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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM 8-K
ON FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 10, 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: (713) 556-4600
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Exhibit Index Appears on Page 4
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EXPLANATION
This amendment reflects changes to selling, general and administrative
expense, depreciation expense and earnings before interest, taxes,
depreciation, amortization and additional charges for the nine months ended
March 31, 1996, in the financial table.
ITEM 5. OTHER EVENTS
PRESS RELEASE
On May 10, 1996, EqualNet Holding Corp. (the "Company") issued a press
release that contained forward looking statements and announced expected
results for its third fiscal quarter ended March 31, 1996. The Company
announced that net sales for the fiscal quarter ended March 31, 1996, were
$19.2 million, compared to $21.6 million for the same quarter of the previous
fiscal year. The Company attributed the reduction in sales revenue to
difficulties in the transition from its original NetBase operating system to
the NetBase Plus operating system and noted it began reverting to the original
NetBase system late in the third quarter.
The Company reported that it expects earnings before interest, taxes,
depreciation, amortization and additional charges for the third quarter to be
$1,324,786, compared to $1,298,820 in the same quarter of the previous fiscal
year. However, the Company reported that it expects a net loss for the quarter
of $6.4 million, or $1.07 per share, which includes an additional pre-tax
charge of approximately $7.5 million or approximately $1.00 per share on an
after tax basis. This charge relates primarily to a write down of NetBase Plus
assets, revised estimates of uncollectible receivables, additional write-offs
of acquired customer traffic as the result of continued higher than expected
attrition rates, and recognition of allowances for certain contingent
liabilities.
The Company also noted that although the Company's primary underlying
carrier has improved provisioning times in the past 90 days, provisioning
delays have continued to result in customer attrition. Such attrition,
together with the delays in information from the NetBase Plus operating system,
have adversely affected the collection of customer accounts receivable.
A copy of the Company's press release dated May 10, 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 future results of
operations embodied in oral and written forward looking statements made in
connection with the press release filed in this Current Report on Form 8-K 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 rate either as a result of increased
provisioning times by its underlying carrier, the purchase of poor
performing traffic, or the inability to properly manage the existing
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customer base due to transitional difficulties to the NetBase system
from the NetBase Plus system, additional charges that affect
earnings may be incurred.
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"). EqualNet'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 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 - In the event that the
Company's bad debt experience continues at the current rate either as a
result of the purchase of poor performing traffic or the inability of
the Company to properly manage existing customer receivables due to
transitional difficulties from the NetBase Plus system to the NetBase
system, additional charges that affect earnings may be incurred. 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.
EqualNet'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 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 ending 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 on the
Company's service and billing. The carrier has taken certain steps to
decrease the provisioning time; however, no assurances can be made as
to how quickly the remaining backlog will be reduced or 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 that could
materially and adversely impact the
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Company should the Company fail to meet its commitments. The Company
has from time to time failed to meet its commitment levels under
particular contracts and is currently in a shortfall situation with the
AT&T and Sprint contracts; however, the Company has historically been
able to negotiate a settlement with the carrier which resulted in no
penalty being incurred by the Company. No assurances can be made that
the Company will be able to reach similar favorable settlements with
its carriers should it 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 materially
adversely affect the Company.
Inability to Transition Customer Bases Obtained through Acquisition -
As the Company expands its customer base through acquisitions, it may
experience increased attrition as a result of underlying deficiencies
in the acquired customer base and difficulties incurred in connection
with the transition of such customer bases onto the EqualNet operating
system.
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,
the Company began reverting to the original NetBase operating system
late in the fiscal third quarter. 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
impacting attrition levels and therefore results of operations.
Relationships With State Regulatory Agencies - EqualNet'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 is presently responding to consumer protection inquiries from
seven states. Management believes these inquiries will be resolved
satisfactorily, though settlement offers may be made or accepted in
instances where 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
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maintain proper certification 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 May 10, 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: May 10, 1996 By: /s/ Michael L. Hlinak
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Michael L. Hlinak
Senior Vice President
and Chief Financial Officer
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Number
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<S> <C> <C>
99.1 Press release of EqualNet Holding Corp. dated May 10, 1996. 8
</TABLE>
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EXHIBIT 99.1
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Contact: Michael Hlinak
Senior Vice President/CFO
EqualNet Holding Corp.
(713) 510-4600
Investor Relations:
Howard Zar/Melissa
Garelick
Ross Felix
Press: Lee Foley
Morgen-Walke Associates
(212) 850-5600
EQUALNET HOLDING CORP. ANNOUNCES THIRD QUARTER RESULTS
HOUSTON, Texas, May 10, 1996 -- EqualNet Holding Corp. (Nasdaq: ENET)
today announced results for the third quarter ended March 31, 1996.
Net sales for the quarter were $19.2 million compared to $21.6 million
for the same quarter last year. The Company noted that third quarter revenues
have been adversely affected due to reduced marketing efforts by the Company's
independent sales representatives during a period of systems transition.
During the latter part of the third period, the Company began reversion to the
use of its original NetBase operating system in order to obtain timely and
accurate information for accounting purposes, to improve support of its
independent sales agents and to reduce ongoing expenses associated with the
implementation of its current operating system, NetBase Plus. The Company
noted that while the expanded NetBase Plus system offered possible future
enhancements, its usage had adversely affected relations with customers and
independent sales agents. The Company believes that the return to its original
NetBase system, in addition to reducing cash outlays, will improve the
dissemination of accurate information to customers and will enhance customer
relations efforts by its network of independent sales agents for the
foreseeable future.
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The Company reported earnings before interest, taxes, depreciation,
amortization and additional charges for the quarter of $1.3 million, unchanged
from the amount reported in the same quarter last year.
For the quarter, the Company reported a net loss of $6.4 million, or
$1.07 per share, compared to pro forma net income of $.6 million, or $.14 per
share for the comparable period in 1995. The net loss for the quarter reflects
the effects of pre-tax charges of approximately $7.5 million, or $ 1.00 per
share on an after tax basis. The charge relates primarily to the write-down
of the NetBase Plus assets, revised estimates of uncollectible receivables,
additional write-offs of acquired customer traffic as the result of continued
higher than expected attrition rates, and recognition of allowances for certain
contingent liabilities. The net loss for the current period reflects an
effective tax benefit rate of only 19.4%, as a valuation allowance of $1.5
million was recorded for deferred tax assets.
As discussed in the Company's last announcement, the Company experienced
customer attrition arising from the provisioning delays by the Company's
primary underlying carrier. The effects of those provisioning delays continued
to adversely affect operating results during the quarter. Although the carrier
has improved its provisioning times significantly in the past 90 days, the
residual effects of such delays and resultant customer cancellations are still
being felt. Such cancellations, together with the delays in information from
the NetBase Plus operating system, continued to impact collection of customer
accounts receivable.
"The two biggest hurdles faced by EqualNet in the past few quarters have
been the provisioning delays caused by our primary underlying carrier and the
effort to enhance internal operating systems," noted Zane Russell, EqualNet's
Chairman and CEO. "Our primary carrier has made efforts to improve
provisioning times, but more importantly, we believe that it has made a sincere
attempt to accommodate our efforts to transition to the use of Unified Network
Services LLC (UNS), our previously announced joint venture with MetroLink.
Selected initial orders are currently being provisioned on the UNS network in
days rather than weeks, and at attractive margins to the Company."
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Mr. Russell continued, "As a result of a full review of our internal
systems, we decided to utilize an enhanced version of our original NetBase
system for the processing of our customer accounts. Upon careful examination,
we felt we could continue to support our current operations using NetBase. We
would thus be able to offer customers the same services they had enjoyed
previously but at a significant savings to the Company."
Mr. Russell concluded, "We believe that improved provisioning, coupled
with the successful enhancement of our NetBase customer management system, will
combine to contribute to the restoration of favorable operating performance.
We feel strongly that by recognizing the impact of our difficulties in the
recent periods, we have better positioned our Company to achieve such operating
improvements in the future quarters."
This press release contains forward looking statements. While these
statements reflect the Company's best current judgment, they are subject to
risks and uncertainties that could cause actual results to vary. In addition
to the factors noted in Item 5 of the Company's Quarterly Report on Form 10-Q
for the period ended December 31, 1995, these risks are discussed in detail in
the Company's Current Report on Form 8-K filed with the Securities and Exchange
Commission on the date hereof.
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.
(financial table follows)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1995 1996 1995 1996
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<S> <C> <C> <C> <C>
Revenues $ 21,621,137 $ 19,212,135 $ 46,320,334 $ 62,179,037
Cost of Revenues 17,873,498 18,424,661 38,078,895 50,235,498
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3,747,639 787,474 8,241,439 11,943,539
Selling, general and administrative
expenses 2,439,662 3,515,197 5,943,723 10,327,098
Depreciation and amortization 252,398 1,606,498 474,725 3,849,812
Write down of long term assets - 3,182,661 - 6,882,661
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Operating income 1,055,579 (7,516,882) 1,822,991 (9,116,032)
Other income (expense)
Interest income 34,920 11 43,841 55,488
Interest expense (103,472) (196,128) (223,945) (439,629)
Miscellaneous (9,157) (264,830) (29,154) (309,777)
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(77,709) (460,947) (209,258) (693,918)
Income before federal income
taxes 977,870 (7,977,829) 1,613,733 (9,809,950)
Provision for federal income taxes 170,404 (1,547,699) 170,404 (2,258,563)
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Net income (loss) $807,466 $(6,430,130) $1,443,329 $(7,551,387)
============ =========== ============ ===========
Net income (loss) per share $ (1.07) $ (1.25)
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Pro forma adjustment for taxes (1) 201,187 442,815
Pro forma net income $ 606,279 $ 1,000,514
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Pro forma net income per share $ 0.14 $ 0.24
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Weighted average number of
shares 4,462,556 6,023,750 4,151,934 6,023,750
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Earnings before interest, taxes, depreciation,
amortization and additional charges 1,298,820 1,324,786 2,268,562 5,624,003
============ =========== ============ ===========
</TABLE>
(1) 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 to
reflect the federal and state income taxes as if the Company were a C
corporation is presented for the three and nine months ended March 31, 1995
at the Company's effective tax rate of 39%.
