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 1, 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 2, 1997, EqualNet Holding Corp. (the "Company") and Cherry
Communications Inc. ("Cherry") jointly issued a press release announcing a
proposed business combination.
The Company and Cherry announced that they have entered into a letter of
intent to combine the two companies, subject to negotiation and execution of a
definitive agreement. Cherry is a privately-held, switch-based long distance
provider with domestic and international operations. The proposed business
combination is expected to be structured as a merger and will result in the
shareholders of Cherry receiving in exchange for their shares approximately 91
percent of the combined company. Shareholders of the Company will retain the
remaining nine percent.
The press release stated that upon completion of the proposed combination,
the resulting company will be renamed Cherry Holding Corp. The Company expects
to complete the transaction during the fourth quarter of calendar 1997.
A copy of the Company's press release dated July 2, 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:
UNCERTAINTY OF BUSINESS COMBINATION; REGULATORY APPROVALS - The proposed
business combination between the Company and Cherry is subject to a number of
contingencies, including the ability of the parties to reach a mutually
agreeable definitive agreement and approval of the shareholders of the
Company. There can be no assurance that the parties will be able to reach
such an agreement or that the shareholders of the Company will approve any
such agreement. The proposed business combination is also subject to
regulatory approvals at the federal and state levels. There can be no
assurance that the Company and Cherry will be able to obtain such approvals.
See "--Relationships With State Regulatory Agencies".
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
in addition to the sale of securities described in Item 9 of this Current
Report. If the proposed business
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combination between the Company and Cherry 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 orders to the
Company or as to the Company's ability to attract and establish relationships
with new Agents.
INABILITY TO COLLECT ACCOUNTS RECEIVABLE - Although the Company's bad debt
rate has improved somewhat in recent months, if it were not to continue to
improve or revert to the fiscal 1996 rate, either as a result of the purchase
of poorly performing traffic or the inability of the Company to properly
manage existing customer receivables, additional charges may be incurred that
would affect earnings. In addition, the inability to collect past due
receivables could have a material adverse impact upon the Company's liquidity
and cash flow.
DEPENDENCE ON AT&T AND OTHER FACILITIES-BASED CARRIERS - The Company does
not own transmission facilities and currently depends primarily upon AT&T
and, to a lesser extent, upon Sprint, 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
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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 its carriers in the event that the Company should continue
to fail to meet its commitments.
In recent years, AT&T, MCI Communications Corporation ("MCI") and Sprint
have consistently followed one another in pricing their long distance
products. If MCI and Sprint were to lower their rates for long distance
service and AT&T did not adopt a similar price reduction, adverse customer
reaction could affect the Company's ability to meet its commitments under the
AT&T contract, which could have a material adverse affect on the Company's
financial position and results of operations.
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 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.
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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 2, 1997.
ITEM 9. SALES OF EQUITY SECURITIES PURSUANT TO REGULATION S
On July 1, 1997, the Company sold 508,968 shares (the "Securities") of the
Company's common stock, par value $.01 per share, to Lexus Commercial
Enterprises, Ltd. (the "Purchaser") for $2.063 per share, for an aggregate
purchase price of $1,050,000 (the "Purchase Price"). The Purchase Price was paid
by a secured promissory note made payable to the order of the Company in an
aggregate principal amount of the Purchase Price (the "Note"). The Note is
secured by a pledge of the Securities and bears interest at an annual rate equal
to 8%.
The Company believes that the offering and sale of the Securities is
exempt from registration under section 4(2) of the Securities Act of 1933 (the
"Act") and under Regulations D and S promulgated thereunder.
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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 9, 1997 By: /s/ MICHAEL L. HLINAK
Michael L. Hlinak
Chief Operating Officer
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INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
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99.1 Press release of EqualNet Holding Corp. dated July 2, 1997.
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EXHIBIT 99.1
EQUALNET AND CHERRY COMMUNICATIONS
ANNOUNCE INTENT TO COMBINE
HOUSTON, Texas, July 2, 1997 - EqualNet Holding Corp. (Nasdaq: ENET), a
telecommunications company offering discounted long distance services throughout
the U.S., and Cherry Communications Inc., a privately-held, switch-based long
distance provider with domestic and international operations, today announced
that they have entered into a letter of intent to combine the two companies,
subject to negotiation and execution of a definitive agreement. Upon completion
of the proposed combination, the resulting company will be renamed Cherry
Holding Corp.
The proposed business combination is expected to be structured as a merger
and will result in the shareholders of Cherry Communications owning
approximately 91 percent of the combined company. Shareholders of EqualNet
Corporation will retain the remaining nine percent.
It is anticipated that the definitive agreement will contain customary
terms and conditions to closing, including due diligence, shareholder approval,
regulatory approval and the resolution of any material contingencies that could
adversely affect the proposed business combination. The transaction is expected
to be completed during the fourth quarter of calendar 1997.
In a joint statement, Mr. Zane Russell, EqualNet's Chairman and CEO, and
Mr. James Elliott, Chairman of Cherry Communications, said, "We expect the
strategic combination of our two companies will create a stronger international
competitor in the long distance services market. Cherry Communications has an
established U.S. network of switches, as well as access to transatlantic fiber
optic lines terminating in Europe. It is an aggressive competitor in the
international market, with a particular emphasis on wholesale and commercial
customers. EqualNet has primarily concentrated on serving the telecommunications
needs of small business customers in the U.S. Together, we expect to provide
cost-competitive domestic interstate, intrastate and international calling
services to retail, wholesale and commercial users."
According to a recent New York Times article dated June 7, 1997, Cherry
was the tenth largest international long distance company, based on its 1996
revenues of $354 million. For the nine months ended March 31, 1997, EqualNet
reported revenues of $36.1 million.
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.
Cherry Communications is a switch-based international telecommunications
company specializing in carrier to carrier sales. Cherry's core strategy is the
deployment of a global telecommunications network.
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.
