UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ___________ to ______________
Commission file number 000-26479
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WOLFPACK CORPORATION
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(Exact name of small business issuer as specified in its charter)
Delaware 56-2086188
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4021 Stirrup Creek Drive, suite 400 Research Triangle Park Durham, NC 27703
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(Address of principal executive offices)
(919) 419-5600
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(Issuer's telephone number)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 20,198,458 common stock issued and
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outstanding; par value $.001 per share at November 19, 2001
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Transitional Small Business Disclosure Format (Check one): Yes [ ] No [x]
WOLFPACK CORPORATION
SEPTEMBER 30, 2001 QUARTERLY REPORT ON FORM 10-QSB
TABLE OF CONTENTS
Page Number
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Special Note Regarding Forward Looking Information................. 3.
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements........................................... 4.
Item 2. Management's Discussion and Analysis........................... 13.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings............................................... 17.
Item 2. Changes in Securities........................................... 18.
Item 3. Defaults Upon Senior Securities................................. 18.
Item 4. Submission of Matters to a Vote of Security Holders............. 18.
Item 5. Other Information............................................... 18.
Item 6. Exhibits and Reports on Form 8-K................................ 18.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
To the extent that the information presented in this Quarterly Report on Form
10-QSB for the quarter ended September 30, 2001, discuss financial projections,
information or expectations about our products or markets, or otherwise makes
statements about future events, such statements are forward-looking. We are
making these forward-looking statements in reliance on the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Although we
believe that the expectations reflected in these forward-looking statements are
based on reasonable assumptions, there are a number of risks and uncertainties
that could cause actual results to differ materially from such forward-looking
statements. These risks and uncertainties are described, among other places in
this Quarterly Report, in "Management's Discussion and Analysis".
In addition, we disclaim any obligation to update any forward-looking statements
to reflect events or circumstances after the date of this Quarterly Report.
When considering such forward-looking statements, you should keep in mind the
risks referenced above and the other cautionary statements in this Quarterly
Report.
PART I - FINANCIAL INFORMATION
Wolfpack Corporation and Subsidiaries (Note 1)
CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 2001
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
September 30,
ASSETS 2001
------------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 128
Accounts receivable, net of allowances of $54 66
Inventories 326
Prepaid expenses and other current assets 174
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Total current assets 694
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PROPERTY AND EQUIPMENT, net 1,132
RESTRICTED CASH 215
DEFERRED FINANCING COSTS 278
INTANGIBLE ASSETS, net 3,268
GOODWILL 19,639
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$ 25,226
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,497
Deferred revenue 1,454
Payables to affiliates 821
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Total current liabilities 4,772
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RELATED PARTY NOTES PAYABLE AND CAPITAL LEASES 7,154
Total liabilities 11,929
COMMITMENTS AND CONTINGENCIES (NOTE 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 1,000,000 shares authorized;
no shares issued and outstanding 0
Common stock, $.001 par value, 100,000,000 shares authorized;
20,198,458 issued and outstanding 29
Additional paid-in capital 26,163
Accumulated deficit (12,893)
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Total stockholders' equity 13,300
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$ 25,226
========
The accompanying notes to consolidated financial statements
are an integral part of this balance sheet.
Wolfpack Corporation and Subsidiaries (Note 1)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(all amounts in thousands, except per share data)
2001 2000
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REVENUES:
Airtime revenue $ 387 $ 279
Cellular telephone equipment revenue 235 152
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Total revenues 622 431
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COSTS AND EXPENSES:
Cost of airtime service 807 412
Cost of cellular telephone equipment 205 358
Selling, general and administrative 972 1,180
Depreciation and amortization 207 200
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Total costs and expenses 2,191 2,150
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NET LOSS FROM OPERATIONS (1,569) (1,719)
INTEREST EXPENSE, net (219) (51)
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NET LOSS $(1,788) $(1,770)
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WEIGHTED AVERAGE SHARES OUTSTANDING 12,629 12,623
BASIC AND DILUTED LOSS PER SHARE $ (0.14) $ (0.14)
======= =======
The accompanying notes to consolidated financial statements
are an integral part of these statements.
Wolfpack Corporation and Subsidiary (Note 1)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(all amounts in thousands, except per share data)
2001 2000
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REVENUES:
Airtime revenue $ 1,429 $ 829
Cellular telephone equipment revenue 745 324
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Total revenues 2,174 1,153
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COSTS AND EXPENSES:
Cost of airtime service 2,174 1,029
Cost of cellular telephone equipment 1,105 775
Selling, general and administrative 3,342 3,019
Depreciation and amortization 617 582
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Total costs and expenses 7,238 5,405
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NET LOSS FROM OPERATIONS (5,064) (4,252)
INTEREST EXPENSE, NET (560) (49)
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NET LOSS BEFORE MINORITY INTEREST (5,624) (4,301)
MINORITY INTEREST 0 341
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NET LOSS $(5,624) $(3,960)
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WEIGHTED AVERAGE SHARES OUTSTANDING 12,627 7,597
BASIC AND DILUTED LOSS PER SHARE $ (0.45) $ (0.52)
======= =======
The accompanying notes to consolidated financial statements
are an integral part of these statements.
Wolfpack Corporation and Subsidiaries (Note 1)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(all amounts in thousands)
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,624) $(3,960)
Adjustments to reconcile net loss to net cash used in operating activities:
Minority interest 0 (341)
Depreciation and amortization 617 587
Amortization of deferred financing costs 119 15
Other, non-cash 161 192
Change in operating assets and liabilities:
Accounts receivable 325 127
Inventories 234 (163)
Prepaid expenses and other current assets 406 (338)
Accounts payable and accrued expenses 1,153 244
Deferred revenue (494) 582
Restricted cash 10 111
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Net cash used in operating activities (3,093) (2,944)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in Merger 127 0
Acquisition of property and equipment (93) (171)
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Net cash provided by/(used in) investing activities 34 (171)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 3,050 1,250
Proceeds from issuance of common stock 0 1,876
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Net cash provided by financing activities 3,050 3,126
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(DECREASE)/INCREASE IN CASH (9) 11
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 137 4
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 128 $ 15
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SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest 76 46
Cash paid for income taxes 0 0
Debt issued for deferred financing costs 214 88
Equity issued for non-cash consideration
Minority interest buyout 0 44
Deferred financing costs 0 159
Receipt of non-cash assets 0 191
Cancellation of warrants 80 0
The accompanying notes to consolidated financial statements
are an integral part of these statements.
Wolfpack Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(dollar amounts in thousands, except share and per share data)
1. NATURE OF BUSINESS, MERGER AND BASIS OF PRESENTATION
Nature of Business
Wolfpack Corporation (Wolfpack), located in Research Triangle Park, North
Carolina and Dallas, Texas is a national provider of prepaid
telecommunications services including cellular telephone service, long
distance service and local exchange telecommunications services, leveraging
existing carrier networks and a network of distribution channels.
Merger Transaction and Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States in accordance with Item 310 (b) of Regulation SB. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. This interim financial data should be read in conjunction with
the consolidated financial statements and related notes, management's
discussion and analysis and other information included in Wolfpack's Annual
Report on Form 10-K for the year ended December 31, 2000, and the Current
Reports on Forms 8-K filed on October 15, 2001 and November 19, 2001.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have
been included for the three and nine-month periods ended September 30, 2001
and 2000. The results of operations are not necessarily indicative of the
results that may be expected for the year ended December 31, 2001.
On September 28, 2001, Wolfpack acquired approximately 93.64% of the
outstanding securities of equitel, inc. (ei) (the Merger). ei is a
nationwide reseller of cellular telephone service and a seller of cellular
telephone equipment on a prepaid basis. Management believes that the
combination of Wolfpack and ei brings together a nearly complete range of
prepaid communications services and product offerings that is not currently
offered by one provider in the industry. Management also believes it can
cut costs of the combined organization through economies of scale.
This Merger occurred under the terms of a stock purchase agreement, as
amended, (the Purchase Agreement) by and among Wolfpack, ei, Alpha Omega
Group, Inc. (Alpha), Capital Research, Ltd. (Capital), Lancer Offshore,
Inc. (Offshore) and Lancer Partners, LP (LP) (Alpha, Capital, Offshore and
LP are collectively referred to as Lancer) and was effected by issuing
11,825,936 shares of Wolfpack common stock at an exchange ratio of 1.85327
shares of Wolfpack for each share of equitel common stock outstanding (the
exchange ratio). Prior of the Merger, Wolfpack was publicly traded on the
OTC Bulletin Board trading system with 16,745,043 common shares
outstanding. Prior to the Merger, on September 19, 2001, Wolfpack conducted
a reverse stock split thereby reducing the outstanding shares to 8,372,522.
At the time of the Merger, 93.64% of the outstanding shares of equitel was
owned by Lancer with 6,814,218 shares of common stock outstanding. As such,
6,381,118 shares of equitel (6,814,218 x 93.64%) were exchanged at the
exchange ratio. The remaining 433,100 shares of equitel common stock remain
outstanding in the hands of minority shareholders. The value of the
purchase price is based on the market price of Wolfpack on the date of the
transaction ($1.85) and equates to $21,878. Following the transaction, the
93.64% shareholders of equitel were approximately 60% holders of Wolfpack.
As such, Lancer, the controlling shareholders of equitel, controlled
Wolfpack following the Merger. Accordingly, as discussed below, because of
the post transaction control, this transaction qualifies for reverse merger
accounting.
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and include
the accounts of Wolfpack and its wholly owned subsidiaries. The Merger
discussed above resulted in Wolfpack acquiring substantially of the
outstanding securities of ei. Although Wolfpack is the legal survivor in
the Merger and remains the registrant with the Securities and Exchange
Commission, under United States generally accepted accounting principles,
the Merger will be accounted for as a reverse acquisition, whereby ei is
considered the 'acquirer' of Wolfpack for financial reporting purposes as
its shareholders controlled more than 50% of the post transaction combined
company. Among other matters, this will require Wolfpack to present in all
financial statements and other public informational filings, post
completion of the Merger, prior historical financial and other information
of ei, and require a retroactive restatement of ei historical shareholders'
investment for the equivalent number of shares of common stock received in
the Merger. Accordingly, the accompanying consolidated financial statements
present the results of operations for ei for the three and nine-month
periods ended September 30, 2001 and 2000 and reflect the acquisition of
Wolfpack on September 28, 2001 under the purchase method of accounting.
Subsequent to September 28, 2001, the operations of the Company will
reflect the combined operations of Wolfpack and equitel. The assets
acquired and liabilities assumed have been recorded at their estimated fair
values as of the date of acquisition. The excess purchase price over the
fair value of the assets acquired and liabilities assumed has been recorded
as goodwill. Wolfpack is in the process of obtaining third-party valuations
of certain intangible assets; thus, the allocation of the purchase price is
subject to refinement. The final purchase price allocation may be
materially different from preliminary allocations with respect to property
and equipment and other intangible assets based upon finalization of fair
value determination. Any changes to the preliminary estimates within one
year of the purchase date will be reflected as an adjustment to goodwill.
The pro forma effects of the acquisition are included in the table below.
Any revisions to the purchase price (following the completion of the third-
party valuations) which adjust the value of amortizable intangible assets
and, accordingly, the value of goodwill, as compared to the estimates
considered below, will increase or decrease the amount of amortization. For
every $500 of reallocation between amortizable intangible assets and
goodwill, the pro forma net loss for three month periods presented below
would change by amounts ranging from $42 to $125. For the nine month pro
forma periods, every $500 of reallocation between amortizable intangible
assets and goodwill would result in a change in net loss ranging from $125
to $375.
Pro Forma Financial Information -- The accompanying unaudited consolidated
pro forma results of operations give effect to the Merger discussed above
as if such Merger had occurred at the beginning of each period (in
thousands, except per share amounts):
Three months ended Three months ended Nine-months ended Nine-months ended
September 30, 2001 September 30, 2000 September 30, 2001 September 30, 2000
------------------ ------------------ ------------------ ------------------
Revenue $2,374 $1,227 $3,744 $2,904
Net loss $2,352 $2,260 $8,847 $5,654
Basic and diluted net loss
per share $ 0.14 $ 0.08 $ 0.28 $ 0.20
Continuing Operations
The Company has suffered net losses and negative operating cash flows since
inception. Funding for its operations has been provided primarily by Lancer
through long-term debt and equity investments. 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.
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.
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. Actual results could differ from those
estimates.
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
has adopted SFAS No. 133, as amended, beginning the first quarter of fiscal
2001. The impact of adoption of this statement on the Company's financial
position and results of operations was not significant.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations." SFAS No. 141 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 Merger.
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets," was
issued. 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 is assessing but has not yet determined how the adoption
of SFAS No. 142 will impact its financial position and results of
operations.
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (SFAS 144) was issued which supersedes SFAS No. 121. It
established new accounting standards for the impairment of long-lived
assets. The Company will adopt SFAS No. 144 effective with the beginning of
fiscal 2002. The Company has not yet quantified the impact of SFAS No. 144
on its financial statements.
3. INVENTORIES
Inventories consist of the following at September 30, 2001:
2001
----
Cellular telephones $285
Accessories 41
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$326
====
4. OTHER ASSETS
At September 30, 2001, other assets include certain intangible assets that
were acquired by ei at its inception in April 1999. Such assets consisted
of the value of airtime resale agreements with cellular carriers and a
significant distribution agreement. Such capitalized costs are being
amortized over a three-year useful life.
In connection with the September 28, 2001 Merger of Wolfpack and ei,
intangible assets totaling $22,434 million were recorded based on the
allocation of the purchase price. Such assets included the value of the
acquired customer base, dealer network, contractual arrangements and
goodwill, based on the Company's preliminary purchase price allocation.
5. NOTES PAYABLE
During 2000, the Company issued several subordinated convertible notes
outstanding to Lancer. 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%. During 2001, the
Company issued an additional $3,263 of convertible notes payable to Lancer.
These notes bear interest at 10%. Each of these notes is due on March 31,
2003.
In connection with the Merger, Lancer, ei and Wolfpack entered into a Note
Exchange, Restructure and Conversion Agreement. This agreement provides
that the notes payable together with all accrued interest at the date of
the Merger were converted into two subordinated convertible notes of
Wolfpack Corporation totaling $7,099. In addition, the stock purchase
warrants held by Lancer were cancelled. Further, upon a sale of equity by
Wolfpack to outside parties, Lancer will agree to exchange, on a dollar for
dollar basis or equal amount of debt for Wolfpack common stock. To the
extent the debt owed to Lancer has not been converted by February 28, 2002,
Lancer will obtain the right to convert its debt at any time thereafter,
into Wolfpack common stock at a thirty percent discount to the market price
of Wolfpack common stock.
6. STOCKHOLDERS' (DEFICIT)/ EQUITY
The changes in stockholders' (deficit)/equity in 2001 were as follows:
Balance at December 31, 2000 $(3,035)
ei stock options issued 161
Net loss for nine-months ended
September 30, 2001 (5,624)
Impacts of Merger:
Cancellation of ei warrants (80)
Fair value of common stock issued
in conjunction with the Merger 21,878
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Balance at September 30, 2001 $13,300
For legal purposes, Wolfpack acquired ei. However, for accounting purposes,
ei was treated as the acquiring company in a reverse acquisition accounted
for as a purchase. The above activity reflects the historical data of ei
prior to the September 28, 2001 reverse acquisition. The ei stock options
previously issued remain outstanding and were not exchanged in the Merger.
Item 2. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis should be read in conjunction with
the financial statements and related notes that are included under Item 1.
Certain statements in this Quarterly Report, which are not statements of
historical fact, are forward-looking statements. See "Special Note
Regarding Forward-Looking Information" on page 3.
Overview
equitel, inc. ("ei") and equitel communications corp. ("ecc") (collectively
"equitel") were formed in April 1999 through a combination of commonly
controlled entities. On September 28, 2001, equitel consummated a reverse
acquisition merger with Wolfpack Corporation, a Delaware Corporation, and
its subsidiaries (collectively "Wolfpack), which include E-Z Fon Services,
Inc. and E-Z Wireless, Inc. Pursuant to the merger, Lancer Offshore, Inc.
and its affiliates (collectively "Lancer"), the majority owners of equitel,
agreed to sell approximately 94% of the equitel's outstanding shares of
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).
Immediately following the merger, Lancer owned approximately 60% of
Wolfpack's outstanding common stock.
The newly merged Wolfpack Corporation ("the Company") has locations in
Research Triangle Park, North Carolina and Dallas, Texas and operates as a
national provider of prepaid telecommunications services including cellular
telephone service, long distance service and local exchange services,
leveraging existing carrier networks and a network of distribution
channels.
Management's plans for operations during the upcoming twelve months consist
of developing its market share for prepaid telecommunications services
through product awareness promotional campaigns and development of key
distributor relationships for its products and services. The Company sells
its products and services primarily through distributor and agent
relationships, which resell the Company's products and services to
subscribers through a variety of distribution channels.
The interim financial statements should be read in conjunction with the
consolidated financial statements and related notes, management's
discussion and analysis and other information included in Wolfpack
Corporation's Annual Report on Form 10-KSB for the year ended December 31,
2000, and the Current Reports on Forms 8-K filed on October 15, 2001 and
November 19, 2001. In connection with the reverse acquisition discussed
above, although Wolfpack is the legal acquiror, equitel is the accounting
acquiror for financial reporting purposes. Accordingly, the interim results
of operations and cash flows in this Form 10-QSB are presented for equitel,
rather than for the legal registrant, Wolfpack. Results of operations
previously reported for Wolfpack have been restated to reflect those of
equitel.
Results of Operations
Three and nine months ended September 30, 2001 and 2000 (all amounts in
thousands)
Revenues
During the three months ending September 30, 2001, the Company generated
revenues from airtime and product sales of $622, as compared to $431 for
the same period ended September 30, 2000. During the nine months ending
September 30, 2001, the Company generated revenues from airtime and product
sales of $2,174 as compared to $1,153 for the same period ended September
30, 2000. The increases are a result of the Company's increased customer
base and nationwide coverage for cellular telephone service. The Company
has conducted various promotional initiatives to provide sales incentives
to customers and gain a competitive advantage in its market segment. Such
incentive include, among other things, cash and/or airtime rebates, free
long distance calls, and increased usage time based on the dollar amount of
time downloaded. Furthermore, the Company has developed unique distribution
relationships which focus on strategic target markets such as convenience
oriented outlets and college bookstores.
Costs of Airtime and Cellular Telephone Equipment
During the three months ending September 30, 2001, the Company had direct
costs for airtime and product sales of $1,012 as compared to $770 for the
same period ended September 30, 2000. During the nine months ending
September 30, 2001, the Company had direct costs for airtime and product
sales of $3,279 as compared to $1,804 for the same period ended September
30, 2000. The increases during these periods were directly associated with
the increased number of customer cellular telephone activations and airtime
recharges. Recharges represent existing customers purchasing additional
airtime following their initial telephone activation. The cost of customer
acquisition is reflected in the Company's discounted pricing of cellular
telephone handsets resulting in negative gross margin for equipment sales.
The cellular equipment gross margins for the three months ending September
30, 2001 were $30 as compared to a negative gross margin of $206 for the
quarter ended September 30, 2000. The nine months negative gross margin on
cellular equipment is $360 at September 30, 2001, as compared to $451 for
the period ended September 30, 2000. In regards to airtime gross margins,
the three months ending September 30, 2001 shows a negative gross margin of
$420 as compared to $133 for the three months period ended September 30,
2000. Likewise, the nine months airtime gross margins indicate a negative
gross margin of $745 and $200 for 2001 and 2000 respectively. The primary
reasons for the negative gross margins for all the periods noted above
relate to the Company's efforts to maintain an active customer base for
airtime usage by allowing customers to remain active beyond normal churn
parameters. Because
the Company was early in its stage of customer acquisition, these efforts
were a method to obtain wider geographic appeal for our products. The
Company currently has reinstated a more aggressive customer churn routine
to reduce carrier airtime billings. Further, the Company must maintain an
inventory of telephone numbers for activations as they are requested by new
customers. Maintaining such inventory levels requires the payment of
standard monthly service fees on a "per telephone number" basis. As such,
inventory not in use by the Company's subscribers generates costs with no
corresponding revenue. The management of the inventory of telephone numbers
has been a focus of management, and the Company continues its efforts to
maintain the minimum inventory levels. Additionally, the airtime gross
margins are affected by some carrier contracts that require an activated
number to remain in our inventory for a minimum of one year from the date
of activation. The Company uses it's best efforts to recycle those numbers
first for those customers that have been churned before the one-year
minimum.
Selling, General and Administrative Expenses (SG&A)
During the three month period ended September 30, 2001, the Company
incurred expenses of $972 as compared to $1,180 for the same period ended
September 30, 2000. For the nine months ending September 30, 2001 the
Company incurred expenses of $3,342 as compared to $3,019 for the same
period ended September 30, 2000. The overall increase in the SG&A expense
for the nine months ended September 30, 2001, is a result of a general
increase in the expenses related to increased business activity in Customer
Service and Marketing during 2001 and increased costs associated with the
build-out of the Company's proprietary customer service and management
technology platform. The Company implemented certain cost cutting measures
during the third quarter of 2001, including salary and headcount reductions
and limitations on travel expenditures. These changes resulted in reduced
expenses during the three months period ended September 30, 2001 as
compared to the corresponding quarter for 2000.
Depreciation and Amortization
During the three months ending September 30, 2001, depreciation and
amortization increased $7 as compared to the same period ended September
30, 2000. For the nine months ending September 30, 2001, the depreciation
and amortization increased $35 as compared to the period ended September
30, 2000. These increases are due to additional capital equipment purchases
necessary to support the increase in operations.
Interest Expense
During the three months ending September 30, 2001, interest expense
increased by $168 as compared to the same period ended September 30, 2000.
For the nine months ending September 30, 2001, there was an increase of
$511 as compared to the same period ended
September 30, 2000. During this period, the Company increased related party
debt as a funding mechanism to finance management's strategic operating
plan. Additional funds will be required in the near term to fund future
customer acquisitions. Interest expense may continue to increase during the
upcoming twelve months period due to the constraints on cash flows from
operations associated with investments in customer acquisitions.
During the three months ending September 30, 2001, the Company incurred a
net loss of $1,788 ($.14 per share) as compared to a net loss of $1,770
($.14 per share) for the same period ended September 30, 2000. During the
nine months ending September 30, 2001, the Company incurred a loss of
$5,624 ($.45 per share) as compared to a loss of $3,960 ($.52 per share)
for the same period ended September 30, 2000. The Company has an
accumulated deficit since inception of $12,893. The increase in the loss
for the three and the nine month periods was primarily due to increased
costs of customer acquisition, as the Company continues to expand its
operations, higher interest expense associated with related party debt, and
the completion of ePRIME development, the Company's proprietary software
for customer activations and customer management. The share amounts used in
the per share calculations above represent the former equitel share amounts
adjusted for the equivalent amount of Wolfpack shares based on the exchange
ratio used in the reverse acquisition.
Liquidity and Capital Resources
At September 30, 2001, the Company maintained a negative working capital
balance of $4,078. This was attributed primarily to accounts payable and
accrued expenses of $2,497 and deferred revenue (related to product sold by
the Company to the distributor but not activated by the end user) of
$1,454.
Management's plans for future operations consist of developing its market
share for nationwide, prepaid telecommunications services through the
development of key distributor relationships for its products and services.
A significant portion of its sales from inception to date has been through
one major distributor. Establishing favorable relationships with
distributors is key to the Company's development of its market share.
In order to provide reliable service to its subscribers, the Company must
continue to develop and maintain favorable relationships with the
telecommunications carriers from which it purchases and resells
telecommunications services. There are no assurances that management will
be successful in its marketing plans or that favorable contracts will be
negotiated with the major telecommunications carriers.
The ultimate success of the Company is dependent upon the development of
the Company's subscriber base to sustainable levels to generate positive
operating cash flow. During the period required to develop the distributor
relationships and the Company's subscriber base, additional operating and
capital funding will be required. Such funding is needed primarily for
additional sales and marketing to enhance the Company's nationwide
distributor and subscriber presence, development costs related to its
proprietary technology platform and increases in working capital
requirements. Additionally, funding may be necessary for key strategic
acquisitions in order to increase its customer base. The Company has
incurred net losses and negative operating cash flows since inception. Cash
used by operations was $3,093 for the nine months ended September 30, 2001,
and $2,944 for the comparable period ended September 30, 2000.
Additionally, cash of $93 and $171 was used for capital purchases in the
nine-month periods ended September 30, 2001 and 2000, respectively.
Additional capital resources will be required due to the reverse
acquisition discussed above. The overall company focus on developing
distributor and agent relationships and increasing the customer base
through sales and marketing channels is also critical to the ongoing
operations of Wolfpack. On a pro forma basis, including the results of
Wolfpack, the Company generated negative cash flow from operations of
$3,982 and $2,938 for the nine months ended September 30, 2001 and 2000,
respectively. Additionally, pro forma cash used in investing activities,
including Wolfpack, were $392 and $913 for the nine months ended September
30, 2001 and 2000, respectively.
From a funding standpoint, management is focused on identifying and
securing sufficient capital sources. Historically, funding for the
Company's operating and capital requirements have come from Lancer in the
form of convertible debt and equity investments. Financing activities for
the nine months ended September 30, 2001, provided $3,050 from the proceeds
of related party notes payable. For the nine months period ended September
30, 2000, the financing activities provided $1,250 from the proceeds from
related party notes payable and $1,876 from the issuance of common stock.
On a pro forma basis, cash flows from financing activities were $4,398 and
$3,926 for the nine months ended September 30, 2001 and 2000, respectively.
Wolfpack's operations and capital requirements were provided through
issuances of common stock and advances from shareholders.
The Company is currently pursuing additional funding up to $10 million
through various sources of capital. Although management believes it will be
successful in attracting sufficient capital to build out the Company, no
assurances can be given that the Company will be successful in obtaining
such 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. However, there are no
assurances that Lancer will continue to fund the Company beyond December
31, 2001.
Risk Factors
Management anticipates that results of operations may fluctuate in the
foreseeable future due to several factors, including but not limited to the
following:
. the Company's ability to raise additional capital to fund the growth of
its subscriber base and distributor relationships;
. competitive price pressures;
. changes in telephony technology and product acceptance in the
marketplace.
The ultimate success of the Company is dependent upon management's ability
to market and sell prepaid local, long distance and cellular services at
levels sufficient to generate operating revenues in excess of expenses. Due
to the Company's limited operating history, an accurate prediction on
future operating results is difficult.
Risk or uncertainties that could be reasonably likely to have a material
adverse effect on the business of the Company and thereby materially impact
the Company's short-term or long-term liquidity and/or net sales, revenues
or income from continuing operations, specifically for prepaid cellular
telephone services are: (1) loss of distribution channels for future sales;
(2) loss of carrier contracts due to non-payment or renewal of existing
contracts with similar or better terms than current contracts; (3) failure
to obtain a digital cellular telephone at a price point that limits the
level of product discounting necessary to achieve competitiveness in the
market place; and (4) retention of key personnel.
Risk factors specific to the prepaid local and prepaid long distance
markets are: (1) Federal and/or state regulations that may affect the
ability of the Company to complete it's market strategy; (2) competition
from the growing number of well financed Competitive Local Exchange
Companies ("CLECs"); (3) competition from Incumbent Local Exchange
Companies ("ILECs"); and (4) retention of highly skilled personnel.
Part II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES.
In connection with the merger of the Company, equitel, inc. and Lancer
entered into a Note Exchange, Restructure and Conversion Agreement on September
30, 2001. This agreement provides that the notes payable together with all
accrued interest at the date of the merger were converted into two subordinated
convertible notes of Wolfpack Corporation for $7,099. In addition, the stock
purchase warrants, at a carrying value of $120, held by Lancer were canceled.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on 8-K/A.
(1) Change in Accountant's filed with the Commission October 15,
2001.
(2) Consolidated Financial Statements of equitel, inc. as of
December 31, 2000 and 1999, filed with the Commission
November 19, 2001.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WOLFPACK CORPORATION
Date: November 19, 2001 By: /s/ Anthony W. Cullen
---------------------------
Anthony W. Cullen
Chief Executive Officer
Date: November 19, 2001 By: /s/ E. Eugene Whitmire
---------------------------
E. Eugene Whitmire
Chief Executive Officer