<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO.1 TO FORM 10-Q ON FORM 10-Q/A
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 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 Identi-
Incorporation or Organization) fication Number)
1250 WOOD BRANCH PARK DRIVE
HOUSTON, TEXAS 77079
Address of Principal Executive Offices, Including Zip Code
(713) 510-4600
(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 6,020,182 shares of the Registrant's $.01 par value common stock
outstanding as of May 13, 1996.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Revenues for the three months ended March 31, 1996, decreased 11.1% to $19.2
million compared with revenues of $21.6 million for the same period of the
prior year. Gross margin, which in the three month period ended March 31,
1996, includes special charges of $3.6 million for uncollectible receivables
and $350,000 for certain contingent liabilities, decreased 79.0% to $787,000
compared to $3.7 million for the same period of the prior year. Net loss for
the three months ended March 31, 1996, included a $7.5 million additional
pre-tax charge related to the write down of capitalized costs associated with
a customer service information system that was abandoned, an increase in
allowance for doubtful accounts related to revised estimates of uncollectible
receivables, additional write-offs of acquired customer traffic and
recognition of allowances for certain contingent liabilities, decreased to an
after-tax loss of $6.4 million compared with net income of $807,000 for the
same period in the prior year. Earnings before interest, taxes, depreciation,
amortization and additional charges were $1.3 million for the each of the
three month periods ended March 31, 1996 and 1995 and were $5.6 million for
the nine month period ended March 31, 1996, as compared to $2.3 million for
the same period in the previous year. Additional charges affecting earnings
before interest, taxes, depreciation, amortization and additional charges for
the three and nine month periods ended March 31, 1996, were $3.6 million for
uncollectible receivables, and $700,000 for certain contingent liabilities.
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 operations:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
3/31/95 3/31/96 3/31/95 3/31/96
<S> <C> <C> <C> <C>
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 82.7% 95.9% 82.2% 80.8%
---------------- ---------------- -------------- ---------------
Gross margin 17.3% 4.1% 17.8% 19.2%
Selling, general and administrative expenses 11.3% 18.3% 12.8% 16.6%
Depreciation and amortization 1.2% 8.4% 1.0% 6.2%
Write down of long term assets 0.0% 16.6% 0.0% 11.1%
---------------- ---------------- -------------- ---------------
Operating income (loss) 4.8% (39.2%) 4.0% (14.7%)
Other income (expense)
Interest income 0.2% 0.0% 0.1% 0.1%
Interest expense (0.5%) (1.0%) (0.5%) (0.7%)
Miscellaneous 0.0% (1.4%) (0.1%) (0.5%)
---------------- ---------------- -------------- ---------------
0.3% (2.4%) (0.5%) (1.1%)
Income (loss) before federal income taxes 4.5% (41.6%) 3.5% (15.8%)
Provision (benefit) for federal income taxes 0.8% (8.1%) 0.4% (3.6%)
---------------- ---------------- -------------- ---------------
Net Income (loss) 3.7% (33.5%) 3.1% (12.2%)
================ ================ ============== ===============
Pro forma adjustment for taxes 0.9% 1.0%
Pro forma net income 2.8% 2.1%
================ ==============
</TABLE>
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Revenues
The Company experienced a decrease in revenues in the three months ended March
31, 1996, of 11.1% to $19.2 million compared to $21.6 million for the
comparable period of the prior year and an increase in revenues for the nine
months ended March 31, 1996, of 34.2% to $62.2 million compared to $46.3
million for the comparable period of the previous year. The decrease for the
quarter ended March 31, 1996, as compared to the same quarter of the previous
year was primarily the result of increased customer attrition attributable to
provisioning delays at the Company's primary carrier and from internal
difficulties resulting from the implementation of the NetBase Plus operating
system, both of which led to a decline in billable minutes. Billable minutes
decreased 9.0% to 66.5 million minutes for the quarter ended March 31, 1996,
from 73.1 million minutes for the quarter ended March 31, 1995. Total billable
minutes for the nine months ended March 31, 1996, increased 37.6% to 211.2
million minutes compared to 153.5 million minutes for the same period of the
prior year. The increase for the nine month period was due primarily to an
increase in customer accounts purchased from third parties and marketing
agents and a corresponding increase in billable minutes.
The lower than anticipated revenues for the three months ended March 31, 1996,
were attributable to a number of factors. Specifically, as discussed in the
previous quarter, delayed provisioning time -- the time it takes the Company's
primary underlying long-distance carrier to activate new customers -- while
improving, has continued to depress revenues. Additionally, the conversion to
NetBase Plus, the Company's second generation customer management system, did
not perform as anticipated, leading to delays in providing the Company's
customers with bills on a timely basis and negatively affecting customer
service by delaying the processing of customer credits and refunds. These
conditions kept customer attrition rates at substantially higher than normal
levels. The Company has taken a number of actions to address the problems,
including continuing to work with the carrier to improve provisioning times
and reverting to a modified version of the previously utilized and tested
NetBase operating system to improve accuracy. The Company also finalized the
previously announced joint venture with MetroLink, Inc., Unified Network
Services LLC ("UNS"), which is expected to allow the Company to reduce
provisioning time and, by utilizing the UNS network for a portion of the
Company's traffic, to lower the cost of long-distance to the Company.
Cost of Revenues
The cost of revenues for the three months ended March 31, 1996, increased 3.1%
to $18.4 million compared to $17.9 million for the comparable period of the
prior year. This increase was primarily attributable to additional charges of
$3.6 million for uncollectible receivables, and $350,000 for estimated
settlements on disputed carrier charges and long-distance commitment
shortfalls. As a result of the additional charges, cost of revenues as a
percent of revenue was 95.9% for the quarter ended March 31, 1996, as compared
to 82.7% for the quarter ended March 31, 1995.
The Company's cost of long-distance (which is a component of cost of revenues)
as a percentage of revenues increased to 65.8% for the quarter ended March 31,
1996, as compared to 62.6% for the quarter ended March 31, 1995, and increased
to 64.3% for the nine months ended March 31, 1996, as compared to 63.7% for
the same period of the previous year. The increase in the cost of
long-distance as a percentage of revenues for the three and nine months ended
March 31, 1996, as compared to the same periods in 1995 is primarily due to
carrier charges and long-distance commitment shortfalls.
Commission expense prior to the charge for the agent advance allowance
decreased as a percent of revenue to 4.7% from 14.6% for the three months
ended March 31, 1996 and 1995, respectively, and to 5.4% from 13.1% for the
nine months ended March 31, 1996 and 1995, respectively. The decrease is
primarily the result of the
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Company making a payment to a principle agent to reduce the agent's commission
rate in November 1995, acquisition of customer accounts on which commissions
are not paid and a decrease in the commission percentage payable to agents.
Bad debt expense increased to $3.1 million from $384,000 for the three months
ended March 31, 1996 and 1995, respectively, and to $3.5 million from $674,000
for the nine months ended March 31, 1996 and 1995, respectively. During the
third quarter of fiscal 1996, the Company recorded an additional charge to
uncollectible receivables of $2.6 million related to customer accounts
receivable. A primary contributing factor to the increase in bad debt incurred
by the Company was the result of the shift to more purchased orders on which
the Company had full exposure to uncollectible accounts as compared to the
commissioned orders whereby the agents shared in a substantial portion of the
risk on uncollectible accounts. In addition, the Company's collection efforts
were hindered by the failure of NetBase Plus to produce some of the necessary
information to allow for the most effective method of collection.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, including depreciation and
amortization and the write down of deferred acquisition costs and the NetBase
Plus assets, increased 209% to $8.3 million for the three months ended March
31, 1996, from $2.7 million for the same period of the prior year and
increased 228% to $21.1 million for the nine months ended March 31, 1996, from
$6.4 million for the same period of the previous year. The write down of
deferred acquisition costs was necessitated by continued greater than expected
turnover of acquired customer bases which resulted from difficulties in
billing and servicing the customer accounts. The Company wrote deferred
acquisition costs down an additional $1.0 million in the third quarter of
fiscal 1996. As was previously reported, the Company also took a write down
during the quarter ended December 31, 1995, which consisted of a $3.7 million
non-cash charge to reduce the carrying value of an acquired customer base to
the present value of the expected future cash flows associated with the
underlying customer accounts.
Amortization has also continued to increase substantially when comparing the
three and six month periods ended March 31, 1996 and 1995, because of the
significant increase in purchased accounts and customer base acquisitions.
Depreciation expense has risen over the same periods discussed above as a
result of purchases of furniture, leasehold improvements and computers needed
to support the increase in staff required to manage the Company's growth and
as a result of the significant investment in NetBase Plus. During the quarter
ended March 31, 1996, the Company began reverting from the NetBase Plus
operating system which was implemented in November 1995, to the NetBase
operating system, the Company's previously utilized operating system. As a
result, the Company wrote off approximately $2.2 million in capitalized
software development costs associated with the NetBase Plus system. The
Company fully reverted to utilizing the NetBase operating system in April
1996. The Company expects the reversion to reduce cash outlays that were
required to service, maintain and modify the NetBase Plus system as well as
decrease depreciation expense in the future by approximately $50,000 per
month.
Selling, general and administrative expenses other than depreciation also
increased as a percentage of revenue for the three and nine month periods
ended March 31, 1995 and 1996, from 11.3% to 18.3% and from 12.8% to 16.6%,
respectively. This increase was primarily due to the increased staff necessary
to handle the increased provisioning and customer service activities required
by the growth in sales volume over the comparable nine month periods. However,
the Company reduced staffing in late December 1995 in reaction to declining
order activity. As a result, salary expense was approximately $450,000 less in
the third quarter of fiscal 1996 as compared to the second quarter of fiscal
1996; however, salary expense in total and as a percent of revenue were
<PAGE> 5
substantially higher for the three and nine months ended March 31, 1996, as
compared to the same periods of the preceding fiscal year. Lease expense has
increased as a result of the addition of several substantial leases relating
to computer and office equipment and a new phone system. The new phone system,
acquired in late December 1995, has significantly reduced customer hold times
resulting in a reduction to the Company's long-distance expense of
approximately $20,000 per month.
Liquidity and Capital Resources
The Company generated $218,000 in cash flow from operations for the nine
months ended March 31, 1996, compared to $1.1 million generated for the prior
year's comparable period. The Company's substantial revenue growth resulted in
an increase to $4.6 million from $2.5 million in cash provided by net income
adjusted for non-cash expenses for the first nine months of fiscal year 1996
as compared to the same period in fiscal year 1995. Cash flow from operations
was negatively effected by a change in the Company's policy related to the
timing of payment of commissions. Beginning in fiscal year 1996, the Company
began paying commissions based upon revenue billed while prior to that time,
commissions were paid on revenues collected. In addition, during fiscal 1996,
the Company has settled and paid the majority of the sales taxes due to
various states resulting from an error in the calculation and remittance of
taxes in previous years. A further use of cash was required to satisfy the
Company's federal tax liability paid in the third quarter of fiscal 1996 for
the stub tax period March 7, 1995 through June 30, 1995. These uses of cash
were partially offset by an increase in accrued expenses related to the timing
of payments.
Cash used in investing activities totaled $13.1 million for the nine months
ended March 31, 1996, compared to $3.3 million for the same period of the
previous year. The increase was due primarily to the acquisition of $8.2
million of customer accounts compared with acquisitions of $1.4 million of
customer accounts for the same period in the previous year, the payment of
$710,000 to one of the Company's largest agents December 1995 to reduce such
agent's commission rate, costs associated with leasehold improvements related
to the Company's relocation to expanded facilities and costs of creating and
implementing NetBase Plus. Costs associated with the leasehold improvements
and expanded facilities, and the improvements to NetBase totaled $4.2 million
compared to $2.2 million for the comparable period of the previous year.
Cash provided by financing activities was $9.5 million for the nine months
ended March 31, 1996, generated almost entirely by borrowings under the
Company's line of credit and the sale and leaseback of $1.2 million in assets.
The Telecommunications Act of 1996 (the "Act"), signed into law on February 8,
puts mechanisms in place to remove the barriers that previously kept the
Regional Bell Operating Companies ("RBOC"s) from providing interexchange long
distance services. The Act effectively replaces the 1984 consent decree that
related to the AT&T divestiture and the restriction placed upon the RBOCs in
that decree. The Act contains certain restrictions designed to prevent RBOCs
from using their local exchange position to an unfair competitive advantage,
and opens the door for Interexchange Carriers ("IXCs") to provide local
services. This legislation is the most comprehensive amendment to the area of
communications law since the passage of the Communications Act of 1934;
however, there are still numerous areas of the Act that require the
promulgation of regulations by the Federal Communications Commission before
better interpretation and analysis may be made of the full impact of this
legislation on the Company's business and prospects. The RBOCs have the
potential to be very large, well funded and aggressive competitors in the long
distance industry, and will no doubt actively compete for the Company's long
distance customers. It is impossible to predict at this time with any degree
of accuracy the extent to which the Company may lose market share as a result
of this increased competition. It is also uncertain at this time as to when
and under what circumstances the Company will be able to effectively market
local services as permitted under the Act.
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The Company has significant commitments to 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 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 under AT&T and Sprint contracts. However,
the Company has historically been able to negotiate settlements with its
carriers that resulted in no penalty being incurred by the Company. Should the
Company continue to fail to meet its carrier commitments and be unable to
negotiate settlements with the carriers, the penalties incurred as a result of
such shortfalls could have a material adverse impact upon the Company's
liquidity.
The Company maintains a credit agreement with its principal commercial lender
for a revolving line of credit of up to $25 million. Borrowings under the
agreement are subject to a borrowing base formula tied to eligible accounts
receivable, which at March 31, 1996, supported borrowings of up to $13.3
million. In the Company's monthly cash cycle, cash receipts fluctuate in
relation to the applicable billing dates while cash disbursements experience a
more dramatic increase when the payments to underlying carriers are due.
During this increase in the cash disbursements cycle, the Company approaches
the limits of its borrowing capacity under the line of credit.
On October 12, 1995, the Company entered into an agreement to acquire ALD
Communications, Inc., a California based long-distance company ("ALD"), for
$2.25 million payable in shares of the Company's common stock. Consummation of
the acquisition was subject to certain conditions precedent, including
approvals by regulatory authorities. The agreement provided that any party
could terminate the agreement at any time after March 31, 1996, if the
conditions had not been satisfied and the closing of the transaction had not
occurred. On May 10, 1996, ALD notified EqualNet of its intent to terminate
the agreement and to cease negotiations with EqualNet with respect to the
proposed agreement.
The Company has signed a letter of intent that sets forth a proposed agreement
for the Company to, among other things, purchase the existing customer base of
American Teletronics Long Distance, Inc. ("ATLD") for a purchase price based
upon a multiple of monthly revenue. The purchase price is expected to
approximate $7.7 million. The Company is currently considering alternatives to
financing the ATLD acquisition including, but not limited to, financing
through term debt obtained from outside lenders, a financing arrangement with
a vendor of ATLD for the acquisition of the ATLD accounts, through an increase
in the borrowing base under the Company's existing credit agreement due to
increased receivables when the acquisitions are consolidated, or through a
combination of the above. There can be no assurances the Company will be able
to obtain such financing nor any assurances regarding the viability of the
acquisitions should the Company be unable to obtain additional financing.
In January 1996, the Company entered into a four-year agreement with MCI
Telecommunications Corporation ("MCI") which will allow the Company to offer
an additional long-distance product to its customers. The agreement can be
terminated by either party without penalty before July 15, 1996. If the
Company does not elect to terminate the agreement prior to July 15, 1996, it
will be committed, beginning November 1, 1996, to resell $1.0 million of MCI
long-distance service each month through December 1996 and $1.5 million of MCI
long-distance each month from January 1997 through the expiration of the
agreement on February 1, 2000. Beginning in January 1997, if the Company does
not meet its monthly commitment levels, it must pay to MCI the lesser of (i)
its actual usage charges at standard MCI tariffed rates plus 15% of the unmet
commitment or (ii) the monthly commitment amount. In the event that the
Company terminates the agreement after July 15, 1996, but prior to its
expiration on February 1, 2000, it must pay an early termination fee equal to
15% of the aggregate remaining monthly commitments and repay any installation
credits received by the Company pursuant to the agreement.
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Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.1 Carrier Agreement between MCI
Telecommunications Corporation and
EqualNet Communications, Inc., dated
January 16, 1996. (Confidential
treatment requested for certain
provisions pursuant to Rule 24b-2
under the Securities Exchange Act of
1934.)
10.2 Corporate Guarantee given to AT&T Corp. by
EqualNet Corporation and MetroLink, Inc. on
behalf of Universal Network Services LLC.
b. Reports on Form 8-K
None.
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 July 2, 1996 /s/ Michael L. Hlinak
----------------------
Michael L. Hlinak
Senior Vice President and
Chief Financial Officer
