SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934.
April 5, 2001
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Date of Report (Date of earliest event reported)
CCC GLOBALCOM CORPORATION
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(Name of Small Business Issuer as specified in its charter)
Nevada 36-36939936
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization identification No.)
SEC File Number 33-30365-C
1250 Wood Branch Park Drive, 6th Floor, Houston, TX 77079
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(Address of principal executive offices)
Registrant's telephone no., including area code: (281) 529-4600
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16350 Park Ten Place, Suite 241, Houston, TX 77084
(Former name or former address, if changed since last report)
Item 2. Acquisitions or Disposition of Assets
On April 5, 2001, CCC GlobalCom Corporation (OTCBB: CCGC) acquired selected
assets from Equalnet Communications Corp. (OTCBB: ENET). The assets acquired
include: a customer base of approximately 30,000 long distance customers, 65
employees, and telecommunication hardware switching equipment and networks. CCC
GlobalCom and Equalnet will combine the operations into 32,000 square feet of
office space previously occupied by Equalnet. Additionally, CCC GlobalCom
purchased two Siemans and one debit card switch from d-Tel Network, LLC for
$750,000 cash.
The purchase price for the acquired assets was approximately $8,750,000,
payable as follows:
Cash $ 1,250,000
Assumed Liabilities $ 7,500,000
The acquisition was funded in part by a $10,000,000 revolving line of
credit provided by RFC Capital.
Item 7. Financial Statements and Exhibits
A. Financial Statements. As of the date of the initial Form 8-K filing
relating to the acquisition described in Item 2, it was impractical for CCC
Globalcom to provide the financial statements required by this Item 7(a).
Attached hereto are the following financial statements:
Proforma Balance Sheet at March 31, 2001
Proforma Statement of Operations for the year ended December 31, 2000
Proforma Statement of Opertaitons for the three months ended March 31,2001
Audit Financial Statements of Equalnet for the year ended June 30, 2000.
Financial Statements of Equalnet for the year ended June 30, 1999, are
incorporated by reference from the Form 10-KSB of Equalnet for the year ended
June 30, 1999. Equalnet's prior auditor would not consent to the inclusion of
the Equalnet June 30, 1999 financial statements in this Form 8-K unless CCC
Globalcom made a significant payment to such auditor. CCC Globalcom's auditor is
currently reauditing Equalnet's financial statement for the year ended June 30,
1999.
B. Exhibits.
10.1 Asset Purchase Agreement *
10.2 First Amendment to Asset Purchase Agreement *
*Previously filed
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Dated: June 18, 2001 CCC GLOBALCOM CORPORATION
By /s/ Ziad A. Hakim
----------------------------------------
Ziad A. Hakim, CEO
CCC GLOBALCOM CORPORATION
Pro Forma Combined Financial Statements
1
CCC GLOBALCOM CORPORATION
Pro Forma Combined Financial Statements
On April 5, 2001, CCC Globalcom Corporation (CCC) acquired selected assets of
Equalnet, Inc. (Equalnet) in exchange for $500,000 cash and the assumption of
certain liabilities and obligations totaling $7,500,000. In addition, CCC
purchased switching equipment for $750,000. The following unaudited pro forma
combined financial statements are presented as though the transaction occurred
on January 1, 2000. The pro forma financial statements aggregate the balance
sheet of CCC as of March 31, 2001 and the related statements of operations as of
the year ended December 31, 2000, and three months ended March 31, 2001 and the
balance sheet of Equalnet as of March 31, 2001 and the related statements of
operations for the year ended December 31, 2000 and the three months ended March
31, 2001. The pro forma balance sheet and statements of operations used
management assumptions as described in the notes and the historical financial
information available at March 31, 2001. The format and amounts used in these
pro forma financial statements are based on financial statements and subsequent
unaudited financial information prepared by the Companies.
The pro forma combined financial statements are not necessarily indicative of
the combined balance sheet and statements of operations which might have existed
for the periods indicated or the results of operations as they may be now or in
the future.
2
CCC GLOBALCOM CORPORATION
Pro Forma Combined Balance Sheet
March 31, 2001 (Unaudited)
Pro forma
CCC Adjustments
Globalcom Equalnet, Increase Pro forma
Corporation Inc. (Decrease) Combined
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Assets
Current assets:
Cash $ 602,000$ 261,000 $ (500,000) (1)$ 363,000
Accounts receivable, net 223,000 3,045,000 - 3,268,000
Other current assets 3,000 206,000 - 209,000
--------------------------------------------------
Total current assets 828,000 3,512,000 - 3,840,000
Deposit 250,000 - - 250,000
Property and equipment, net 118,000 1,569,000 750,000 (3) 2,437,000
Intangible assets, net 367,000 - 2,919,000 (1) 3,286,000
--------------------------------------------------
Total assets $ 1,563,000$ 5,081,000 $3,169,000 $ 9,813,000
--------------------------------------------------
Liabilities and Stockholders'
Equity (Deficit)
Current liabilities:
Accounts payable $ 103,000$ 11,519,000 $(11,519,000)(2) 103,000
Accrued liabilities 137,000 4,852,000 (4,852,000)(2) 137,000
Deferred income 86,000 - - 86,000
Debt in default - 5,791,000 (5,791,000)(2) -
Contractual obligation with
regard to receivable sales
agreement - 5,523,000 (5,523,000)(2) -
--------------------------------------------------
Total current liabilities 326,000 27,685,000 (27,685,000) 326,000
Long term debt 750,000 (3)
8,000 - 7,500,000 (1) 8,258,000
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Total liabilities 334,000 27,685,000 (19,435,000) 8,584,000
--------------------------------------------------
Stockholders' equity (deficit):
Preferred stock - 12,399,000 (12,399,000)(2) -
Common stock, 100,000,000 shares
authorized 32,241,403 shares
issued and outstanding,
$.001 par value 32,000 424,000 (424,000)(2) 32,000
Additional paid-in-capital 4,415,000 58,091,000 (58,091,000)(2) 4,415,000
Treasury stock (38,504
shares at cost) - (45,000) 45,000 (2) -
27,685,000 (2)
Accumulated deficit (3,218,000)(93,473,000) 65,788,000 (1)(3,218,000)
--------------------------------------------------
Total stockholders'
equity (deficit) 1,229,000 (22,604,000) 22,604,000 1,229,000
--------------------------------------------------
Total liabilities and
stockholders'equity
(deficit) $ 1,563,000$ 5,081,000 $ 3,169,000 $9,813,000
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3
CCC GLOBALCOM CORPORATION
Pro Forma Combined Balance Sheet Continued
(1) To record purchase of Equalnet, Inc. assets by CCC Globalcom Corporation.
(2) To eliminate liabilities not included in the asset purchase agreement and
eliminate the equity of Equalnet, Inc.
(3) To record the purchase of switching equipment for $750,000.
4
CCC GLOBALCOM CORPORATION
Pro Forma Combined Statement of Operations
Three Months Ended March 31, 2001 (Unaudited)
Pro forma
CCC Adjustments
Globalcom Equalnet, Increase Pro forma
Corporation Inc. (Decrease) Combined
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Sales $ 406,000 $ 3,796,000 $ - $ 4,202,000
Cost of sales 321,000 2,417,000 - 2,738,000
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Gross profit 85,000 1,379,000 - 1,464,000
General and administrative
expense 788,000 2,513,000 - 3,301,000
-----------------------------------------------
Operating loss (703,000) (1,134,000) - (1,837,000)
Other expense (income):
Interest expense (1,000) (186,000) - (187,000)
Other income 3,000 - - 3,000
-----------------------------------------------
Loss before income taxes (701,000) (1,320,000) - (2,021,000)
Income tax benefit - - - -
-----------------------------------------------
Net loss $ (701,000)$ (1,320,000) $ (2,021,000)
-----------------------------------------------
Net loss per common share - basic and diluted $ (.06)
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Weighted average shares outstanding 32,283,000
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5
CCC GLOBALCOM CORPORATION
Pro Forma Combined Statement of Operations
Year Ended December 31, 2000
Pro forma
CCC Adjustment
Globalcom Equalnet, Increase Pro forma
Corporation Inc. (Decrease) Combined
-----------------------------------------------
Sales $ 1,827,000 $21,483,000 $ - $23,310,000
Cost of sales 1,425,000 17,686,000 - 19,111,000
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Gross profit 402,000 3,797,000 - 4,199,000
General and administrative
expense 2,219,000 25,101,000 - 27,320,000
-----------------------------------------------
Operating loss (1,817,000) (21,304,000) - (23,121,000)
Other expense (income):
Interest expense - (1,314,000) - (1,314,000)
Other income 28,000 - - 28,000
-----------------------------------------------
Loss before income taxes (1,789,000) (22,618,000) - (24,407,000)
Income tax benefit - - - -
-----------------------------------------------
Net loss $(1,789,000)$(22,618,000) - $(24,407,000)
-----------------------------------------------
Net loss per common share -
basic and diluted $ (.78)
-----------
Weighted average shares outstanding 31,384,000
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6
CCC GLOBALCOM CORPORATION
Notes to Pro Forma Combined Financial Statements
(1) On April 5, 2001, CCC Globalcom Corporation (CCC) acquired selected
assets of Equalnet, Inc. (Equalnet) in exchange for $500,000 cash and the
assumption of liabilities and obligations totaling $7,500,000. The pro forma
combined financial statements at December 31, 2000 and March 31, 2001 assume the
transaction occurred January 1, 2000.
(2) During the period ended December 31, 2000, the Company had a reverse
stock split of 1 share for 20 shares. All earnings (loss) per share reflect the
reverse stock split as if it had taken place January 1, 2000.
(3) The unaudited financial statements include the accounts of CCC
Globalcom Corporation and subsidiaries and include all adjustments (consisting
of normal recurring items) which are, in the opinion of management, necessary to
present fairly the financial position as of March 31, 2001 and the results of
operations and changes in financial position for the year ended December 31,
2000 and three months ended March 31, 2001. The results of operations for the
three months ended March 31, 2001 are not necessarily indicative of the results
to be expected for the entire year.
(4) Loss per common share is based on the weighted average number of shares
outstanding during the period.
7
EQUALNET COMMUNICATIONS CORP.
AND SUBSIDIARIES
June 30, 2000
Consolidated Financial Statements
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Index to Consolidated Financial Statements
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Page
Independent Auditors' Report F-2
Consolidated balance sheet F-3
Consolidated statement of operations F-4
Consolidated statement of stockholders' deficit F-5
Consolidated statement of cash flows F-6
Notes to consolidated financial statements F-7
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F-1
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Equalnet Communications Corp. and Subsidiaries
We have audited the consolidated balance sheet of Equalnet Communications Corp.
and Subsidiaries (the Company) as of June 30, 2000, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the year
ended June 30, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Equalnet
Communications Corp. and Subsidiaries as of June 30, 2000, and the results of
their operations and their cash flows for the year ended June 30, 2000 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, there is substantial doubt about the ability
of the Company to continue as a going concern. Management's plans in regard to
that matter are also described in note 3. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
TANNER + CO.
Salt Lake City, Utah
June 1, 2001
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F-2
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
- --------------------------------------------------------------------------------
March 31,
2001 June 30,
(unaudited) 2000
----------------------------
Assets
Current assets:
Cash $ 261,000 $ 180,000
Accounts receivable, net 3,045,000 3,260,000
Other current assets 206,000 129,000
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Total current assets 3,512,000 3,569,000
Property and equipment, net 1,569,000 5,021,000
----------------------------
Total assets $ 5,081,000 $ 8,590,000
----------------------------
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 11,519,000 $ 9,576,000
Accrued expenses 4,852,000 4,560,000
Debt in default 5,791,000 7,666,000
Contractual obligations with regard
to receivable sales agreement 5,523,000 5,523,000
----------------------------
Total current liabilities 27,685,000 27,325,000
Commitments and contingencies - -
Stockholders' deficit:
Preferred stock $.01 par value; 5,000,000
shares authorized 12,399,000 12,399,000
Common stock $.01 par value; 200,000,000
shares authorized; 42,300,939 shares
issued and outstanding 424,000 424,000
Additional paid-in-capital 58,091,000 58,091,000
Treasury stock 38,504 shares, at cost (45,000) (45,000)
Accumulated deficit (93,473,000) (89,604,000)
----------------------------
Total stockholders' deficit (22,604,000) (18,735,000)
----------------------------
Total liabilities and
stockholders' deficit $ 5,081,000 $ 8,590,000
----------------------------
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See accompanying notes to consolidated financial statements. F-3
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Consolidated Statement of Operations
- --------------------------------------------------------------------------------
Nine Months
Ended
March 31, Year Ended
2001 June 30,
(unaudited) 2000
----------------------------
Net sales $ 13,933,000 $ 26,051,000
Cost of sales 8,722,000 19,140,000
----------------------------
Gross profit 5,211,000 6,911,000
----------------------------
Expenses:
Selling, general and administrative 6,538,000 15,525,000
Depreciation and amortization 1,952,000 7,378,000
Write-down of long lived assets - 7,639,000
----------------------------
8,490,000 30,542,000
----------------------------
Loss from operations (3,279,000) (23,631,000)
Other income (expense):
Interest expense (590,000) (1,630,000)
----------------------------
Loss before provision for income tax (3,869,000) (25,261,000)
Provision for income taxes - -
----------------------------
Net loss $ (3,869,000 $(25,261,000)
----------------------------
Preferred stock dividends and deemed
distributions $ - $ (2,027,000)
Net loss applicable to common shareholders $(3,869,000) $(27,288,000)
----------------------------
Loss per common share - basic and diluted $ (0.09) $ (0.82)
----------------------------
Weighted average common shares - basic and
diluted 42,301,000 33,307,000
----------------------------
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Deficit
Year Ended June 30, 2000 and
Period Ended March 31, 2001 (unaudited)
- --------------------------------------------------------------------------------
Additional
Preferred Common Paid-In Treasury Deferred Accumulated
Stock Stock Capital Stock Compensation Deficit Total
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Balance, July 1, 1999 $16,153,000$ 284,000$49,859,000$(232,000)$ (20,000)$(62,316,000)$3,728,000
Preferred stock beneficial conversion - - 880,000 - - (880,000) -
Conversion of Preferred stock into
common stock:
Series A (1,263,000) 47,000 975,000 241,000 - - -
Series B (3,000,000) 15,000 2,985,000 - - - -
Series D (131,000) 14,000 117,000 - - - -
Series E (500,000) 8,000 492,000 - - - -
Stock issued for:
Cash - 20,000 675,000 - - - 695,000
Services - 19,000 602,000 - - - 621,000
Payable - 3,000 24,000 - - - 27,000
Acquisition - 13,000 558,000 - - - 571,000
Exercise of common stock options - 1,000 25,000 - - - 26,000
Stock acquired for treasury stock - - - (54,000) - - (54,000)
Stock options and warrants issued for
servics - - 899,000 - - - 899,000
Dividends:
Stock 1,140,000 - - - - (1,140,000) -
Cash for fraction shares - - - - - (7,000) (7,000)
Deferred compensation amortization - - - - 20,000 - 20,000
Net loss - - - - - (25,261,000)(25,261,000)
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Balance, June 30, 2000 12,399,000 424,000 58,091,000 (45,000)$ - (89,604,000)(18,735,000)
Net loss (unaudited) - - - - - (3,869,000) (3,869,000)
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Balance, March 31, 2001
(unaudited) $12,399,000$ 424,000$58,091,000$ 45,000 $ - $93,473,000$(22,604,000)
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- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-5
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
- --------------------------------------------------------------------------------
Nine Months
Ended
March 31, 2001 Year Ended
(unaudited) June 30, 2000
------------------------------
Cash flows from operating activities:
Net loss $ (3,869,000) $(25,261,000)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 1,952,000 7,378,000
Amortization of unearned compensation - 20,000
Issuance of common stock for services - 621,000
Issuance of stock option/warrant for services - 899,000
Provision for bad debt 1,171,000 4,146,000
Write-down of assets - 7,639,000
(Increase) decrease in:
Receivables (956,000) (154,000)
Other receivables - 472,000
Other current assets (77,000) 272,000
Other assets - 407,000
Increase (decrease) in:
Accounts payable 1,943,000 5,729,000
Accrued liabilities 292,000 (1,189,000)
-----------------------------
Net cash provided by
operating activities 456,000 979,000
-----------------------------
Cash flows from investing activities:
Purchase of property and equipment - (634,000)
Cash paid for acquisitions of business and assets - (157,000)
-----------------------------
Net cash used in
investing activities - (791,000)
-----------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock - 695,000
Decrease in notes payable and long-term debt (375,000) (1,567,000)
Proceeds from note payable - 126,000
Proceeds from exercise of common stock and options - 26,000
Dividends paid - (7,000)
Net proceeds on contractual obligations with regards
to receivables sales agreement - 507,000
Treasury stock - (54,000)
-----------------------------
Net cash used in
financing activities (375,000) (274,000)
-----------------------------
Net increase (decrease) in cash 81,000 (86,000)
Cash, beginning of period 180,000 266,000
-----------------------------
Cash, end of period $ 261,000 $ 180,000
-----------------------------
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See accompanying notes to consolidated financial statements. F-6
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Year Ended June 30, 2000
- --------------------------------------------------------------------------------
1. Organization Organization
and Equalnet Communications Corp., formerly Equalnet Holding
Summary of Corp., (the Company) is a national long-distance telephone
Significant company which provides services to small commercial and
Accounting residential accounts nationwide. The Company is comprised
Policies of four wholly-owned operating subsidiaries, EqualNet
Corporation (EqualNet), USC Telecom, Inc. (USC Telecom),
Netco Acquisition Corp. (Netco), and Freecaller
Communications Corporation (Freecaller).
Principles of Consolidation
The consolidated financial statements include the accounts
of all majority-owned and controlled subsidiaries of the
Company. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Concentration of Credit Risk
The Company maintains its cash in bank deposit accounts
which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Financial instruments that potentially subject the Company
to concentration of credit risk consist primarily of trade
receivables. In the normal course of business, the Company
provides credit terms to its customers. Accordingly, the
Company performs ongoing credit evaluations of its customers
and maintains allowances for possible losses.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash includes
all cash and investments with original maturities to the
Company of three months or less.
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F-7
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization Property and Equipment
and Property and equipment are recorded at cost, less
Summary of accumulated depreciation. Additions of new equipment and
Significant major replacements of existing equipment are capitalized.
Accounting Depreciation on property and equipment is determined using
Policies the straight-line method over the estimated useful lives of
Continued the various classes of assets, which range from four to ten
years. Leasehold improvements are amortized over the shorter
of their useful lives or the term of the lease. Minor
expenditures for maintenance and repairs are expensed when
incurred. Gains and losses on sale or disposal of property
and equipment are reflected in operations.
Revenue Recognition
The Company recognizes revenue in the month customers
complete telephone calls.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable
through undiscounted future cash flows. If it is determined
that an impairment loss has occurred based on expected cash
flows, such loss is recognized in the statement of
operations.
The Company had non-cash write-downs of assets during the
year ended June 30, 2000 in the amount of approximately
$7,639,000.
Income Taxes
The Company accounts for income taxes using the asset and
liability method. Under the asset and liability method,
deferred tax assets and liabilities are recognized for
future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the
period that includes the enactment date.
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F-8
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization Earnings Per Share
and The computation of basic earnings per common share is based
Summary of on the weighted average number of shares outstanding during
Significant each year.
Accounting
Policies The computation of diluted earnings per common share is
Continued based on the weighted average number of shares outstanding
during the year plus the common stock equivalents, which
would arise from the exercise of stock options and warrants
outstanding using the treasury stock method and the average
market price per share during the year. Options and warrants
to purchase 14,796,315 shares of common stock at prices
ranging from $.18 to $7.50 per share were outstanding at
June 30, 2000, but were not included in the diluted earnings
per share calculation because the effect would have been
antidilutive.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
2. Bankruptcy The Company and its subsidiaries, EqualNet, NetCo, and USC
Filings Telecom, filed voluntary petitions for relief under Chapter
11 of the United States Bankruptcy Code (the Bankruptcy
Code) on August 9, 2000 (the petition date) in the United
States Bankruptcy Court for the Southern District of Texas
(Bankruptcy Court), Houston, Texas. In January 2001, the
Company exchanged in foreclosure switching equipment with a
book value of $1,500,000 for notes in default totaling
$1,500,000. Effective April 5, 2001 as part of a
reorganization, substantially all of the assets of the
Company were sold to CCC GlobalCom Corporation for $500,000
cash plus assumption of certain liabilities totaling
$7,500,000. It is not known when or if the Company will
emerge from bankruptcy protection.
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F-9
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Bankruptcy On September 10, 1998, EqualNet, filed for relief under
Filings Chapter 11 of the Bankruptcy Code in Bankruptcy Court.
Continued Pursuant to Section 1107 and 1108 of the Bankruptcy Code,
EqualNet managed its assets and operated its business as a
debtor-in-possession pending confirmation of its
reorganization plan, which plan was confirmed on April 28,
1999.
3. Going At June 30, 2000, the Company has a working capital deficit,
Concern a stockholders' deficit, and has suffered recurring losses.
In addition, subsequent to year end, the Company filed a
petition for bankruptcy (see note 2). These conditions raise
substantial doubt about the ability of the Company to
continue as a going concern. The consolidated financial
statements do not include any adjustments to reflect the
possible future effect on recoverability of assets or
amounts of liabilities that might result from the outcome of
this uncertainty.
Management intends to continue to work through the
Bankruptcy Court and is considering merger possibilities
with businesses that might value the public entity. However,
there can be no assurance they will be successful.
4. Detail of Receivables and preferred stock consist of the following at
Certain June 30, 2000:
Balance
Sheet Receivables:
Accounts Trade receivables $ 5,399,000
Allowance for doubtful accounts (2,139,000)
-------------
3,260,000
-------------
Preferred stock:
Series A
2,500 shares authorized, 869 shares
issued and outstanding 869,000
Series B
3,000 shares authorized, 0 shares
issued and outstanding -
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F-10
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
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4. Detail of Series C
Certain 300,000 shares authorized, 227,950
Balance Sheet shares issued and outstanding 6,269,000
Accounts
Continued Series D
6,500 shares authorized, 3,994
shares issued and outstanding 2,264,000
Series E
900,000 shares authorized, 0 shares
issued and outstanding -
Series F
6,500 shares authorized, 3.392
shares issued and outstanding 2,997,000
-------------
$ 12,399,000
-------------
5. Property and Property and equipment is recorded at cost and consisted of
Equipment the following at June 30, 2000:
Telecommunications switches $ 2,821,000
Computer equipment 5,202,000
Furniture and fixtures 1,209,000
Leasehold improvements 1,255,000
-------------
10,487,000
Less accumulated depreciation and
amortization (5,466,000)
-------------
$ 5,021,000
-------------
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F-11
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
6. Debt in Default Note payable to a company in thirty-six
monthly installments of approximately
$159,000 including interest at an index
rate based on the US Treasury rate plus
6.42%, secured by certain assets of the
Company, and guaranteed by an officer/
shareholder of the Company. The note
matures March 2001. Subsequent to
year end this note was assigned to a
company indirectly owned in part by the
guarantor and foreclosed upon (see
note 19). $4,123,000
Note payable to a company bearing interest
at prime plus 5%, secured by assets, customer
base and the stock of EqualNet and USC Telecom
owned by the Company, matures July 21, 2000.
Due to the Company being in violation of
certain loan covenants, the note is classified
as default. 1,197,000
Note payable to a company in monthly
installments of $41,667, including interest
at prime plus 5%, secured by assets and
customer base of the Company, matures in
June 29, 2001. Due to the Company being in
violation of certain loan covenants, the note
is classified as debt in default. 1,000,000
Note payable to a financial institution
bearing interest at a rate of prime plus
2.5%, was due on February 28, 1999, and is
secured by the assets of USC Telecom. The
Company is currently in default of this note
and the debt is classified as debt in default
as of June 30, 2000. 559,000
Note payable to a company owned by a major
shareholder for certain advances made on
behalf of the Company bearing interest at a
rate of 11% and is due December 31, 2000.
The Note is secured by assets of the Company.
At June 30, 2000, the note is classified as
debt in default due to the Company subsequently
filing for Bankruptcy. 444,000
- --------------------------------------------------------------------------------
F-12
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
6. Debt in Default Unsecured note payable to a company bearing
Continued interest at a rate of 12% and is due on
July 1, 2000. The note is classified as debt
in default due to the Company subsequently
filing for Bankruptcy. 200,000
Note payable to a company in thirty-six
monthly installments of approximately
$7,000 including interest at prime plus 5%,
with a balloon payment at the maturity date of
the note which is May 31, 2001. 143,000
----------
$7,666,000
----------
7. Contractual EqualNet and USC Telecom have entered into an arrangement
Obligations with RFC Capital Corporation (formerly Receivables Funding
with Regards Corp.) (RFC) which is essentially a receivable purchase
to Receivable arrangement which based borrowing capacity on a percentage
Sales of outstanding receivables up to a specified maximum of
Agreement $11,500,000 for EqualNet and $750,000 for USC Telecom. The
agreements allow RFC to cease funding new receivables
without prior written notice. A program fee applies to the
outstanding balance of net purchased receivables equal to
the prime rate plus 4%. The aggregate total owed to RFC
under these agreements at June 30, 2000 is $5,523,000.
8. Capital Stock As of June 30, 2000 the Company has authorized 200,000,000
shares of $.01 par value common stock and 5,000,000 shares
of $.01 par value preferred stock. In addition, a one-for-
ten reverse stock split has been approved by the
shareholders to be implemented at a future date at the
discretion of the Board of Directors.
- --------------------------------------------------------------------------------
F-13
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Capital Stock Series A Preferred Stock
Continued During fiscal year 1998 the Company issued 2,000 shares of
Series A Convertible Preferred Stock (Series A Preferred)
valued at $2,000,000 and had 869 shares of Series A
Preferred with a stated value of $1,000 per share
outstanding at June 30, 2000. Series A Preferred dividends
are cumulative at the rate of $60 per year, payable
quarterly in either cash or additional shares of Series A
Preferred. The Holders of Series A have the right to convert
their shares into the Company's common stock based upon a
formula which, subject to the Company's listing on a
national exchange, will not be less than $0.75 per share of
common stock. Should the Company be delisted from all
national exchanges, the conversion floor is removed and the
conversion formula of 85% of the Average Market Price has no
lower conversion price per share limit. The Series A
Preferred has a per share $1,000 liquidation preference plus
accrued and unpaid dividends. Series A Preferred is
redeemable at a rate of $1,000 per share at the option of
the holder when certain events, which are in control of the
Company, occur. Series A Preferred ranks senior to the
Company's other series of preferred stock in liquidation
preference
The Company issued 102 shares of Series A Preferred during
the year ended June 30, 2000 as dividends. In addition,
holders of Series A Preferred converted 1,263 shares of
Series A Preferred into 5,190,912 shares of common stock
during the year ended June 30, 2000.
Series B Preferred Stock
During fiscal year 1998, the Company issued 3,000 shares of
Series B Convertible Preferred Stock (Series B Preferred)
valued at $3,000,000. During the year ended June 30, 2000
all of Series B Preferred was converted into 1,500,000
shares of common stock. No dividends were paid on Series B
Preferred during fiscal year 2000.
- --------------------------------------------------------------------------------
F-14
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Capital Stock Series C Preferred Stock
Continued During fiscal year 1999 the Company the Company issued
196,553 shares of Series C Senior Convertible Preferred
Stock (Series C Preferred) valued at approximately
$5,405,000 in connection with an acquisition. In addition
the Company issued 5,358 shares of Series C Preferred valued
at approximately $147,000 in January 1999 as additional
purchase consideration.
Series C Preferred Stock - Continued
As of June 30, 2000, the Company had 227,950 shares
outstanding. Series C Preferred is non-voting and is
convertible, at the holder's option, into ten shares of the
Company's common stock, and has a liquidation preference of
$27.50 per share, plus any accrued and unpaid dividends.
Holders of Series C Preferred are entitled to receive
dividend at the rate of $2.00 per year, payable quarterly in
either cash or additional shares of Series C Preferred.
Series C Preferred is redeemable after July 22, 1999, at the
Company's option at a rate of approximately $28.19 per share
of Series C Preferred if the Company's common stock is
trading above $3.44 per share on a quoted national exchange.
Series C Preferred is junior in liquidation preference to
Series A Preferred and Series B Preferred.
The Company issued 16,004 shares of Series C Preferred
during the year ended June 30, 2000 as dividends.
- --------------------------------------------------------------------------------
F-15
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Capital Stock Series D Preferred Stock
Continued During fiscal year 1999 the Company issued 3,750 shares of
Series D Senior Convertible Preferred Stock (Series D
Preferred) value at approximately $1,889,000. Series D
Preferred dividends are cumulative at the rate of $60 per
year, payable in either cash or additional shares of Series
D Preferred. The Holders of Series D have the right to
convert their shares into the Company's common stock based
upon a formula which, subject to the Company's listing on a
national exchange, will not be less than $0.75 per share of
common stock. Should the Company be delisted from all
national exchanges, the conversion floor is removed and the
conversion formula of 85% of the Average Market Price has no
lower conversion price per share limit. The Series D
Preferred has a $1,000 liquidation preference plus accrued
and unpaid dividends. Series D Preferred is redeemable at a
rate of $1,000 per share at the option of the holder when
certain events, which are in control of the Company, occur.
Series D Preferred is junior in liquidation preference to
Series A, B, and C Preferred.
The Company issued 348 shares of Series D Preferred during
the year ended June 30, 2000 as dividends. In addition,
holders of Series D Preferred converted 260 shares of Series
D Preferred into 1,398,620 shares of common stock during the
year ended June 30, 2000.
Series E Preferred Stock
During fiscal year 1999 the Company issued 833,333 shares of
Series E Convertible Preferred Stock (Series E Preferred)
valued at $500,000. During the year ended June 30, 2000 all
of Series E Preferred was converted into 833,333 shares of
common stock. No dividends were paid on Series E Preferred
during fiscal year 2000.
- --------------------------------------------------------------------------------
F-16
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Capital Stock Series F Preferred Stock
Continued During fiscal year 1999 the Company issued 3,142 shares of
Series F Senior Convertible Preferred Stock (Series F
Preferred) valued at approximately $2,747,000. Series F
Preferred dividends are cumulative at the rate of $60 per
year, payable in either cash or additional shares of Series
F Preferred. The Holders of Series F have the right to
convert their shares at a discounted price. A deemed
distribution of approximately $880,000 was recorded during
fiscal year ended June 30, 2000. Holders of Series F
Preferred have the right to convert their shares of Series F
Preferred into shares of the Company's into the Company's
common stock based upon a formula which, subject to the
Company's listing on a national exchange, will not be less
than $0.75 per share of common stock. Should the Company be
delisted from all national exchanges, the conversion floor
is removed and the conversion formula of 85% of the Average
Market Price has no lower conversion price per share limit.
The Series F Preferred has a $1,000 liquidation preference
plus accrued and unpaid dividends. Series F Preferred is
redeemable at a rate of $1,000 per share at the option of
the holder when certain events, which are in control of the
Company, occur. Series F Preferred is junior in liquidation
preference to Series A, B, C, and D Preferred.
The Company issued 250 shares of Series F Preferred during
the year ended June 30, 2000 as dividends.
Stock Purchase Plan
During 1995, the Company adopted the EqualNet Holding Corp.
Employee Stock Purchase Plan (the Stock Purchase Plan) in
which substantially all employees are eligible to
participate. The Stock Purchase Plan provides eligible
employees of the Company and its subsidiaries an opportunity
to purchase shares of Common Stock through after-tax payroll
deductions. The Company will match an amount equal to 15% of
each participant's contribution. The Stock Purchase Plan is
administered by an independent administrator which puchases
shares of Common Stock on the open market with the amounts
contributed by the participants and the matching
contributions made by the Company.
- --------------------------------------------------------------------------------
F-17
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Stock Option Stock Option and Restricted Stock Plan
Plan and The Company has a Stock Option and Restricted Stock Plan
Warrants (the Option Plan). The Option Plan is administered by a
committee appointed by the Board of Directors, which
determines the terms of options granted including the
exercise price, the number of shares subject to the option,
and the exercisability of the option. Under the Option Plan,
the committee may grant restricted stock awards or options
to purchase up to an aggregate of 4,000,000. In March of
2000 the Plan was amended to increase the aggregate number
of shares for gant to 7,000,000.
The Option Plan provides for the grant of stock options and
restricted stock. Restricted stock may be issued to
employees for no payment by the employee or for a payment
below fair market value on the date of grant. The restricted
stock is subject to certain restrictions described in the
Option Plan, with no restrictions continuing for more than
five years from the date of the award. The Company granted
3,000 restricted stock awards for shares of Common Stock to
certain key employees, none of whom is a director or
executive officer of the Company as of June 30, 2000. These
employees were not required to make any payment for these
restricted stock awards. During the year ended June 30,
2000, 3,636 shares of common stock were received into
treasury stock resulting from the forfeiture of restricted
stock awards.
Non-Employee Director Stock Option Plan
The Company has a Non-Employee Director Stock Option Plan
(the Director Option Plan). The Director Option Plan is
administered by the Board of Directors. Pursuant to the
Director Option Plan, each non-employee director receives
options to purchase a number of shares of common stock equal
to $60,000 divided by the fair market value of stock on the
day before elected as a director and options to purchase a
number of shares of common stock equal to $30,000 divided by
the fair market value of stock the day before each annual
meeting.
Information regarding stock options and warrants is
summarized below:
- --------------------------------------------------------------------------------
F-18
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Stock Option Range of
Plan and Exercise
Warrants Number of Number of Price Per
Continued Options Warrants Share
-------------------------------
Outstanding at July 31, 1999 1,773,000 3,626,899 $ .55 - 7.50
Granted 4,125,000 6,972,500 .18 - 1.50
Expired of forfeited (1,587,084) - .25 - 1.88
Exercised (114,000) - .25 - .48
-------------------------------
Outstanding at June 30, 2000 4,196,916 10,599,399 $ .18 - 7.50
-------------------------------
The Company adopted the disclosure only provisions of
Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no
compensation expense has been recognized for stock options
granted to employees. Had compensation expense for the
Company's stock options been determined based on the fair
value at the grant date consistent with the provisions of
SFAS No. 123, the Company's results of operations would have
been reduced to the pro forma amounts indicated below at
June 30, 2000:
Net loss - as reported $(27,288,000)
Net loss - pro forma $(27,425,000)
Loss per share - as reported $ (.82)
Loss per share - pro forma $ (.82)
The fair value of each option grant is estimated at the date
of grant using the Black-Scholes option pricing model with
the following assumptions at June 30, 2000:
Expected dividend yield $ -
Expected stock price volatility 150%
Risk-free interest rate 6%
Expected life of options 7 years
The weighted average fair value of options granted during
the years ended June 30, 2000 is $.22.
- --------------------------------------------------------------------------------
F-19
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
The following table summarizes information about stock
options and warrants outstanding at June 30, 2000:
Outstanding Exercisable
-------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
-------------------------------------------------------------
$ .18 - .44 9,657,000 5.99 $ 0.24 5,475,500 $ 0.25
.48 -1.00 3,718,482 3.54 0.87 3,557,732 0.88
1.13 -1.88 972,499 3.45 1.45 967,498 1.45
2.00 -4.25 348,334 2.55 2.26 348,334 2.26
7.50 100,000 1.34 7.50 100,000 7.50
-------------------------------------------------------------
$ .18 -7.50 14,796,315 5.10 $ 0.57 10,449,064 $ 0.71
-------------------------------------------------------------
10.Income Taxes The provision for income taxes is different than amounts
which would be provided by applying the statutory federal
income tax rate to loss before provision for income taxes
for the following reasons as of June 30, 2000:
Federal income tax benefit at statutory rate $8,589,000
State income tax benefit at statutory rate 1,213,000
Other (4,493,000)
Change in valuation allowance (5,309,000)
------------
$ -
------------
- --------------------------------------------------------------------------------
F-20
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
10.Income Taxes Deferred tax assets (liabilities) are comprised of the
Continued following:
Net operating loss carryforward $ 21,611,000
Amortization of acquisition costs 5,611,000
Write-off of goodwill 310,000
Allowance and reserves 155,000
Other 188,000
------------
27,875,000
Valuation allowance (27,875,000)
------------
$ -
------------
A valuation allowance has been established for the net
deferred tax asset due to the uncertainty of the Company's
ability to realize such asset.
The Company has net operating loss carryforwards of
approximately $63,561,000 at June 30, 2000 which are
available to offset future taxable income which expire in
2012 through 2020. The utilization of the net operating loss
carryforwards is dependent upon the tax laws in effect at
the time the net operating loss carryforwards can be
utilized. The Tax Reform Act of 1986 significantly limits
the annual amount that can be utilized for certain of these
carryforwards as a result of changes in the Company's
ownership.
- --------------------------------------------------------------------------------
F-21
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
11.Lease At June 30, 2000, the Company had a non-cancellable
Obligations operating lease for office space. This lease obligation has
subsequently been assumed by CCC Globalcom Corporation (see
note 19). Future minimum operating lease payments are
approximately as follows for the years ending June 30:
2001 $ 373,000
2002 375,000
2003 375,000
2004 375,000
2005 62,000
------------
$ 1,560,000
------------
Lease expense was approximately $432,000 for the year ended
June 30, 2000.
12.Savings Plan The Company sponsors a 401 (k) Plan (the Plan) which is open
to all employees over the age of 21, who has completed six
consecutive months of employment. The Plan give the Company
the option to determine the amount the Company will
contribute each year. Contributions made to the Plan for the
year ended June 30, 2000 were approximately $26,000. The
Plan during the year purchased approximately 873,000 shares
of common stock of the Company for approximately $245,000.
Subsequent to the year ended June 30, 2000 the Company's
Board of Directors terminated the Plan.
13.Supplemental During the year ended June 30, 2000, the Company:
Disclosure of
Cash Flow o issued common stock in satisfaction of certain accounts
Information payable of $27,000.
o issued common stock from treasury with cost of $241,000
for satisfaction of conversion of preferred stock in the
amount of $111,000, the Company recorded a $130,000
decrease in additional paid in capital.
- --------------------------------------------------------------------------------
F-22
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
o issued common stock of $4,783,000 in satisfaction of
conversion of preferred stock.
o acquired common stock into treasury of $51,000 from an
officer for reimbursement of stock issued in settlement
of an obligation of the officer.
o issued common stock in the amount of $234,000, assumed
payables in the amount of $16,000 as well as assumed a
note payable and contractual obligations with regards to
receivables sales agreement in the amount of $1,677,000
for the acquisition of certain assets of another company.
The Company recorded an increase to fixed assets in the
amount of $180,000 and customer acquisition costs of
$1,747,000.
o issued common stock in the amount of $337,000, assumed
payables in the amount of $67,000, and contributed a
receivable in the amount of $621,000 and increased fixed
assets in the amount of $1,025,000.
o issued preferred stock of $1,140,000 as dividends.
o increased additional paid in capital and accumulated
deficit in the amount of $880,000 for the beneficial
conversion feature related to certain preferred stock.
o issued a note payable of $200,000 in satisfaction of
certain accounts payable.
Actual amounts paid for interest and income taxes are as
follows for June 30, 2000:
Interest $ 1,392,000
------------
Income taxes $ 15,000
------------
- --------------------------------------------------------------------------------
F-23
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
14.Related Party During the year ended June 30, 2000 the Company had the
Transactions following related party transactions:
o Consulting services were provided to the Company by a
former employee in exchange for stock with a fair market
value of approximately $101,000.
o Consulting services were provided by an officer/
shareholder in exchange for approximately $119,000.
o Services were provided by and received from a shareholder
in the net amount of approximately $317,000 in revenues.
15.Asset Purchase Intelesis Group
and On October 29, 1999, one of the Company's wholly-owned
Acquisitions subsidiaries signed an agreement with The Intelesis Group,
Inc. (Intelesis) to acquire certain assets in exchange for a
combination of shares of common stock, cash, and assumption
of certain liabilities. The Company paid total consideration
of $150,000 cash, contributed a note receivable of
approximately $621,000, and issued 899,807 shares of common
stock.
Atcall, Inc.
On March 22, 2000 the Company acquired certain assets of
Atcall, Inc. from the debtor in possession under a Chapter
11 proceeding of the United States Bankruptcy court. The
purchase price paid for the acquired assets included the
assumption of certain indebtedness on a limited recourse
basis in the amount of approximately, $1,500,000, the
assumption of $165,000 of indebtedness on a fully recourse
basis, and the issuance of 365,044 restricted shares of
common stock
As of June 30, 2000, management has determined that the
assets acquired in the above acquisitions are impaired as
defined in note 1, therefore, these assets have been written
down to reflect their undiscounted future cash flows.
- --------------------------------------------------------------------------------
F-24
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
16.Fair Value of The Company's financial instruments consist of cash,
Financial receivables, payables, and notes payable. The carrying
Instruments amount of cash, receivables, and payables approximates
fair value because of the short-term nature of these items.
The carrying amount of notes payable approximates fair value
as the individual borrowings bear interest at market
interest rates.
17.Commitments On January 26, 2000, WorldCom Network Services, Inc. and MFS
and Telecom, Inc.(collectively WorldCom) filed suit against the
Contingencies Company and USC Telecom in the United States District Court
for the District of Delaware (Cause no. 00-049) alleging
damages under the filed rate doctrine of the Communications
of 1934, for breach of contract, quantum meruit, and unjust
enrichment in the amount of $7,800,000 arising out of
service allegedly provided to customers acquired by USC
Telecom from SA Telecommunications, Inc. and its
subsidiaries in their combined bankruptcy proceedings. The
Company disputes the amount owed and believes that the
claims made by WorldCom include amounts for services
incurred long after WorldCom was directed to terminate the
services. Additionally, the Company believes that a
significant portion of the amount claimed by WoldCom is
duplicative of claims made by WorldCom against EqualNet
Corporation, which were addressed in its reorganization plan
under its first bankruptcy. The Company cannot accurately
determine the extent of either USC Telecom's or the
Company's exposure, if any, in these proceedings. No amounts
have been accrued in the financial statements relating to
this litigation.
On November 4, 1999, Comdisco, Inc. (Comdisco) filed suit
against the Company in the United States District Court for
the Southern District of Texas (Cause No. H-99-3872)
alleging damage for breach of contract and promissory
estoppel arising out of failure to pay for the purchase of
certain assets in the amount of $155,000. The Company
disputes the allegations of Comdisco. The Company listed the
amount due Comdisco as a claim in its first bankruptcy, and
asserts this is a liability of EqualNet Corporation in its
bankruptcy proceeding, and not a liability of the Company.
It is impossible at this time to state with any degree of
certainty the ultimate exposure of the Company in this
matter. No amounts have been accrued in the financial
statements relating to this litigation.
- --------------------------------------------------------------------------------
F-25
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
17.Commitments On September 21, 1998, Cyberserve, Inc., WSHS Enterprises,
and Inc. and William Stuart (collectively Bluegate) filed suit
Contingencies against the Company and Netco Acquisition LLC (Cause No.
Continued 98-45115) alleging damages for breach of contract and other
alleged claims. The lawsuit arose out of matters relating to
a letter of intent wherein the Company proposed to purchase
certain assets of Cyberserve, Inc. and WSHS Enterprises,
Inc., subject to, among other things, the performance of due
diligence by the Company. The damages Bluegate alleges it
incurred were as a result of, among other things, the
claimed modification of its business to its detriment in
anticipation of the integration of its operations with those
of the Company. It is imposible to determine with any degree
of certainty what, if any, liability the Company or any of
its subsidiaries may incur in this matter. No amounts have
been accrued in the financial statements relating to this
litigation.
The Company from time to time 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. The Company does not believe that
the adverse determination of any such claims would have a
material adverse effect on either the results of operations
or the financial condition of the Company.
18.Recent SFAS No. 133, Accounting for Derivative Instruments and
Accounting Hedging Activities, was issued in June 1998 and amended by
Pronounce- SFAS No. 138, issued in June 2000. The requirements of SFAS
ments No. 133, as amended, will be effective for the Company in
the first quarter of the fiscal year beginning July 1, 2001.
The standard establishes accounting and reporting standards
for derivative instruments embedded in other contracts and
for hedging activities. Under the standard, certain
contracts that were not formerly considered derivatives may
now meet the definition of a derivative. The Company has
determined SFAS 133 to have no impact on the Company's
financial position and results of operations because the
Company has no derivative activity.
- --------------------------------------------------------------------------------
F-26
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
18.Recent SFAS No. 140, Accounting for Transfers and Servicing of
Accounting Financial Assets and Extinguishments of Liabilities, was
Pronounce- issued in September 2000. SFAS No. 140 is a replacement of
ments SFAS No. 125, Accounting for Transfers and Servicing of
Continued Financial Assets and Extinguishments of Liabilities. Most of
the provisions of SFAS No. 125 were carried forward to SFAS
No. 140 without reconsideration by the Financial Accounting
Standards Board (FASB), and some were changed only in minor
ways. In issuing SFAS No. 140, the FASB included issues and
decisions that had been addressed and determined since the
original publication of SFAS No. 125. SFAS No. 140 is
effective for transfers after March 31, 2001. Management
does not expect the adoption of SFAS No. 140 to have a
significant impact on the financial position or results of
operations of the Company.
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue
Recognition in Financial Statements, was issued in December
1999. SAB 101 provides guidance on the recognition,
presentation, and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic
criteria that must be met to recognize revenue and provides
guidance for disclosure related to revenue recognition
policies. SAB 101 is effective for the Company beginning
April 1, 2001. The Company does not believe SAB 101 will
have a material effect on its financial position or results
of operations.
19.Subsequent Subsequent to June 30, 2000, the following significant items
Events have occurred:
o The Company's rights to certain switching equipment were
terminated due to foreclosure by the D-Tel Network (a
company managed by a shareholder), LLC on a promissory
note in default.
o The Company filed a voluntary petition for relief under
Chapter 11 of the United States bankruptcy code on August
9, 2000 (See note 2).
- --------------------------------------------------------------------------------
F-27
EQUALNET COMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
19.Subsequent o The Company entered into an asset purchase agreement with
Events CCC Globalcom Corporation (CCC) on April 5, 2001. Under
Continued the agreement, CCC agreed to purchase substantially all of
the assets of the Company in exchange for $500,000 cash
and the assumption of certain liabilities and commitments
totaling $7,500,000.
o The Company's wholly owned subsidiaries, EqualNet and
USC Telecom changed their names to Erudite
Communications, Inc. and Rident Communications, Inc.,
respectively.
- --------------------------------------------------------------------------------
F-28