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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 30, 1996
EQUALNET HOLDING CORP.
(Exact name of registrant as specified in charter)
Texas 0-25482 76-0457803
(State of Incorporation) (Commission File No.) (I.R.S. Employer
Identification No.)
1250 Wood Branch Park Drive
Houston, Texas 77079
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 281/529-4600
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Item 5. Other Events
Press Release
On September 30, 1996, EqualNet Holding Corp. (the "Company")
issued a press release announcing (i) expected results for its fourth fiscal
quarter and fiscal year ended June 30, 1996, (ii) its liquidity situation and
(iii) that it was unable to file its Annual Report on Form 10-K within the
90-day period prescribed by the Securities Exchange Act of 1934, as amended.
The Company announced that net sales for the quarter ended
June 30, 1996 were $16.2 million compared to $21.6 million for the same quarter
of the prior year, and that the net loss for the fourth quarter of 1996 was
$865,000, or $0.14 per share compared to net income of $921,000, or $0.15 per
share, for the same period in 1995. The Company also reported that net sales for
the year ended June 30, 1996 were $78.4 million compared to $67.9 million for
the prior fiscal year, and that the net loss for the 1996 fiscal year was $8.4
million, or $1.40 per share, compared to pro forma net income for the 1995
fiscal year of $1.8 million, or $0.38 per share. The Company noted that results
in the fourth quarter and during much of the fiscal year reflect the continuing
effects of customer attrition related to provisioning time and operating system
transition issues, but added that it had been working throughout the past nine
months to correct these problems and believes that it has made significant
progress.
The Company funded its operations during the year ended June
30,1996 with the remaining proceeds of its initial public offering which closed
in March 1995, through advances under its revolving credit facility and through
operating cash flows. By December 31, 1995, the remaining funds from the initial
public offering had been expended, and, due to operating losses sustained in the
second half of fiscal 1996 and a declining revenue base, the Company reached its
maximum borrowing capacity under its revolving credit facility. An additional
source of liquidity during this time period has been an extension of payment
terms from the Company's major suppliers, although there can be no assurance
that any such extensions will be granted in the future. The Company's borrowing
capacity under this credit facility continues to decline as a result of
operating losses, a decline in the revenue base and the exclusion of certain
receivables from the criteria of eligible receivables. At current levels of
operations and with a declining borrowing base, the Company must seek additional
capital and continued concessions from its vendors and must continue to reduce
expenses to bring them in line with current levels of revenues.
The Company currently is negotiating with (i) potential
investors to secure between $2.5 million and $3.5 million from a private
placement of the Company's convertible preferred stock and (ii) its lenders to
increase availability under its revolving credit facility, amend certain
financial covenants and waive certain events of default. There can be no
assurance, however, that the Company will be successful in securing such
financing or such amendments to its existing credit facility. In the event the
Company is unsuccessful in achieving these objectives, it will seek an alliance
with a strategic partner, or in the event no such strategic alliance is
accomplished, the Company may be required to seek protection under United States
bankruptcy laws.
As a result of Management's focus on resolving the liquidity
issues described in the foregoing paragraphs, the Company today filed a notice
with the Securities and Exchange
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Commission advising that the Company will be unable to file its Annual Report on
Form 10-K within the 90-day period prescribed by the Securities Exchange Act of
1934, as amended, but expects to make the filing on or before October 13, 1996.
A copy of the Company's press release dated September 30,
1996, which describes the foregoing is filed as Exhibit 99.1 to this Current
Report on Form 8-K and is incorporated herein by reference.
Cautionary Statements
The Company's expectations with respect to operating results
and other matters described in the foregoing paragraphs, the press release filed
as an exhibit to this report and otherwise embodied in oral and written forward
looking statements are subject to the following risks and uncertainties that
must be considered when evaluating the likelihood of the Company's realization
of such expectations:
Attrition Rates - In the event that the Company's attrition
rates continue at the current level either as a result of increased
provisioning times by its underlying carrier, the purchase of poorly
performing traffic, or the inability to properly manage the existing
customer base due to unforeseen difficulties with the NetBase system,
additional charges may be incurred that would affect earnings.
Dependence on Independent Marketing Agents - The Company has a
small internal sales force and obtains a significant majority of its
new customers from the Company's network of independent marketing
agents ("Agents"). The Company's near-term ability to expand its
business depends upon whether it can continue to maintain favorable
relationships with existing Agents and recruit and establish new
relationships with additional Agents. Should the return to the original
NetBase system not continue to improve the exchange of information
between the Company and its Agents, no assurances can be made as to the
willingness of the existing Agents to continue to provide new orders to
the Company or as to the Company's ability to attract and establish
relationships with new Agents.
Inability to Collect Accounts Receivable - Although the
Company's bad debt rate has improved somewhat in recent months, if it
were not to continue to improve or revert to the fiscal 1996 rate,
either as a result of the purchase of poorly performing traffic or the
inability of the Company to properly manage existing customer
receivables, additional charges may be incurred that would affect
earnings. In addition, the inability to collect past due receivables
could have a material adverse impact upon the Company's liquidity and
cash flow.
Dependence on AT&T and Other Facilities-Based Carriers - The
Company does not own transmission facilities and currently depends
primarily upon AT&T and, to a lesser extent, upon Sprint to provide it
with the telecommunications services that it resells to its customers
and the detailed information upon which it bases its customer billings.
The Company's near-term ability to expand its business depends upon
whether it can continue to maintain favorable relationships with AT&T
and Sprint. Although the Company believes that its relations with AT&T
and Sprint are good and should remain so with
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continued contract compliance, the termination of the Company's current
contracts with either AT&T or Sprint or the loss of the
telecommunications services that the Company receives from AT&T or
Sprint could have a material adverse effect on the Company's results of
operations and financial condition.
This dependence on the Company's primary carrier further
manifested itself during the quarter ended March 31, 1996, as continued
delays in provisioning (activating new customers) by the carrier
continued to result in a backlog of customers who would otherwise have
been activated on the Company's long distance and billing services.
Although the carrier has agreed to take certain steps to decrease the
provisioning time which has resulted in an elimination of the
provisioning backlog, there can be no assurance that similar delays
will not occur in the future.
Carrier Commitments - The Company has significant commitments
with its two primary carriers to resell long distance services. The
Company's contracts with its carriers contain penalty clauses which
could materially and adversely impact the Company should the Company
incur a shortfall in meeting its commitments. The Company currently is
in a shortfall situation with both of its primary carriers. Although
the Company has from time to time failed to meet its commitment levels
under a particular contract and in each case been able to negotiate a
settlement with the carrier which resulted in no penalty being incurred
by the Company, there can be no assurance that the Company will be able
to reach similar favorable settlements with its carriers currently or
in the event that the Company should continue to fail to meet its
commitments.
In recent years, AT&T, MCI Communications Corporation ("MCI")
and Sprint have consistently followed one another in pricing their long
distance products. If MCI and Sprint were to lower their rates for long
distance service and AT&T did not adopt a similar price reduction,
adverse customer reaction could affect the Company's ability to meet
its commitments under the AT&T contract which could have a material
adverse affect on the Company's financial position and results of
operations.
Developmental and Transitional Problems with NetBase - NetBase
Plus(R), the Company's second generation customer management system,
was not able to meet the operating requirements of the Company. As a
result, in the third quarter of fiscal 1996 the Company began reverting
to an enhanced version of the original NetBase operating system.
Although the Company successfuly completed the reversion in the fourth
quarter of fiscal 1996 and has made continued improvements to the
operating system, to the extent that the Company experiences
significant growth, the existing NetBase operating system may reach
technical limitations and hinder reporting visibility to management as
well as cause a decline in customer service, thereby negatively
impacting attrition levels and, therefore, results of operations.
Relationships With State Regulatory Agencies - The Company's
intrastate long distance telecommunications operations are subject to
various state laws and regulations, including prior certification,
notification or registration requirements. The Company must generally
obtain and maintain certificates of public convenience and necessity
from regulatory authorities in most states in which it offers service.
The Company presently
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is responding to consumer protection inquiries from seven states.
Management believes these inquiries will be resolved satisfactorily,
although settlement offers may be made or accepted in instances in
which it is determined to be cost effective. During the quarter ended
March 31, 1996, the Company recorded an accrual for such estimated
settlements. No assurances can be made however, that additional states
will not begin inquiries or that the current accrual will be sufficient
to provide for existing or future settlements. Failure to resolve
inquiries satisfactorily or reach a settlement with the regulatory
agencies could, in the extreme, result in the inability of the Company
to provide long distance service in the jurisdiction requiring
regulatory certification. Any failure to maintain proper certification
in jurisdictions in which the Company provides a significant amount of
intrastate long distance service could have a material adverse effect
on the Company's business.
Item 7. Financial Statements and Exhibits
(c) Exhibits.
The following documents are filed as exhibits to this report in
accordance with Item 601 of Regulation S-K.
99.1 Press release of EqualNet Holding Corp. dated September 30, 1996.
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SIGNATURES
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 hereunto duly authorized.
EQUALNET HOLDING CORP.
Dated: September 30, 1996 By: /s/ Michael L. Hlinak
-------------------------
Michael L. Hlinak
Senior Vice President, Chief Operating Officer
and Chief Financial Officer
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INDEX TO EXHIBITS
Exhibit
Number
- -------
99.1 Press release of EqualNet Holding Corp. dated
September 30, 1996.
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EXHIBIT 99.1
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EQUALNET HOLDING CORP. ANNOUNCES FOURTH QUARTER AND YEAR-END RESULTS
-Delays 10K Filing -
HOUSTON, Texas, September 30, 1996 -- EqualNet Holding Corp.
(Nasdaq: ENET), today announced results for the fourth quarter and year ended
June 30, 1996.
Net sales for the quarter were $16.2 million compared to $21.6
million for the same quarter last year. The net loss for the quarter was
$865,000, or $0.14 per share, compared to net income of $921,000, or $0.15 per
share, for the same period in 1995.
For the year ended June 30, 1996, net sales were $78.4 million
compared to $67.9 million for the prior fiscal year. The net loss for the year
was $8.4 million, or $1.40 per share, compared to pro forma net income of $1.8
million, or $0.38 per share for the same period in 1995. The loss for the fiscal
year reflects special charges which were incurred during the second and third
fiscal quarters totaling $11.2 million.
The Company noted that results in the fourth quarter and
during much of the fiscal year reflect the continuing effects of customer
attrition related to provisioning time and operating systems transition issues.
The Company has been working throughout the past nine months to correct these
problems and believes that it has made significant progress.
"We have experienced a reduction in provisioning time over the
last two quarters, which has resulted in fewer customer cancellations," noted
Zane Russell, EqualNet's Chairman and CEO. "As well, our transition back to an
enhanced version of our original NetBase operating system is complete, allowing
us to better support our sales force and to provide customers
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with improved service. We have resumed agent order activity, which was hampered
by our systems transition, and the result is that in the beginning of our first
fiscal quarter we are retaining more of our current customers while also adding
new customers and getting back to what made us successful to start with."
Mr. Russell continued, "We are also pursuing a number of other
strategies to improve revenues and earnings, including a joint venture which
will enhance our product line by offering specialty long-distance calling cards;
improving the quality of the Company's agent sales force; and transferring our
smallest customers to a LEC billing system whereby monthly statements are billed
by the local phone service operator, thus improving collection efforts, reducing
customer attrition and reducing billing expenditures."
The Company funded its operations during the year ended June
30, 1996 with the remaining proceeds of its initial public offering which closed
in March 1995, through advances under its revolving credit facility and through
operating cash flows. By December 31, 1995, the remaining funds from the initial
public offering had been expended, and, due to operating losses sustained in the
second half of fiscal 1996 and a declining revenue base, the Company began
reaching its maximum borrowing capacity under its revolving credit facility. An
additional source of liquidity during this time period has been an extension of
payment terms from major suppliers, though there can be no assurance that such
extensions will be granted in the future. The Company's borrowing capacity under
its credit facility continues to decline as a result of operating losses, a
decline in the revenue base, and the exclusion of certain receivables from the
criteria of eligible receivables. At current levels of operations and with a
declining borrowing base, the Company must seek additional capital and continued
concessions from its vendors and continue to reduce expenses to bring them in
line with current levels of revenues. The Company currently is negotiating with
(i) potential investors to secure between $2.5 million and $3.5 million from a
private placement of the Company's convertible preferred stock and (ii) its
lenders to increase availability under its revolving credit facility, amend
certain financial covenants and waive certain events of default. There can be no
assurance, however, that the Company will be successful in securing such
financing or such amendments to its existing credit facility. In the event the
Company is unsuccessful in achieving these objectives, it will seek an alliance
with a strategic partner, or in the event no such strategic alliance is
accomplished, the Company may be
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required to seek protection under United States bankruptcy laws.
As a result of management's focus on resolving the liquidity
issues, the Company plans to file a notice with the Securities and Exchange
Commission advising that the Company will be unable to timely file its Annual
Report on Form 10-K and expects to make the filing on or before October 13,
1996.
This press release contains forward-looking information that
is subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected. Some of the more significant factors
noted in the Company's Reports on Forms 8-K, 10-K and 10-Q include the ability
to reduce provisioning times and related customer attrition, the ability to
improve the Company's operating systems and the ability to attract and retain
new customers.
EqualNet is a nationwide long-distance company offering
discounted major carrier transmission services to businesses. The Company's core
strategy focuses on managing growth while remaining adaptable in the highly
competitive long distance industry.
EQUALNET HOLDING CORP.
CONSOLIDATED STATEMENTS OF INCOME
Dollars in Thousands
Three Months Ended Twelve Months Ended
June 30, June 30,
1996 1995 1996 1995
Revenues $16,176 $21,591 $78,355 $67,911
Cost of Revenues 11,572 16,576 61,807 54,655
------- ------- ------- -------
4,604 5,015 16,548 13,256
Selling, general and
administrative expenses 3,392 2,934 13,719 8,800
Depreciation and amortization 2,084 940 5,934 1,492
Write down of long term assets - - 6,883 -
------- ------- ------- -------
Operating income (872) 1,141 (9,988) 2,964
Other income (expense)
Interest income - 454 56 498
Interest expense (240) (303) (680) (527)
Miscellaneous (155) (34) (465) (64)
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(395) 117 (1,089) (93)
Income before federal
income taxes (1,267) 1,258 (11,077) 2,871
Provision for federal
income taxes (402) 337 (2,660) 1,120(a)
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Net income (loss) $ (865) $ 921 $(8,417) $ 1,751(b)
======= ======= ======== =======
Net income (loss) per share $ (0.14) $ 0.15 $ (1.40) $ 0.38(b)
======= ======= ======= =======
Weighted average number of
shares outstanding 6,002 6,009 6,017 4,618
======== ======= ======== =======
(a) From July 1, 1992, through March 7, 1995, the Company reported for
federal income tax purposes as an S corporation. Accordingly, all taxable
earnings of the Company during that period were taxed directly to the
shareholders of the Company at their individual tax rates. A pro forma
adjustment of $613,000 to reflect the federal and state income taxes as if the
Company were a C corporation is presented for the twelve months ended June 30,
1995 at the Company's effective tax rate of 39%.
(b) Represents pro forma results to reflect the recalculation of tax
expense.
Contact:
Michael Hlinak
Senior Vice President/COO
EqualNet Holding Corp.
(281) 529-4600
OR
Investor Relations:
Howard Zar/Melissa Garelick
Ross Felix
Press: Lee Foley/Jennifer Swanson
Morgen-Walke Associates
(212) 850-5600
