<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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
July 31, 2000 was 38,657,684.
<PAGE> 2
CAPROCK COMMUNICATIONS CORP.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART 1. FINANCIAL INFORMATION................................................................ 1
Item 1. Financial Statements................................................................. 1
Consolidated Balance Sheets at June 30, 2000 (unaudited) and December 31, 1999....... 1
Consolidated Statements of Operations (unaudited) for the Three Months and Six
Months Ended June 30, 2000 and 1999.................................................. 2
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended
June 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........................................................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 16
PART II. OTHER INFORMATION.................................................................... 18
Item 1. Legal Proceedings.................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders ................................. 18
Item 6. Exhibits and Reports on Form 8-K..................................................... 18
SIGNATURE PAGE....................................................................... 19
</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>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,680 $ 5,692
Marketable securities 139,134 182,636
Accounts receivable and unbilled services, less allowance for doubtful
accounts of $5,034 and $5,208 at June 30, 2000 and December 31,
1999, respectively 75,287 116,380
Income tax receivable 34 411
Costs and estimated earnings in excess of billings 10,785 870
Inventory 771 1,761
Prepaid expenses and other 2,241 2,775
Deferred income taxes 17,344 6,594
------------ ------------
Total current assets 249,276 317,119
Property, plant and equipment 452,934 249,969
Accumulated depreciation (29,895) (21,368)
------------ ------------
Property, plant and equipment, net 423,039 228,601
Other assets 3,859 3,115
------------ ------------
Total assets $ 676,174 $ 548,835
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 97,025 $ 62,594
Accrued expenses 22,242 26,131
Billings in excess of costs and earnings 12,522 11,541
Bank overdraft 11,279 --
Unearned revenue 1,896 708
------------ ------------
Total current liabilities 144,964 100,974
Senior notes, net of unamortized debt issuance costs 348,218 347,502
Deferred income taxes 5,254 4,329
------------ ------------
Total liabilities 498,436 452,805
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, 38,655,484 and 33,242,351 shares at June 30, 2000 and
December 31, 1999, respectively 387 333
Additional paid-in capital 191,808 94,543
Retained earnings (accumulated deficit) (13,570) 2,067
Accumulated other comprehensive loss (21) (6)
Unearned compensation (188) (229)
Treasury stock, at cost (678) (678)
------------ ------------
Total stockholders' equity 177,738 96,030
------------ ------------
Total liabilities and stockholders' equity $ 676,174 $ 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Integrated services $ 11,763 $ 4,643 $ 21,443 $ 9,148
Network services 19,157 14,299 36,612 27,684
Systems services 5,902 7,606 11,803 15,686
Dark fiber sales 6,422 11,011 44,078 22,078
---------- ---------- ---------- ----------
Total revenues 43,244 37,559 113,936 74,596
Cost of revenues 36,442 22,538 79,220 44,919
---------- ---------- ---------- ----------
Gross profit 6,802 15,021 34,716 29,677
Operating expenses:
Selling, general and administrative 24,302 12,461 43,398 25,012
Depreciation and amortization 4,989 1,857 9,077 3,337
---------- ---------- ---------- ----------
Total operating expenses 29,291 14,318 52,475 28,349
---------- ---------- ---------- ----------
Operating income (loss) (22,489) 703 (17,759) 1,328
Interest expense (4,082) (5,880) (10,616) (10,136)
Interest income 1,358 2,156 3,595 3,002
Other income (expense) 68 (116) 25 (135)
---------- ---------- ---------- ----------
Loss before income taxes (25,145) (3,137) (24,755) (5,941)
Income tax benefit (9,304) (1,235) (9,118) (2,335)
---------- ---------- ---------- ----------
Net loss $ (15,841) $ (1,902) $ (15,637) $ (3,606)
========== ========== ========== ==========
Loss per common share:
Basic $ (0.47) $ (0.06) $ (0.47) $ (0.12)
Diluted $ (0.47) $ (0.06) $ (0.47) $ (0.12)
Weighted average shares outstanding:
Basic 33,476 31,700 33,406 30,321
Diluted 33,476 31,700 33,406 30,321
</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>
SIX MONTHS ENDED JUNE 30,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (15,637) $ (3,606)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 9,077 3,337
Gain on sale of assets -- (3)
Non-cash compensation expense 447 --
Deferred income taxes (8,788) (2,569)
Equity in earnings of unconsolidated joint ventures -- 98
Amortization of discount and debt issuance costs, included in
interest expense 716 392
Changes in operating assets and liabilities:
Accounts receivable and unbilled services 41,093 (26,060)
Income taxes receivable 377 --
Costs and earnings in excess of billings (9,915) 6,905
Inventory 990 52
Prepaid expenses and other (272) (1,372)
Accounts payable and accrued liabilities 30,542 5,014
Billings in excess of costs and estimated earnings 981 2,848
Unearned revenue 1,188 67
------------ ------------
Net cash provided by (used in) operating activities 50,799 (14,897)
Cash flows from investing activities:
Purchases of property, plant and equipment (216,263) (45,717)
Purchase of marketable securities (96,372) (283,613)
Proceeds from sale of marketable securities 139,874 73,199
Proceeds from disposal of property, plant and equipment 12,851 4,749
Investment in unconsolidated subsidiary -- (6,787)
------------ ------------
Net cash used in investing activities (159,910) (258,169)
Cash flows from financing activities:
Proceeds from the issuance of senior notes, net of debt issuance -- 201,432
Purchase of treasury stock -- (124)
Proceeds from stock option exercises 588 687
Proceeds from issuance of common stock 95,246 81,877
Proceeds from bank overdraft 11,279 --
------------ ------------
Net cash provided by financing activities 107,113 283,872
Effect of exchange rate on cash and cash equivalents (14) (14)
------------ ------------
Net increase (decrease) in cash and cash equivalents (2,012) 10,792
Cash and cash equivalents at beginning of period 5,692 294
------------ ------------
Cash and cash equivalents at end of period $ 3,680 $ 11,086
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest including interest capitalized of $11,218 and $2,479
for the six months ended June 30, 2000 and 1999, respectively $ 21,075 $ 8,950
============ ============
Non-cash financing activity:
Issuance of restricted stock $ 447 $ --
============ ============
</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 regional facilities-based integrated communications
provider offering local, long distance, Internet, DSL, data and private line
services primarily 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 extensive fiber, voice and data networks throughout
Texas, Louisiana, Oklahoma, Arkansas, New Mexico and Arizona to support its
products and services. Additionally, the Company, through its wholly owned
subsidiary - CapRock Services Corp., 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 six months ended June 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 $95.2 million.
(3) CREDIT FACILITY
On August 11, 2000, we executed a revised commitment letter from The Chase
Manhattan Bank for a $150 million senior secured credit facility. Chase has
committed to fund $25 million upon the successful syndication of a minimum of an
additional $75 million from other lenders. The final terms and conditions of the
credit facility will depend on negotiation of definitive documentation, which we
expect will contain customary restrictive covenants, including financial
covenants. Additionally, the credit facility will have terms restricting draws
above $125 million unless certain events occur.
4
<PAGE> 7
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(4) LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (15,841) $ (1,902) $ (15,637) $ (3,606)
============ ============ ============ ============
Denominator:
Denominator for basic and dilutive loss
per share-weighted average shares
outstanding 33,476 31,700 33,406 30,321
============ ============ ============ ============
Basic and diluted loss per share $ (0.47) $ (0.06) $ (0.47) $ (0.12)
============ ============ ============ ============
</TABLE>
For the three and six months ended June 30, 2000 and 1999, the effect of
the Company's potential common stock equivalents was omitted from the
computation of diluted net loss per common share, as their effect would be
antidilutive. At June 30, 2000 the Company had 4,646,527 options outstanding.
(5) SEGMENT REPORTING
The Company's business is now segmented into five areas: Integrated
Services, Network Services, Systems Services, Dark Fiber, and Corporate. 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"). The Corporate segment includes certain general and
administrative functions and operating expenses. Information regarding operating
segments is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000
-----------------------------------------------------------------------------------------
NETWORK INTEGRATED SYSTEMS DARK
SERVICES SERVICES SERVICES FIBER CORPORATE CONSOLIDATED
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external
customers $ 19,156 $ 11,763 $ 5,903 $ 6,422 $ -- $ 43,244
Depreciation and amortization 3,267 927 795 -- -- 4,989
Capitalized interest 6,776 -- -- -- -- 6,776
Operating income (loss) (12,466) (8,240) 456 4,325 (6,564) (22,489)
Total assets 354,133 34,535 25,088 -- 262,418 676,174
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
-----------------------------------------------------------------------------------------
NETWORK INTEGRATED SYSTEMS DARK
SERVICES SERVICES SERVICES FIBER CORPORATE CONSOLIDATED
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external
customers $ 14,299 $ 4,643 $ 7,606 $ 11,011 $ -- $ 37,559
Depreciation and amortization 885 204 768 -- -- 1,857
Capitalized interest 1,389 -- -- -- -- 1,389
Operating income (loss) (3,672) (1,442) 28 8,715 (2,926) 703
Total assets 111,761 9,950 27,966 -- 329,856 479,533
</TABLE>
5
<PAGE> 8
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
-----------------------------------------------------------------------------------------
NETWORK INTEGRATED SYSTEMS DARK
SERVICES SERVICES SERVICES FIBER CORPORATE CONSOLIDATED
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external
customers $ 36,612 $ 21,443 $ 11,803 $ 44,078 $ -- $ 113,936
Depreciation and amortization 5,837 1,658 1,582 -- -- 9,077
Capitalized interest 11,218 -- -- -- -- 11,218
Operating income (loss) (22,326) (15,103) 658 29,364 (10,352) (17,759)
Total assets 354,133 34,535 25,088 -- 262,418 676,174
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
-----------------------------------------------------------------------------------------
NETWORK INTEGRATED SYSTEMS DARK
SERVICES SERVICES SERVICES FIBER CORPORATE CONSOLIDATED
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external
customers $ 27,684 $ 9,148 $ 15,686 $ 22,078 $ -- $ 74,596
Depreciation and amortization 1,485 344 1,508 -- -- 3,337
Capitalized interest 2,479 -- -- -- -- 2,479
Operating income (loss) (6,537) (2,587) 373 16,034 (5,955) 1,328
Total assets 111,761 9,950 27,966 -- 329,856 479,533
</TABLE>
All revenue was derived from unaffiliated customers.
(6) JOINT FIBER CONSTRUCTION AGREEMENTS
In January 2000, the Company entered into a joint fiber construction
agreement with 360networks, Inc. to jointly build approximately 1,300 miles of
fiber network through Texas, New Mexico and Arizona. The agreement calls for us
to construct a Texas fiber route from Austin through Temple to El Paso, while
360networks is responsible for the segment from El Paso west through New Mexico
to Tucson and Phoenix. We will each own one conduit individually and will
jointly own two conduits. Construction began in the first quarter of 2000 with
completion expected in 2001.
Joint build agreements provide several benefits, including reduction of
construction costs, accelerated construction, and the freeing up of internal
resources to focus attention on the construction of additional portions of the
network.
(7) 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). Two 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 and 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). The named defendants 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
the suits and all other similar suits subsequently filed.
6
<PAGE> 9
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) OTHER COMPREHENSIVE LOSS
The following table sets forth the computation of comprehensive loss (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Comprehensive loss:
Net loss $ (15,841) $ (1,902) $ (15,637) $ (3,606)
Currency translation adjustment (10) (6) (14) (14)
---------- ---------- ---------- ----------
Total comprehensive loss $ (15,851) $ (1,908) $ (15,651) $ (3,620)
========== ========== ========== ==========
</TABLE>
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
CapRock's consolidated financial statements and notes thereto for the year ended
December 31, 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 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 leading 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. 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.
We believe that our current and planned networks will provide our target
customer
8
<PAGE> 11
base the most comprehensive facilities-based service alternative to the
incumbent and other competitive communications service providers in our region.
Our communications services are provided through resale and over our fiber,
voice and data networks. Upon completion, our fiber network will connect nearly
every primary, secondary and tertiary market in the six-state region of Texas,
Louisiana, Arkansas, Oklahoma, New Mexico and Arizona. At June 30, 2000, the
network covered approximately 4,500 route miles. 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 and intend to continue to sell
excess dark fiber.
We had 61 central office collocations at June 30, 2000 and intend to expand
that number to 200 collocations by the end of 2000. We plan to equip
approximately 60 of these collocations so that we can provide DSL services over
our own facilities. Additionally, we have expanded our DSL footprint through our
recent agreement with Rhythms Netconnections Inc. These collocations enable us
to provide local and other services over our own network infrastructure, thereby
lowering our cost of providing these services. Additionally, we had 17 data and
12 voice switches as of June 30, 2000.
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.
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, Oklahoma, Lafayette and New Orleans, Louisiana and Phoenix,
Arizona. We anticipate increased revenue from integrated services as our
networks are further deployed in new markets and as our sales force for this
revenue segment continues to grow. 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 120,326 local access lines as of June 30, 2000 of which 82,581
were installed lines. The remaining 37,745 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. Our provisioning throughput has more
than tripled since the beginning of the year, and the time required to provision
most orders has decreased to five to seven days.
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 IP/ATM
switches as they become operational. We recently entered into an agreement with
Rhythms Netconnections Inc. to mutually resell DSL services over each others'
facilities within the Southwestern U.S. CapRock will utilize Rhythms DSL
facilities in certain major markets, and Rhythms will utilize CapRock DSL
9
<PAGE> 12
facilities in Tier 2 and Tier 3 markets. We believe this will accelerate our DSL
rollout, reduce our initial capital expenditures and expand our DSL service
footprint.
The table below provides key operational data relating to our integrated
services offering:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
Markets served 13 7
Business customers served 21,275 7,294
Sales force employees 251 156
Voice switches 12 8
IP/ATM and frame switches 17 --
Collocations completed 61 20
Lines sold 120,326 29,833
Lines installed 82,581 17,078
</TABLE>
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. We intend to continue to market and sell dark fiber
in the future.
10
<PAGE> 13
The following table represents the various sources of revenues (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Integrated services $ 11,763 $ 4,643 $ 21,443 $ 9,148
Network services 19,157 14,299 36,612 27,684
Systems services 5,902 7,606 11,803 15,686
Dark fiber sales 6,422 11,011 44,078 22,078
---------- ---------- ---------- ----------
Total revenues $ 43,244 $ 37,559 $ 113,936 $ 74,596
========== ========== ========== ==========
</TABLE>
The following table sets forth for the periods indicated CapRock's
statement of operations as a percentage of its operating revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Cost of revenues 84% 60% 70% 60%
---------- ---------- ---------- ----------
Gross profit 16% 40% 30% 40%
Operating expenses:
Selling, general and administrative 56% 33% 38% 34%
Depreciation and amortization 12% 5% 8% 4%
---------- ---------- ---------- ----------
Total operating expenses 68% 38% 46% 38%
---------- ---------- ---------- ----------
Operating income (loss) (52)% 2% (16)% 2%
Interest expense (9)% (16)% (9)% (14)%
Interest income 3% 6% 3% 4%
Other income (expense) -% -% -% -%
---------- ---------- ---------- ----------
Loss before income taxes (58)% (8)% (22)% (8)%
Income tax benefit (21)% (3)% (8)% (3)%
---------- ---------- ---------- ----------
Net loss (37)% (5)% (14)% (5)%
========== ========== ========== ==========
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Revenues. Total revenues increased $5.6 million, or 15%, to $43.2 million
during the three months ended June 30, 2000 from $37.6 million during the three
months ended June 30, 1999. This increase was attributable to increases of 153%
in integrated services and 34% in network services and was offset by a decrease
of 22% in systems services revenue and a 42% decrease in dark fiber sales.
Integrated services revenue increased $7.2 million to $11.8 million during
the three months ended June 30, 2000 from $4.6 million during the three months
ended June 30, 1999. The 153% 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 120,326 at June 30, 2000 from 29,833 at June 30, 1999. Installed
access lines increased to 82,581 at June 30, 2000 from 17,078 at June 30, 1999.
Our direct sales force increased to 251 at June 30, 2000 from 156 at June 30,
1999.
Network services revenue increased $4.9 million to $19.2 million during the
three months ended June 30, 2000 from $14.3 million during the three months
ended June 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 price decline will be partially offset by
increased volumes. We derived approximately $11.5 million and $6.5 million or
60% and 46% of our network services revenue from traffic terminated to foreign
countries during the three months ended June 30, 2000 and
11
<PAGE> 14
1999, respectively. Revenue per minute for a majority of the foreign countries,
particularly Mexico, continues to decrease as a result of deregulation and
increased competition.
Systems services revenue decreased $1.7 million to $5.9 million during the
three months ended June 30, 2000 from $7.6 million during the three months ended
June 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 and North Sea regions.
We will continue to provide these services to our oil and gas industry customer
base within our region.
Dark fiber sales decreased to $6.4 million during the three months ended
June 30, 2000 from $11.0 million during the three months ended June 30, 1999.
IRU revenues have grown steadily on a quarter to quarter basis over the past two
years until this second quarter. We anticipate revenue relating to IRUs in the
remaining quarters of 2000 to exceed the level realized in the second quarter.
Cost of Revenues. Cost of revenues increased $13.9 million, or 62%, to
$36.4 million during the three months ended June 30, 2000 from $22.5 million
during the three months ended June 30, 1999. The increase in cost of revenues
was primarily attributable to the continued growth in revenue. Gross margins
were 16% and 40% for the three month periods ended June 30, 2000 and 1999,
respectively. This decrease was a result of a lower volume of IRU sales during
the three months ended June 30, 2000 compared to the three months ended June 30,
1999. IRUs contribute higher gross margins than other reporting segments, and
the decrease in IRUs negatively impacted gross margins. Additionally, gross
margins on minutes of use associated with our carrier customers have decreased
from the three months ended June 30, 1999 to the three months ended June 30,
2000 as a result of competitive pressures.
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 $11.8 million, or 95%, to $24.3 million during the three months ended
June 30, 2000 from $12.5 million during the three months ended June 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.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $3.1 million, or 169%, to $5.0 million during the three months
ended June 30, 2000 from $1.9 million during the three months ended June 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. We expect that depreciation and amortization expense
will continue to increase in subsequent periods as we continue to expand our
facilities and place additional fiber segments in service.
Interest Expense. Interest expense decreased $1.8 million to $4.1 million
during the three months ended June 30, 2000 from $5.9 million during the three
months ended June 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 $798,000 to $1.4 million during
the three months ended June 30, 2000 from $2.2 million during the three months
ended June 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 Benefit. During the three months ended June 30, 2000, we
incurred an income tax benefit of $9.3 million compared to an income tax benefit
of $1.2 million during the three months ended June 30, 1999. The benefit
resulted from the losses for the respective periods.
Net Loss. Net loss increased $13.9 million to a net loss of $15.8 million
during the three months ended June 30, 2000 from a net loss of $1.9 million
during the three months ended June 30, 1999 as a result of the factors discussed
above.
12
<PAGE> 15
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Revenues. Total revenues increased $39.3 million, or 53%, to $113.9 million
during the six months ended June 30, 2000 from $74.6 million during the six
months ended June 30, 1999. This increase was attributable to increases of 134%
in integrated services revenues, 32% in network services revenue and 100% in
dark fiber sales and was offset by a decrease of 25% in systems services
revenue.
Integrated services revenue increased $12.3 million to $21.4 million during
the six months ended June 30, 2000 from $9.1 million during the six months ended
June 30, 1999. The 134% 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 120,326 at the end of June 30, 2000 from 29,833 at June 30, 1999. Installed
access lines increased to 82,581 at June 30, 2000 from 17,078 at June 30, 1999.
Our direct sales force increased to 251 at June 30, 2000 from 156 at June 30,
1999. We now have sales offices in Dallas, Fort Worth, Houston, San Antonio,
Austin, Corpus Christi, Tyler, Victoria, and McAllen, Texas, Oklahoma City,
Oklahoma, Lafayette and New Orleans, Louisiana and Phoenix, Arizona. We
anticipate increased revenue from integrated services as our networks are
further deployed in new markets and as our sales force for this revenue segment
continues to grow.
Network services revenue increased $8.9 million to $36.6 million during the
six months ended June 30, 2000 from $27.7 million during the six months ended
June 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 price decline will be partially offset by
increased volumes. We derived approximately $20.7 million and $12.1 million or
57% and 44% of our network services revenue from traffic terminated to foreign
countries during the six months ended June 30, 2000 and 1999, respectively.
Revenue per minute for a majority of foreign countries, particularly Mexico,
continues to decrease as a result of deregulation and increased competition.
Systems services revenue decreased $3.9 million to $11.8 million during the
six months ended June 30, 2000 from $15.7 million during the six months ended
June 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, attributed to IRUs, increased $22.0 million to $44.1
million during the six months ended June 30, 2000 from $22.1 million during the
six months ended June 30, 1999. IRU revenues have grown steadily on a quarter to
quarter basis over the past two years up until this second quarter. We
anticipate revenue relating to IRUs in the remaining quarters of 2000 to exceed
the level realized during the second quarter.
Cost of Revenues. Cost of revenues increased $34.3 million, or 76%, to
$79.2 million during the six months ended June 30, 2000 from $44.9 million
during the six months ended June 30, 1999. The increase in cost of revenues was
primarily attributable to the continued growth in revenue. Gross margins were
30% for the six month period ended June 30, 2000 and 40% for the six month
period ended June 30, 1999. Gross margins on minutes of use associated with our
carrier customers have decreased from the six months ended June 30, 1999 to the
six months ended June 30, 2000 as a result of competitive pressures. This
decrease was offset by a higher volume of IRU sales during the six months ended
June 30, 2000 compared to the six months ended June 30, 1999, which carry a
higher gross margin.
Selling, General and Administrative Expenses. SG&A includes salaries,
benefits, occupancy costs, commissions, sales and marketing expenses and
administrative expenses. SG&A increased $18.4 million, or 74%, to $43.4 million
during the six months ended June 30, 2000 from $25.0 million during the six
months ended June 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.
13
<PAGE> 16
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $5.8 million, or 172%, to $9.1 million during the six months
ended June 30, 2000 from $3.3 million during the six months ended June 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. We expect that depreciation and amortization expense
will continue to increase in subsequent periods as we continue to expand our
facilities and place additional fiber segments in service.
Interest Expense. Interest expense increased $480,000 to $10.6 million
during the six months ended June 30, 2000 from $10.1 million during the six
months ended June 30, 1999. The increase resulted from interest expense related
to our 1999 Senior Notes and was partially offset by an increase in capitalized
interest. See "--Liquidity and Capital Resources."
Interest Income. Interest income increased $593,000 to $3.6 million during
the six months ended June 30, 2000 from $3.0 million during the six months ended
June 30, 1999. The increase was attributable to the interest and investment
accretion associated with the marketable securities purchased with the proceeds
from our 1999 Senior Notes.
Income Tax Benefit. During the six months ended June 30, 2000, we incurred
an income tax benefit of $9.1 million compared to an income tax benefit of $2.3
million during the six months ended June 30, 1999. The benefit resulted from the
loss for the respective periods.
Net Loss. Net loss increased $12.0 million to a net loss of $15.6 million
during the six months ended June 30, 2000 from a net loss of $3.6 million during
the six months ended June 30, 1999 as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
We had cash, cash equivalents and marketable securities of $142.8 million
at June 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 six months
ended June 30, 2000 was $50.8 million as compared to $14.9 million used in
operating activities during the six months ended June 30, 1999. The change was
primarily attributable to 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 six months ended June 30, 2000
and June 30, 1999 was $159.9 million and $258.2 million, respectively. Capital
resources used for the purchase of property, plant and equipment increased
$170.6 million to $216.3 million during the six months ended June 30, 2000 from
$45.7 million during the six months ended June 30, 1999. This increase primarily
related to the purchase of telecommunications equipment and costs incurred with
the build out of our fiber optic network. During the six months ended June 30,
2000 the Company used $96.4 million to invest in marketable securities while it
received $139.9 million from the sale of marketable securities as compared to
$283.6 million used to invest in marketable securities and $73.2 million
received from the sale of marketable securities during the six months ended June
30, 1999.
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.
14
<PAGE> 17
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.
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 $95.2 million.
The remaining proceeds from our 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, for potential acquisitions and for general working capital
purposes. Unutilized funds have been invested in short-term, high-grade
investment securities classified as available for sale.
On August 11, 2000, we executed a revised commitment letter from The Chase
Manhattan Bank for a $150 million senior secured credit facility. Chase has
committed to fund $25 million upon the successful syndication of a minimum of an
additional $75 million from other lenders. The final terms and conditions of the
credit facility will depend on negotiation of definitive documentation, which we
expect will contain customary restrictive covenants, including financial
covenants. Additionally, the credit facility will have terms restricting draws
above $125 million unless certain events occur.
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 with AT&T,
Pathnet, 360networks and Enron Broadband Services, to approximately 6,200 route
miles throughout the Southwest region, (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.
We currently estimate that our aggregate capital expenditures will total
approximately $160 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 proposed $150 million credit
facility, should be sufficient to fund our capital requirements through June
2001. However, we must successfully raise at least $100 million to
fund our operations and capital expenditures through 2000, and we cannot assure
you that we will close on the proposed credit facility. If we are unsuccessful
in closing the credit facility we will pursue other financing and/or strategic
alternatives. In addition, we may require additional sources of capital to fund
our capital expenditure requirements for 2001. We cannot assure you that
additional sources of capital will be available, that the anticipated sources of
working capital will be available, that cash flow from operations will meet our
expectations, that we have anticipated all future costs, or that our expected
financial resources will be sufficient to cover future expenditures. If we are
unable to finalize our credit facility or obtain additional sources of capital
by September 30, 2000, we will significantly curtail our level of
expenditures and our rate of expansion.
We may require additional capital in the future for new business activities
related to our current and planned businesses, or in the event we decide to make
acquisitions, enter into joint venture and strategic alliances or
15
<PAGE> 18
expand into new geographic regions. Sources of additional capital may include
cash flow from operations, public or private equity and debt financings, bank
debt and vendor financings. In addition, we may enter into joint construction
agreements with carriers, thereby reducing our capital expenditure requirements.
However, we cannot assure you that we will be successful in producing sufficient
cash flow or raising sufficient debt or equity capital to meet our strategic
business objectives or that such funds, if available, will be available on a
timely basis and on terms that are acceptable to us. If we are unable to obtain
such capital, the build out of portions of our expanded network may be
significantly delayed, curtailed or abandoned. In addition, we may accelerate
the rate of deployment of our network, which in turn may accelerate our need for
additional capital. Our actual capital requirements will also be affected,
possibly materially, by various factors, including the timing and actual cost of
the deployment of our network, the timing and cost of expansion into new
markets, the extent of competition and the pricing of dark fiber and
telecommunications services in our markets.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("Statement 133"), which was amended by Statement 137 issued in July 1999 and
Statement 138 issued in June 2000. Statement 137 delayed the effective date of
Statement 133. Statement 133 is now effective for all interim and annual periods
of the Company commencing December 1, 2000. Given the Company's current and
anticipated derivative activities, management does not believe the adoption of
Statement 133 should have a material effect on the Company's consolidated
financial position and results of operations.
FASB issued Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation - an Interpretation of APB Opinion No. 25" ("FIN
44") in March 2000. Among other issues, this interpretation clarifies the
definition of employee for purposes of applying APB Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), the criteria for determining whether
a plan qualifies as a non-compensatory plan, the accounting consequence of
various modifications to the terms of previously fixed stock options or awards
and the accounting for an exchange of stock compensation awards in a business
combination. The Interpretation is effective July 1, 2000, but certain
conclusions in the Interpretation cover specific events that occurred after
either December 15, 1998 or January 12, 2000. Management believes that FIN 44
will not have a material effect on the Company's financial position and
consolidated results of operations upon adoption.
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). Two 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 and 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). The named defendants 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
the suits and all other similar suits subsequently filed.
In addition, we are from time to time party to ordinary litigation
incidental to our business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
CapRock is exposed to market risk from changes in marketable securities
(which consist of money market and commercial paper). At June 30, 2000,
marketable securities of CapRock were recorded at a fair value of approximately
$139.1 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
16
<PAGE> 19
risk, which is estimated as the potential loss in fair value due to a
hypothetical change of 50 basis points (10% of CapRock's overall average return
on marketable securities) in quoted market prices. This hypothetical change
would have an immaterial effect on the recorded value of the marketable
securities.
CapRock is not exposed to material future earnings or cash flow
fluctuations from changes in interest rates on long-term debt since 100% of its
long-term debt is at a fixed rate as of June 30, 2000. The fair value of
CapRock's long-term debt at June 30, 2000 was estimated to be $327.8 million
based on the overall rate of the long-term debt of 11.71% and an overall
maturity of 8.5 years compared to terms and rates currently available in
long-term financing markets. Market risk is estimated as the potential decrease
in fair value of CapRock's long-term debt resulting from a hypothetical increase
of 117 basis points in interest rates (ten percent of CapRock's overall
borrowing rate). Such an increase in interest rates would result in
approximately a $9.1 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.
17
<PAGE> 20
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on June 1, 2000. At the
meeting, the shareholders voted in favor of electing as directors the six
nominees named in the Proxy Statement dated May 15, 2000. Also at the meeting,
the shareholders voted to amend the 1998 Equity Incentive Plan and in favor of
ratifying the appointment of KPMG LLP as the Company's independent accountants
for the 2000 fiscal year. The number of votes cast for each item was as follows:
I. Election of Directors
<TABLE>
<CAPTION>
NAME OF NOMINEE FOR WITHHELD
--------------- --- --------
<S> <C> <C>
Jere W. Thompson, Jr. 27,288,012 1,037,405
Leo J. Cyr 28,298,129 27,288
Timothy W. Rogers 28,298,179 27,238
Mark Langdale 28,298,629 26,788
Christopher J. Amenson 28,298,429 26,988
John R. Harris 28,298,629 26,788
</TABLE>
II. Amendment of the 1998 Equity Incentive Plan
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
21,829,657 3,752,665 12,413
</TABLE>
III. Ratification of KPMG LLP as Independent Accountants
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
28,260,464 64,330 623
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Registration Statement on Form S-4, as amended, SEC
Registration No. 333-57365 (the "Merger Form S-4")).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-4, as amended, SEC Registration No.
333-64699 (the "1998 Exchange Offer Form S-4")).
+10.1 CapRock Communications Corp. 1998 Equity Incentive Plan, as amended.
+27.1 Financial Data Schedule.
----------
+ Filed herewith.
(b) Reports on Form 8-K
Current Report on Form 8-K dated April 14, 2000 to announce the
offering of 5 million shares of the Company's common stock and $125
million in convertible preferred stock.
18
<PAGE> 21
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/ JERE W. THOMPSON, JR.
-------------------------------------------
Jere W. Thompson, Jr.
(Chief Executive Officer and Acting Principal Financial Officer)
Date: August 11, 2000
19
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Articles of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Registration Statement on Form S-4, as amended, SEC
Registration No. 333-57365 (the "Merger Form S-4")).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-4, as amended, SEC Registration No.
333-64699 (the "1998 Exchange Offer Form S-4")).
+10.1 CapRock Communications Corp. 1998 Equity Incentive Plan, as amended.
+27.1 Financial Data Schedule.
</TABLE>
----------
+ Filed herewith.
