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 AND
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1996.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934.
For the transition period from ________,19__ to _________, 19__.
Commission File Number: 0-25482
EQUALNET HOLDING CORP.
(Exact Name of Registrant as Specified in its Charter)
TEXAS 76-0457803
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1250 WOOD BRANCH PARK DRIVE
HOUSTON, TEXAS 77079
Address of Principal Executive Offices, Including Zip Code
(281) 529-4600
(Registrant's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 and 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 [ ]
There were 6,002,000 shares of the Registrant's $.01 par value common stock
outstanding as of November 11, 1996.
<PAGE>
Part I Financial Information
Item I Financial Statements
EQUALNET HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents ............................................................ $ 381,849 $ 304,685
Accounts receivable, net of allowance for doubtful
accounts of $3,284,886 at June 30, 1996 and $3,869,231 at
September 30, 1996 .......................................................... 14,372,858 12,248,915
Receivable from officers ........................................................ 28,367 28,367
Due from agents, net of allowances of $1,000,000 at June 30,
1996 and September 30, 1996 ................................................. 1,640,808 2,307,982
Prepaid expenses and other ...................................................... 582,052 554,853
Recoverable federal income taxes ................................................ 1,302,595 459,212
Deferred tax assets ............................................................. 696,868 696,868
------------ ------------
Total current assets ........................................................ 19,005,397 16,600,882
Property and equipment
Computer equipment .............................................................. 3,172,950 3,187,758
Office furniture and fixtures ................................................... 1,204,880 1,204,880
Leasehold improvements .......................................................... 1,174,510 1,174,777
------------ ------------
5,552,340 5,567,415
Accumulated depreciation and amortization ....................................... (1,864,068) (2,335,944)
------------ ------------
3,688,272 3,231,471
Customer acquisition costs, net of accumulated amortization of $5,379,338 at
June 30, 1996 and $6,376,493 at September 30, 1996 ................................. 9,019,774 8,037,680
Deferred tax assets ................................................................ 1,531,209 2,334,054
Other assets ....................................................................... 1,351,180 1,204,656
------------ ------------
Total assets ................................................................ $ 34,595,832 $ 31,408,743
============ ============
</TABLE>
See accompanying notes.
2
<PAGE>
EQUALNET HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable ................................... $ 2,057,092 $ 2,185,717
Accrued expenses ................................... 1,080,627 1,223,002
Accrued sales taxes ................................ 912,123 840,024
Brokerage commissions payable ...................... 177,891 278,809
Payable to providers of long-distance services ..... 7,194,856 8,009,281
Current maturities of capital lease obligations .... 90,000 90,000
Revolving line of credit ........................... 10,654,245 7,909,885
------------ ------------
Total current liabilities .............................. 22,166,834 20,536,718
Long term obligations under capital leases ............. 45,000 24,000
Shareholders' equity
Preferred stock (non-voting), $.01 par value,
Authorized shares - 1,000,000 at June 30,
1996 and September 30, 1996 Issued and
outstanding shares - 0 at June 30, 1996 and
September 30, 1996 ............................. -- --
Common stock, $.01 par value, Authorized shares -
20,000,000 at June 30, 1996, and September 30,
1996 , Issued and outstanding shares - 6,002,000
at June 30, 1996, and September 30, 1996 ....... 60,237 60,237
Treasury stock at cost: 21,750 shares at June 30,
1996 and September 30, 1996 .................... (104,881) (104,881)
Additional paid in capital ......................... 19,942,428 19,942,428
Deferred compensation .............................. (335,836) (313,336)
Accumulated deficit ................................ (7,177,950) (8,736,423)
------------ ------------
Total shareholders' equity ............................. 12,383,998 10,848,025
------------ ------------
Total liabilities and shareholders' equity ............. $ 34,595,832 $ 31,408,743
============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
EQUALNET HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1995 1996
------------ ------------
Sales .......................................... $ 23,920,169 $ 13,314,899
Cost of sales .................................. 18,212,061 10,287,564
------------ ------------
5,708,108 3,027,335
Selling, general and administrative expenses ... 3,111,563 3,177,697
Depreciation and amortization .................. 1,090,620 1,850,148
------------ ------------
Operating income (loss) ........................ 1,505,925 (2,000,510)
Other income (expense)
Interest income ............................. 44,740 32
Interest expense ............................ (107,579) (270,277)
Miscellaneous ............................... (4,087) (90,563)
------------ ------------
(66,926) (360,808)
Income (loss) before federal income taxes ...... 1,438,999 (2,361,318)
Provision (benefit) for federal income taxes ... 558,331 (802,845)
------------ ------------
Net income (loss) .............................. $ 880,668 $ (1,558,473)
============ ============
Net income (loss) per share .................... $ 0.15 $ (0.26)
============ ============
Weighted average number of shares .............. 6,023,749 6,002,000
============ ============
See accompanying notes.
4
<PAGE>
EQUALNET HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ................................. $ 880,668 $ (1,558,473)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities
Depreciation and amortization .................. 1,090,620 1,850,148
Provision for bad debt ......................... 242,412 671,344
Equity in loss on investment ................... -- 75,704
Benefit for deferred income taxes .............. -- (802,845)
Loss on sale of assets ......................... -- 341
Compensation expense recognized
for common stock issue ....................... 35,000 22,500
Change in operating assets and
liabilities:
Accounts receivable ......................... 380,392 1,452,599
Due from agents and commissions ............. (1,757,671) (814,698)
Prepaid expenses and other .................. (37,075) 870,582
Other assets ................................ 268,382 (162,025)
Accounts payable and accrued liabilities .... (947,367) 1,114,244
------------ ------------
Net cash provided by operating activities ......... 155,361 2,719,421
INVESTING ACTIVITIES
Purchase of property and equipment ................ (1,663,813) (16,964)
Purchase of customer accounts ..................... (2,489,553) (15,061)
Proceeds from sale of equipment ................... -- 800
------------ ------------
Net cash used in investing activities ............. (4,153,366) (31,225)
FINANCING ACTIVITIES
Proceeds from revolving line of credit ............ 20,822,663 13,290,000
Repayments on revolving line of credit ............ (16,297,610) (16,034,360)
Repayments on capital lease obligations ........... (27,000) (21,000)
------------ ------------
Net cash provided by (used in) financing activities 4,498,053 (2,765,360)
------------ ------------
Net increase (decrease) in cash and equivalents ... 500,048 (77,164)
Cash and equivalents, beginning of period ......... 3,526,543 381,849
------------ ------------
Cash and equivalents, end of period ............... $ 4,026,591 $ 304,685
============ ============
</TABLE>
See accompanying notes.
5
<PAGE>
EQUALNET HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - MANAGEMENT'S REPRESENTATION
The consolidated financial statements included herein have been
prepared by the management of EqualNet Holding Corp. (the
"Company") without audit. Certain information and note
disclosures normally included in the consolidated financial
statements prepared in accordance with generally accepted
accounting principles have been omitted. In the opinion of the
management of the Company, all adjustments considered necessary
for fair presentation of the consolidated financial statements
have been included and were of a normal recurring nature, and the
accompanying consolidated financial statements present fairly the
financial position of the Company as of September 30, 1996, and
the results of operations and cash flows for the three months
ended September 30, 1995 and 1996.
It is suggested that these consolidated financial statements be
read in conjunction with the consolidated financial statements
and notes for the three years ended June 30, 1996, included in
the Company's Annual Report on Form 10-K for the year ended June
30, 1996, as amended, which was filed with the Securities and
Exchange Commission. The interim results are not necessarily
indicative of the results for a full year.
NOTE 2 - INCOME TAXES
The Company has recorded an income tax benefit at the federal
statutory rate of 34%. The Company has recorded no tax benefit
for state and local taxes.
NOTE 3 - CARRIER COMMITMENTS
At September 30, 1996 the Company had an agreement with AT&T
Corp. ("AT&T") which expires in November 1998. The agreement
covers the pricing of services and establishes minimum
semi-annual revenue commitments ("MSARCs") which must be met to
receive the contractual price and to avoid shortfall penalties.
The Company's commitment to AT&T is segregated into components
differentiated by the type of traffic. At September 30, 1996, the
Company was $7.1 million below the cumulative MSARC.
In the past, management has been able to renegotiate the
multi-year agreement approximately every six months, and the
Company believes that it will be able to continue to renegotiate
the agreement. Historically, the Company has been able to
negotiate a settlement with the carrier which has resulted in no
penalty being incurred by the Company, and, therefore, no amount
has been accrued in the financial statements for any failure to
meet the MSARCs. No assurances can be made that the Company will
be able to reach similar favorable settlements with the carrier
should it continue to fail to meet its commitment.
NOTE 4 - DEBT
At September 30, 1996, the Company had a $12.5 million revolving
line of credit with a bank which will expire December 1, 1997
with an effective interest rate equal to the bank's prime rate
plus three percent. The Company had a working capital deficit of
$3.9 million at September 30, 1996. This reflects the
consequences of $7.9 million of borrowings under the line of
credit being reclassified as a current liability as a result of
covenant violations at September 30, 1996 and anticipated future
covenant violations. While the Company does not believe it is
probable that it will be required to repay the outstanding
borrowings in the next twelve months, generally accepted
accounting principles require that an obligation in violation of
covenants which allow the lender to demand immediate payment be
classified as a current liability at September 30, 1996.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
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 is presently responding to consumer protection inquiries
from eight states. The inquiries do not state specific damage
amounts, and the potential liability, if any, is not
determinable. The Company 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 year ended June 30, 1996, the Company
recorded an accrual of $250,000 for such estimated settlements.
No assurances can be made however, that the inquiries can be
settled for amounts within the amount currently accrued, that
additional states will not begin inquiries or that the current
accruals 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 could have a
material adverse effect on the Company's business.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales for the three months ended September 30, 1996 decreased 44.3% to $13.3
million compared with sales of $23.9 million for the same period of the prior
year. Gross margin decreased 47.0% to $3.0 million compared to $5.7 million for
the same period of the prior year. The Company recorded a $2.4 million loss
before taxes compared with net income of $1.4 million for the same period in the
prior year, a decrease of 264.1%.
The following table sets forth for the fiscal periods indicated the percentages
of total sales represented by certain items reflected in the Company's
consolidated statements of income:
THREE MONTHS ENDED
SEPTEMBER 30,
1995 1996
----- -----
Total sales .......................................... 100.0% 100.0%
Cost of sales ........................................ 76.1% 77.3%
----- -----
Gross margin ......................................... 23.9% 22.7%
Selling, general and administrative .................. 13.0% 23.8%
Depreciation and amortization ........................ 4.6% 13.9%
----- -----
Operating income (loss) .............................. 6.3% (15.0%)
Other income (expense)
Interest income ...................................... 0.2% 0.0%
Interest expense ..................................... (0.5%) (2.0%)
Miscellaneous ........................................ -- (0.7%)
----- -----
(0.3%) (2.7%)
Income (loss) before federal income taxes ............ 6.0% (17.7%)
Provision (benefit) for federal income taxes ......... 2.3% (6.0%)
----- -----
Net income (loss) .................................... 3.7% (11.7%)
===== =====
7
<PAGE>
SALES
The Company experienced a decrease in revenues in the three months ended
September 30, 1996 of 44.3% to $13.3 million compared to $23.9 million for
the comparable period of the prior year. This decrease was due primarily to
a decrease in the number of customer accounts and a corresponding decrease
in billable minutes. Total billable minutes for the quarter ended September
30, 1996 decreased 45.1% to 42.5 million minutes from 77.4 million minutes
for the same period of the prior year. The decline in revenues and billable
minutes was the result of an increased rate of attrition for existing
customers and a decline in order activity beginning in January 1996.
COST OF SALES
The cost of sales for the three months ended September 30, 1996 decreased
43.5% to $10.3 million compared to $18.2 million for the comparable period
of the prior year. This decrease was primarily attributable to a decrease in
sales. Cost of sales as a percentage of sales increased to 77.3% for the
three months ended September 30, 1996, from 76.1% for the corresponding
period in the previous year. This increase is primarily the result of an
increase in billing expense and bad debt expense as a percentage of sales.
Billing expense as a percentage of sales increased as a result of the
Company beginning to bill a portion of its customers through Local Exchange
Carriers ("LECs"). The cost of billing through LECs is generally greater
than directly billing customers through independent billing companies;
however, the Company believes that by billing customers directly through the
LECs, savings will be recognized by decreased bad debt expense and reduced
customer attrition. In addition, because the majority of customer service is
performed by the LECs, the Company believes it will be able to reduce
overhead related to the cost of servicing these customers directly.
Bad debt expense as a percentage of sales increased for the three months
ended September 30, 1996 to 5.0% of sales as compared to 1.0% of sales for
the comparable period in the previous year. The increase is primarily the
result of the Company's decision to switch from commissioned sales, in which
the sales agents shared bad debt expense with the Company, to purchased
accounts, in which the Company had full exposure on uncollectible accounts.
This increase in bad debt expense was partially offset by a decrease in
commission expense as a percentage of sales to 3.5% for the first quarter of
fiscal 1997 from 7.3% for the first quarter of fiscal 1996. In the fourth
quarter of fiscal 1996, the Company discontinued the purchase order program
and currently is relying on commissioned sales to provide orders to the
Company.
The Company's cost of long distance (which is a component of cost of sales)
decreased as a percentage of sales to 63.2% from 65.0% for the quarters
ended September 30, 1996 and 1995, respectively. The decrease is primarily
the result of the Company reducing its cost of long distance by negotiating
more favorable rates and amending the AT&T contract effective in June 1996.
8
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 2.1% to $3.2 million
for the three months ended September 30, 1996, from $3.1 million for the
same period of the prior year. Selling, general and administrative expenses
increased as a percentage of sales to 23.8% for the three months ended
September 30, 1996 from 13.0% for the same period of the prior year. The
increase in selling, general and administrative expenses as a percentage of
sales relates primarily to an increase in lease expense and professional
fees, partially offset by a decrease in salary expense and administrative
costs. Lease expense increased approximately $190,000 in the first quarter
of fiscal 1997 compared to the same period in fiscal 1996. The increase was
the result of the addition of two significant leases in January 1996, one of
which related to the phone system and the other to computer equipment.
Professional fees increased approximately $95,000 in the first quarter of
fiscal 1997 compared to the same period in fiscal 1996. The increase in
professional fees related primarily to legal and consulting fees incurred
with respect to the ongoing negotiations with the bank and with respect to
exploring alternatives related to a private placement. The increases in
lease expense and professional fees were partially offset by a decrease in
salary and related expenses of $130,000 for the quarter ended September 30,
1996 as compared to the quarter ended September 30, 1995. Staffing decreased
from 195 employees at September 30, 1995 to 173 employees at September 30,
1996. In addition, the Company reduced administrative expenses $106,000 in
the first quarter of fiscal 1997 compared to the same period in fiscal 1996
as part of overall cost reduction efforts.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 69.6% to $1.9 million for the
quarter ended September 30, 1996 as compared to $1.1 million for the same
period in the previous year. Depreciation and amortization as a percentage
of sales increased to 13.9% for the first quarter of fiscal 1997 from 4.6%
for the corresponding period of the prior year. The increase is a result of
the significant purchases of customer accounts throughout fiscal year 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $2.7 million in cash flow from operations for the
three months ended September 30, 1996, compared to $155,000 for the same
period of the prior year. Cash flow from operations was negatively affected
in the first quarter of fiscal 1996 primarily as a result of a change in the
Company's policy related to the timing of the payment of commissions.
Beginning in fiscal year 1996, the Company began paying commissions based
upon revenues billed whereas prior to that time, commissions were paid as
revenues were collected. In addition, cash flow from operations was aided in
the first quarter of fiscal 1997 by the decline in accounts receivable and
the increase in accounts payable and accrued liabilities.
Cash used in investing activities totaled $31,000 for the three months ended
September 30, 1996, compared to $4.2 million for the same period of the
previous year. Cash used in investing activities in the first quarter of
fiscal 1996 included the acquisition of $2.5 million
9
<PAGE>
of customer accounts associated with the purchased order program and the
costs associated with both the Company's relocation to expanded facilities
and improvements to the NetBase Customer Management System which totaled
$1.7 million.
Cash used in financing activities was $2.8 million for the three months
ended September 30, 1996, substantially all of which related to net
repayments on borrowings under the Company's line of credit. Cash provided
by financing activities totaled $4.5 million for the three months ended
September 30, 1995, substantially all of which related to net borrowings
under the Company's line of credit.
In early 1994, the Company determined that its treatment and disbursement of
sales taxes was not being properly administered and engaged an outside tax
compliance firm to assist in the resolution of the matter with various
states and other regulatory and taxing authorities. The Company has accrued
liabilities for the resolution of this matter totaling $757,000 at September
30, 1996. The improper treatment of sales taxes arose from the Company's
failure to remit the sales tax due to the various taxing authorities on the
incremental component of revenue in excess of the cost of the underlying
service (for which taxes were properly paid). While there can be no
assurance, the Company believes that the amount accrued is adequate for the
satisfaction of this tax liability, including any interest payable, and that
the Company can negotiate payment terms which would not significantly impact
liquidity. The Company anticipates that the tax issues and payment terms
will be resolved during fiscal year 1997. No assurances can be made,
however, that the Company will be able to negotiate favorable terms with the
taxing authorities and a request for immediate payment could have a material
adverse effect on the Company's financial condition.
The Company is currently negotiating with its lenders to maintain
availability under its revolving credit facility, to amend certain financial
covenants and waive past financial covenant default. The significant special
charges incurred in fiscal year 1996 resulted in decreased earnings, equity
and tangible net worth so that in March 1996 the Company was in default with
respect to certain loan covenants of its credit agreement. The credit
agreement was amended in June 1996 with certain of the amended covenants
having increasing ratios over time. The Company was not in compliance with
the financial covenants at September 30, 1996, and will need to obtain from
its lender waivers or the lender could accelerate all amounts due under the
10
<PAGE>
loan agreement, and amendments to its loan agreement in order to cure
default. If the situation is not resolved, the Company's ability to continue
as a going concern will be in doubt. There can be no assurance that the
Company will be successful in securing such amendments. In addition, the
Company is negotiating with its carriers for extension of payment terms;
however, there can be no assurance that the Company will be successful in
that regard. In the event the Company is unsuccessful in achieving any one
or a combination of these objectives sufficient to meet the Company's
liquidity needs, 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.
11
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time the Company is involved in what it believes
to be routine litigation or other legal proceedings that may
be considered as part of the ordinary course of its business.
Currently the Company is involved in litigation filed in
August, 1995 under Cause No. 95-CH-0142 in the Circuit Court
of the Seventh Judicial Circuit of Sangamon County, Illinois
brought by the Illinois Attorney General under that state's
Consumer Fraud and Deceptive Business Practices Act, seeking
injunctive relief, attorneys fees and civil penalties in the
amount of $50,000 for each violation of that Act. The Company
is also involved in litigation filed in February, 1996 under
Cause No. IJ96-1153 in the Chancery Court of Pulansky County,
Arkansas, 1st Division, brought by the Arkansas Attorney
General under that state's Deceptive Trade Practices Act
seeking injunctive relief, attorneys fees, restitution to
consumers and civil penalties in the amount of $10,000 for
each violation of the Act. The Company is also involved in
litigation filed in February, 1996 in the Fourth Judicial
District of the State of Idaho in and for the County of Ada
under Cause No. CV-DC-9600809D brought by the Idaho Attorney
General under that state's Consumer Protection Act, Telephone
Solicitation Act and Rules of Telephone Solicitations seeking
injunctive relief, restitution to consumers, attorneys fees
and civil penalties in the amount of $5,000 for each violation
of either the Consumer Protection or Telephone Solicitation
Acts. The Company has also received and responded to a civil
investigative demand from the Kansas Attorney General, and has
reached a settlement agreement with the Safety & Enforcement
Division of the California Public Utility Commission, which
agreement is awaiting formal approval of the Public Utility
Commission. Each of these matters allege that the Company has
received an excessive number of customer complaints that
long-distance service was switched to EqualNet without the
customer's knowledge or informed consent, with remedies being
sought under the deceptive trade practices-consumer protection
statutes of these states. While the Company acknowledges that
some customers may not fully understand the technical
distinction between being a customer of one of the Company's
underlying carriers and being a customer of EqualNet with all
network processes being handled by those same underlying
carriers, the Company vigorously denies that it has engaged in
any program or pattern of wrongfully switching customers'
long-distance service in violation of state or federal laws.
Although it is not possible at this time to predict with any
degree of certainty the ultimate exposure of the Company in
these matters, the Company does not believe that the outcome
of any of these proceedings will have a material adverse
effect on either the Company's results of operations or
financial condition. See Note 5 to the financial statements in
Item 1 hereof.
12
<PAGE>
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
At September 30, 1996, the Company was not in compliance with
certain of the financial convenants of the loan agreement with
its principal lender, including (i) Tangible Debt to Net Worth
ratio of not more than 8.0 to 1.0 and (ii) Debt to EBITDA
ratio of not more than 12.25 to 1.0. To have been in
compliance with all financial covenants at September 30, 1996,
a reduction of $2.0 million in the net loss for the twelve
months ended September 30, 1996 would have been required.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
CAUTIONARY STATEMENTS:
The Company's expectations with respect to operating results
and other matters described in this Quarterly Report on Form
10-Q, 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 experiences
excessive attrition rates 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 customer base due to unforeseen difficulties with
the NetBase 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"). 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. 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 poor
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.
13
<PAGE>
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 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 service and billing. Although the carrier has
taken 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 that 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 has been able to
negotiate a settlement with the carrier which resulted in no
penalty being incurred by the Company, there can be no
assurances 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 the
Company's financial position and results of operations.
DEVELOPMENTAL 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
14
<PAGE>
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 successfully 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 is
presently responding to consumer protection inquiries from
eight 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 of $250,000 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 6. Exhibits and Reports on Form 8-K
a. Exhibits
27.1 Financial Data Schedule
b. Reports on Form 8-K
On September 30, 1996, the Registrant filed a Current
Report on Form 8-K with the Securities and Exchange
Commission, pursuant to which it disclosed that it had
issued a press release the same day 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 timely file
its Annual Report on Form 10-K within the 90-day
period prescribed by the Securities Exchange Act of
1934, as amended.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
EQUALNET HOLDING CORP.
Date November 13, 1996 /S/ ZANE D. RUSSELL
Zane D. Russell
Chairman of the Board and
Chief Executive Officer
Date November 13, 1996 /S/ MICHAEL L. HLINAK
Michael L. Hlinak
Senior Vice President and
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF EQUALNET HOLDING CORP.
AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 304,685
<SECURITIES> 0
<RECEIVABLES> 16,118,146
<ALLOWANCES> 3,869,231
<INVENTORY> 0
<CURRENT-ASSETS> 16,600,882
<PP&E> 5,567,415
<DEPRECIATION> 2,335,944
<TOTAL-ASSETS> 31,408,743
<CURRENT-LIABILITIES> 20,536,718
<BONDS> 0
0
0
<COMMON> 60,237
<OTHER-SE> 10,787,788
<TOTAL-LIABILITY-AND-EQUITY> 31,408,743
<SALES> 13,314,899
<TOTAL-REVENUES> 13,314,899
<CGS> 10,287,564
<TOTAL-COSTS> 10,287,564
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 671,344
<INTEREST-EXPENSE> 270,277
<INCOME-PRETAX> (2,361,318)
<INCOME-TAX> (802,845)
<INCOME-CONTINUING> (1,558,473)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,558,473)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
