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): JULY 7, 1997
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 July 18, 1997, EqualNet Holding Corp. (the "Company") issued a press
release announcing that it had secured new financing to replace its existing
working capital facility.
A copy of the Company's press release dated July 18, 1997 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:
NO ASSURANCE OF ADDITIONAL NECESSARY CAPITAL - The Company continues to
pursue financing of between $1.0 million and $3.0 million in debt or equity.
If the proposed business combination between the Company and Cherry
Communications Inc. ("Cherry") described in the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission July 10, 1997 is
consummated, the Company intends to seek these additional funds as part of a
larger refinancing for the combined company. If the proposed business
combination is not consummated, or if the Company is unable to obtain funds
sufficient to meet its liquidity needs, it will be necessary to seek an
alliance with a strategic partner other than Cherry or, in the event no such
strategic alliance is accomplished, the Company may be required to seek
protection under United States bankruptcy laws.
ATTRITION RATES - In the event that the Company experiences attrition
rates in excess of those anticipated 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 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 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
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orders to the Company or as to the Company's ability to attract and
establish relationships with new Agents.
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, through its contract with The Furst
Group, to provide 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 compliance with contract
and payment terms, 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.
CARRIER COMMITMENTS - The Company has significant commitments with its
primary carrier to resell long distance services. The Company's contract
with its carrier contains clauses that could materially and adversely impact
the Company should the Company incur a shortfall in meeting its commitments.
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 assurances that the Company will be able to
reach similar favorable settlements with the carrier in the event that the
Company should continue to fail to meet its commitment.
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.
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 eleven 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 year ended June 30, 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
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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.
DEFERRED INCOME TAXES - The Company had deferred tax assets totaling $3.0
million at March 31, 1997. Financial Accounting Standards Board Statement
No. 109, "Accounting for Income Taxes", allows for the recognition of
deferred tax assets by considering, among other things, the ability of the
Company to generate future taxable income. A valuation allowance is required
to reduce tax assets to their expected realizability if it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Statement 109 explicitly provides that reaching a conclusion that
a valuation allowance is not required is difficult when there is negative
evidence such as cumulative losses in recent years. It is anticipated that
the Company will be in a cumulative loss position at June 30, 1997.
Accordingly, sufficient positive evidence of the ability to generate future
taxable income will be required to counteract negative evidence, the
cumulative losses, in order to support a conclusion that a valuation
allowance for the full amount of the recorded deferred tax assets is not
required. It is probable that the Company will not be in a position to
provide sufficient positive evidence to avoid recording a valuation
allowance for the full amount of the deferred tax assets. The recording of a
$3.0 million valuation allowance, while a non-cash impact, would have a
material adverse effect on recorded operating results of the Company.
VOLATILITY OF SECURITIES PRICES - Historically, the market price of the
Common Stock has been highly volatile. During the last two quarters of
fiscal 1996 and throughout fiscal 1997, the closing market price for the
Common Stock as reported by The Nasdaq Stock Market has ranged from a high
of $10 per share to a low of $ 5/8 per share. There can be no assurance that
the market price of the Common Stock will remain at any level for any period
of time or that it will increase or decrease to any level. Changes in the
market price of the Common Stock may bear no relation to EqualNet's actual
operational or financial results.
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 July 11, 1997.
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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: July 21, 1997 By: /s/ ZANE RUSSELL
Zane Russell
Chairman of the Board, President and
Chief Executive Officer
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INDEX TO EXHIBITS
Exhibit
NUMBER EXHIBIT
99.1 Press release of EqualNet Holding Corp. dated
July 18, 1997.
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EXHIBIT 99.1
EQUALNET SECURES WORKING CAPITAL FACILITY
HOUSTON, Texas, July 18, 1997 -- EqualNet Holding Corp. (Nasdaq:ENET), a
telecommunications company offering discounted long distance services throughout
the U.S., today announced that it had secured new financing to replace its
existing $7.5 million working capital facility, which expired July 1, 1997. The
new financing arrangement has a maximum capacity of $15 million based on the
level of the Company's accounts receivable. Currently, the Company is eligible
to finance $5.0 million under the new facility and the annual effective interest
rate of amounts financed under this arrangement is approximately prime plus
4.5%.
Mr. Zane Russell, EqualNet's Chairman and Chief Executive Officer, said,
"We are particularly pleased that the new facility will increase our potential
borrowing capacity and has virtually no restrictive covenants. With the
commitment of this new capital facility behind us, we can continue working
toward the improvement of operations and the previously announced proposed
merger with Cherry Communications."
EqualNet is a nationwide telecommunications company offering discounted
major carrier long distance and other services. EqualNet's core strategy focuses
on building relationships with customers and offering a wide range of telephone
and data transmission products and services that meet the needs of small
business consumers.
This press release includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical fact included in this press release, including
without limitation, EqualNet's business strategy, plans and objectives, are
forward-looking statements. Although EqualNet believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. Factors that could
cause actual results to differ materially from EqualNet's expectations include,
without limitation, EqualNet's ability to secure financing on favorable terms,
if at all; its ability to favorably settle pending inquiries from state
regulatory agencies; increases in customer attrition rates; dependence on
independent marketing agents; dependence on third-party carriers for
telecommunications services; increased or continued provisioning delays by its
carriers; changes in government regulation; general economic and competitive
factors, and EqualNet's ability to implement and finance its marketing programs
and other growth strategies. These factors are discussed in EqualNet's Annual
Report on Form 10-K for the year ended June 30, 1996, and its Quarterly Report
for the period ended March 31, 1997 which are on file with the Securities and
Exchange Commission.
