i) the Shares to be issued by the Company as described in
the Registration Statement are duly authorized and when issued pursuant to the
Registration Statement will be validly issued, fully paid, and nonassessable and
(ii) the Shares to be sold by the Selling Shareholders (as such term is used in
the Registration Statement) as described in the Registration Statement are duly
authorized, validly issued, fully paid, and nonassessable.
<PAGE> 2
CapRock Communications Corp.
April 16, 1999
Page 2
For purposes of rendering the above opinion, we have assumed with
respect to shares of Common Stock issued after the date hereof, (i) the receipt
of proper consideration for the issuance thereof at least equal to the par value
thereof, (ii) the availability of a sufficient number of shares of Common Stock
authorized by the Company's Articles of Incorporation, as amended, then in
effect, and (iii) that no change occurs in the applicable law or the pertinent
facts from the date hereof to the date of issuance of the Common Stock.
The opinion set forth above is limited to the substantive laws of the
State of Texas and no opinion is expressed herein as to matters governed by any
other law.
This opinion is rendered solely to you in connection with the foregoing
matters. This opinion may not be relied upon by you for any other purpose or
relied upon by or furnished to any other person without our prior written
consent.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and also to the use of our name in the Registration
Statement and the prospectus that is deemed to be a part thereof under the
caption "Legal Matters" as having passed upon certain legal matters in
connection with the Shares. By so consenting, we do not thereby admit that we
come within the category of persons whose consent is required under Section 7 of
the Act or the rules and regulations of the Commission promulgated thereunder.
Very truly yours,
MUNSCH HARDT KOPF &
HARR, P.C.
<PAGE> 3
EXHIBIT A
1. Officers' Certificate of the Company in support of this opinion
executed by duly authorized officers of the Company, dated as of the
date hereof, certifying that the matters set forth therein are true and
correct, including, but not limited to, the minutes of the meetings of
the Board of Directors authorizing the issuance of certain of the
issued and the outstanding shares of capital stock of the Company.
2. Stock certificates and stock record book, minutes of shareholders and
directors meeting and consents in lieu thereof.
<PAGE> 1
EXHIBIT 10.16
6221
[CAPROCK COMMUNICATIONS LOGO]
ACCT..# [ ][ ][ ][ ][ ][ ][ ]
TAX I.D..# [ ][ ][ ][ ][ ][ ][ ][ ]
CHECK ONE Tax Exempt: [ ] (Exemption Certificate
[ ] Sole Proprietorship (Commercial)* must be Attached)
[ ] Partnership (Commercial)*
[ ] Corporation (Commercial)*
COMMERCIAL APPLICATION
<TABLE>
<S> <C> <C>
---------------------------------------
In Business Since Type of Business
Legal _______________________________________
Name ______________________________________________________________________ Name of Owner/Partner/President
Physical BUSINESS TRADE SUPPLIERS
Address ______________________________________________________________________
Suite City State Zip Trade Supplier Name #1
Billing _______________________________________
Address ______________________________________________________________________ Contact Name/Title
_______________________________________
______________________________________________________________________ Street Address Suite #
_______________________________________
Contact City State Zip
Phone (_____) ______________________________________________________________ _______________________________________
Phone #
AP Contact _______________________________________
Phone #2 (_____) ______________________________________________________________ Account #
_______________________________________
- -------------------------------------------------------------------------------- Trade Supplier Name #2
EQUAL ACCESS INSTRUCTIONS INTERNATIONAL ACCESS INSTRUCTIONS _______________________________________
Contact Name/Title
[ ] PIC Required [ ] VERIFIED International Access [ ] Y [ ] N _______________________________________
[ ] w/Acct. Codes [ ] NONVERIFIED International Product Number _______ Street Address Suite #
# of Digits [ ] Canada Product Number _______ _______________________________________
[ ] 10795 Access ONLY Mexico Product Number _______ City State Zip
[ ] Additional #'s listed (See Attached) _______________________________________
- -------------------------------------------------------------------------------- Phone #
Type _______________________________________
F=Fax __ (______)-[ ][ ][ ]-[ ][ ][ ][ ] __(______)-[ ][ ][ ]-[ ][ ][ ][ ] Account #
M=Modem __ (______)-[ ][ ][ ]-[ ][ ][ ][ ] __(______)-[ ][ ][ ]-[ ][ ][ ][ ]
C=Cellular __ (______)-[ ][ ][ ]-[ ][ ][ ][ ] __(______)-[ ][ ][ ]-[ ][ ][ ][ ] BANK REFERENCE
__ (______)-[ ][ ][ ]-[ ][ ][ ][ ] __(______)-[ ][ ][ ]-[ ][ ][ ][ ]
__ (______)-[ ][ ][ ]-[ ][ ][ ][ ] __(______)-[ ][ ][ ]-[ ][ ][ ][ ] Primary Bank Name
- -------------------------------------------------------------------------------- _______________________________________
TRAVEL CARD PROFILE 800 SERVICE PROFILE Bank Address
_______________________________________
Travel Product # _________ 800 # [ ][ ][ ]-[ ][ ][ ][ ] City State Zip
# of Cards [ ][ ][ ] Ring to ( )-[ ][ ][ ]-[ ][ ][ ][ ] _______________________________________
# of Codes [ ][ ][ ] 800 # [ ][ ][ ]-[ ][ ][ ][ ] Bank Contact Phone
- ----------------------------------------- Ring to ( )-[ ][ ][ ]-[ ][ ][ ][ ] _______________________________________
Inbound 800 Outbound Terms 800 # [ ][ ][ ]-[ ][ ][ ][ ] Checking Account #
Switched [ ] Switched [ ] M/M [ ] Ring to ( )-[ ][ ][ ]-[ ][ ][ ][ ] _______________________________________
Dedicated [ ] Dedicated [ ] 1 Yr. [ ]
Product #____ Product #____ 2 Yr. [ ] [ ] Additional 800 Info Attached LETTER OF AGENCY
3 Yr. [ ]
[ ][ ].[ ][ ] [ ][ ].[ ][ ] Cust. Effective immediately, the undersigned
Monthly Fee Monthly Fee Initials______ does hereby authorize and appoint
- -------------------------------------------------------------------------------- CapRock Communications Corp. to act as
COMMENTS: ____________________________ The undersigned states that all the above our authorized agent and communications
statements are true and correct and are representative. THIS AUTHORIZATION WILL
______________________________________ made to obtain long distance telephone RESULT IN A CHANGE OF OUR LONG DISTANCE
service and that (s)he is authorized to CARRIER. The authorization is not
sign on behalf of Customer. exclusive and shall not supersede our
- -------------------------------------------------------------------------------- own authority.
________________________________________________________________________________
Acct. Executive ____________________ Authorized Signature ______________________ Your LEC may charge a fee to switch
A.E. # ____________________________________________ Title ______________________ your Long Distance provider.
Sales Mgr. ________________________________________ SSN ______________________
Estimated Usage ___________________________________ Date ______________________
For Office Use Only ____________________________________________________________
"ALL TERMS AND CONDITIONS ON THE REVERSE SIDE OF THIS APPLICATION
FOR SERVICE ARE A PART HEREOF AND ARE BINDING UPON THE PARTIES HERETO"
</TABLE>
<PAGE> 2
TERMS OF SERVICE AGREEMENT
The customer identified on the front page of this Application for Service (the
"Customer") and Caprock Communications Corp. (Caprock) hereby agree as follows:
1. This Application for Service ("Application") is subject to the approval of
Caprock. Accordingly, Caprock can refuse to provide the services applied for
by Customer for any reason whatsoever. Caprock shall have no liability
whatsoever for any damages, costs or expenses (consequential or otherwise)
arising from or related to Caprock's failure or refusal to approve this
Application and to provide the telecommunication services applied for
hereunder.
2. Customer authorizes Caprock to obtain credit and financial information about
the Customer as Caprock deems appropriate and necessary in order to evaluate
the credit worthiness of the Customer and otherwise process this
Application.
3. Customer hereby warrants to Caprock that it has all requisite legal
authority to execute this Application and to be bound by and perform all of
the terms and conditions hereof.
4. For all services provided by Caprock hereunder, Customer agrees to pay
Caprock at the rates for service established by Caprock. All rates for
services provided hereunder are subject to change. Billings for services are
rendered monthly and are due and payable fifteen (15) days from invoice
date. All balances for billings not received by the due date (described in
the immediately preceding sentence) shall be subject to a finance charge
levied at the rate of one and one-half percent (1 1/2%) per month or the
maximum lawful rate under the laws of the State of Texas, whichever is less.
All returned checks will be assessed a $25.00 returned check fee. In the
event Caprock must take steps to collect any balance owed by Customer for
services rendered pursuant hereto, Customer hereby agrees to pay Caprock all
costs of collection, including the actual attorney's fees incurred by
Caprock. Additionally, Caprock reserves the right to bill and all charges
through Southwestern Bell, U.S. West, or other billing agent without prior
consent or authorization of the Customer.
5. Upon approval of this Application by Caprock, Caprock shall use its best
efforts to provide Customer with the services applied for herein.
Notwithstanding anything else contained herein to the contrary, Caprock
shall have no liability whatsoever for any lost business or profits or any
direct, indirect, special or consequential damages or loss resulting from
Caprock failure or inability to provide the services required hereunder at
any time and Customer shall indemnify and hold harmless Caprock, its
shareholders directors, officers, employees, agents and representatives,
from and against any and all claims, actions, suits, proceedings, costs,
expenses, damages and liabilities, including attorney's fees, arising out
of, connected with, or resulting from Caprock failure or inability to
provide the services required hereunder at any time including such failure
or inability as may be attributable to Caprock's own negligence.
6. Customer acknowledges that Caprock has no liability whatsoever for issuing
"800" numbers. Accordingly, no 800 number should be construed as operational
by Customer until it is an established working number. Customer is
responsible for all charges associated with said 800 number.
7. Caprock assumes no liability for the cancellation of Telecommunication
services contracted or otherwise, with other vendors.
8. Upon any breach of the terms of this Application by Customer, including
without limitation breaches resulting from the failure to timely pay all
service charges in accordance herewith, Caprock shall be entitled to
terminate the services provided hereunder and to seek any and all other
remedies available at law or in equity on account of such breach by
Customer. Customer agrees to subscribe for the term specified within this
agreement. If customer cancels service on any activated line, Caprock
reserves the right to charge customer 20% of the average monthly bill
(previous 3 months) multiplied by the remainder of the months remaining on
the contract. Customer agrees to pay Caprock said amount due immediately
upon breach of this agreement in one lump sum.
9. This Application shall be construed and enforced in accordance with the laws
of the State of Texas. Venue for any action arising out of or related hereto
or the services provided hereunder shall be exclusively in Dallas County,
Texas.
10. This Application may not be assigned by customer without the express
written consent of Caprock in each instance.
11. Caprock assumes no responsibility for damages caused by any delay in
activation of Customer's service.
12. Customer is responsible for all Local Exchange Company related charges
(Local Loop charges) for the entire term specified under this agreement.
Initial __________________________________ Date _____________________
<PAGE> 1
EXHIBIT 10.59
TELECOMMUNICATIONS AGREEMENT
This Telecommunications Agreement (this "Agreement") made effective as of
_________ is between CapRock Communications Corp., a Texas corporation with its
principal place of business at Two Galleria Tower, 13455 Noel Road, Suite 1925,
LB 46, Dallas, Texas, 75240 ("CapRock") and a ________________, a ____________
corporation with its principal place of business at ________________
("Customer").
WHEREAS, CapRock desires to provide telecommunications services and/or
facilities (collectively, the "Services"), as described in the relevant
Addendums attached hereto, to Customer; and
WHEREAS, Customer desires to receive the Services, and has requested
that CapRock provide the Services in accordance with the terms of this
Agreement.
NOW THEREFORE, in consideration of the mutual premises and covenants
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the undersigned agree as follows:
1. Services. CapRock agrees to furnish to Customer, and Customer agrees to
accept, upon the terms and conditions set forth herein, the telecommunications
services and/or the telecommunications facilities set forth in Addendum "A." All
Addendums identified herein are incorporated by reference and specifically made
a part of this Agreement.
2. Duration. This initial term of the Agreement shall be ________ years
commencing on the earlier of the above date or the date Customer may begin
receiving Services (the "Effective Date"). This Agreement shall automatically be
renewed for additional successive one (1) year terms unless one party delivers
written notice to the other party of an intent not to renew this Agreement at
least sixty (60) days before the end of the initial term or any renewal term.
3. Minimum DS-1 Usage. Beginning with the next full calendar month
following the Effective Date, Customer agrees to maintain a monthly dollar
billing average per Committed DS-1, as indicated on Addendum "A" (the "Minimum
Billing Amount") and a monthly average loading or traffic (the "Minimum Usage
Amount") per Committed DS-1. CapRock reserves the right to refuse acceptance of
DS-1's in excess of those required for minimum volume commitments as specified
in Addendum "A." Further, CapRock reserves the right to cancel DS-1's with
Customer with thirty (30) days notice if Customer fails to meet the specified
usage minimums.
4. Rates. During the term of this Agreement, CapRock shall charge and
Customer shall pay those charges specified in Addendum "A." CapRock reserves the
right to adjust its charges at any time upon at least three (3) days prior
written notification to Customer without requiring any other signatures of the
parties hereto acknowledging and agreeing to the same.
5. Billings. Customer acknowledges that billings are processed monthly on
a per call basis and that payment for the Services must be received by CapRock
within fifteen (15) days of invoice date (which shall be the last day of the
previous month's billing cycle) or 10 days after receipt of invoice, whichever
is later, via wire transfer. All amounts which are due and payable to CapRock
shall be paid when due notwithstanding any termination of this Agreement. If
payment of charges is not received by CapRock within fifteen (15) days of any
given month's invoice date, the delinquent balance shall accrue interest at the
lesser of: (a) the rate of one and one-half percent (1 1/2%) per month; or (b)
the highest rate allowed by applicable law. Customer also agrees that if it has
not submitted properly executed Certificate(s) of Exemption for all applicable
foreign, federal, state, county and local taxes and fees that CapRock will
invoice Customer and Customer shall pay said taxes
- ------------------ -------------------
INITIALS - CAPROCK INITIALS - CUSTOMER
<PAGE> 2
and fees. Beginning with the fourth billing period, Customer will pay CapRock
port charge of $500.00 per month per installed T-I circuit in addition to any
usage charges unless either total dollar usage exceeds $50,000 multiplied by the
number of T-1 digital circuits Customer has installed in order for CapRock to
provide Services or total usage for the billing month is more than 100,000
minutes per said T-1 digital circuits, in which event the port charge shall be
waived.
If the parties hereunder are providing services to one another, the
usage shall be understood and agreed to be offset on a daily basis. At the end
of each calendar month, the party which has an accrued balance payable after
such daily netting shall make payment to the other under the terms and
conditions as set forth below.
Should either party default in payment for services, then the
defaulting party agrees that services provided to them may be terminated as
provided in this agreement; and furthermore, the defaulting party further agrees
to continue to provide services, payment for which shall be offset against the
outstanding invoices, until all defaults are cured or offset.
6. Disputes. If Customer, in good faith, disputes any invoiced amount,
Customer must notify CapRock, in writing, of such dispute within thirty (30)
days of the date of such invoice. CapRock shall not be obligated to consider any
Customer notice of invoice disputes which is received by CapRock more than
thirty (30) days following the date of the invoice in question. If Customer
fails to deliver written notice of any dispute within the described thirty (30)
day period, then such charges shall be deemed valid and all such invoice
disputes shall be deemed to have been waived by Customer. Notwithstanding any
invoice dispute, Customer agrees to fully and timely pay all invoice amounts,
pursuant to the terms of paragraph 5 above. Any amounts, which are determined to
be in error, will be credited against the next periodic invoice. Any timely
identified dispute which has not been resolved by the good faith efforts of the
parties will be settled by binding arbitration conducted expeditiously in
accordance with the commercial Arbitration Rules of the American Arbitration
Association ("AAA Rules"), as amended by this Agreement and judgment upon the
award rendered by the arbitrator(s) may be entered by any court with
jurisdiction. The location of the arbitration shall be in Dallas, Texas. The
cost of the arbitration, including fees and expenses of the arbitrator(s), shall
be shared equally by the parties unless the arbitration award provides
otherwise. Each party shall bear the cost of preparing and presenting its case.
The arbitrator(s) are not empowered to award damages in excess of compensatory
damages and each party irrevocably waives any damages in excess of compensatory
damages.
7. Security. CapRock's obligation to provide Services is contingent upon
credit approval by CapRock and Customer's acceptance of CapRock's initial and
continuing credit approval procedures and policies. During the term of this
Agreement, upon request by CapRock, Customer shall deliver current financial and
usage information concerning Customer's operations. A cash deposit, irrevocable
letter of credit and/or individual guaranty ("Deposit") or other form of
security in form and amount acceptable to CapRock may be required by CapRock
prior to commencement of Services. After the Effective Date, a Deposit or
additional Deposit may also be required in form and amount acceptable to CapRock
if, in CapRock's sole discretion, Customer's financial circumstances or payment
history warrant or in light of Customer's actual usage when compared to
projected usage levels upon which any initial security or assurance Deposit
requirement was based. Such requests must be honored within five (5) business
days, or CapRock may terminate this Agreement without liability. If this
Agreement, or any of the Services provided herein, has been terminated, the
Deposit shall be applied to all charges and other amounts then due CapRock.
CapRock agrees to refund the excess portion of the Deposit, if any, within
thirty (30) days following final settlement of Customer's account. The refunding
or crediting of the Deposit in no way relieves Customer from complying with all
terms and provisions contained in this Agreement or from tendering payments when
due.
8. Taxes. Customer acknowledges and understands that the Rates and other
non-recurring charges for the Services are exclusive of any applicable use,
excise, gross receipts, sales, value-added and privilege taxes,
- ------------------ -------------------
INITIALS - CAPROCK INITIALS - CUSTOMER
<PAGE> 3
duties, fees or assessments (other than general income and real property taxes)
which may be imposed by any government or governmental authority on the Services
(collectively the "Taxes"). Such Taxes, if applicable, shall be listed as
separate line items on CapRock's invoice and paid for by Customer. Customer
agrees to indemnify and hold CapRock harmless from liability of any kind arising
from Customer's failure to pay any applicable Taxes. Customer may provide
CapRock with a valid tax exemption form under applicable law which may exempt
Customer from the payment of certain Taxes that would otherwise be paid by
Customer. Customer shall be responsible for all Taxes that are not lawfully
covered by the tax exemption certificate filed with CapRock.
9. Termination. Except as otherwise provided herein, CapRock may terminate
this Agreement or suspend any Service at any time without liability upon five
(5) days written notice to Customer of any breach of this Agreement.
Notwithstanding the preceding, CapRock may terminate this Agreement upon
forty-eight (48) hours notice upon the failure of Customer to timely pay for all
charges (including transmission charges, service charges and monthly fixed
charges, if any) billed to Customer. Such termination right of CapRock shall not
be exclusive of other remedies available at law or equity for default of breach
of this Agreement.
10. Remedies Upon Termination. Upon termination, in addition to other
rights and remedies afforded CapRock hereunder or by law or equity, CapRock may
terminate all Services provided to Customer hereunder -- and Customer shall pay
to CapRock (a) all outstanding invoices; (b) all charges for Services incurred,
whether or not such charges have been invoiced or whether or not fifteen (15)
days have expired since the date of invoice; and (c) an amount equal to the
Minimum Billing Amount times the number of Committed DS-1's times the remaining
number of calendar months in the initial term or any renewal term.
11. Warranties. The quality of Services provided hereunder shall be
consistent with industry standards, government regulations and sound business
practices. CAPROCK MAKES NO OTHER REPRESENTATIONS OR WARRANTIES ABOUT THE
SERVICES PROVIDED HEREUNDER, EXPRESS OR IMPLIED, BY OPERATION OF LAW OR IN FACT,
INCLUDING WITHOUT LIMITATION ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
Customer shall give written notice to CapRock of any deficiency in performance
of the Services. CapRock shall have thirty (30) days after notice to cure any
deficiency. If after the thirty (30) day period, and in the reasonable
discretion of CapRock, CapRock fails to cure such deficiency, Customer may
terminate the nonconforming Service(s).
12. Fraudulent Usage. Customer acknowledges and agrees that irrespective of
the nature of usage of CapRock provided Services hereunder, that is to say
whether or not usage is authorized or not, restitution in full shall be made to
CapRock for all usage properly billable to Customer's account pursuant to the
terms hereof; it being the express intention of the parties that Customer and
not CapRock shall bear the risk of loss arising from any unauthorized or
fraudulent procurement or consumption of the Services provided hereunder.
13. Damages. UNDER NO CIRCUMSTANCES SHALL CAPROCK BE LIABLE TO CUSTOMER OR
ANY OF CUSTOMER'S CLIENTS FOR SPECIAL, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE
DAMAGES IN CONNECTION WITH OR RELATED TO ANY OF THE SERVICES AND/OR FACILITIES
PROVIDED PURSUANT TO THIS AGREEMENT, WHETHER OR NOT CAPROCK RECEIVES NOTICE OF
ANY SUCH DAMAGES AND WHETHER OR NOT SUCH DAMAGES COULD HAVE BEEN FORESEEN.
14. Indemnity. Customer agrees to indemnify, defend (by counsel of
CapRock's choosing), and hold harmless CapRock, and its officers, directors,
shareholders and agents (the "CapRock Parties"), for any liability incurred or
threatened to be incurred by the CapRock Parties to any third party as a result
of the negligent
- ------------------ -------------------
INITIALS - CAPROCK INITIALS - CUSTOMER
<PAGE> 4
conduct, willful acts or omissions of Customer, its agents, servants, employees
or any other parties over whom Customer exercises control. Such indemnification
shall include, without limitation, any liability, including attorneys' fees and
court costs, incurred or threatened to be incurred by CapRock as a result of any
claim, demand, action, lawsuit or proceeding brought about by Customer's acts or
omissions in connection with the transmission or republication of any material
which is found to be defamatory in nature or involves the unauthorized use or
infringement of a trademark, trade name, service mark, patent rights or similar
data or information transmitted by Customer over CapRock's network.
15. Looping. Customer shall indemnify, defend and hold harmless CapRock
from and against all costs, expenses, losses, damages, claims and actions of any
kind arising from or related to any "looping" of calls back to CapRock (i.e.,
any Customer traffic that is routed by CapRock but ultimately returned to
CapRock by Customer). In the event that any looping occurs, CapRock will
identify the loop and, at CapRock's sole option, either remove the carrier in
question from CapRock's routing or block the incoming traffic on a trunk group
level by incoming exclusion. Once the looping problem has been resolved, CapRock
will restore routing and notify Customer of the actions that have been taken.
16. Force Majeure. CapRock shall not be liable for any failure,
interruption and/or diminution of Services in the event that such failure,
interruption and/or diminution is the result of any fire, flood, epidemic,
earthquake or any other act of God, explosion, strike or other disputes, riot or
civil disturbance, war (whether declared or undeclared), armed conflict, any
municipal ordinance, or state or federal law, governmental order or regulation,
or order of any Court of competent jurisdiction, or other similar forces not
within the control of CapRock.
17. Assignment. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.
Customer shall not assign or transfer any of its rights or obligations hereunder
without the prior written consent of CapRock.
18. Confidentiality. Customer understands and agrees that the terms and
conditions of this Agreement and all non-tariff documents referenced herein are
confidential as between Customer and CapRock and shall not be disclosed by
Customer to any party other than the professional advisors of Customer or as may
be required by applicable law. Violation by Customer or its agents of the
foregoing provision shall entitle CapRock, at its option, to immediately
discontinue providing services and/or facilities to Customer.
19. Illegality. If any term or provision of this Agreement shall be found
to be illegal or unenforceable, then, notwithstanding such illegality or
unenforceabilty, this Agreement shall remain in full force and effect and such
term or provision shall be deemed to be deleted. In addition, this Agreement
shall be terminated upon the determination of a governmental entity having
jurisdiction over the Services provided pursuant to this Agreement that the
relationship of the parties, Services provided hereunder are contrary to
existing law.
20. Waiver. No term or provision of this Agreement shall be deemed waived,
and no breach or default shall be deemed excused unless such waiver or consent
shall be in writing and signed by the party claimed to have waived or consented.
No consent by any party to, or waiver of, a breach or default by the other,
whether express or implied, shall constitute a consent to, waiver of or excuse
for, any different or subsequent breach or default.
21. Notice. All notices given hereunder and all payments to be made
hereunder shall be sent to the addresses set forth on the signature page hereof,
or at such other addresses as a party may designate in writing to the other
party. All notices, requests, consents and other communications under this
Agreement shall be in writing and shall be deemed to have been delivered on the
date when hand delivered or three (3) days after deposit in the mail when sent
by US Mail, postage prepaid, by certified mail, return receipt requested, or
telegraphed and confirmed, or upon confirmation of sending when sent by fax, or
on the day after being sent when sent by overnight delivery service.
- ------------------ -------------------
INITIALS - CAPROCK INITIALS - CUSTOMER
<PAGE> 5
22. Tariffs. The terms, conditions and rates specified in this Agreement
are subject to all applicable tariffs (excluding CapRock Tariff F.C.C. No. 2)
which may affect the services and/or facilities provided hereunder. Should a
change in any rates specified herein become necessary due to changes in any
applicable tariffs, CapRock shall give Customer at least three (3) days notice
of said rate change.
23. Entire Agreement. This Agreement contains the entire agreement and
understanding of the parties hereto and supersedes all prior statements,
representations, understandings or agreements of the parties with respect to the
subject matter contained herein.
24. Amendment. Except as otherwise provided herein, including without
limitation CapRock's ability to make rate changes as provided in paragraph 4
above, this Agreement shall not be amended, changed, modified, terminated or
discharged in whole or in part except by an instrument in writing duly executed
by CapRock and Customer or their successors or assigns.
25. Construction. The preparation of this Agreement by counsel for a given
party shall not be material to the construction hereof, and the terms hereof
shall not be strictly construed against such party. This Agreement is not
intended to be, and shall not be construed to create a partnership, agency or
joint venture between the parties, or result in a joint communications offering
to the customers of either CapRock or Customer; provided, however, that, for the
purpose of ordering telephone or other telecommunications services and/or
facilities, CapRock may act as agent of Customer should the parties so agree in
writing.
26. Attorneys' Fees. Except as provided otherwise herein, should it become
necessary for either party to retain the services of any attorney to enforce its
rights hereunder (including in-house counsel), and/or should any lawsuit be
necessary to enforce said rights, then the prevailing party shall be entitled to
receive reasonable attorneys' fees from the other party.
27. Headings/Counterparts The headings included herein are for convenience
only and will not be considered for any purpose in construing this Agreement.
This Agreement may be executed in two or more counterparts, each of which shall
be deemed an original. It shall not be necessary in making proof of this
Agreement to produce or account for more than one of such counterparts.
28. Governing Law. This Agreement is executed in Dallas, Texas and shall be
governed by the laws of the State of Texas, with exclusive venue at Dallas,
Dallas County, Texas.
29. Certification of Interstate/Intrastate Usage. For CapRock provided
services traffic which originates in a given state and is delivered by a CapRock
POP within that state to an IXC switch located in the same state, the Customer
must provide CapRock with written certification of the percentage of interstate
(including international) minutes of usage and the percentage of intrastate
minutes of usage. Said certification must be provided for each IXC switch prior
to utilization of each switch to receive or route such traffic. Customer may
amend its certification at any time, and CapRock shall have the right to request
re-certification at any time provided that such request shall not unilaterally
be made more than once in any calendar quarter. Certifications amended
voluntarily or pursuant to a request for re-certification shall be effective on
the first day of the calendar month next following the expiration of a period of
forty-five (45) days after such amendment or request for re-certification. If
Customer fails to furnish adequate certification prior to utilization of an IXC
switch for such traffic or in response to a request for re-certification, the
minutes of use attributable to such traffic will be deemed to be intrastate and
subject to the intrastate rates set forth herein. Customer agrees to cooperate
at its own expense with any audit initiated by CapRock or required by a third
party with respect to CapRock's interstate and intrastate minutes of traffic.
Such cooperation shall include without limitation the provision of call detail
records, billing records and other information to CapRock or to the auditing
third party for the purpose of verifying Customer's interstate/intrastate
traffic and the accuracy of Customer's certification with respect to same.
Customer agrees to indemnify and reimburse CapRock for any liability or expense
- ------------------ -------------------
INITIALS - CAPROCK INITIALS - CUSTOMER
<PAGE> 6
incurred by CapRock due to a determination by audit that Customer's
interstate/intrastate traffic is different than that set forth in its
certification.
IN WITNESS WHEREOF, the undersigned have set their hands.
CAPROCK: CUSTOMER:
CAPROCK COMMUNICATIONS CORP. -------------------------------
By: By:
----------------------------- ----------------------------
Name: Name:
--------------------------- --------------------------
Title: Title:
-------------------------- -------------------------
Address: Two Galleria Tower Address:
13455 Noel Road -----------------------
Suite 1925, LB 46 -------------------------------
Dallas, Texas 75240 -------------------------------
Date of Execution: Date of Execution:
-------------- -------------
- ------------------ -------------------
INITIALS - CAPROCK INITIALS - CUSTOMER
<PAGE> 7
ADDENDUM "A"
TELECOMMUNICATION SERVICES AND/OR FACILITIES
This Addendum is hereby incorporated into the underlying Agreement as
though an original part thereof.
Customer:
-----------------------------------------------------------------
Address:
------------------------------------------------------------------
City: State: Zip:
------------ ------------- ----------------
Primary Account Contact:
----------------------------------------
Phone No. Fax No.:
--------------------------- ------------------
Committed DS-1's:
------------------------
Minimum Billing Amount per Committed DS-1:
------------------------
Minimum Usage Amount per Committed DS-1:
------------------------
(DETAIL OF OTHER TELECOMMUNICATIONS SERVICES/FACILITIES TO BE PROVIDED AND
INITIAL RATES)
IN WITNESS WHEREOF, the undersigned have set their hands.
CAPROCK: CUSTOMER:
CAPROCK COMMUNICATIONS CORP. -------------------------------
By: By:
----------------------------- ----------------------------
Name: Name:
--------------------------- --------------------------
Title: Title:
-------------------------- -------------------------
Address: Two Galleria Tower Address:
13455 Noel Road -----------------------
Suite 1925, LB 46 -------------------------------
Dallas, Texas 75240 -------------------------------
Date of Execution: Date of Execution:
------------ -----------
- ------------------ -------------------
INITIALS - CAPROCK INITIALS - CUSTOMER
<PAGE> 8
ADDENDUM "B"
DEPOSIT REQUIREMENTS
This Addendum is hereby incorporated into the underlying Agreement as
though an original part thereof.
Deposit Requirements:
Amount
Cash Deposit No: Yes: $
--- --- ----
Letter of Credit: No: Yes: $
--- --- ----
Guaranty: No: Yes: Full
--- ---
If a Cash Deposit, Letter of Credit and/or Guaranty of this account is
required for initial credit review purposes, or if an additional Deposit is
required during the term of this Agreement, Customer agrees to execute such
documentation necessary to record, perfect and/or effect such instruments for
the benefit of CapRock.
- ------------------ -------------------
INITIALS - CAPROCK INITIALS - CUSTOMER
<PAGE> 9
[CAPROCK COMMUNICATIONS LETTERHEAD]
UNIVERSAL CONNECTIVITY CHARGE EXEMPTION CERTIFICATION
Customer Name: ("Customer")
----------------------------------------------
(Full Legal Name)
Customer Address:
--------------------------------------------------------------
CUSTOMER submits this certification in support of its request for an exemption
from the Universal Connectivity Charge as described in CapRock Communications'
tariffs on file with the FCC.
1. CUSTOMER is either a telecommunications carrier that provides
interstate telecommunications service to the public for a fee on a
common carrier basis, or a private service provider that offers
interstate telecommunications service to others for a fee on a non-
common carrier basis. CUSTOMER is required to contribute to the
universal service support mechanisms pursuant to Section 254 of the
Communications Act (47 U.S.C. Section 254) and F.C.C. Rules and
Orders issued to implement Section 254 (including the Universal
Service Fund Order, CC Docket No. 96-45, FCC 97-157, released on
May 8, 1997).
2. CUSTOMER has filed with the FCC a completed and signed copy of
FCC Form 457 - Universal Service Worksheet, a copy of which
completed form (with any confidential information blacked-out or
erased) is attached hereto as Attachment 2. The revenue information
filed with such form incorporates and reflects all revenue received
by Customer in connection with the resale of the Resold Services to
CUSTOMER's end users.
3. CUSTOMER acknowledges that CUSTOMER will be subject to
Subscriber Charges under CapRock Communications' Tariff with
respect to any purchase of CapRock Communications' services that do
not constitute Resold Services.
4. If CapRock Communications waives the Universal Connectivity
Charge for CUSTOMER (in whole or in part) based on the information
provided by CUSTOMER in this Certification, and CapRock
Communications thereafter determines that inaccuracy in the
information provided by CUSTOMER resulted in a waiver of the
Universal Connectivity Charge with respect to charges that
constitute CapRock Communications end-user revenues, then CapRock
Communications may bill CUSTOMER for the amount of the Universal
Connectivity Charge that was waived as a result of such inaccuracy.
5. CUSTOMER understands that its obligation to contribute to the
universal service support mechanisms is a legal obligation arising
under Section 254 of the Communications Act (47 U.S.C. Section 254)
and F.C.C. Rules and Orders issued to implement Section 254. The
extent of obligation to pay the Universal Connectivity Charge to
CapRock Communications, or any waiver of that charge by CapRock
Communications. CapRock Communications' waiver determination will
be based on the information provided by CUSTOMER in this
Certification. In the event that CUSTOMER fails to provide accurate
or timely information to CapRock Communications, CUSTOMER may be
liable to both CapRock Communications for the Universal
Connectivity Charge and to the Universal Service Administrator for
its contribution to the universal service support mechanism.
- ------------------ -------------------
INITIALS - CAPROCK INITIALS - CUSTOMER
<PAGE> 10
6. CapRock Communications may require CUSTOMER to provide an
updated version of this Certification to CapRock Communications on
a semi-annual basis, by October 14 and April 14 of each year in
which the CUSTOMER files a Form 457.
7. CapRock Communications may provide a copy of this Certification
to the Universal Service Administrator and/or the F.C.C. If CapRock
Communications does so, it will request confidential treatment of
the Certification.
8. CUSTOMER hereby agrees to indemnify, defend and hold harmless
CapRock Communications, its parents, affiliates, and subsidiaries
("indemnified parties") from any claims, losses, liabilities,
fines, penalties, or charges relating to the USF or related access
charges which may be imposed upon such indemnified parties or which
they may incur with respect to the sale of Resold Services to
Customer, as a result CapRock Communications' acceptance of an
reliance upon this Certificate.
9. The undersigned individual is authorized by CUSTOMER to make
this Certification on its behalf.
CUSTOMER:
-----------------------------------------------------------------------
BY:
-----------------------------------------------------------------------
(signature)
-----------------------------------------------------------------------
(Print or type name)
TITLE:
--------------------------------------------------------------------------
DATE:
--------------------------------------------------------------------------
RETURN COMPLETED FORM TO:
CapRock Communications Corp.
Two Galleria Tower
13455 Noel Road, Suite 1925
LB 46
Dallas, Texas 75240
Or Fax to:
(972) 788-4243
- ------------------ -------------------
INITIALS - CAPROCK INITIALS - CUSTOMER
<PAGE> 11
CERTIFICATE OF EXEMPTION FROM
FEDERAL EXCISE TAX ON COMMUNICATIONS
SERVICES AND FACILITIES
The undersigned hereby certifies that the services furnished by CapRock
Communications Corp. are exempt from the Federal Excise Tax on communications
services and facilities because the organization is exempt under Internal
Revenue Code 4253 as marked below. At such time when the claimed status no
longer applies, written notice of recession will be submitted.
( ) A nonprofit hospital referred to in Internal Revenue Code Section
170(b)(1)(A)(iii) which is exempt from income tax under Section 501(a).
( ) A nonprofit educational organization described in Internal Revenue Code
Section 170(b)(1)(A)(ii) which is exempt from income tax under Section
501(a).
( ) The government of the United States, or the government of any state or its
political subdivisions or the District of Columbia.
( ) An international organization described in Internal Revenue Code Section
4253(b).
( ) The service will be used exclusively in the rendering of a communications
service upon which tax is imposed by Internal Revenue Code Section 4251. It is
understood that no tax will be collected by CapRock Communications Corp. on
charges for said services and that it will be the responsibility of the
undersigned to collect such tax as may be due from its customers.
( ) Common carriers and communications companies. Certain communications
facilities used by common carriers and telephone companies. A common carrier is
one holding itself out to the public as engaged in the business of
transportation of persons or property from place to place for compensation,
offering its services to the public generally.
Exempt status effective as of .
--------------------------------
ANY MODIFICATIONS TO THE ABOVE WILL RENDER THIS CERTIFICATE NULL AND VOID.
Organization:
-------------------------------------------------------------------
Account Number(s):
--------------------------------------------------------------
Federal Tax ID:
-----------------------------------------------------------------
By (Signature):
-----------------------------------------------------------------
Title:
--------------------------------------------------------------------------
***All information requested must be furnished for this certificate to be
valid***
- ------------------ -------------------
INITIALS - CAPROCK INITIALS - CUSTOMER
<PAGE> 1
EXHIBIT 10.60
FIRST AMENDMENT TO OFFICE LEASE AGREEMENT
This FIRST AMENDMENT TO OFFICE LEASE AGREEMENT ("Amendment") is made
and entered into effective as of the 25th day of March, 1999 ("Effective Date")
by and between CHAMPION ADDISON ONE LIMITED PARTNERSHIP, a Delaware limited
partnership ("Landlord"), and CAPROCK COMMUNICATIONS CORP., a Texas corporation
("Tenant").
WITNESSETH:
WHEREAS, Landlord and Tenant have entered into that certain Office
Lease Agreement (the "Lease") dated effective as of November 24, 1998, whereby
Landlord agreed to lease to Tenant, and Tenant agreed to lease from Landlord,
those certain premises located in the office building commonly known as Addison
Circle One located in Dallas County, Texas (the "Premises"), which Premises are
more particularly described in the Lease; and
WHEREAS, Landlord and Tenant desire to expand the Premises, extend the
Lease Term and otherwise amend the terms of the Lease upon the terms and
conditions set forth hereinbelow.
NOW, THEREFORE, for and in consideration of the foregoing premises and
the mutual covenants and agreements set forth hereinbelow, together with other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged and confessed by each of the parties hereto, the undersigned
Landlord and Tenant do hereby covenant and agree as follows:
1. Expansion of Premises. Landlord and Tenant hereby agree to expand
the Premises to include 30,786 square feet of Rentable Area, constituting the
entire eighth (8th) floor of the Building (the "Eighth Floor Space"), which
Eighth Floor Space is depicted and shown on Exhibit "A" attached hereto and made
a part hereof for all purposes.
2. Grant. Upon the terms and conditions of the Lease, Landlord leases
to Tenant, and Tenant leases from Landlord, the Eighth Floor Space and the
nonexclusive right to use the Common Areas, subject to all of the terms and
conditions of the Lease (including the Rules and Regulations). As a result of
the expansion of the Premises, the last six (6) sentences of Section 2 of the
Lease are hereby deleted in their entirety and replaced with the following:
Notwithstanding the foregoing, Landlord and Tenant agree that Tenant
will occupy the Premises in four (4) stages and, therefore, (i) during
the Initial Stage, the Premises shall be deemed to consist only of (and
Tenant shall only be entitled to occupy) the Initial Premises, (ii)
during the Second Stage, the Premises shall be deemed to consist only
of (and Tenant shall only be entitled to occupy) the Initial Premises
and the Second Phase, (iii) during the Third Stage, the Premises shall
be deemed to consist only of (and Tenant shall only be entitled to
occupy) the Initial Premises, the Second Phase and the Third Phase, and
(iv) during the Final Stage, the Premises shall be deemed to consist of
(and Tenant shall be entitled to occupy) the Entire Premises upon the
terms and conditions set forth in this Lease. Landlord shall deliver
the Second Phase of the Premises to Tenant upon the earlier to occur of
(i) the commencement of the Second Stage of Occupancy; and (ii) the
date Tenant actually occupies the Second Phase (with Landlord agreeing
to make the Second Phase available for early occupancy). Landlord shall
deliver the Third Phase of the Premises to Tenant upon the earlier to
occur of (i) the commencement of the Third Stage of occupancy; and (ii)
the date Tenant actually occupies the Third Phase (with Landlord
agreeing to make the Third Phase available for early occupancy).
Landlord shall deliver the Final Phase of the Premises to Tenant upon
the earlier to occur of (i) the commencement of the Final Stage of
occupancy; and (ii) the date Tenant actually occupies the Final Phase
(with Landlord agreeing to make the Final Phase available for early
occupancy). Landlord's delivery obligations with respect to the Second
Phase, the Third Phase and the Final Phase have been satisfied. Tenant
shall be deemed to have "actually occupied" a particular Stage of the
Premises at such time as Tenant takes possession of such Stage of the
Premises and commences business operations therefrom.
FIRST AMENDMENT TO OFFICE LEASE AGREEMENT - Page 1
<PAGE> 2
3. Extension of Lease Term. In connection with the expansion of the
Premises, Landlord and Tenant have agreed to extend the Lease Term. In that
regard, the definition of "Lease Term" set forth in Section 1(v) of the Lease
is hereby deleted in its entirety and replaced with the following:
(v) "Lease Term" means the period commencing on the Commencement
Date and ending on March 31, 2007.
4. Definitions. As a result of the expansion of the Premises and the
extension of the .Lease Term, Landlord and Tenant hereby agree that the
definitions of the following terms which are currently set forth in Section I of
the Lease are hereby deleted in their entirety and replaced with the following
definitions:
(p) "Final Phase" means that portion of the Premises known as Suite
850, located on the eighth (8th) floor of the Building and outlined on
the floor plan(s) attached to this Lease as Exhibit "B", which Final
Phase shall consist of 15,393 square feet of Rentable Area.
(q) "Final Stage" means the period commencing on the date (the
"Final Stage Commencement Date") which is the earlier to occur of (i)
October 1, 2000 and (ii) the date Tenant actually occupies the Final
Phase, and continuing until the end of the Lease Term.
(s) "Initial Premises" means that portion of the Premises known as
Suite 700, located on the seventh (7th) floor of the Building and
outlined on the floor plan(s) attached to this Lease as Exhibit "B",
which Initial Premises shall consist of 30,786 square feet of Rentable
Area.
(t) "Initial Stage" means the period commencing on the Commencement
Date and continuing until the earlier to occur of (i) June 30, 1999 and
(ii) the date Tenant actually occupies the Second Phase.
(an) "Second Phase" means that portion of the Premises known as
Suite 600, located on the sixth (6th) floor of the Building and
outlined on the floor plan(s) attached to this Lease as Exhibit "B",
which Second Phase shall consist of 30,786 square feet of Rentable
Area.
(ao) "Second Stage" means the period commencing on the date which is
the earlier to occur of (i) July 1, 1999 and (ii) the date Tenant
actually occupies the Second Phase, and continuing until the earlier to
occur of (x) March 31, 2000 and (y) the date Tenant actually occupies
the Third Phase.
(ar) "Stage" shall mean the Initial Stage, the Second Stage, the
Third Stage or the Final Stage, as the case may be.
5. Additional Definitions. As a result of the expansion of the Premises
and the extension of the Lease Term, Section 1 of the Lease is hereby further
amended to include the following additional definitions:
(aaa) "Third Phase" means that portion of the Premises known as
Suite 800, located on the eighth (8th) floor of the Building and
outlined on the floor plan(s) attached to this Lease as Exhibit "B",
which Third Phase shall consist of 15,393 square feet of Rentable Area.
(aab) "Third Stage" means the period commencing on the date (the
"Third Stage Commencement Date") which is the earlier to occur (i)
April 1, 2000 and (ii) the date Tenant actually occupies the Third
Phase, and continuing until the earlier to occur of (x) September 30,
2000 and (y) the date Tenant actually occupies the Final Phase.
FIRST AMENDMENT TO OFFICE LEASE AGREEMENT - Page 2
<PAGE> 3
(aac) "Applicable Rental Rate" means (x) with respect to the Initial
Premises and the Second Phase, the sum of $22.40 per square foot of
Rentable Area from the applicable rental commencement date through and
including the Rent Step Date and $24.64 per square foot of Rentable
Area from the Rent Step Date through and including the expiration of
the Lease Term; and (y) with respect to the Third Phase and the Final
Phase, $23.50 per square foot of Rentable Area from the applicable
commencement date through and including the Rent Step Date and $25.85
from and after the Rent Step Date through and including the expiration
of the Lease Term.
(aad) "Rent Step Date" means April 30, 2004.
(aae) "Phase" means the Initial Premises, the Second Phase, the
Third Phase or the Final Phase, as the case may be.
6. Premises. As a result of the expansion of the Premises, the
definition of "Premises" set forth in Section l(ae) of the Lease is hereby
deleted in its entirety and replaced with the following:
(ae) "Premises" means the Initial Premises, the Second Phase, the
Third Phase and the Final Phase, which collectively shall constitute
the entire sixth (6th), seventh (7th) and eighth (8th) floors of the
Building.
7. Base Rental. As a result of the expansion of the Premises and the
extension of the Lease Term, the definition of "Base Rental" set forth in
Section I (d) of the Lease hereby deleted in its entirety and replaced with the
following:
"Base Rental" means:
(i) with respect to the Initial Premises, (a) commencing on the
Commencement Date and continuing until the Rent Step Date, an annual
sum of $689,606.40, payable in monthly installments of $57,467.20 (but
subject to abatement as provided in Section 5 hereof) and (b)
commencing on May 1, 2004 and continuing until the end of the initial
Lease Term, an annual sum of $758,567.04, payable in monthly
installments of $63,213.92;
(ii) with respect to the Second Phase, (a) commencing on July 1,
1999 and continuing until the Rent Step Date, an annual sum of
$689,606.40, payable in monthly installments of $57,467.20 and (b)
commencing on May 1, 2004, and continuing until the end of the initial
Lease Term, an annual sum of $758,567.04, payable in monthly
installments of $63,213.92;
(iii) with respect to the Third Phase, (a) commencing on the Third
Stage Commencement Date and continuing until the Rent Step Date, an
annual sum of $361,735.50, payable in monthly installments of
$30,144.63 and (b) commencing on May 1, 2004 and continuing until the
end of the initial Lease Term, an annual sum of $397,909.05, payable in
monthly installments of $33,159.09; and
(iv) with respect to the Final Phase, (a) commencing on the Final
Stage Commencement Date and continuing until the Rent Step Date, an
annual sum of $361,735.50, payable in monthly installments of
$30,144.63 and (b) commencing on May 1, 2004 and continuing until the
end of the initial Lease Term, an annual sum of $397,909.05, payable in
monthly installments of $33,159.09.
Therefore, Tenant's total Base Rental obligation with respect to the
Premises from time to time during the Lease Term shall be as follows:
FIRST AMENDMENT TO OFFICE LEASE AGREEMENT - Page 3
<PAGE> 4
(i) Commencing on the Commencement Date and continuing until June
30, 1999, an annual sum of $689,606.40, payable in monthly installments
of $57,467.20 (but subject to abatement as provided in Section 5
hereof);
(ii) Commencing on July 1, 1999 and continuing until the end of the
Second Stage, an annual sum of $1,379,212.80, payable in monthly
installments of $114,934.40;
(iii) Commencing on the Third Stage Commencement Date and continuing
until the end of the Third Stage, an annual sum of $1,740,948.30,
payable in monthly installments of $145,079.03;
(iv) Commencing on the Final Stage Commencement Date and continuing
until the Rent Step Date, an annual sum of $2,102,683.80, payable in
monthly installments of $175,223.65; and
(v) Commencing on the day following the Rent Step Date and
continuing until the end of the Lease Term, an annual sum of
$2,312,952.18, payable in monthly installments of $192,746.02.
The Base Rental for any partial months during the Lease Term or any
applicable Stage shall be pro-rated and paid at the Applicable Rental
Rate during such month of the Lease Term or the applicable Stage. Any
such pro-rated Base Rental shall be due upon receipt of an invoice from
Landlord.
8. Floor Plan - Exhibit "B" to the Lease. As a result of the expansion
of the Premises, Exhibit "B" to the Lease is hereby modified to include the
floor plan attached to this Amendment as Exhibit "A", which floor plan depicts,
among other things, the Eighth Floor Space.
9. Rentable Area of the Premises. As a result of Tenant's expansion of
the Premises, the definition of "Rentable Area of the Premises" set forth in
Section 1(al) of the Lease is hereby deleted in its entirety and replaced with
the following:
(al) "Rentable Area of the Premises" means (and is hereby deemed to
be) (i) 30,786 square feet of Rentable Area (representing the Initial
Premises) during the Initial Stage of occupancy, (ii) 61,572 square
feet of Rentable Area (representing the Initial Premises and the Second
Phase) during the Second Stage of occupancy, (iii) 76,965 square feet
of Rentable Area (representing the Initial Premises, the Second Phase
and the Third Phase) during the Third Stage of occupancy, and (iv)
92,358 square feet of Rentable Area (representing the entire Premises)
during the Final Stage of occupancy.
10. Tenant's Share. As a result of the expansion of the Premises, the
definition of "Tenant's Share" set forth in Section 1(ay) of the Lease has been
adjusted. In that regard, Section 1(ay) of the Lease is hereby deleted in its
entirety and replaced with the following:
(au) "Tenant's Share" means (i) during the Initial Stage of
occupancy, 10.49%, (ii) during the Second Stage of occupancy, 20.98%,
(iii) during the Third Stage of occupancy, 26.23% and (iv) during the
Final Stage of occupancy, 31.48%, which in each case is the proportion
which the Rentable Area of the Premises bears to the Rentable Area of
the Building.
11. Security Deposit. As a result of the expansion of the Premises,
Landlord and Tenant have agreed to increase the amount of the Security Deposit.
In that regard, Section 1(ap) of the Lease is hereby deleted in its entirety
and replaced with the following:
(ap) "Security Deposit" means the sum of $350,447.32 which may be
in the form of a sight draft irrevocable letter of credit for the
benefit of Landlord, issued by an institution reasonably satisfactory
to Landlord in form and substance reasonably satisfactory to Landlord.
FIRST AMENDMENT TO OFFICE LEASE AGREEMENT - Page 4
<PAGE> 5
Landlord acknowledges receipt of a letter of credit in the amount of $229,868.80
(the "Original Letter of Credit"), representing the Security Deposit originally
required under the Lease. In that regard, on or before the date which is five
(5) days after the Effective Date of this Amendment, Tenant shall provide to
Landlord a substitute letter of credit in the amount of $350,447.32 (the
"Substitute Letter of Credit"), representing the entire amount of the Security
Deposit, whereupon Landlord shall promptly return to Tenant the Original Letter
of Credit. The Substitute Letter of Credit shall be on the same terms and
conditions and issued by the same institution as the Original Letter of Credit.
12. Landlord's Delivery of Premises. As a result of the expansion of
the Premises, the last sentence of Section 3(c) of the Lease is hereby deleted
in its entirety and replaced with the following:
Landlord shall deliver the Second Phase of the Premises to Tenant not
later than sixty (60) days prior to commencement of the Second Stage of
occupancy, shall deliver the Third Phase of the Premises to Tenant not
later than sixty (60) days prior to the commencement of the Third Stage
of occupancy, and shall deliver the Final Phase of the Premises not
later than sixty (60) days prior to the commencement of the Final Stage
of occupancy.
In addition, the last sentence of Section 3(d) is hereby deleted in its entirety
and replaced with the following:
In such event, all future take-down dates for the Second Phase, the
Third Phase and the Final Phase of the Premises shall also be extended
on the same day-to-day basis.
13. Addition of Exhibits. Section 52 of the Lease is hereby amended to
add the following reference to the newly created Exhibit "L":
Exhibit "L" - Exterior Signage Guidelines
In addition, the Lease is hereby amended to add Exhibit "L" containing
the Exterior Signage Guidelines, which Exhibit "L" is attached to this
Lease as Exhibit "B".
14. Building Signage. In connection with Tenant's expansion of the
Premises, Landlord has agreed to grant Tenant exterior signage on the upper
fascia located at the top of the Building in accordance with this Section 13. In
that regard, Section 55 of the Lease is hereby deleted in its entirety and
replaced with the following:
55. Building Signage. So long as no monetary default exists under
this Lease and provided Tenant (but not a sublessee or assignee of
Tenant) occupies at least 76,965 square feet of Rentable Area in the
Building, Tenant shall have the right, at Tenant's sole cost and
expense, to place two signs (the "Upper Fascia Signage") on the upper
fascia of the Building (one on the north side of the Building and one
on the south side of the Building), which Upper Fascia Signage shall be
subject to Landlord's prior written approval (which approval shall not
be unreasonably withheld or delayed). The Upper Fascia Signage shall be
subject to the Exterior Signage Guidelines attached to this Lease as
Exhibit "L" and made a part hereof for all purposes and the location of
the Upper Fascia Signage shall be limited to the Sign Field (herein so
called) identified in the drawings attached to Exhibit "L" as
Attachment 1. Upon the expiration or earlier termination of this Lease,
or in the event Tenant otherwise is not entitled to maintain the Upper
Fascia Signage in accordance with this Section 55, Tenant shall, at
Tenant's sole cost and expense, remove the Upper Fascia Signage and
shall repair any damage to the Building caused by such removal. In
addition, prior to installing or removing any signage on the exterior
of the Building, Tenant shall cooperate with Landlord and Landlord's
engineer and/or contractor to ensure that the installation or removal
of such signage will not damage the exterior of the Building. Tenant
further hereby agrees to indemnify, defend and hold harmless Landlord
from damage caused to the Building as a result of Tenant's
installation, removal, maintenance, repair or replacement of
FIRST AMENDMENT TO OFFICE LEASE AGREEMENT - Page 5
<PAGE> 6
any exterior signage as provided in this Section 55. Notwithstanding
anything to the contrary set forth herein, the Upper Fascia Signage
shall be limited to the word "CapRock" and otherwise shall be
consistent with the Exterior Signage Guidelines.
15 Parking. As a result of the expansion of the Premises, Tenant shall
also be entitled to the use of additional parking spaces in the Parking Garage,
subject to the terms and conditions of the Parking Agreement attached to the
Lease as Exhibit "E". In that regard, Section 2 of the Parking Agreement is
hereby deleted in its entirety and replaced with the following:
2. Grant and Rental Fee. Provided no Event of Default has occurred
and is continuing under the Lease and subject to Landlord's recapture
right set forth below, Tenant shall have (i) a non-exclusive right to
use 332 unreserved parking spaces located within the Office Portion of
the Parking Garage, during the Lease Term at a monthly rate of $30.00
per Space and (ii) an exclusive right to use 37 reserved parking spaces
located within the Office Portion of the Parking Garage (of which at
least seven [7] shall be on the first ramp up from the first level of
the Parking Garage in the locations identified on Annex 1 to this
Exhibit "E") during the Lease Term at a monthly rate of $80.00 per
Space (all of such unreserved and reserved parking spaces being
collectively referred to herein as the "Spaces"), plus any applicable
tax thereon, subject to such terms, conditions, and regulations as are,
from time to time, promulgated by Landlord, including the rules and
regulations set forth in Section 5 to this Parking Agreement. Tenant
shall pay all sums due under the preceding sentence ("Parking Charges")
to Landlord in advance in monthly installments on the first day of each
calendar month during the Lease Term, and such Parking Charges shall be
deemed to be Rent for all purposes under the Lease.
Of the total 369 Spaces for the Premises, 123 Spaces are allocable
to the Initial Premises (the "Initial Premises Spaces"), 123 Spaces are
allocable to the Second Phase (the "Second Phase Spaces"), 61 Spaces
are allocable to the Third Phase (the "Third Phase Spaces") and 62
Spaces are allocable to the Final Phase (the "Final Phase Spaces").
Tenant may freely utilize as many of the Spaces as are needed at any
time prior to Tenant's occupancy of the entire Premises, provided
Tenant pays the Parking Charges for all Spaces so used. Notwithstanding
the foregoing, upon the commencement of the Initial Stage, Tenant shall
pay Parking Charges on the greater of (A) the number of Spaces actually
being used by Tenant pursuant to this Section 2 and (B) all of the
Initial Premises Spaces (which shall include all 37 reserved Spaces).
Upon the commencement of the Second Stage, Tenant additionally
shall be required to pay Parking Charges to Landlord on 100 of the
Second Phase Spaces (the "Required Second Phase Spaces"). Not less than
four months after the commencement of the Second Stage, Tenant shall
deliver written notice to Landlord informing Landlord of the total
number of Second Phase Spaces which Tenant desires to utilize with
respect to the remainder of the Lease Term; provided, however, Tenant
may not elect to utilize less than the Required Second Phase Spaces. In
the event Tenant timely notifies Landlord that Tenant elects to utilize
less than all of the allocated Second Phase Spaces for the remainder of
the Lease Term, Landlord shall have the right to recapture the
remaining Second Phase Spaces and Tenant's rights and obligations with
respect to such recaptured Second Phase Spaces shall terminate for the
remainder of the Lease Term.
Upon commencement of the Third Stage, Tenant additionally shall be
required to pay Parking Charges to Landlord on 50 of the Third Phase
Spaces (the "Required Third Phase Spaces"). Not less than four months
after the commencement of the Third Stage, Tenant shall deliver written
notice to Landlord informing Landlord of the total number of Third
Phase Spaces which Tenant desires to utilize with respect to the
remainder of the Lease Term; provided, however, Tenant may not elect to
utilize less than the Required Third Phase Spaces. In the event Tenant
timely notifies Landlord that Tenant elects to utilize less than all of
the allocated Third Phase Spaces for the remainder of the Lease Term,
Landlord shall have the right to
FIRST AMENDMENT TO OFFICE LEASE AGREEMENT - Page 6
<PAGE> 7
recapture the remaining Third Phase Spaces and Tenant's rights and
obligations with respect to such recaptured Third Phase Spaces shall
terminate for the remainder of the Lease Term.
Upon the commencement of the Final Stage, Tenant additionally shall
be required to pay Parking Charges to Landlord on 50 of the Final Phase
Spaces (the "Required Final Phase Spaces"). Not less than four months
after the commencement of the Final Stage, Tenant shall deliver written
notice to Landlord informing Landlord of the total number of Final
Phase Spaces which Tenant desires to utilize with respect to the
remainder of the Lease Term; provided, however, Tenant may not elect to
utilize less than the Required Final Phase Spaces. In the event Tenant
timely notifies Landlord that Tenant elects to utilize less than all of
the allocated Final Phase Spaces for the remainder of the Lease Term,
Landlord shall have the right to recapture the remaining Final Phase
Spaces and Tenant's rights and obligations with respect to such
recaptured Final Phase Spaces shall terminate for the remainder of the
Lease Term.
Upon Landlord's recapture of any of the Second Phase Spaces, the
Third Phase Spaces or the Final Phase Spaces pursuant to this Section
2, Landlord shall have the right to allocate such recaptured Spaces to
other tenants of the Building.
16. Right of First Refusal. As a result of the expansion of the
Premises, Exhibit G to the Lease containing certain rights of refusal of Tenant
is hereby deleted in its entirety and shall be of no further force of effect.
17. Tenant Improvements Agreement. The Tenant Improvements Agreement
attached to the Lease as Exhibit "D" specifies the rights and obligations of
Landlord and Tenant with respect to the design, construction and payment for
completion of the Tenant Improvements. Notwithstanding the foregoing, as a
result of the expansion of the Premises, the fifth (5th) and sixth (6th)
sentences of Paragraph 4 of the Tenant Improvements Agreement are hereby deleted
in their entirety and replaced with the following:
Notwithstanding anything in the Lease to the contrary, Tenant may take
possession of the Second Phase, the Third Phase and the Final Phase at
any time after the Delivery Date for the purpose of commencing Tenant's
Work; provided, however, that upon taking such possession, each of the
terms and conditions of the Lease (save and except payment of Base
Rental and Tenant's Share of Basic Operating Costs) shall be in full
force and effect with respect to such Phase(s). In addition, upon
Tenant's commencement of construction of Tenant's Work with respect to
the Second Phase, the Third Phase and the Final Phase, Tenant shall
diligently pursue such phases to Substantial Completion.
18. Tenant Improvement Allowance. Notwithstanding anything to the
contrary set forth in this Lease, the Allowance referenced in Paragraph 5(b) of
the Tenant Improvements Agreement shall not be applicable to the Eighth Floor
Space. Rather, Landlord shall provide Tenant with an allowance (the "Additional
Allowance") equal to $21.00 per square foot of Rentable Area in the Eighth Floor
Space to be used for the performance of Tenant's Work with respect to the Eighth
Floor Space. The payment of the Additional Allowance shall be made in the same
manner set forth in Paragraph 5 of the Tenant Improvements Agreement and each of
the other provisions of Paragraph 5 of the Tenant Improvements Agreement shall
be applicable to the Additional Allowance in the same manner as such provisions
are applicable to the Allowance, except that the entire amount of the Additional
Allowance must be allocated to the Eighth Floor Space.
19. Effect of Amendment. Except as specifically amended by the
provisions of this Amendment, the terms and provisions stated in the Lease shall
continue to govern the rights and obligations of Landlord and Tenant with
respect to the matters that are the subject of the Lease; and all provisions and
covenants of the Lease shall remain in full force and effect as stated therein,
except to the extent as specifically amended by the provisions of this
Amendment. The terms and conditions of this Amendment shall inure to the benefit
of and be binding upon each of the parties hereto and their respective
successors and assigns.
FIRST AMENDMENT TO OFFICE LEASE AGREEMENT - Page 7
<PAGE> 8
20. Capitalized Terms. Except as otherwise defined in this Amendment,
all capitalized terms used herein shall have the meaning given to such terms in
the Lease.
21. Counterparts. To facilitate execution of this Amendment, this
Amendment may be executed in one or more counterparts as may be convenient or
required, and an executed copy of this Amendment delivered by facsimile shall
have the effect of an original, executed instrument. All counterparts of this
Amendment shall collectively constitute a single instrument, but in making proof
of this Amendment, it shall not be necessary to produce or account for more than
one such counterpart.
22. Further Assurances. Landlord and Tenant each hereby agree that this
Amendment accurately sets forth the substantive understanding of the parties
with respect to the transactions which are the subject of this Amendment.
However, in the event the parties in the course of preparing this Amendment
failed to modify a provision of the Lease which should have been modified based
on such understanding, the parties hereby agree to execute such further
amendments to the Lease as are reasonably necessary to effect such understanding
of the parties and to conform the Lease to the terms of this Amendment.
[Remainder of Page Intentionally Left Blank]
FIRST AMENDMENT TO OFFICE LEASE AGREEMENT - Page 8
<PAGE> 9
IN WITNESS WHEREOF, this Amendment has been executed and delivered
effective as of the date and year first above written.
LANDLORD:
ADDISON CIRCLE ONE LIMITED
PARTNERSHIP, a Delaware limited partnership
By: CP/AOC VENTURE I, LTD.,
a Texas limited partnership
its sole general partner
By: CHAMPION-ACO, LTD.,
a Texas limited partnership its
general partner
By: ADDISON-CHAMPION, INC., a
Texas corporation its general
partner
By: /s/ JEFFREY L. SWOPE
------------------------------
Jeffrey L. Swope, President
TENANT:
CAPROCK COMMUNICATIONS CORP.,
a Texas corporation
By: /s/ Kevin McAleer
--------------------------------------
Kevin McAleer
Chief Financial Officer
FIRST AMENDMENT TO OFFICE LEASE AGREEMENT - Page 9
<PAGE> 10
EXHIBIT "A"
Depiction of Eighth Floor Space
[DEPICTION OF EIGHTH FLOOR SPACE]
EIGHTH FLOOR PLAN
30,796 SF TOTAL NET RENTABLE AREA
26,362 SF TOTAL USABLE AREA
================================================================================
[LOGO] ADDISON CIRCLE OFFICE TOWER [LOGO]
ADDISON, TEXAS
EXHIBIT "A" - Depiction of Eighth Floor Space
<PAGE> 11
EXHIBIT "B"
The following exhibit shall constitute Exhibit "L" to the Lease:
Exterior Signage Guidelines
o Exterior building mounted signs shall be restricted to corporate name
only.
o Sign locations shall be limited to the upper 60" vertical (top of
building) fascia area between the cornice cap detailing and the top of the
tenth floor window line.
o Signage shall be restricted to one sign on the northern and southern-most
fascias of the building and shall be located as prescribed on attached
building elevation exhibits.
o Signage shall be limited to a maximum vertical letter dimension of 48" for
the upper-case letters "C", "R" and "K" of "CapRock". The letters "a",
"p", "o" and "c" shall be lower-case and in proportion to the upper-case
letters.
o Corporate letter style may be utilized on the upper fascia of the building
and shall be constructed of metal. Signage shall appear to be opaque black
during daylight hours.
o Sign lighting shall be via internally lit, white luminaries.
o All requirements for electrical service, wiring, power transformation and
installation shall be the responsibility of the tenant.
o Upon lease termination or vacation of the building, the tenant shall be
responsible for signage removal and restoration of the fascia area.
o All signage must conform to city sign ordinances and plans for such
signage approved by Landlord prior to installation.
o The location of the Upper Fascia Signage shall be limited to the Sign
Field attached hereto as Attachment 1.
EXHIBIT "B" - Exterior Signage Guidelines
<PAGE> 12
ATTACHMENT 1
[The Building elevations showing the Sign Field for the Upper Fascia
Signage follow this cover page.)
ATTACHMENT 1 TO EXHIBIT "B"
<PAGE> 13
[PICTURE OF NORTH ELEVATION - SIGN LIMIT DIMENSIONS]
02 NORTH ELEVATION
------------------------------
1/16" = 1'-0"
<PAGE> 14
[PICTURE OF SOUTH ELEVATION - SIGN LIMIT/MARGIN DIMENSIONS]
01 SOUTH ELEVATION
------------------------------
1/16" = 1'-0"
<PAGE> 1
EXHIBIT 21.1
CapRock Telecommunications Corp., a Texas corporation
IWL Communications, Incorporated, a Texas corporation
CapRock Fiber Network, Ltd., a Texas limited partnership
CapRock Telecommunications Leasing Corp., a Texas corporation
CapRock Design Services, L.P., an Arizona limited partnership
CapRock Network Services, L.P., a Texas limited partnership
Spacelink Systems, Inc., a Texas corporation
Spacelink Systems FSC, Inc., a U.S. Virgin Islands corporation
IWL Communications, Ltd., a corporation organized under the laws of Russia
IWL Baltija Communications (Latvia) SIA, a corporation organized under the
laws of Latvia
Integrated Communications and Engineering Limited, a limited company
incorporated in Scotland
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
CapRock Communications Corp.
(Formerly IWL Holdings, Inc.):
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
April 15, 1999
<PAGE> 1
EXHIBIT 23.2
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
April 15, 1999
<PAGE> 1
EXHIBIT 99.1
Consent
The undersigned, Richard G. Ellenberger, has agreed, if elected at CapRock
Communications Corp.'s 1999 Annual Meeting of Shareholders, to be held in May
1999, to serve as a director of CapRock. The undersigned hereby consents to
being named as a director nominee in CapRock's Registration Statement on Form
S-1, File No. 333-74735, as amended.
Dated: April 15, 1999 /s/ RICHARD G. ELLENBERGER
--------------------------
Richard G. Ellenberger