<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
------------ --------------
Commission File Number: 0-24581
CAPROCK COMMUNICATIONS CORP.
(Exact name of registrant as specified in its charter)
TEXAS 75-2765572
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
15601 DALLAS PARKWAY, SUITE 700
DALLAS, TEXAS 75001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 982-9500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's common stock outstanding as of
October 31, 2000, was 38,730,243.
<PAGE> 2
CAPROCK COMMUNICATIONS CORP.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART 1. FINANCIAL INFORMATION................................................................ 1
Item 1. Financial Statements................................................................. 1
Consolidated Balance Sheets at September 30, 2000, (unaudited)
and December 31, 1999................................................................ 1
Consolidated Statements of Operations (unaudited) for the Three Months and Nine
Months Ended September 30, 2000 and 1999............................................. 2
Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended
September 30, 2000 and 1999.......................................................... 3
Notes to Consolidated Financial Statements........................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 19
PART II. OTHER INFORMATION.................................................................... 20
Item 1. Legal Proceedings.................................................................... 20
Item 6. Exhibits and Reports on Form 8-K..................................................... 20
Signature Page....................................................................... 21
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,075 $ 5,692
Marketable securities 47,225 182,636
Accounts receivable and unbilled services, less allowance for doubtful
accounts of $7,238 and $5,208 at September 30, 2000 and December 31,
1999, respectively 74,635 116,380
Income tax receivable -- 411
Costs and estimated earnings in excess of billings 59,118 870
Inventory 753 1,761
Prepaid expenses and other 2,581 2,775
------------- ------------
Total current assets 187,387 310,525
Property, plant and equipment 564,767 249,969
Accumulated depreciation (35,205) (21,368)
------------- ------------
Property, plant and equipment, net 529,562 228,601
Deferred income taxes 17,901 6,594
Other assets 2,692 3,115
------------- ------------
Total assets $ 737,542 $ 548,835
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 185,364 $ 62,594
Accrued expenses 19,700 26,131
Billings in excess of costs and earnings 11,119 11,541
Bank overdraft 3,656 --
Unearned revenue 2,198 708
------------- ------------
Total current liabilities 222,037 100,974
Senior notes, net of unamortized debt issuance costs 348,576 347,502
Deferred income taxes 5,825 4,329
------------- ------------
Total liabilities 576,438 452,805
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, 38,729,536 and 33,242,351 shares at September 30, 2000 and
December 31, 1999, respectively 388 333
Additional paid-in capital 191,759 94,543
Retained earnings (accumulated deficit) (30,176) 2,067
Accumulated other comprehensive loss (22) (6)
Unearned compensation (167) (229)
Treasury stock, at cost (678) (678)
------------- ------------
Total stockholders' equity 161,104 96,030
------------- ------------
Total liabilities and stockholders' equity $ 737,542 $ 548,835
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- -------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Integrated services $ 14,679 $ 6,190 $ 36,122 $ 15,338
Network services 19,490 14,717 56,102 42,401
Systems services 7,138 7,750 18,941 23,436
Dark fiber sales 31,676 20,346 75,753 42,424
---------- ---------- ---------- ----------
Total revenues 72,983 49,003 186,918 123,599
Cost of revenues 55,890 28,762 135,109 73,681
---------- ---------- ---------- ----------
Gross profit 17,093 20,241 51,809 49,918
Operating expenses:
Selling, general and administrative 27,083 13,572 70,481 38,584
Depreciation and amortization 5,940 2,843 15,018 6,180
---------- ---------- ---------- ----------
Total operating expenses 33,023 16,415 85,499 44,764
---------- ---------- ---------- ----------
Operating income (loss) (15,930) 3,826 (33,690) 5,154
Interest expense (2,171) (9,080) (12,786) (19,216)
Interest income 1,516 3,587 5,110 6,589
Other income (expense) (21) 1,748 5 1,613
---------- ---------- ---------- ----------
Income (loss) before income taxes (16,606) 81 (41,361) (5,860)
Income tax expense (benefit) -- 32 (9,118) (2,302)
---------- ---------- ---------- ----------
Net income (loss) $ (16,606) $ 49 $ (32,243) $ (3,558)
========== ========== ========== ==========
Loss per common share:
Basic $ (0.43) $ 0.00 $ (0.92) $ (0.11)
Diluted $ (0.43) $ 0.00 $ (0.92) $ (0.11)
Weighted average shares outstanding:
Basic 38,702 33,047 35,171 31,230
Diluted 38,702 34,355 35,171 31,230
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (32,243) $ (3,558)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 15,018 6,180
Gain on sale of assets -- (13)
Non-cash compensation expense 460 --
Deferred income taxes (8,736) (2,815)
Equity in earnings of unconsolidated joint ventures -- (1,586)
Amortization of discount and debt issuance costs, included in
interest expense 1,074 752
Changes in operating assets and liabilities:
Accounts receivable and unbilled services 41,745 (42,098)
Income taxes receivable 411 (399)
Costs and earnings in excess of billings (58,248) 4,337
Inventory 1,008 90
Prepaid expenses and other 525 (2,815)
Accounts payable and accrued liabilities 116,340 20,953
Billings in excess of costs and estimated earnings (422) 1,625
Unearned revenue 1,490 235
---------- ----------
Net cash provided by (used in) operating activities 78,422 (19,112)
Cash flows from investing activities:
Purchases of property, plant and equipment (343,046) (103,975)
Purchase of marketable securities (96,372) (283,613)
Proceeds from sale of marketable securities 231,783 134,772
Proceeds from disposal of property, plant and equipment 27,222 10,641
Investment in unconsolidated subsidiary -- (16,671)
---------- ----------
Net cash used in investing activities (180,413) (258,846)
Cash flows from financing activities:
Proceeds from the issuance of senior notes, net of debt issuance -- 201,309
Purchase of treasury stock -- (202)
Proceeds from stock option exercises 659 --
Proceeds from issuance of common stock 95,074 82,790
Proceeds from bank overdraft 3,656 --
---------- ----------
Net cash provided by financing activities 99,389 283,897
Effect of exchange rate on cash and cash equivalents (15) (16)
---------- ----------
Net increase (decrease) in cash and cash equivalents (2,617) 5,923
Cash and cash equivalents at beginning of period 5,692 294
---------- ----------
Cash and cash equivalents at end of period $ 3,075 $ 6,217
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest including interest capitalized of $19,948 and $3,853
for the nine months ended September 30, 2000 and 1999, respectively $ 30,075 $ 17,950
========== ==========
Non-cash financing activity:
Issuance of restricted stock $ 460 $ --
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation and Nature of Business
The consolidated financial statements include CapRock Communications Corp.
("CapRock" or the "Company") and its majority owned subsidiaries. All
significant inter-company transactions are eliminated in the consolidation. The
equity method is used to account for unconsolidated investments in companies in
which the Company exercises significant influences over operating and financial
policies, but does not have a controlling interest.
The Company is a facilities-based integrated communications provider
primarily to small and medium-sized businesses in the Southwestern United
States. CapRock offers business customers an integrated bundle of communications
products and services including local exchange, domestic and international long
distance, enhanced voice, data, Internet, DSL, and dedicated private line
services. Additionally, CapRock offers its communications intensive business and
carrier customers dark fiber, high bandwidth, dedicated fiber infrastructure,
terminating access for domestic and international long distance and ATM, frame
relay and IP data transport services. CapRock's communications services are
provided through resale and over its fiber, voice, and data networks. As of
September 30, 2000, CapRock's network covered approximately 5,400 route miles
(including 22 metro fiber loops in key markets). Additionally, the Company,
provides communications solutions to the oil and gas industry primarily in and
along the Gulf of Mexico. The Company markets its services through its internal
sales representatives and a network of independent agents.
The accompanying unaudited consolidated financial statements, which should
be read in conjunction with the consolidated financial statements and footnotes
included in the Company's 1999 Annual Report on Form 10-K, have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. Accounting measurements at interim dates
inherently involve greater reliance on estimates than at year-end. The results
of operations for the nine months ended September 30, 2000, are not necessarily
indicative of the results to be expected for the entire fiscal year ending
December 31, 2000.
(2) PUBLIC OFFERING
On March 21, 2000, the Company filed a shelf registration statement with
the Securities and Exchange Commission ("SEC") to sell up to $900 million in
debt securities, preferred stock and common stock, which was declared effective
on April 11, 2000. On June 15, 2000, the Company filed a prospectus supplement
with the SEC under this registration statement to sell 4,500,000 shares of
common stock. On June 21, 2000, the Company completed a public offering of
common stock, issuing 4,500,000 shares at $19.50 per share. On June 28, 2000,
the underwriters exercised an over allotment option and purchased an additional
675,000 shares. The proceeds from this offering, net of commissions and
expenses, totaled $95.1 million.
(3) WARRANTS
On March 15, 2000, Roth Capital Partners (formerly known as Cruttenden Roth
Incorporated) exercised all of its outstanding warrants, receiving 125,577
shares of the Company's common stock. These warrants have now been fully
exercised.
(4) RECENT DEVELOPMENTS
On October 2, 2000, CapRock, McLeodUSA Incorporated, a Delaware corporation
("McLeodUSA"), and Cactus Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of McLeodUSA ("Cactus"), entered into an Agreement and Plan of
Merger ("Merger Agreement") which provides for the merger of Cactus with and
into CapRock (the "Merger").
4
<PAGE> 7
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As a result of the Merger, each share of CapRock common stock will be
converted into the right to receive 0.3876 of a share of McLeodUSA Class A
Common Stock. Outstanding stock options to purchase shares of CapRock common
stock will generally all vest and be converted to options to purchase shares of
McLeodUSA Class A Common Stock at the same exchange ratio. The Merger is
intended to be tax-free to the shareholders of CapRock. Holders of CapRock's
common stock will vote on a proposal to approve the Merger Agreement at a
meeting to be held on December 5, 2000. Shareholders of CapRock holding
approximately 52% of the aggregate voting power of CapRock Common Stock have
agreed to vote their shares in favor of the approval of the Merger Agreement.
The Merger Agreement is subject to a number of conditions and contingencies
certain of which have been satisfied and others which remain to be satisfied.
While CapRock believes all such conditions and contingencies will be satisfied,
should one or more not be satisfied, depending upon the condition or
contingency, either CapRock or McLeodUSA could elect to terminate the Merger
Agreement.
One of the closing conditions set forth in the Merger Agreement is the
receipt by CapRock of the written consent (the "Requisite Consent") of the
holders of at least a majority of the aggregate principal amount of each series
of CapRock Notes (defined below) outstanding to the matters set forth in
CapRock's consent solicitation dated October 11, 2000 (the "Consent
Solicitation"). On October 27, 2000, the Requisite Consent was obtained pursuant
to the Consent Solicitation with respect to amendments to the Indenture dated as
of July 16, 1998, pursuant to which the CapRock 12% Senior Notes due 2008 (the
"CapRock 1998 Notes") were issued and the Indenture dated as of May 18, 1999,
pursuant to which the CapRock 11 1/2% Senior Notes due 2009 were issued (the
"CapRock 1999 Notes" and, together with the CapRock 1998 Notes, the "CapRock
Notes"). CapRock and Chase Manhattan Trust Company National Association, as
trustee, executed supplemental indentures which give effect or will give effect
to the amendments proposed in the Consent Solicitation after the satisfaction of
certain other conditions.
Contemporaneously with the Merger Agreement, CapRock Fiber Ltd. and CapRock
Telecommunications, as borrowers, and CapRock, as guarantor, and The Chase
Manhattan Bank, as lender and administrative agent, entered into a credit
agreement as of October 2, 2000, for a revolving credit facility of up to $100
million. Up to $50 million of such facility is available from October 2, 2000,
to December 31, 2000, and up to $100 million is available from January 1, 2001,
to the maturity date of the credit facility of May 30, 2001. The obligations
under the credit facility are secured by a guarantee by CapRock and its domestic
non-borrower subsidiaries, a pledge of stock held by CapRock and its domestic
subsidiaries, and a security interest in substantially all of the assets of
CapRock and its domestic subsidiaries. The credit agreement also contains
restrictive covenants, which limit the ability of CapRock to take or omit to
take certain actions and conditions to borrowing which must be met to obtain
funds under the credit agreement.
(5) EXCHANGE OFFER
On October 30, 2000, pursuant to the Merger Agreement, McLeodUSA commenced
an exchange offer to exchange McLeodUSA 11 1/2% Senior Notes due May 1, 2009 for
the CapRock 11 1/2% Senior Notes due May 1, 2009, and commenced an exchange
offer to exchange McLeodUSA 12% Senior Notes due July 15, 2008 for the CapRock
12% Senior Notes due July 15, 2008 (collectively, the "Exchange Offer"). The
Exchange Offer is subject to the consummation of the Merger.
5
<PAGE> 8
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(6) EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ (16,606) $ 49 $ (32,243) $ (3,558)
========== ========== ========== ==========
Denominator:
Denominator for basic earnings (loss)
per share-weighted average shares
outstanding 38,702 33,047 35,171 31,230
Effect of diluted securities:
Employee stock options and warrants -- 1,308 -- --
---------- ---------- ---------- ----------
Denominator for diluted earnings (loss)
per share-weighted average shares
outstanding 38,702 34,355 35,171 31,230
========== ========== ========== ==========
Basic and diluted earnings (loss) per share $ (0.43) $ 0.00 $ (0.92) $ (0.11)
========== ========== ========== ==========
</TABLE>
For the three and nine months ended September 30, 2000, and the nine months
ended September 30, 2000, the effect of the Company's potential common stock
equivalents was omitted from the computation of diluted net earnings (loss) per
common share, as their effect would be antidilutive. At September 30, 2000, the
Company had 6,549,646 options outstanding.
(7) SEGMENT REPORTING
The Company's business is now segmented into four areas: Integrated
Services, Network Services, Systems Services, and Dark Fiber. The Company
measures segment profit as operating income, which is defined as income before
interest income and expense, other income and expenses and income taxes. The
Integrated Services segment includes all revenues generated from the sale of
telecommunications products to business and residential customers. These
products and services include local, long distance, Internet, DSL, data and
private line services. Network Services includes all carrier and wholesale
revenues generated from the terminating access of domestic and international
long distance, broadband capacity, and ATM, frame relay and IP data transport
services. The Systems Services segment 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 Dark Fiber segment
represents the sale of fiber strands through indefeasible right to use
agreements ("IRUs"). Corporate activities include certain general and
administrative functions and operating expenses. Information regarding operating
segments and corporate activities is as follows (in thousands):
6
<PAGE> 9
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2000
----------------------------------------------------------------------------
INTEGRATED NETWORK SYSTEMS DARK
SERVICES SERVICES SERVICES FIBER CORPORATE CONSOLIDATED
---------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external
customers $ 14,679 $ 19,490 $ 7,138 $ 31,676 $ -- $ 72,983
Depreciation and amortization 1,063 3,097 842 938 -- 5,940
Capitalized interest -- 8,730 -- -- -- 8,730
Operating income (loss) (10,176) (15,907) 999 16,276 (7,122) (15,930)
Total assets 33,765 247,561 24,159 244,590 187,467 737,542
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2000
----------------------------------------------------------------------------
INTEGRATED NETWORK SYSTEMS DARK
SERVICES SERVICES SERVICES FIBER CORPORATE CONSOLIDATED
---------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external
customers $ 6,190 $ 14,717 $ 7,750 $ 20,346 $ -- $ 49,003
Depreciation and amortization 288 689 778 1,088 -- 2,843
Capitalized interest -- 1,815 -- -- -- 1,815
Operating income (loss) (2,699) (5,612) 862 13,729 (2,454) 3,826
Total assets 13,960 42,223 28,818 115,639 294,204 494,844
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000
----------------------------------------------------------------------------
INTEGRATED NETWORK SYSTEMS DARK
SERVICES SERVICES SERVICES FIBER CORPORATE CONSOLIDATED
---------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external
customers $ 36,122 $ 56,102 $ 18,941 $ 75,753 $ -- $ 186,918
Depreciation and amortization 2,725 6,750 2,424 3,119 -- 15,018
Capitalized interest -- 19,948 -- -- -- 19,948
Operating income (loss) (25,281) (38,294) 1,657 45,703 (17,475) (33,690)
Total assets 33,765 247,561 24,159 244,590 187,467 737,542
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000
----------------------------------------------------------------------------
INTEGRATED NETWORK SYSTEMS DARK
SERVICES SERVICES SERVICES FIBER CORPORATE CONSOLIDATED
---------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external
customers $ 15,338 $ 42,401 $ 23,436 $ 42,424 $ -- $ 123,599
Depreciation and amortization 626 1,721 2,286 1,547 -- 6,180
Capitalized interest -- 3,853 -- -- -- 3,853
Operating income (loss) (5,188) (12,258) 1,234 29,775 (8,409) 5,154
Total assets 13,960 42,223 28,818 115,639 294,204 494,844
</TABLE>
All revenue was derived from unaffiliated customers.
(8) CONTINGENCIES
On July 26, 2000, a shareholder class action complaint was filed in the
United States District Court for the Northern District of Texas on behalf of all
purchasers of the Company's common stock during the period between April 28,
2000, and July 6, 2000, (Hector Alfaro, On Behalf of Himself and All Others
Similarly Situated vs. CapRock Communications Corp., et al. (Civil Action No.
3-00CV1613R). Additional suits have been filed subsequently: Angela Amos v.
CapRock Communications Corporation, Leo J. Cyr, Jere W. Thompson, Jr. and Kevin
W. McAleer, C.A. No. 3-00CV1730-P, in the United States District Court Northern
District of Texas, Dallas Division; Teresa A. Cicala v. CapRock Communications
Corporation, Leo J. Cyr, Jere W. Thompson, Jr. and Kevin W. McAleer, C.A. No.
3-00CV1727-G, in the United States District Court Northern District of Texas,
Dallas Division) and Todd Katz v. CapRock Communications Corp., Leo J. Cyr, Jere
W. Thompson Jr. and Kevin W. McAleer, C.A. No. 3-00CV-1767-L, in the United
States District Court Northern District of Texas, Dallas Division and Joseph
Chen v. CapRock Communications Corp., Leo J. Cyr and Jere W. Thompson, Jr.; C.A.
No. 3-00CV1772-D, in the United States District Court for the Northern District
of Texas, Dallas Division, and Larry J. Bland v. CapRock Communications Corp.,
Leo J. Cyr, Jere W. Thompson, Jr. and Kevin W. McAleer, C.A. No. 3-00CV1920-R,
in the United States District Court for the Northern District
7
<PAGE> 10
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
of Texas, Dallas Division. CapRock expects these actions will be consolidated
upon the selection of a lead plaintiff. On October 6, 2000, a derivative suit
Westcott Rochette v. Jere W. Thompson, Jr., Leo J. Cyr, Timothy W. Rogers, Mark
Langdale, Christopher J. Amenson, and John R. Harris and CapRock Communications
Corporation, Civil Action No. 3-00CV2217-P, in the United States District Court
Northern District of Texas, Dallas Division, was filed. The named defendants in
these suits include the Company and certain officers and directors of the
Company. The complaints allege violations of Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making untrue
statements of material fact and omitting to state material facts necessary to
make the statements made, in light of the circumstances under which they were
made, not misleading. The plaintiffs seek monetary damages plus interest. The
Company intends to vigorously defend these lawsuits and all other similar suits
subsequently filed.
On October 6, 2000, a class action complaint was filed in the County Court
at Law of Dallas County, Texas on behalf of CapRock's stockholders - Richard
Betsinger, on behalf of himself and all others similarly situated v. CapRock
Communications Corp., Leo J. Cyr, Jere W. Thompson, Jr., Timothy W. Rogers, Mark
Langdale, Christopher J. Amenson and John R. Harris, C.A. No. CC-00-11629-D, in
the County Court at Law No. 4 of Dallas County, Texas. This complaint names as
defendants CapRock and each member of its board of directors and principally
alleges that the directors violated fiduciary duties owed to CapRock's
stockholders in connection with entering into the Merger Agreement. The
plaintiffs in the lawsuit seek both unspecified monetary damages and an
injunction to prevent completion of the Merger. CapRock intends to vigorously
defend the lawsuit and all other similar suits subsequently filed.
(9) OTHER COMPREHENSIVE INCOME (LOSS)
The following table sets forth the computation of comprehensive income
(loss) (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Comprehensive income (loss):
Net income (loss) $ (16,606) $ 49 $ (32,243) $ (3,558)
Currency translation adjustment (1) (2) (15) (16)
---------- ---------- ---------- ----------
Total comprehensive income (loss) $ (16,607) $ 47 $ (32,258) $ (3,574)
========== ========== ========== ==========
</TABLE>
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
CapRock's consolidated financial statements and notes thereto for the year ended
December 31, 1999. The Company believes that all necessary adjustments
(consisting of normal recurring adjustments) have been included in the amounts
stated below to present fairly the following quarterly information. Accounting
measurements at interim dates inherently involve greater reliance on estimates
than at year-end. The results for interim periods are not necessarily indicative
of results to be expected for the year. In this Form 10-Q, the "Company,"
"CapRock," "we," "us" and "our" refer to CapRock and its subsidiaries, including
CapRock Telecommunications Corp., CapRock Fiber Network Ltd. and IWL
Communications Incorporated dba CapRock Services Corp., which are our three
predecessor companies, as well as CapRock Network Services, L.P., CapRock
Telecommunications Leasing Corp. and CapRock Design Services, L.P., unless the
context otherwise requires.
FORWARD LOOKING INFORMATION
This Quarterly Report on Form 10-Q includes forward-looking statements. We
have based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements are subject to
risks, uncertainties and assumptions about CapRock, including:
o the completion of the Merger and the Exchange Offer,
o our ability to raise capital to fund operations and capital projects,
o our anticipated growth strategies,
o anticipated trends in our business, including trends in technology,
products and services,
o future expenditures for capital projects, and
o our ability to continue to control costs and maintain quality.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including risks
related to, among other things, the need for additional capital to fund our
evolving business model, our limited operating history, rapid growth, debt and
interest payment obligations, restrictions in our senior note indentures,
dependence on and retention of key personnel, successful completion of our
networks, dependence on information systems, interconnection with incumbent
local exchange carriers ("ILECs"), our ability to obtain sufficient collocations
with ILECs, competition, supply and demand for data and communications services
and profitability of such services, the quality and condition of the
infrastructure of the ILECs (including, but not limited to, last mile
connectivity), our ability to profitably market and sell our services and our
fiber and develop positive cash flow, government regulation and the uncertainty
of deregulation, delays by the ILECs in connecting our customers, reliance on
equipment suppliers and other carriers, regulation of access charges, rapid
technological change, service interruptions, security risks, system failures and
equipment failures, dependence on major carrier customers and joint build
partners, building a fiber network (including obtaining the necessary rights of
way, permits and regulatory approvals), potential liability as an Internet
service provider, shareholder litigation and protection of our intellectual
property.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Because of these risks, uncertainties and assumptions, the forward-looking
events discussed in this Form 10-Q might not occur.
OVERVIEW
We are a facilities-based integrated communications service provider
primarily to small and medium-sized business and communications carrier
customers in the Southwestern United States. We offer business customers an
integrated bundle of communications products and services including local
exchange, domestic and international long distance, enhanced voice, data,
Internet, DSL and dedicated private line services.
9
<PAGE> 12
Additionally, we offer our communications intensive business and carrier
customers dark fiber, high bandwidth dedicated fiber infrastructure, terminating
access for domestic and international long distance and ATM, frame relay and IP
data transport services.
Our communications services are provided through resale and over our fiber,
voice and data networks. At September 30, 2000, the network covered
approximately 5,400 route miles (including 22 metro fiber loops in key markets).
We have entered into joint fiber construction agreements with AT&T, Enron
Broadband Services, Inc., Pathnet, Inc. and 360networks, Inc. The joint
construction arrangements provide several benefits, including reduction of
construction costs, accelerated construction, and the freeing up of resources to
focus attention on the construction of additional portions of our network. To
further recover the cost of building our fiber network, we have sold excess dark
fiber.
We had 70 central office collocations at September 30, 2000. CapRock is
implementing its DSL footprint through its recent agreement with a third party
supplier of DSL services. These collocations enable us to provide local and
other services over our own network infrastructure, thereby lowering our cost of
providing these services. Additionally, as of September 30, 2000, we had 12
voice and 17 data switches installed and on our network.
Building and expanding our fiber, voice and data networks and information
technology infrastructure has required and will continue to require significant
capital expenditures. See "--Liquidity and Capital Resources."
RESULTS OF OPERATIONS
Our revenue is now segmented into four categories: integrated services,
network services, systems services and dark fiber sales. Previously, network
services and dark fiber sales were combined together within the carriers'
carrier segment. Because of the growing magnitude and impact of dark fiber sales
on our financial results, they are now reported separately.
The table below provides key operational data relating to our business:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Fiber route miles substantially complete 5,462 2,000
Fiber route miles under construction 469 3,339
Total employees 1,068 605
Voice switches 12 8
IP/ATM and frame switches 17 8
Collocations completed 70 6
Lines sold 127,800 38,172
Lines installed 95,365 27,988
</TABLE>
Integrated Services. Integrated services revenue includes sales of
communications services primarily to small and medium-sized business customers.
These services include local, long distance, data, Internet, DSL and dedicated
private line services. We now have sales offices in Dallas, Fort Worth, Houston,
San Antonio, Austin, Corpus Christi, Tyler, Victoria, and McAllen, Texas,
Oklahoma City and Tulsa, Oklahoma, Lafayette and New Orleans, Louisiana, Little
Rock, Arkansas, and Phoenix, Arizona. We record revenues and the related cost of
services at the time of customer usage. Commissions paid to sales
representatives or independent sales agents to acquire customers are expensed in
the period when associated revenues are recognized.
We have sold 127,800 local access lines as of September 30, 2000, of which
95,365 were installed lines. The remaining 32,435 local access lines were in
various stages of customer provisioning. We continue to introduce initiatives to
reduce the provisioning cycle time and our backlog of lines. These initiatives
include electronic bonding with the ILECs, which allows our systems to
communicate with those of the ILEC on an automated basis.
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<PAGE> 13
Our long distance revenue consists of both switched access and dedicated
access. Switched access services include "one plus long distance," whereby a
customer has selected CapRock as their long distance provider, toll free
800/888/877 service and calling cards. These services are offered for both
domestic and international calling. Dedicated access service is generally for
larger users with sufficient traffic volume to warrant the use of dedicated
private lines that directly connect the end user to our switch.
Our data services include frame relay, ATM, virtual private networks,
dedicated access, Internet dial-up and access, virtual access POPs and IP data
transport services. These services are being offered over our 17 Cisco Systems
Inc. IP/ATM switches as they become operational. We recently entered into an
agreement with a third party supplier of DSL service, to resell DSL services.
CapRock will utilize such supplier's facilities in certain major markets.
Network Services. Previously, network services was a part of the carriers'
carrier segment, which has now been split into network services and dark fiber
sales. Network services includes all carrier and wholesale revenues generated
from domestic and international long distance, broadband capacity, ATM, frame
relay, IP data transport services and dark fiber leases. These revenues and
related costs are recognized when the services are provided. Revenues generated
from dark fiber leases are recognized in monthly installments over the lease
term, which is generally less than ten years.
Systems Services. Systems services revenue includes revenues generated from
the design, installation, leasing and sale of voice and data systems and
services typically to offshore oil and gas industry customers in the Gulf of
Mexico. Satellite and microwave transmission media are used depending on the
type and location of the drilling rig involved. These revenues are recognized as
the services are provided.
Dark Fiber Sales. Previously, dark fiber sales were a part of the carriers'
carrier segment, which has now been split into network services and dark fiber
sales. Dark fiber sales are generally referred to as IRUs (indefeasible right to
use). Revenues are recognized immediately on IRUs sold from available fiber on
completed network segments, and on the percentage of completion basis on IRUs
sold from network segments under construction. Payment for IRUs sold on
completed network segments is generally received at the time of sale, or shortly
thereafter. Payment for IRUs sold from network segments under construction is
generally received upon completion of contractual milestones. All of our IRU
sales since July 1, 1999 have conveyed title to the purchaser and, accordingly,
revenue from such sales has been recognized on a percentage-of completion basis
or in its entirety at the time of the sale.
Dark fiber sales are one time and non-recurring and therefore are subject
to revenue fluctuation. IRUs have enabled us to recover a significant portion of
our fiber network investment as well as to offset the ramp-up losses of our
integrated services segment.
The following table represents the various sources of revenues (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Integrated services $ 14,679 $ 6,190 $ 36,122 $ 15,338
Network services 19,490 14,717 56,102 42,401
Systems services 7,138 7,750 18,941 23,436
Dark fiber sales 31,676 20,346 75,753 42,424
-------- -------- -------- --------
Total revenues $ 72,983 $ 49,003 $186,918 $123,599
======== ======== ======== ========
</TABLE>
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<PAGE> 14
The following table sets forth for the periods indicated CapRock's
statement of operations as a percentage of its operating revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Cost of revenues 77% 59% 72% 60%
-------- -------- -------- --------
Gross profit 23% 41% 28% 40%
Operating expenses:
Selling, general and administrative 37% 27% 38% 31%
Depreciation and amortization 8% 6% 8% 5%
-------- -------- -------- --------
Total operating expenses 45% 33% 46% 36%
-------- -------- -------- --------
Operating income (loss) (22)% 8% (18)% 4%
Interest expense (3)% (19)% (7)% (15)%
Interest income 2% 7% 3% 5%
Other income (expense) 0% 4% 0% 1%
-------- -------- -------- --------
Income (loss) before income taxes (23)% 0% (22)% (5)%
Income tax expense (benefit) 0% 0% (5)% (2)%
-------- -------- -------- --------
Net income (loss) (23)% 0% (17)% (3)%
======== ======== ======== ========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Revenues. Total revenues increased $24.0 million, or 49%, to $73.0 million
during the three months ended September 30, 2000, from $49.0 million during the
three months ended September 30, 1999. This increase was attributable to
increases of 137% in integrated services revenue, 32% in network services
revenue, and 56% in dark fiber sales and was offset by a decrease of 8% in
systems services revenue.
Integrated services revenue increased $8.5 million to $14.7 million during
the three months ended September 30, 2000, from $6.2 million during the three
months ended September 30, 1999. The 137% 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. Access lines
sold increased to 127,800 at September 30, 2000, from 38,172 at September 30,
1999. Installed access lines increased to 95,365 at September 30, 2000, from
27,988 at September 30, 1999. Our direct sales force increased to 271 at
September 30, 2000, from 184 at September 30, 1999. We believe that the negative
publicity about our ability to access capital and questions about our future
hurt our sales force retention, our ability to hire new sales people, and our
sales closure rates.
Network services revenue increased $4.8 million to $19.5 million during the
three months ended September 30, 2000, from $14.7 million during the three
months ended September 30, 1999. This increase was due to increased long
distance minutes of use which was partially offset by a decrease in revenue per
minute. The decrease in the revenue per minute is attributable to decreases in
both domestic and international rates. We anticipate that long distance
competitive pressures will continue to drive down prices, but the Company
believes that the price decline will be partially offset by increased volumes.
We derived approximately $11.4 million and $8.2 million or 58% and 56% of our
network services revenue from traffic terminated to foreign countries during the
three months ended September 30, 2000 and 1999, respectively. Revenue per minute
in the United States and a majority of foreign countries, particularly Mexico,
continues to decrease as a result of deregulation and increased competition.
Systems services revenue decreased $612,000 to $7.1 million during the
three months ended September 30, 2000, from $7.8 million during the three months
ended September 30, 1999. This decrease was primarily attributable to our
decision to no longer pursue projects involving the engineering and installation
of telecommunications systems outside of the Gulf of Mexico region. We continue
to provide these services to our oil and gas industry customer base.
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<PAGE> 15
Dark fiber sales increased $11.3 million to $31.7 million during the three
months ended September 30, 2000, from $20.3 million during the three months
ended September 30, 1999. We anticipate revenue relating to IRUs to continue at
comparable levels through 2000 and decline in subsequent years.
Cost of Revenues. Cost of revenues increased $27.1 million, or 94%, to
$55.9 million during the three months ended September 30, 2000, from $28.8
million during the three months ended September 30, 1999. The increase in cost
of revenues was primarily attributable to the continued growth in revenue. Gross
margins were 23% for the three month period ended September 30, 2000, and 41%
for the three month period ended September 30, 1999. This decrease was a result
of gross margins on minutes of use associated with our carrier customers have
decreased from the three months ended September 30, 1999 to the three months
ended September 30, 2000, as a result of competitive pressures. This decrease
was partially offset by a higher volume of IRU sales during the three months
ended September 30, 2000, compared to the three months ended September 30, 1999,
which carry a higher gross margin. Gross margins on IRU sales were 55% for the
three month period ended September 30, 2000, and 75% for the three month period
ended September 30, 1999. The decrease in gross margin on dark fiber sales was
attributable to a higher cost basis in the specific fibers sold during the three
months ended September 30, 2000. Certain fibers sold during the three months
ended September 30, 2000, were purchased from a third party and have a higher
cost basis than the fiber constructed by the Company.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") include salaries, benefits, occupancy costs,
commissions, sales and marketing expenses and administrative expenses. SG&A
increased $13.5 million, or 100%, to $27.1 million during the three months ended
September 30, 2000, from $13.6 million during the three months ended September
30, 1999. The increase resulted primarily from the continued investment in back
office systems, additional personnel required to support our growth, added
senior management depth and a larger sales force. We expect that selling,
general and administrative expenses will begin to decline as a percent of sales
due to the growing economies of scale and productivity improvements in our back
office. We also posted non-recurring charges related to joint build construction
penalties and additional allowances for bad debts during the three months ended
September 30, 2000.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $3.1 million, or 109%, to $5.9 million during the three months
ended September 30, 2000, from $2.8 million during the three months ended
September 30, 1999. This increase resulted primarily from additional fiber
segments placed in service and purchases of additional equipment and other fixed
assets to accommodate our growth.
Interest Expense. Interest expense decreased $6.9 million to $2.2 million
during the three months ended September 30, 2000, from $9.1 million during the
three months ended September 30, 1999. The decrease resulted from an increase in
the amount of capitalized interest resulting from the build out of our fiber
network.
Interest Income. Interest income decreased $2.1 million to $1.5 million
during the three months ended September 30, 2000, from $3.6 million during the
three months ended September 30, 1999. The reduction was attributable to the
decrease in marketable securities primarily as a result of our ongoing
investment in network assets.
Income Tax Expense (Benefit). During the three months ended September 30,
2000, we have recorded a partial valuation allowance against our carryforward
tax benefits to the extent that we believe that it is more likely than not all
of such benefits will not be realized in the near term. Our assessment of this
valuation allowance was made using all available evidence, both positive and
negative. In particular we consider both our historical results and our
projections of profitability for only reasonably foreseeable future periods. Our
realization of the recorded net deferred tax assets is dependent on future
taxable income and therefore, no assurance can be provided that such benefits
will be realized.
Net Income (Loss). Net income decreased $16.7 million to a net loss of
$16.6 million during the three months ended September 30, 2000, from a net
income of $49,000 during the three months ended September 30, 1999 as a result
of the factors discussed above.
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<PAGE> 16
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Revenues. Total revenues increased $63.3 million, or 51%, to $186.9 million
during the nine months ended September 30, 2000, from $123.6 million during the
nine months ended September 30, 1999. This increase was attributable to
increases of 136% in integrated services revenue, 32% in network services
revenue, and 79% in dark fiber sales and was offset by a decrease of 19% in
systems services revenue.
Integrated services revenue increased $20.8 million to $36.1 million during
the nine months ended September 30, 2000, from $15.3 million during the nine
months ended September 30, 1999. The 136% 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. Access lines
sold increased to 127,800 at the end of September 30, 2000, from 38,172 at
September 30, 1999. Installed access lines increased to 95,365 at September 30,
2000, from 27,988 at September 30, 1999. Our direct sales force increased to 271
at September 30, 2000, from 184 at September 30, 1999. We now have sales offices
in Dallas, Fort Worth, Houston, San Antonio, Austin, Corpus Christi, Tyler,
Victoria, and McAllen, Texas, Oklahoma City and Tulsa, Oklahoma, Lafayette and
New Orleans, Louisiana, Little Rock, Arkansas and Phoenix, Arizona. We believe
that the negative publicity about our ability to access capital and questions
about our future hurt our sales force retention, our ability to hire new sales
people, and our sales closure rates.
Network services revenue increased $13.7 million to $56.1 million during
the nine months ended September 30, 2000, from $42.4 million during the nine
months ended September 30, 1999. This increase was due to increased long
distance minutes of use which was partially offset by a decrease in revenue per
minute. The decrease in the revenue per minute is attributable to decreases in
both domestic and international rates. We anticipate that long distance
competitive pressures will continue to drive down prices, but the Company
believes that the price decline will be partially offset by increased volumes.
We derived approximately $32.1 million and $20.3 million or 57% and 48% of our
network services revenue from traffic terminated to foreign countries during the
nine months ended September 30, 2000 and 1999, respectively. Revenue per minute
for the United States and a majority of foreign countries, particularly Mexico,
continues to decrease as a result of deregulation and increased competition.
Systems services revenue decreased $4.5 million to $18.9 million during the
nine months ended September 30, 2000, from $23.4 million during the nine months
ended September 30, 1999. This decrease was primarily attributable to our
decision to no longer pursue projects involving the engineering and integration
of telecommunications systems outside of the Gulf of Mexico region. We will
continue to provide these services to our oil and gas industry customer base.
However, we expect other operating segments to grow more rapidly.
Dark fiber sales increased $33.3 million to $75.8 million during the nine
months ended September 30, 2000, from $42.4 million during the nine months ended
September 30, 1999. We anticipate revenue relating to IRUs to continue at
comparable levels through 2000 and decline in subsequent years.
Cost of Revenues. Cost of revenues increased $61.4 million, or 83%, to
$135.1 million during the nine months ended September 30, 2000, from $73.7
million during the nine months ended September 30, 1999. The increase in cost of
revenues was primarily attributable to the continued growth in revenue. Gross
margins were 28% for the nine month period ended September 30, 2000, and 40% for
the nine month period ended September 30, 1999. Gross margins on minutes of use
associated with our carrier customers have decreased from the nine months ended
September 30, 1999 to the nine months ended September 30, 2000, as a result of
competitive pressures. This decrease was partially offset by a higher volume of
IRU sales during the nine months ended September 30, 2000, compared to the nine
months ended September 30, 1999, which carry a higher gross margin. Gross
margins on IRU sales were 64% for the nine month period ended September 30,
2000, and 77% for the nine month period ended September 30, 1999. The decrease
in gross margin on dark fiber sales was attributable to a higher cost basis in
the specific fibers sold during the nine months ended September 30, 2000.
Certain fibers sold during the nine months ended September 30, 2000, were
purchased from a third party and have a higher cost basis than the fiber
constructed by the Company.
14
<PAGE> 17
Selling, General and Administrative Expenses. SG&A includes salaries,
benefits, occupancy costs, commissions, sales and marketing expenses and
administrative expenses. SG&A increased $31.9 million, or 83%, to $70.5 million
during the nine months ended September 30, 2000, from $38.6 million during the
nine months ended September 30, 1999. The increase resulted primarily from the
continued investment in back office systems, additional personnel required to
support our growth, added senior management depth and a larger sales force. We
also posted non-recurring charges related to joint build construction penalties
and additional allowances for bad debts during the nine months ended September
30, 2000.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $8.8 million, or 143%, to $15.0 million during the nine months
ended September 30, 2000, from $6.2 million during the nine months ended
September 30, 1999. This increase resulted primarily from additional fiber
segments placed in service and purchases of additional equipment and other fixed
assets to accommodate our growth.
Interest Expense. Interest expense decreased $6.4 million to $12.8 million
during the nine months ended September 30, 2000, from $19.2 million during the
nine months ended September 30, 1999. The decrease resulted from an increase in
the amount of capitalized interest resulting from the build out of our fiber
network.
Interest Income. Interest income decreased $1.5 million to $5.1 million
during the nine months ended September 30, 2000, from $6.6 million during the
nine months ended September 30, 1999. The reduction was attributable to the
decrease in marketable securities primarily as a result of our ongoing
investment in network assets.
Income Tax Expense (Benefit). During the nine months ended September 30,
2000, we have recorded a partial valuation allowance against our carryforward
tax benefits to the extent that we believe that it is more likely than not all
of such benefits will not be realized in the near term. Our assessment of this
valuation allowance was made using all available evidence, both positive and
negative. In particular we consider both our historical results and our
projections of profitability for only reasonably foreseeable future periods. Our
realization of the recorded net deferred tax assets is dependent on future
taxable income and therefore, no assurance can be provided that such benefits
will be realized.
Net Loss. Net loss increased $28.7 million to a net loss of $32.2 million
during the nine months ended September 30, 2000, from a net loss of $3.6 million
during the nine months ended September 30, 1999 as a result of the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
We had cash, cash equivalents and marketable securities of $50.3 million at
September 30, 2000, as compared with $188.3 million at December 31, 1999. The
decrease was attributable to the utilization of cash, cash equivalents and
marketable securities for the build out of our fiber, voice and data networks,
our back office information technology systems and an increase in corporate
overhead to support our growth.
CapRock's cash flow provided by operating activities for the nine months
ended September 30, 2000, was $78.4 million as compared to $19.1 million used in
operating activities during the nine months ended September 30, 1999. The change
was primarily attributable to a decrease in accounts receivable and unbilled
services, and the timing of certain capital expenditure payments to vendors
relating to our fiber optic network build out. IRU transactions for network
segments under construction typically have longer payment terms than other
accounts receivable activity due to contractual milestones that must be met
before payments are made.
Cash used in investing activities during the nine months ended September
30, 2000, and September 30, 1999 was $180.4 million and $258.8 million,
respectively. Capital resources used for the purchase of property, plant and
equipment increased $239.0 million to $343.0 million during the nine months
ended September 30, 2000, from $104.0 million during the nine months ended
September 30, 1999. This increase primarily related to the purchase of
telecommunications equipment and costs incurred with the build out of our fiber
optic network. The Company received proceeds from the sale of marketable
securities of $231.8 million during the nine months ended September 30, 2000,
offset by using $96.4 million to acquire marketable securities during the nine
month period. During the nine months ended September 30, 1999, we used $283.6
million to acquire marketable securities offset by the sale of marketable
securities of $134.8 million during the period.
15
<PAGE> 18
In May 1999, we sold 4,000,000 shares of our common stock at a price of
$22.00 per share in a public offering. We received net proceeds, after deducting
underwriting discounts and expenses payable by us, of approximately $81.9
million from the sale of our common stock.
In May 1999, we issued $210 million aggregate principal amount of our 1999
Senior Notes. Interest on the 1999 Senior Notes is payable semi-annually in
arrears on May 1 and November 1 of each year, which commenced November 1, 1999,
at the rate of 11 1/2% per year. We received net proceeds from that offering,
after deducting the initial purchasers' discount and estimated expenses, of
approximately $201.4 million.
The indentures governing our 1999 Senior Notes contain 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. The 1999 Senior Notes are senior unsecured obligations and as
such rank pari passu in right of payment with our existing Senior Notes and with
all of our future unsecured and unsubordinated indebtedness. All of the
covenants are subject to a number of important qualifications and exceptions.
These covenants may adversely affect our ability to finance our future
operations or capital needs or to engage in other business activities that may
be in our best interests. Upon completion of the Merger, the restrictive
covenants will no longer be applicable as provided in the supplemental
indentures executed in November 2000.
On March 21, 2000, the Company filed a shelf registration statement with
the SEC to sell up to $900 million in debt securities, preferred stock and
common stock, which was declared effective on April 11, 2000. On June 15, 2000,
the Company filed a prospectus supplement with the SEC under this registration
statement to sell 4,500,000 shares of common stock. On June 21, 2000, the
Company completed a public offering of common stock, issuing 4,500,000 shares at
$19.50 per share and the underwriters exercised an over allotment option and
purchased an additional 675,000 shares. The proceeds, net of commissions and
expenses, from this offering resulted in net proceeds of $95.1 million.
The remaining proceeds from our 1999 Senior Notes and common stock have
been, and will be, used to fund capital expenditures for the construction of our
fiber network, switching equipment and other capital expenditures and to expand
our sales offices, and for general working capital purposes. Unutilized funds
have been invested in short-term, high-grade investment securities classified as
available for sale.
On October 2, 2000, CapRock, McLeodUSA, and Cactus entered into the Merger
Agreement which provides for the Merger of Cactus with and into CapRock.
As a result of the Merger, each share of CapRock common stock will be
converted into the right to receive 0.3876 of a share of McLeodUSA Class A
Common Stock. Outstanding stock options to purchase shares of CapRock common
stock will generally all vest and be converted to options to purchase shares of
McLeodUSA Class A Common Stock at the same exchange ratio. The Merger is
intended to be tax-free to the shareholders of CapRock. Holders of CapRock's
common stock will vote on a proposal to approve the Merger Agreement at a
meeting to be held on December 5, 2000. Shareholders of Caprock holding
approximately 52% of the aggregate voting power of CapRock Common Stock have
agreed to vote their shares in favor of the approval of the Merger Agreement.
Contemporaneously with the Merger Agreement, CapRock Fiber Ltd. and CapRock
Telecommunications, as borrowers, and CapRock, as guarantor, and The Chase
Manhattan Bank, as lender and administrative agent, entered into a credit
agreement as of October 2, 2000, for a revolving credit facility of up to $100
million. Up to $50 million of such facility is available from October 2, 2000,
to December 31, 2000, and up to $100 million is available from January 1, 2001
to the maturity date of the credit facility of May 30, 2001. The obligations
under the credit facility are secured by a guarantee by CapRock and its domestic
non-borrower subsidiaries, a pledge of stock held by CapRock and its domestic
subsidiaries, and a security interest in substantially all of the assets of
CapRock and its domestic subsidiaries. The credit agreement also contains
restrictive covenants, which limit the ability of CapRock to take or omit to
take certain actions and conditions to borrowing which must be met to obtain
funds under the credit agreement.
16
<PAGE> 19
We expect to require significant financing for future capital expenditure
and working capital requirements. Capital will be required to, among other
things, (1) fund the construction and operation of our fiber network, including
the portion to be constructed through joint build arrangements, (2) fund the
purchase and installation of voice and data switches, (3) fund the installation
of equipment associated with DSL services and the build out of collocation
facilities, (4) fund the further development of our operations support systems
and information technology equipment, and (5) open additional sales offices and
add sales support and customer service personnel in markets throughout Texas,
Louisiana, Oklahoma, Arkansas, New Mexico and Arizona. CapRock is exploring the
possibility of modifying its participation in joint build projects. Any such
modification may cause the other partners to the joint build agreements to
assert claims against us.
As a result of market conditions and the Company's performance, our ability
to raise additional capital has been severely limited. We currently estimate
that our aggregate capital expenditures, excluding capitalized interest and
general and administrative expenses, will total approximately $60 million for
the remainder of 2000 and approximately $150 million for 2001. We believe our
cash, cash equivalents, marketable securities and cash flow from operations,
together with the revolving credit facility of up to $100 million entered into
as of October 2, 2000, with Chase Manhattan Bank, should be sufficient to fund
our capital requirements through May 2001, when the credit facility matures.
However, our ability to draw down on the facility is dependent on a number of
conditions, including meeting certain financial covenants, and no assurances can
be given that we will be able to access such funds.
In addition, the announcement of the Merger with McLeodUSA may have
affected our overall ability to raise capital. Our agreement with McLeodUSA,
among other restrictions, has limitations on the amount of capital expenditures
that we can make without McLeodUSA's approval, as well as limits on our ability
to issue equity or borrow funds. If we raise additional funds through the
issuance of equity, equity-related or debt securities, such securities may have
rights, preferences or privileges senior to those of the rights of our common
stock and our shareholders may experience additional dilution. We cannot be
certain that additional financing will be available to us on acceptable terms
when required, or at all.
If the Merger with McLeodUSA is not completed for any reason, we may be
subject to a number of material risks, including the following:
o The price of our common stock may decline to the extent that the
current market price of our common stock reflects a market assumption
that the Merger will be completed,
o Costs incurred by us related to the Merger, such as legal and
accounting fees as well as a portion of the financial advisor fees,
must be paid even if the Merger is not completed,
o Certain benefits that we expect to realize from the Merger, such as
the enhanced financial and competitive position of the combined
company, would not be realized,
o The diversion of the attention of management from our day-to-day
business, the scaling back of capital spending and the unavoidable
disruption to our employees and our relationships with customers and
suppliers, may make it difficult for us to regain our company's
momentum if the Merger does not occur, and
o We may not be able to meet the financial covenants necessary to borrow
under the revolving credit facility.
In addition, if we are unable to borrow under the credit facility, because
the conditions to borrowing are not met or otherwise, and we have not completed
the Merger, we will not have the cash available to fund our operations and
believe it will be very difficult to obtain such capital in the public or
private marketplace. We would pursue all available alternatives at that time,
however, no assurance can be given that any alternative would be available which
would result in the preservation of shareholder or bondholder value.
17
<PAGE> 20
CONTINGENCIES
On July 26, 2000, a shareholder class action complaint was filed in the
United States District Court for the Northern District of Texas on behalf of all
purchasers of the Company's common stock during the period between April 28,
2000, and July 6, 2000 (Hector Alfaro, On Behalf of Himself and All Others
Similarly Situated vs. CapRock Communications Corp., et al. (Civil Action No.
3-00CV1613R). Additional suits have been filed subsequently: Angela Amos v.
CapRock Communications Corporation, Leo J. Cyr, Jere W. Thompson, Jr. and Kevin
W. McAleer, C.A. No. 3-00CV1730-P, in the United States District Court Northern
District of Texas, Dallas Division; Teresa A. Cicala v. CapRock Communications
Corporation, Leo J. Cyr, Jere W. Thompson, Jr. and Kevin W. McAleer, C.A. No.
3-00CV1727-G, in the United States District Court Northern District of Texas,
Dallas Division) and Todd Katz v. CapRock Communications Corp., Leo J. Cyr, Jere
W. Thompson Jr. and Kevin W. McAleer, C.A. No. 3-00CV-1767-L, in the United
States District Court Northern District of Texas, Dallas Division and Joseph
Chen v. CapRock Communications Corp., Leo J. Cyr and Jere W. Thompson, Jr.; C.A.
No. 3-00CV1772-D, in the United States District Court for the Northern District
of Texas, Dallas Division, and Larry J. Bland v. CapRock Communications Corp.,
Leo J. Cyr, Jere W. Thompson, Jr. and Kevin W. McAleer, C.A. No. 3-00CV1920-R,
in the United States District Court for the Northern District of Texas, Dallas
Division. CapRock expects these actions will be consolidated upon the selection
of a lead plaintiff. On October 6, 2000, a derivative suit Westcott Rochette v.
Jere W. Thompson, Jr., Leo J. Cyr, Timothy W. Rogers, Mark Langdale, Christopher
J. Amenson, and John R. Harris and CapRock Communications Corporation, Civil
Action No. 3-00CV2217-P, in the United States District Court Northern District
of Texas, Dallas Division, was filed. The named defendants in these suits
include the Company and certain officers and directors of the Company. The
complaints allege violations of Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder by making untrue statements of
material fact and omitting to state material facts necessary to make the
statements made, in light of the circumstances under which they were made, not
misleading. The plaintiffs seek monetary damages plus interest. The Company
intends to vigorously defend these lawsuits and all other similar suits
subsequently filed.
On October 6, 2000, a class action complaint was filed in the County Court
at Law of Dallas County, Texas on behalf of CapRock's stockholders - Richard
Betsinger, on behalf of himself and all others similarly situated v. CapRock
Communications Corp., Leo J. Cyr, Jere W. Thompson, Jr., Timothy W. Rogers, Mark
Langdale, Christopher J. Amenson and John R. Harris, C.A. No. CC-00-11629-D, in
the County Court at Law No. 4 of Dallas County, Texas. This complaint names as
defendants CapRock and each member of its board of directors and principally
alleges that the directors violated fiduciary duties owed to CapRock's
stockholders in connection with entering into the Merger Agreement. The
plaintiffs in the lawsuit seek both unspecified monetary damages and an
injunction to prevent completion of the Merger. CapRock intends to vigorously
defend the lawsuit and all other similar suits subsequently filed.
In addition, we are from time to time party to ordinary litigation
incidental to our business.
18
<PAGE> 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
CapRock is exposed to market risk from changes in marketable securities
(which consist of money market and commercial paper). At September 30, 2000,
marketable securities of CapRock were recorded at a fair value of approximately
$47.2 million, with an overall weighted average return of approximately 5% and
an overall weighted average life of less than 1 year. The marketable securities
held by CapRock have exposure to price risk, which is estimated as the potential
loss in fair value due to a hypothetical change of 50 basis points (10% of
CapRock's overall average return on marketable securities) in quoted market
prices. This hypothetical change would have an immaterial effect on the recorded
value of the marketable securities.
CapRock is not exposed to material future earnings or cash flow
fluctuations from changes in interest rates on long-term debt since 100% of its
long-term debt is at a fixed rate as of September 30, 2000. The fair value of
CapRock's long-term debt at September 30, 2000, was estimated to be $219.0
million based on the overall rate of the long-term debt of 11.71% and an overall
maturity of 8.3 years compared to terms and rates currently available in
long-term financing markets. Market risk is estimated as the potential decrease
in fair value of CapRock's long-term debt resulting from a hypothetical increase
of 117 basis points in interest rates (ten percent of CapRock's overall
borrowing rate). Such an increase in interest rates would result in
approximately a $7.2 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 does not currently have any material exposure to foreign currency
transaction gains or losses. Substantially all business transactions are in U.S.
dollars. To date, CapRock has not entered into any derivative financial
instrument to manage foreign currency risk and is currently not evaluating the
future use of any such financial instruments.
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<PAGE> 22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information pertaining to this item is incorporated herein from Part I.
Financial Information (Item 2-Management's Discussion and Analysis of Financial
Condition and Results of Operations-Contingencies).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation of the Company (incorporated by reference
to Exhibit 3.1 to the Registration Statement on Form S-4, as amended,
SEC Registration No. 333-57365).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to
the Registration Statement on Form S-4, as amended, SEC Registration
No. 333-64699).
+10.1 Employment Agreement dated as of August 14, 2000, between James E.
Skinner and CapRock Communications Corp., a Texas corporation.
+27.1 Financial Data Schedule.
----------
+ Filed herewith.
(b) Reports on Form 8-K
Current Report on Form 8-K dated July 6, 2000, announcing second quarter
estimates and loss of an anticipated contract.
Current Report on Form 8-K dated July 15, 2000, regarding the filing of a
shareholder class action lawsuit against the Company and certain officers
and directors of the Company.
Current Report on Form 8-K dated August 15, 2000, containing press release
announcing a new Chief Financial Officer of the Company.
20
<PAGE> 23
CAPROCK COMMUNICATIONS CORP.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPROCK COMMUNICATIONS CORP.
By: /s/ JAMES E. SKINNER.
--------------------------------
James E. Skinner
Senior Vice President, and Chief
Financial Officer
(Chief Financial Officer and Principal
Financial Officer)
Date: November 13, 2000
21
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Articles of Incorporation of the Company (incorporated by reference
to Exhibit 3.1 to the Registration Statement on Form S-4, as amended,
SEC Registration No. 333-57365).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to
the Registration Statement on Form S-4, as amended, SEC Registration
No. 333-64699).
+10.1 Employment Agreement dated as of August 14, 2000, between James E.
Skinner and CapRock Communications Corp., a Texas corporation.
+27.1 Financial Data Schedule.
</TABLE>
----------
+ Filed herewith.
