SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
Date of Report (Date of earliest event reported) September 28, 2001
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Wolfpack Corporation
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(Exact name of registrant as specified in its charter)
Delaware 000-26479 56-2086188
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(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
4021 Stirrup Creek Drive Suite 400, Research Triangle Park Durham, NC 27703
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (919) 419-5600
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NA
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(Former name or former address, if changed since last report)
Item 7. Financial Statements and Exhibits.
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(a) Financial Statements of Businesses Acquired.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To equitel, inc.:
We have audited the accompanying consolidated balance sheets of equitel, inc. (a
Delaware corporation) and subsidiary as of December 31, 2000 and 1999, and the
related consolidated statements of operations, changes in stockholders'
(deficit) equity and cash flows for the year ended December 31, 2000 and for the
period from inception (April 5, 1999) to December 31, 1999. 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 audits provide 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 equitel, inc. and
subsidiary as of December 31, 2000 and 1999, and the results of their operations
and their cash flows for the year ended December 31, 2000 and for the period
from inception (April 5, 1999) to December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
Arthur Andersen LLP
Raleigh, North Carolina
November 19, 2001
equitel, inc. and Subsidiary (Note 1)
CONSOLIDATED Balance Sheets -- December 31, 2000 and 1999
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(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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2000 1999
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ASSETS
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Current assets:
Cash and cash equivalents $ 137 $ 4
Accounts receivable, net of allowances of $46 in 2000 97 465
Inventories 560 407
Prepaid expenses and other current assets 574 474
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Total current assets 1,368 1,350
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PROPERTY AND EQUIPMENT, net 313 54
RESTRICTED CASH AND DEPOSITS 225 329
DEFERRED FINANCING COSTS 168 0
INTANGIBLE ASSETS, net 924 1,596
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$ 2,998 $ 3,329
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LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
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CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 907 $ 771
Deferred revenue 1,861 1,496
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Total current liabilities 2,768 2,267
PAYABLES TO AFFILIATES 0 760
RELATED PARTY NOTES PAYABLE, net of unamortized discount of $95 3,265 0
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Total liabilities 6,033 3,027
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MINORITY INTEREST 0 98
COMMITMENTS AND CONTINGENCIES (NOTES 1, 2 AND 8)
STOCKHOLDERS' (DEFICIT) EQUITY:
Preferred stock, $.001 par value, 5,000,000 shares authorized; no shares issued and 0 0
outstanding
Common stock, $.001 par value, 20,000,000 shares authorized; 6,811,218 and 2,100,000 7 2
shares issued and outstanding in 2000 and 1999, respectively
Additional paid-in capital 4,350 1,758
Stock purchase warrants 120 0
Accumulated deficit (7,512) (1,556)
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Total stockholders' (deficit) equity (3,035) 204
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$ 2,998 $ 3,329
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The accompanying notes to consolidated financial statements are an
integral part of this balance sheet.
equitel, inc. and Subsidiary (Note 1)
CONSOLIDATED Statements of Operations
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For the year ended December 31, 2000 and for the period from inception (April 5,
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1999) to December 31, 1999
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(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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2000 1999
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REVENUES:
Airtime revenue $ 1,125 $ 293
Cellular telephone equipment revenue 532 274
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Total revenues 1,657 567
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COSTS AND EXPENSES:
Cost of airtime service 1,437 530
Cost of cellular telephone equipment 1,029 551
Selling, general and administrative 4,311 1,142
Research and development 0 117
Depreciation and amortization 784 545
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Total costs and expenses 7,561 2,885
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NET LOSS FROM OPERATIONS (5,904) (2,318)
INTEREST (EXPENSE) INCOME, NET (150) 5
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NET LOSS BEFORE MINORITY INTEREST (6,054) (2,313)
MINORITY INTEREST 98 757
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NET LOSS $(5,956) $(1,556)
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WEIGHTED AVERAGE SHARES OUTSTANDING 4,776 2,100
BASIC AND DILUTED LOSS PER SHARE $ (1.25) $ (0.74)
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The accompanying notes to consolidated financial statements are an
integral part of these statements.
equitel, inc. and Subsidiary (Note 1)
CONSOLIDATED Statements of Changes in Stockholders' (DEFICIT) Equity
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For the year ended December 31, 2000 and for the period
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from inception (April 5, 1999) to December 31, 1999
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(DOLLAR AMOUNTS IN THOUSANDS)
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Common Stock Additional Stock
------------------ Paid-in Deferred Purchase Accumulated
Shares Amount Capital Compensation Warrants Deficit Total
--------- ------ ---------- ------------ -------- ----------- -------
INCEPTION, April 1999
Initial stock issuance 2,100,000 $2 $ 19 $ 0 $ 0 $ 0 $ 21
Capital contribution from affiliated company 0 0 1,739 0 0 0 1,739
Net loss 0 0 0 0 0 (1,556) (1,556)
--------- -- ------ ----- ---- ------- -------
BALANCE, December 31, 1999 2,100,000 2 1,758 0 0 (1,556) 204
Common stock issuance 4,711,218 5 2,432 0 0 0 2,437
Issuance of stock purchase warrants 0 0 0 0 120 0 120
Issuance of stock options 0 0 160 (160) 0 0 0
Amortization of deferred compensation 0 0 0 160 0 0 160
Net loss 0 0 0 0 0 (5,956) (5,956)
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BALANCE, December 31, 2000 6,811,218 $7 $4,350 $ 0 $120 $(7,512) $(3,035)
========= == ====== ===== ==== ======= =======
The accompanying notes to consolidated financial statements are an integral part
of these statements.
equitel, inc. and Subsidiary (Note 1)
CONSOLIDATED Statements of Cash Flows
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For the year ended December 31, 2000 and for the period
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from inception (April 5, 1999) to December 31, 1999
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(ALL AMOUNTS IN THOUSANDS)
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2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,956) $(1,556)
Adjustments to reconcile net loss to net cash used in operating activities:
Minority interest (98) (757)
Depreciation and amortization 784 545
Amortization of deferred financing costs and debt discount 32 0
Other, non-cash 189 22
Change in operating assets and liabilities:
Accounts receivable 368 (465)
Inventories (153) (407)
Prepaid expenses and other current assets 1 (474)
Accounts payable and accrued expenses 359 796
Deferred revenue 365 1,496
Restricted cash 113 (329)
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Net cash used in operating activities (3,996) (1,129)
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CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of property and equipment (247) (89)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 2,500 0
Proceeds from issuance of common stock 1,876 21
Capital contribution from affiliated company 0 1,201
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Net cash provided by financing activities 4,376 1,222
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INCREASE IN CASH 133 4
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4 0
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 137 $ 4
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SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 68 $ 5
Cash paid for income taxes 0 0
Noncash financing activities -
Pushdown of purchase price, net of minority interest 0 1,427
Debt issued for deferred financing costs 175 0
Equity issued for non-cash consideration
Minority interest buyout 44 0
Forgiveness of parent company advances, net of minority interest 0 312
Deferred financing costs 19 0
Receipt of non-cash assets 191 0
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The accompanying notes to consolidated financial statements are an integral part
of these statements.
equitel, inc. and Subsidiary (Note 1)
Notes to Consolidated Financial Statements
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December 31, 2000 and 1999
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(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND CONTINUING OPERATIONS
Nature of Business and Basis of Presentation
equitel, inc. (ei) (formerly MM Telecommunications Corp.) and subsidiary
(collectively, the Company), consists of the operations of ei and its
common control subsidiary, equitel communications corporation (ecc),
formerly TeleData Wireless Communications, Inc. and formerly SecurFone,
Inc. (SF). Since its inception (April 5, 1999), the Company's activities
have been focused primarily on purchasing airtime from cellular carriers
and reselling the airtime as well as cellular telephone equipment on a
prepaid basis. The Company's corporate offices are located in Durham, North
Carolina.
The consolidated financial statements include the accounts of ei and ecc
since the inception of ei and ecc due to the entities being under common
control. During 1999 and early 2000, ecc and ei were related entities as
both were effectively controlled by Lancer Management Group, LLC and
affiliated entities (including Lancer Offshore, Inc. (Offshore), Alpha
Omega Group, Inc. and Capital Research, Ltd. (Capital)) (collectively,
Lancer). At the inception of ei in April 1999, Lancer held approximately
95% of the outstanding shares of ei. Such ownership was approximately 94%
at December 31, 2000.
ecc (then named SF) was formed in April 1999, as a wholly owned subsidiary
of SecurFone America, Inc. (SA) to facilitate the exchange of certain
assets which were transferred by SA to SF immediately prior to the sale of
SF by SA. On April 15, 1999, TeleData World Services, Inc. (TWOS), a
publicly traded company on the OTC bulletin board trading system, acquired
all issued and outstanding shares of stock of ecc from SA in exchange for
approximately $628 in cash and 6,087,473 shares of TWOS common stock
(valued at $1,500 based on an average trading price of TWOS common stock).
The aggregate purchase price of approximately $2,128 was allocated to the
assets acquired (primarily cellular carrier contracts and a significant
distribution agreement maintained by SA). The acquired assets have been
pushed down from TWOS to ecc as a capital contribution. At the inception of
ecc, Lancer owned approximately 67% of TWOS.
During 2000, Lancer, ei, ecc and TWOS undertook certain transfers of
ownership which transferred the ownership of a majority of the common stock
of ecc from TWOS to ei. Since June 2000, ei has owned 100% of the
outstanding common stock of ecc. As a result of being under the common
control of Lancer since ecc's and ei's inception and prior to ei gaining
direct control of ecc, the operations of ei and ecc have been consolidated
since their inception. Minority interests in ecc have been reflected for
the period from inception through June 2000 at which point ei gained 100%
control of ecc from TWOS. Equity transactions in each of the separate
entities are reflected in the accompanying consolidated financial
statements based on their economic impact to the consolidated organization.
Continuing Operations
Management's plans for future operations consist of developing its market
share for prepaid cellular services through product awareness promotional
campaigns and development of key distributor relationships for its products
and services. The Company does not maintain retail outlets for its
products. Rather, it sells its products and services through distributors
who, in turn, resell the Company's products and services to subscribers
through a variety of distribution channels, including convenience-type
retail stores and, to a lesser extent, other distribution channels. A
significant portion of sales from inception to date has been through one
major distributor.
In order to provide reliable service to its subscribers the Company must
continue to develop and maintain favorable relationships with the cellular
carriers from which it purchases airtime. The Company currently maintains
contracts with eight major cellular carriers, which expire periodically
through 2002. There are no assurances that management will be successful in
its marketing plans or that favorable contracts will be negotiated with the
major cellular carriers upon expiration of the existing contracts.
During the period required to develop the subscriber base and expand its
service coverage area, the Company has required and will continue to
require additional operating funds. The Company has suffered net losses and
negative operating cash flows since inception. For the year ended December
31, 2000, and the period from inception through December 31, 1999, the
Company had net losses of $5,956 and $1,556, respectively, and negative
operating cash flows of $3,996 and $1,129, respectively. Funding for its
operations has been provided primarily by Lancer through the issuance of
common stock and notes payable. The ultimate success of the Company is
dependent upon management's ability to market and sell prepaid cellular
services at levels sufficient to generate operating revenues in excess of
expenses. From a financing standpoint, management's focus is on securing
sufficient additional capital to build its operating, sales and marketing,
and administrative infrastructure to levels needed to generate and support
the operations of the Company. While management believes that the Company
will be successful in raising the additional capital necessary, no
assurances can be given that the Company will be successful in obtaining
additional capital or that such financing will be on terms favorable or
acceptable to the Company. Lancer has committed to provide the Company with
the capital necessary to support management's plans for the foreseeable
future, and, at a minimum, through December 31, 2001.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of these
uncertainties. In addition, the financial statements do not include any
adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of ei and ecc.
All significant intercompany transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Cash and Cash Equivalents
Cash and cash equivalents include all the cash balances and highly liquid
investments with an original maturity of three months or less.
Restricted Cash
Certain of the Company's obligations to airtime carriers are secured by
standby letters of credit issued by a commercial bank. A majority of
airtime carriers require resellers to either remit a refundable deposit,
provide a letter of credit or provide assets for collateral under the
contracts for the purchase of airtime by the reseller from the carrier. The
letters of credit in favor of certain of the airtime carriers from whom the
Company purchases airtime for resale are secured by reimbursement
obligations of an unrelated private lender to the Company. The Company's
obligations to such private lender are, in turn, secured by a security
interest in certain of the Company's assets, including certain cash
accounts. At December 31, 2000 and 1999, cash of $221 and $329 was
restricted under the arrangements in connection with the letters of credit.
Accounts Receivable and Concentration of Credit Risk
In the normal course of business, the Company extends credit to customers
(distributors) and manages its exposure to credit risk through credit
approval and monitoring procedures. At each balance sheet date, the Company
assesses the need for an allowance for potential losses in the collection
of its receivables. As of December 31, 2000, an allowance for doubtful
accounts of $46 was deemed necessary by management. One distributor
accounted for approximately 55% and 98% of distribution shipments during
2000 and 1999, respectively, and 22% and 93% of accounts receivable at
December 31, 2000 and 1999, respectively. One additional distributor
accounted for 14% of distribution shipments during 2000 and 28% of accounts
receivable at December 31, 2000. The Company does not extend credit to
retail purchasers of the Company's products and services.
Revenue Recognition
The Company's products consist of cellular telephone equipment and cellular
airtime service revenue. Service revenue is generated primarily from the
sale of prepaid airtime cards. The Company sells its products primarily
through distributors. Such distribution agreements may grant the
distributor the right to return unsold products. To the extent distributors
are granted return rights for unsold equipment and airtime, sales
transactions to the distributors are accounted for as deferred
revenue until products are sold by the distributor. Revenue from the sale
of cellular telephones is recognized upon activation by the end-user.
Airtime service revenues are recognized as the end-user utilizes the
cellular airtime.
Inventories
Inventories include cellular telephones and accessories including carrying
cases, adapters and batteries, and are valued at the lower of average cost
or market. The Company performs periodic assessments to determine the
existence of obsolete, slow-moving and non-saleable inventories and records
necessary provisions to reduce such inventories to net realizable value.
Sources of Supply
The Company purchases cellular telephones and accessories through two
primary suppliers. Although the Company believes that other suppliers
ultimately could provide similar products on similar terms, a disruption in
the supply from the Company's existing vendors could adversely affect the
ability of the Company to meet its customers' requirements.
The Company currently resells analog cellular telephone service through
relationships with seven primary carriers providing cellular coverage to
approximately 97% of the United States. Analog cellular service is provided
by two service carriers in each market. Should the Company not be able to
renew its reseller carriers with its existing carrier network, it would
need to seek service from the other carrier in the market or accelerate
migration to a digital product. While management believes that cellular
service could be obtained from the other analog cellular carrier in each
market it serves, a disruption in the Company's cellular contracts could
affect the ability of the Company to meet its customers' requirements.
Property and Equipment
Property and equipment are stated at cost and consist of computers and
equipment, computer software, furniture and fixtures and leasehold
improvements. These assets are depreciated on a straight-line basis over
the estimated useful lives of the assets, ranging up to five years.
Leasehold improvements are amortized over the estimated useful life of the
assets or the term of the lease, whichever is shorter. Maintenance and
repairs are expensed as incurred. Expenditures for major renewals,
replacements and betterments are capitalized. When assets are sold or
otherwise disposed of, the cost and related accumulated depreciation or
amortization are removed from the respective accounts and any resulting
gain or loss is recognized.
The majority of the fixed assets utilized by the Company during 1999,
including furniture and fixtures and equipment, were owned by TWOS.
Expenses allocated from TWOS in 1999 (Note 11) included depreciation
expense of $6 related to these assets. During 2000, the assets were
transferred to the Company at the net carrying value on the books of TWOS
at the time of transfer of $90.
Property and equipment consists of the following at December 31, 2000 and
1999, respectively:
2000 1999
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Computers and equipment $ 218 $ 0
Computer software 123 59
Furniture and fixtures 39 0
Leasehold improvements 6 0
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386 59
Less - Accumulated depreciation
and amortization (73) (5)
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$ 313 $ 54
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Depreciation expense was $68 and $5 for the year ended December 31, 2000,
and the period from inception through December 31, 1999, respectively.
Impairment of Long-lived Assets
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" (SFAS 121), establishes accounting standards for the
impairment of long-lived assets. The Company reviews its long-lived assets,
including property and equipment and intangible assets, for impairment
whenever events or circumstances indicate that the carrying amount of an
asset may not be recoverable. If this review indicates that the asset will
not be recoverable based on the expected undiscounted net cash flows of the
related asset, an impairment loss is recognized and the asset's carrying
value is reduced. There were no significant impairment losses recorded in
2000 and 1999.
Deferred Financing Costs
Deferred financing costs totaled $168 at December 31, 2000. Such costs are
being amortized as a component of interest expense over the expected term
of the related financing arrangements. Amortization expense of $26 was
recorded for the year ended December 31, 2000.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes."
Accordingly, deferred income tax assets and liabilities are recognized for
the future income tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective income tax basis. The effect on deferred income tax assets
and liabilities of a change in income tax rates is recognized in the income
statement in the period of the income tax rate change. Valuation allowances
are established when it is necessary to reduce deferred income tax assets
to the amount expected to be realized in future years.
Earnings per Share
In accordance with the provisions of SFAS No. 128, "Earnings Per Share",
basic earnings per share is computed by dividing net income by the number
of weighted-average common shares outstanding during the year. Diluted
earnings per share is computed by dividing net income by the number of
weighted-average common shares outstanding adjusted to include the number
of additional common shares that would have been outstanding if the
dilutive potential common shares resulting from options granted had been
issued. The effect of 500,800 options and 635,000 warrants outstanding
during 2000 were not included in the computation of diluted earnings per
share because the effect on loss from continuing operations would have been
antidilutive.
Product Warranty
All cellular telephones are covered by a one-year manufacturers' warranty
covering product defects. Batteries and accessories are covered by a 90-day
manufacturer's warranty. The Company generally provides a one-year warranty
on operation of the handset due to software defects. To date, the costs
incurred under this program have been minimal.
Advertising Costs
Advertising and sales promotion costs are expensed as incurred. Advertising
expenses included in selling, general and administrative expenses for year
ended December 31, 2000, and the period from inception through December 31,
1999, were approximately $304 and $229.
Licensing Fees
The Company has entered into a software licensing agreement with an
unrelated third party. The agreement requires a one-time fee per unit
licensed and a monthly fee based on usage rates. Licensing fee expenses
included in cost of cellular telephone equipment for the year ended
December, 31 2000, and the period from inception through December 31, 1999,
were approximately $156 and $110, respectively.
Stock Options
As permitted by SFAS No. 123, "Accounting for Stock Based Compensation,"
the Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB No. 25) and its related interpretations. Pursuant to APB No. 25,
compensation expense is recognized for financial reporting purposes using
intrinsic value method when it becomes probable that the options will be
exercisable. The amount of compensation expense to be recognized is
determined by the excess of the fair value of common stock over the
exercise price of the related option at the measurement date.
SFAS No. 123 established an alternative method of expense recognition for
stock-based compensation awards to employees based on fair values. The
Company has elected not to adopt SFAS No. 123 for expense recognition
purposes, but is required to provide certain pro forma disclosures.
Fair Value of Financial Instruments
The values the Company presents for financial assets and liabilities as of
December 31, 2000 (including cash and cash equivalents, accounts
receivable, restricted cash, accounts payable and accrued expenses)
approximate the fair market value of these assets and liabilities due to
their short maturity. The fair value of notes payable approximate carrying
value at December 31, 2000.
Litigation
The Company is subject to litigation in the ordinary course of its
business. Management believes that any potential liability thereto is not
material to the Company's financial position and results of operations.
Reclassifications
Certain amounts in the 1999 financial statements have been reclassified to
conform to the current year presentation.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133), as amended by SFAS No. 137 and SFAS No. 138, will be effective for
the Company during 2001. The statement established accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value.
The statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria
are met and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. The
Company adopted SFAS No. 133, as amended, beginning the first quarter of
fiscal 2001. In management's opinion, the impact of adoption of this
statement on the Company's financial position and results of operations was
not significant.
In June 2001, SFAS No. 141, "Business Combinations" was issued which
requires the use of the purchase method of accounting and prohibits the use
of the pooling-of-interests method of accounting for business combinations
initiated after June 30, 2001. SFAS No. 141 also requires that the Company
recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. SFAS No. 141 was adopted by the
Company in connection with the Wolfpack Transaction (Note 12).
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill has an
indefinite life and will no longer be amortized, but will be tested
annually for impairment. The Company will adopt SFAS No. 142 effective with
the beginning of fiscal 2002. The Company has not yet quantified the impact
of SFAS No. 142 on its financial statements.
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (SFAS 144) was issued which supersedes SFAS 121. It
established new accounting standards for the impairment of long-lived
assets. The Company will adopt SFAS 144 in fiscal 2002. The Company has not
yet quantified the impact of SFAS 144 on its financial statements.
3. INVENTORIES
Inventories consist of the following at December 31, 2000 and 1999:
2000 1999
----- -----
Cellular telephones $ 522 $ 390
Accessories 38 17
----- -----
$ 560 $ 407
===== =====
4. INTANGIBLE ASSETS
At December 31, 2000, intangible assets consist of acquired airtime resale
agreements with cellular carriers and a significant distribution agreement
acquired from SA, by virtue of the acquisition of ecc (Note 1). Such
assets, valued originally at $2,128 are being amortized over a three-year
useful life. Additionally, $44 of goodwill was recorded in a June 2000
buyout of ecc minority stockholders (Note 6). Amortization expense of $716
was recorded during the year ended December 30, 2000, and $532 was recorded
during the period from inception through December 31, 1999.
5. RELATED PARTY NOTES PAYABLE
During 2000, the Company issued several subordinated convertible notes to
various Lancer entities. One note with a balance of $685 at December 31,
2000, bears interest at 9%. The other notes, with a collective balance of
$2,675 at December 31, 2000, bear interest at 10%. Each of these notes is
due on March 31, 2003. These notes are convertible into common stock at a
conversion price of $2.00 per share prior to maturity. At December 31,
2000, accrued interest of $96 was included in accounts payable and accrued
expenses on the accompanying consolidated balance sheet.
Certain of the notes payable were issued with 535,000 common stock purchase
warrants. As a result, the proceeds of the debt issuance were allocated
among the debt and warrants based on their fair values at the date of
issue. The debt discount associated with the warrant valuation is being
amortized as additional interest expense over the terms of the related
notes. Such amortization totaled approximately $6 for the year ended
December 31, 2000.
6. STOCKHOLDERS' EQUITY
Common Stock
The following common stock transactions occurred in the fiscal year 2000:
- In January and February 2000, ecc issued 222,581 shares of common
stock to Lancer in exchange for $1,823 in cash, net of $77 of stock
issuance costs paid to Capital. After these transactions, Lancer
became a 69% direct stockholder in ecc. On May 17, 2000, Lancer
exchanged these ecc shares for 2,225,810 shares of ei.
- On May 17, 2000, 56,000 shares ei's common stock were issued to
certain of its stockholders in exchange for certain services provided
by the stockholders valued at $22.
- On May 18, 2000, ei issued 133,500 shares of common stock to Lancer in
exchange for $53 in cash.
- On May 29, 2000, ei issued 125,000 shares of common stock to Lancer in
exchange for the forgiveness of $50 of outstanding debt owed to
Lancer.
- On June 29, 2000, ei issued 1,897,708 shares of common stock to Lancer
in exchange for certain assets (primarily notes receivable from
outside parties and equipment) and assignment to Lancer of a liability
owed to TWOS in the amount of $538. The transaction was valued at the
net of the historical basis of the assets transferred, the basis of
the liability assigned to Lancer, net of the portion attributable to
minority interests.
- In June 2000, in exchange for receiving 272,000 shares of ei, TWOS
transferred its remaining 6% ownership (100,000 shares) of ecc to ei.
Of this share issuance, 108,800 shares have been treated as a buy-out
of the minority stockholders of TWOS. Accordingly, these shares have
been valued at their fair value of $0.40 per share at the time of
issuance. The difference between the value of the shares issued and
the minority interest basis at the time of the buy-out of $44 has been
treated as goodwill which is being amortized over a three-year period.
Stock Option Plan
The Company applies the principles of APB Opinion No. 25 in accounting for
the 2000 Plan (see below). Accordingly, the Company recognizes deferred
compensation when the exercise price of the options granted is less than
the fair market value of the stock at the date of grant, as determined by
the Board of Directors. The deferred compensation is presented as a
component of stockholders' equity in the accompanying consolidated
financial statements and is amortized over the periods expected to be
benefited, generally the vesting period of the options.
Stock-based Compensation
In May 2000, the Board of Directors adopted the equitel, inc. 2000 Long-
Term Incentive Plan (the 2000 Plan) under which the Company may grant
options to acquire common stock and restricted common stock to employees of
the Company on such terms as permitted by the Plan and as determined by the
Company's Board of Directors or a designated committee of the Company's
board. On May 29, 2000, the Board of Directors granted certain executives
of the Company 1,200 shares of ei common stock pursuant to the Plan. Such
shares vested immediately and contained no significant restrictions.
Additionally, the board of directors also granted stock options to certain
executives to purchase 500,800 shares of ei's common stock at an exercise
price of $.08 per share after a one-month vesting period. Shares have been
reserved for issuance upon the exercise of these options. As these options
were issued with an exercise price below the fair market value of the
common stock, the Company recorded deferred compensation of approximately
$160. These options expire ten years after the date of grant. The Company
amortizes deferred compensation over the vesting period of the options.
Subsequent to year-end, 19,800 options were forfeited.
A summary of changes in outstanding options during the year ended December
31, 2000, is as follows:
Weighted-Average
Options Exercise Price
--------- ----------------
Granted during 2000 500,800 $0.08
Weighted average remaining life 9.5 years
Vested and exercisable at December 31, 2000 500,800
For SFAS No. 123 disclosure purposes for employee-related stock options,
the fair value of each option grant has been estimated as of the date of
grant using the Black-Scholes option pricing model with the following
assumptions at December 31, 2000:
Dividend yield 0%
Expected volatility 0%
Risk-free interest rate at the date of grant 6% to 7%
Expected life 1 to 5 years
Using these assumptions, the fair value of the stock options granted during
the year ended December 31, 2000, would be approximately $180 which would
be amortized over the vesting period of the options. Had compensation cost
been determined consistent with the provisions of SFAS No. 123, the
Company's pro forma net loss in accordance with SFAS No. 123 for the year
ended December 31, 2000, would have been as follows:
Net loss and earnings per share:
As reported $(5,956) ($1.25)
Pro forma $(5,976) ($1.25)
======== =======
7. STOCK PURCHASE WARRANTS
In connection with various financing transactions, the Company issued stock
purchase warrants to purchase a total of 635,000 common shares at an
initial exercise price of $2.00 per share. Shares have been reserved for
future issuance upon the exercise of these warrants. Of these warrants,
100,000 were issued in connection with a letter of credit facility and
expire in 2001. The remaining 535,000 warrants were issued in connection
with certain notes payable and expire in 2005.
The fair value of the 535,000 warrants were recorded as a discount on the
value of the notes payable (Note 5). The fair value of the 100,000 warrants
has been recorded as deferred financing costs in the accompanying balance
sheets (Note 2). Such amounts are being amortized as a component of
interest expense over the expected term of the related debt arrangement.
The valuations were determined utilizing valuation assumptions and a
present value methodology which incorporates the estimated life for the
warrants, expected dividend yield of 0% and discount rates based on risk-
free interest rates at the grant date, which ranged from 6% to 7%.
8. LEASES
The Company leases office space and equipment through agreements, which
expire periodically through 2005. Future commitments for minimum lease
rentals under noncancellable leases at December 31, 2000, are as follows:
2001 $191
2002 197
2003 196
2004 186
2005 66
Thereafter 0
----
$836
Rent expense under operating leases was $188 for the year ended December
30, 2000, and $43 for
the period from inception through December 31, 1999. Obligations under
capital leases are not significant.
9. SAVINGS PLAN
The Company sponsors an employee savings plan that provides for eligible
employees to make pre-tax contributions up to 20% of eligible compensation,
subject to certain limitations imposed by Section 401(k) of the Internal
Revenue Code. Currently, the Company does not match employee contributions.
All U.S. employees are eligible to participate in the plan after completing
six months of service with the Company.
10. INCOME TAXES
A deferred income tax asset is established for the complete amount of
income tax benefits available in future periods from the assumed
realization of tax net operating loss carryforwards. In addition, a
deferred income tax asset or liability is established for the complete
amount of income tax benefits or liabilities from the effect of temporary
differences. The components of the net deferred income tax assets as of
December 31, 2000 and 1999, were as follows:
Deferred income tax assets: 2000 1999
------- ------
Net operating loss carryforwards $ 3,048 $ 805
Other assets 209 97
Other, net 18 0
Valuation allowance (3,275) (903)
------- ------
Net deferred income tax assets $ 0 $ 0
======= ======
At December 31, 2000, the Company has federal and state income tax loss
carryforwards of approximately $7,816 which expire through 2019, subject to
the limitations of the IRC Section 382. The Company has provided a
valuation allowance of $3,275 and $903 at December 31, 2000 and 1999,
respectively, because, in management's assessment, it is uncertain whether
the net deferred income tax assets will be realized. The change in the
valuation allowance of $2,372 and $903 during 2000 and 1999, respectively,
relate primarily to increased net operating losses (NOLs) which increased
the amount of the Company's gross deferred income tax assets.
Future sales of common stock by the Company or its principal stockholders,
or changes in the composition of its principal stockholders, could
constitute a "change of control" that would result in annual limitations on
the Company's use of its NOLs and unused tax credits. Management cannot
predict whether such a "change in control" will occur. If such a "change in
control" were to occur, the resulting annual limitations on the use of NOLs
and tax credits would depend on the value of the equity of the Company and
the amount of "built-in-gain" or "built-in-loss" in the Company's assets at
the time of the "change in control", which cannot be known at this time.
11. RELATED-PARTY TRANSACTIONS AND ALLOCATIONS
The Company engaged in limited transactions with TWOS, and two of TWOS'
controlled affiliates, Galaxy Wireless Communications, LLC and Worldwide
Cellular, Inc. during 1999 and early 2000. During 1999, TWOS remitted
payments to vendors and service providers on behalf of the Company and
charged the Company for such services based on actual amounts paid.
Additionally, TWOS
performed certain services and incurred certain costs for the Company.
Services provided include financial accounting, sales and marketing,
technical support and other general corporate services. The costs of the
services provided by TWOS were allocated to the Company based upon a
combination of estimated usage by the Company and the Company's headcount
as a percentage of combined TWOS and Company headcount. Corporate costs of
TWOS totaling $173 were allocated to the Company in 1999. In the opinion of
management, the method of allocating these costs is reasonable; however,
the costs of these services charged to the Company are not necessarily
indicative of the costs that would have been incurred if the Company had
performed these functions on a standalone basis. The related-party
transactions during 2000 were not material. In connection with the
transfers of ownership between Lancer, ei, ecc and TWOS discussed in Note
1, all outstanding advances from TWOS were settled.
12. SUBSEQUENT EVENTS
On September 28, 2001, pursuant to a stock purchase agreement among
Wolfpack Corporation, a Delaware corporation (Wolfpack), Lancer, and Lancer
Partners, LP, the majority owners of the Company agreed to sell 93.64% of
the outstanding shares of the Company's common stock to Wolfpack in
exchange for 11,825,936 shares of Wolfpack (valued at the then current
Wolfpack market value of $1.85 per share) (the Wolfpack Transaction).
Subsequent to the Wolfpack Transaction, the former stockholders of the
Company owned 56% of the outstanding shares of Wolfpack. Accordingly, the
Wolfpack Transaction will be accounted for as a reverse acquisition using
the purchase method of accounting, with Wolfpack being treated as the
acquired entity and the Company being treated as the accounting acquiror.
In connection with the Wolfpack Transaction, the Company entered into a
debt conversion agreement with Lancer to exchange the notes discussed in
Note 5, including accrued interest, for similar notes of Wolfpack
Corporation. The stock purchase warrants discussed in Note 7 were cancelled
in connection with this debt conversion. The Company's stock options
discussed in Note 6 remain outstanding and were not exchanged in the
Wolfpack Transaction.
Item 7. Financial Statements and Exhibits. (continued)
- ------ ---------------------------------
(b) Pro forma Financial Information.
Pro forma financial information with respect to the transaction
reported by the registrant on Form 8-K, filed October 15, 2001,
is not currently available but will be filed on or prior to
December 14, 2001.
(c) Exhibits:
2.1 Stock Purchase Agreement dated September 28, 2001 by and amount
Alpha Omega Group, Inc., Capital Research, Ltd., Lancer Offshore,
Inc. and Lancer Partners, Limited Partnership (incorporated by
reference to Exhibit 2.1 from the registrant's Report on Form 8-K
filed October 15, 2001).
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.
WOLFPACK CORPORATION
By: /s/ E. Eugene Whitmire
---------------------------
E. Eugene Whitmire
Chief Financial Officer
Dated: November 19, 2001