<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended September 30, 2000
Commission File No. 0-24684
LONE WOLF ENERGY, INC.
(Name of small business issuer in its charter)
Colorado
(State or other jurisdiction of Incorporation or Organization)
73-1587867
(IRS Employer Identification Number)
201 Robert S. Kerr. Suite 500
Oklahoma City, Oklahoma 73102
(405) 943-4615
(Address, including zip code and telephone number, including area
Code of registrant's executive offices)
K&S VENTURES, INC.
(Former Name of Registrant)
Securities registered under Section 12(b) of the Exchange Act: none
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of November 10, 2000 there were
36,485,790 shares of the Company's common stock issued and outstanding.
Documents Incorporated by Reference: None
<PAGE> 2
PART 1. - FINANCIAL INFORMATION
Item 1. Financial Statements
a. The following financial statements include all adjustments, which in the
opinion of management are necessary to make the financial statements not
misleading.
INDEPENDENT REVIEW REPORT
Board of Directors and Stockholders
Lone Wolf Energy, Inc.
We have reviewed the accompanying consolidated balance sheet of Lone Wolf
Energy, Inc. as September 30, 2000, and the related consolidated statements of
income for the three months and nine months then ended and the statements of
cash flow for the nine months ended September 30, 2000 in accordance with
Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants. All information included in
these financial statements is the representation of the management of Lone Wolf
Energy, Inc.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
The December 31, 1999 financial statements for Lone Wolf Energy, Inc. were
audited by us and we expressed an unqualified opinion in our reports dated
March 28, 2000, but we have not performed any auditing procedures since
that date.
Henderson Sutton & Co., P.C.
Certified Public Accountants
Tulsa, Oklahoma
November 10, 2000
2
<PAGE> 3
LONE WOLF ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 2000 1999
------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 61,263 $ 108,921
Accounts receivable 1,024,140 135,385
Current portion of notes receivable 960,000 132,169
Deposits 29,284 --
Inventory 249,436 7,000
----------- -----------
2,324,123 383,475
----------- -----------
PROPERTY AND EQUIPMENT 1,704,261 1,324,425
Less accumulated depreciation (547,874) (389,317)
----------- -----------
1,156,387 935,108
----------- -----------
OTHER
Goodwill (net) 517,552 457,502
Notes receivable-net of Current Portion 265,000 844,148
Organization costs (net) 19,915 34,988
Investments 24,375 24,375
Deferred tax asset 66,000 130,000
----------- -----------
892,842 1,491,013
----------- -----------
$ 4,373,352 $ 2,809,596
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
See Accountants Review Report
3
<PAGE> 4
<TABLE>
<CAPTION>
LIABILITIES & STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 116,500 $ 183,465
Accounts payable 1,698,384 848,156
Accrued expenses 410,007 96,150
Accrued income taxes -- --
Prepayments and customer deposits 56,524 79,310
----------- -----------
2,281,415 1,207,081
----------- -----------
OTHER LIABILITIES
Long-term debt -net of current portion 428,103 409,633
Deposits -- 24,000
Deferred revenue -- 160,449
----------- -----------
428,103 594,082
----------- -----------
TOTAL LIABILITIES 2,709,518 1,801,163
----------- -----------
STOCKHOLDER'S EQUITY
Preferred stock ($0.001 par value, 20,000,000 shares
authorized, no shares issued and outstanding) -- --
Common stock ($0.001 par value, 100,000,000 shares
authorized, 36,485,790 shares issued and outstanding at
September 30, 2000 and 27,220,000 issued and outstanding at
December 31, 1999) 36,486 27,220
Paid-in capital 1,753,852 1,201,618
Treasury stock (300,000 shares @ $0.02) (6,000) --
Unrealized Gain (Loss) on Available for Sale Securities (7,969) (7,969)
Retained earnings (deficit) (112,535) (212,436)
----------- -----------
1,663,834 1,008,433
----------- -----------
$ 4,373,352 $ 2,809,596
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
See Accountants Review Report
4
<PAGE> 5
LONE WOLF ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $ 1,849,755 $ 330,882 $ 5,587,338 $ 885,394
OPERATING EXPENSES
Cost of sales 1,431,890 257,039 4,367,527 655,086
Selling, general and administrative 377,565 309,816 1,144,709 1,070,661
Depreciation and amortization 77,632 50,000 202,427 150,000
----------- ----------- ----------- -----------
1,887,087 616,855 5,714,663 1,875,747
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (37,332) (285,973) (127,325) (990,353)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income 30,277 564 60,310 564
Interest expense (13,511) (2,329) (40,400) (4,996)
Gain (Loss) on sale of equipment -- -- 160,278 --
Gain on sale of financing contract -- -- 578,201 --
Merger related costs (41,735) -- (325,723) --
Research and development (102,811) -- (153,579) --
Other income -- 664,320 12,139 778,900
----------- ----------- ----------- -----------
(127,780) 662,555 291,226 774,468
----------- ----------- ----------- -----------
NET INCOME (LOSS) BEFORE INCOME TAXES $ (165,112) $ 376,582 $ 163,901 $ (215,885)
PROVISION FOR INCOME TAXES:
Current 2,000
Deferred tax benefit (expense) 66,000 137,000 (64,000) 245,000
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (97,112) $ 513,582 $ 99,901 $ 29,115
=========== =========== =========== ===========
PRIMARY EARNINGS (LOSS) PER SHARE nil $ 0.02 nil nil
=========== =========== =========== ===========
FULLY DILUTED EARNINGS (LOSS) PER SHARE nil $ 0.02 nil nil
=========== =========== =========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
See Accountants Review Report
5
<PAGE> 6
LONE WOLF ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ 99,901 $ 29,115
Reconciliation of net income to net cash provided by
operating activities
Depreciation and amortization 203,312 150,000
Gain (loss) on sale of property and equipment (5,000) --
(Increase) decrease from changes in:
Deferred Taxes 64,000 (245,000)
Accounts receivable (888,755) 115,866
Deposits (29,284) --
Inventory (242,436) --
Increase (Decrease) from changes in:
Accounts payable 850,228 (874,928)
Accrued liabilities 313,857 (210,581)
Taxes payable -- --
Deferred revenue (160,449) 166,866
Prepayments and customer deposits (46,786) (59,612)
----------- -----------
158,588 (928,274)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Goodwill in businesses acquired (89,732) --
Cash received for property and equipment sold 5,000 37,852
Increase in investments -- (32,344)
Purchase of property and equipment (379,836) --
----------- -----------
(464,568) 5,508
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock for services 237,500 500
Common stock issued for note conversion 250,000 --
Purchase of Zenex stock -- (6,353)
Increase in paid in capital 1,384,538
Common stock issued for goodwill 68,000 --
Change in notes receivable (248,683) (658,261)
Change in notes payable (48,495) 182,789
----------- -----------
258,322 903,213
----------- -----------
NET INCREASE (DECREASE) IN CASH (47,658) (19,553)
CASH AT BEGINNING OF PERIOD 108,921 87,757
----------- -----------
CASH AT END OF PERIOD $ 61,263 $ 68,204
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
See Accountants Review Report
6
<PAGE> 7
LONE WOLF ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESSES
Lone Wolf Energy, Inc. (formerly K&S Ventures was incorporated on March 4, 1991
in the state of Colorado. In February 1999 the Company signed a Master Sales
Agreement with Eagle Capital, Inc. (OTCBB:ECIC) to sell specialized equipment.
The agreement called for the Company to provide fifteen pieces of equipment over
the next three years. In February 2000 the Company terminated the Master Sales
Agreement and sold the equipment it was financing under that agreement. Under
the terms of the agreement termination and sale of the equipment the Company
recorded a notes receivable for $1,625,000 of which $725,000 had been collected
as of September 30, 2000. The Company has terminated their equipment leasing
activities.
In March 2000 the Company purchased the assets of EP Distributing Company
("EPD") for $100,000 in cash and 1,000,000 shares of common stock valued at
$40,000. EPD is currently operated as a division of the Company. The division
sells nutritional products, with its primary line being Earth Pharmacy brand
products, and also brokers medical supplies. The acquisition was accounted for
as a purchase.
On May 11, 2000, the Company acquired ChurchLink.com, Inc., ("ChurchLink").
ChurchLink is operating as a subsidiary of the Company. ChurchLink has developed
a software product that provides an online communications hub for churches and
their members. ChurchLink is completing the beta test stage with selected
churches and is making final revisions to the software. Significant national
marketing efforts for the software are scheduled for November and December 2000.
Sales of the software are scheduled to begin in the first quarter of 2001. The
purchase price of ChurchLink was 100,000 shares of the Company's Common Stock.
The terms of the acquisition provide that an additional 400,000 shares of the
Company's Common Stock will be issued as churches subscribe to the service. The
additional stock will be issued as follows:
20,000 shares for each block of 100 churches up to 1,000 churches - 200,000
shares
20,000 shares for each block of 300 churches from 1,000 to 2500 churches -
100,000 shares
20,000 shares for each block of 500 churches from 2,500 to 5,000 churches -
100,000 shares
The fair market value of the shares issued was $28,000. The acquisition was
accounted for as a purchase.
On June 21, 2000 the Company completed the acquisition of Zenex Long Distance,
Inc. (d/b/a Zenex Communications, Inc.), ("Zenex"). A newly formed wholly owned
subsidiary of the Company, Prestige Acquisition, Corp. ("Prestige Acquisition"),
was merged with and into Prestige Investments, Inc. ("Prestige Investments"),
the parent company of Zenex. Prestige Investments was the surviving corporation
in the merger. The merger was pursuant to an Agreement and Plan of
Reorganization dated May 4, 2000, by and among the Company, Prestige
Acquisition, Prestige Investments and the five shareholders of Prestige
Investments (the "Zenex Merger Agreement"). Pursuant to the Zenex Merger
Agreement, the Company issued 15,550,000 of the Company's common stock to the
shareholders of
7
<PAGE> 8
LONE WOLF ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
Prestige investments in return for their surrender to the company of all of
their shares of common stock of Prestige Investments. Following the merger,
Prestige Investments became a wholly owned subsidiary of the Company with Zenex
operating as a wholly owned subsidiary of Prestige Investments. The business
combination was accounted for as a pooling of interest. The accompanying
financial statements include the assets, liabilities and operations of Prestige
and its wholly owned subsidiary Zenex for period presented.
Prestige Investments, Inc. and its wholly owned subsidiary, Zenex Long Distance,
Inc. ("Zenex") are engaged primarily in the wholesale of long distance minutes
for prepaid calling cards. Zenex does business as Zenex Communications, Inc. and
primarily markets its product to distributors and switchless resellers who
in-turn market the products to retailers.
Prestige was incorporated in Oklahoma on July 31, 1998. Zenex was incorporated
on January 27,1994 in Oklahoma. Prestige was formed solely for the purpose of
business acquisitions and investments, and had minimal activities prior to the
acquisition of Zenex. Prestige's only operations are those of its wholly owned
subsidiary, Zenex. Prestige acquired Zenex in accordance with a letter of intent
dated January 27, 1999 and a subsequent Stock Purchase Agreement ("The
Agreement") dated February 19, 1999. The business combination of Prestige and
Zenex was accounted for as a purchase.
The Company's September 30, 2000 consolidated balance sheet includes the wholly
owned subsidiary, Prestige and Prestige's wholly owned subsidiary, Zenex, EPD
and Churchlink. The December 31, 1999 consolidated balance sheet includes the
wholly owned subsidiary, Prestige and its wholly owned subsidiary Zenex Long
Distance, Inc. The Company's consolidated statement of operations for the three
months and nine months ended September 30, 2000 includes the pooled entity of
Prestige and its wholly owned subsidiary Zenex for the presented periods. The
purchased entities of EPD and Churchlink are included from their respective
dates of purchase. All significant inter-company accounts have been eliminated
in the consolidated financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid debt or equity instruments purchased
with an original maturity at the date of purchase of 90 days or less to be cash
equivalents.
INVENTORY
Inventory of prepaid long-distance calling cards and nutritional products are
stated at the lower of cost or fair market value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, receivables, short-term
payables, and notes payable. The carrying amounts of cash, receivables, and
short-term payables approximate fair value due to their short-term nature. The
carrying amounts of notes payable approximate fair value based on borrowing
terms currently available to the Company.
8
<PAGE> 9
LONE WOLF ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
ADVERTISING COST
Advertising costs are expensed as incurred as selling, general and
administrative expenses in the accompanying statement of operations.
INCOME TAXES
The company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. This statement prescribes the use of the liability
method whereby deferred tax assets and liabilities are determined based on the
differences between financial reporting and tax bases of assets and liabilities
and measured at tax rates that will be in effect when the differences are
expected to reverse. Valuation allowances are established, when necessary, to
reduce deferred tax assets when it is more likely than not that the deferred tax
asset will not be realized.
REVENUE RECOGNITION
The Company earns revenues by providing access to and usage of long distance
networks and the sale of nutritional products. Revenue is recognized in the
month the service is provided. The Company records deferred revenue for calling
cards sold and recognize revenue as the customer utilizes the calling time.
NET LOSS PER SHARE
The Company computes net income (loss) per share in accordance with SFAS No.
128, Earnings per Share and SEC Staff Accounting Bulletin No. 98 ("SAB 98").
Under the provisions of SFAS No. 128 and SAB 98 basic net income (loss) per
share is calculated by dividing net income (loss) available to common
stockholders for the period by the weighted average number of common shares
outstanding during the period.
CONCENTRATIONS
In connection with providing long distance service to customers, Zenex has
contractual agreements with certain carriers, which provide access to and usage
of their long distance network. The contracts include an agreed-upon billing
rate and a term for these services. During the period two vendors carried
approximately 87% of the Company's long-distance traffic. Although other
carriers are available to provide access and usage of their long distance
network, there are a limited number of such sources. Additionally the time
required to efficiently transfer system connections makes the Company vulnerable
to a risk of a near-term significant impact in the event of a natural disaster
or any other termination of the carrier's service. However the Company has the
ability to utilize back up systems in the event of the carriers termination of
services.
Although Zenex has a significant number of customers, one customer accounts for
approximately eighty percent (80%) of the Zenex revenue. The loss of this
customer would have a materially adverse impact on the company's revenues and
operations.
9
<PAGE> 10
LONE WOLF ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
The Company's receivables are from a small number of companies in the same
industry, which are subject to business cycle variations. This concentration
subjects the Company to a credit risk if the general industry or the companies
fail to perform.
REGULATION
Zenex Long Distance, Inc. is subject to regulation by the Federal Communications
Commission and by various state public service and public utility commissions.
The Company's management and regulatory legal counsel believe the Company is in
compliance with regulations in all states.
USE OF ESTIMATES
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 the 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.
SEGMENT INFORMATION
<TABLE>
<CAPTION>
LONE CHURCH
WOLF ZENEX EPD LINK TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue $ 25,173 $ 5,414,155 $ 148,010 $ -- $ 5,587,338
Operating expense 252,156 5,269,078 193,429 -- 5,714,663
----------- ----------- ----------- ----------- -----------
Operating income (226,983) 145,077 (45,419) -- (127,325)
Other income(expense) 563,482 (117,767) (909) (153,580) 291,226
----------- ----------- ----------- ----------- -----------
Income before taxes $ 336,499 $ 27,310 $ (46,328) $ (153,580) $ 163,901
=========== =========== =========== =========== ===========
</TABLE>
Effective January 1, 1998, the Company adopted the provisions of SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. The Company
identifies its operating segments based upon business activities, management
responsibilities and geographical location. Following is a summary of operations
of the Company by segment for the nine months ended September 30, 2000:
10
<PAGE> 11
LONE WOLF ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.
NOTE 2 - NOTES RECEIVABLE
At September 30, 2000, the Company had notes receivable as follows:
<TABLE>
<S> <C>
Due from an unrelated corporation, payable in minimum monthly
Installments of $5,000, including interest at 4.42%, with
remaining unpaid principal and interest due on December 10, 2002. $ 325,000
Due from an unrelated corporation, payable in minimum monthly
Installments of $50,000 plus interest at 12% with remaining
Principal due on August 1, 2001 900,000
----------
Total 1,225,000
Less current portion 960,000
----------
Notes receivable -net of current portion $ 265,000
==========
</TABLE>
NOTE 3 - PROPERTY AND EQUIPMENT, ACCUMULATED DEPRECIATION AND AMORTIZATION
Property and equipment are recorded at cost. Expenditures for repairs and
maintenance are charged to operations when incurred. Major improvements and
renewals that extend the useful life of the related asset are capitalized and
depreciated over the remaining useful life. Depreciation and amortization are
computed for financial and income tax reporting purposes using straight-line and
accelerated methods over estimated useful lives ranging from three years to ten
years. Depreciation charged to operation for the nine month period was $158,557.
The following table summarizes the classifications of property and equipment;
total accumulated depreciation and the related estimated useful lives:
11
<PAGE> 12
LONE WOLF ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PROPERTY AND EQUIPMENT COST YEARS
---------------------- ---------- -----
<S> <C> <C>
Switching equipment $1,422,277 5-10
Dedicated line equipment 8,291 5
Office software and equipment 217,720 5-7
Autos 32,525 5
Leasehold improvements 23,448 5
----------
Total 1,704,261
Less accumulated depreciation 547,874
----------
Net property and equipment $1,156,387
==========
</TABLE>
NOTE 4 - INTANGIBLE ASSETS
Goodwill represents the excess of the cost of assets acquired over the fair
value at date of acquisition. Goodwill is being amortized on the straight-line
method over fifteen years. Accumulated amortization at September 30, 2000
totaled $140,219, and amortization expense of $29,681 was charged to operations
in the nine-month period ended September 30, 2000.
Organization costs primarily include legal and professional fees associated with
organizing operations. These costs are deferred and amortized using the
straight-line method over five years. Accumulated amortization at September 30,
2000, totaled $85,851. Amortization expense of $15,074 was charged to operations
in the nine month period ended September 30, 2000.
NOTE 5 - LONG-TERM DEBT
The company has notes payable at September 30, 2000 as follows:
<TABLE>
<S> <C>
First National Bank of Midwest City, 9.5% note secured
by all Zenex equipment and Zenex common stock, due in
monthly installments of $5,227, including interest through
January 2005 $ 225,391
First National Bank of Midwest City, 9.75% note secured
by all Zenex equipment and Zenex common stock, due in
monthly installments of $2,124, including interest through
March 2005 93,279
</TABLE>
12
<PAGE> 13
LONE WOLF ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
<TABLE>
<S> <C>
Tim Apgood, a director of the Company, for the balance of
the purchase price of EP Distributing assets, non-interest
bearing, due September 30, 2000 50,000
Federal Bank Centre, Tulsa, Oklahoma, 9.75% note
secured by auto, due in monthly installments of $688
including interest, due May 30, 2005 30,596
Federal Bank Centre, Tulsa, Oklahoma, $450,000 line
line of credit note with interest payable monthly at 1.5%
over Wall Street Journal prime (currently 11%), secured
by all assets of Wolf Energy, Inc. and the personal
guarantee of certain directors, due November 2001 145,337
--------
Total 544,603
Less Current Portion 116,500
--------
Long-Term Debt $428,103
========
</TABLE>
NOTE 6 - INCOME TAXES
At September 30, 2000, the Company had net operating losses of approximately
$1,560,000 available to reduce future federal and state taxable income. Unless
utilized, the carryforward amounts will begin to expire in 2012. For federal and
state tax purposes, the Company's net operating loss carryforward amounts are
subject to an annual limitation due to a greater than 50% change in stock
ownership, as defined by federal and state tax law.
Under the provisions of FAS-109, Accounting for Income Taxes, deferred tax
liabilities and assets are measured using the applicable tax rate based on the
taxable and deductible temporary differences and operating loss carryforward
amounts. Taxable temporary differences result principally from the excess of
depreciation for tax purposes over the amount deducted for financial reporting
purposes. Deductible temporary differences and operating loss carryforwards,
giving rise to deferred tax assets, are reduced by a valuation allowance if it
is more likely than not that some or all of the deferred tax assets will not be
realized.
13
<PAGE> 14
LONE WOLF ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
The following are components of the net deferred tax asset at
September 30, 2000:
<TABLE>
<S> <C>
Deferred tax liability on depreciation $(103,000)
Deferred tax assets for loss carryforwards 595,000
---------
Deferred tax asset 492,000
Less valuation allowance (426,000)
---------
Net deferred tax asset $ 66,000
=========
</TABLE>
The Company has established a valuation allowance for a portion of its net
deferred tax assets because of limitations on the use of loss carryforwards due
to ownership changes.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
CUSTOMER BILLING SERVICE
On June 1, 1999, the Zenex entered into a billing service agreement with a third
party outsource service provider. The agreement extends for a period of
forty-two (42) months. Under the terms of the agreement the service fee is
$2,750 per month for recording up to 750,000 detail call records per month.
The additional monthly fee for call records in excess of 750,000 is on a
declining scale of .00395 (cents) to .00310 (cents) per record.
OPERATING LEASES
The Company leases its facilities under operating leases, which expire at
various intervals through September 30, 2005. Under the terms of the leases the
Company is responsible for its share of common area maintenance and operating
expenses. Rent expense under operating leases for the nine months period ended
September 30, 2000, totaled $15,346.
As of September 30, 2000, the future minimum lease commitments under the leases
were as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------
<S> <C>
2000 $ 17,082
2001 69,039
2002 71,886
2003 74,739
2004 77,583
2005 59,787
--------
$370,016
========
</TABLE>
14
<PAGE> 15
LONE WOLF ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
ACQUISITION OF ZENEX LONG DISTANCE, INC
Prestige Investments, Inc., a wholly owned subsidiary, of the Company acquired
Zenex Long Distance, Inc. in accordance with a letter of intent dated January
27, 1999 and a subsequent Stock Purchase Agreement ("The Agreement") dated
February 19, 1999. The business combination was accounted for as a purchase. In
accordance with the terms of the Agreement, the initial purchase price was
$6,353 for 100% of the 635,295 outstanding common shares. The Agreement includes
a provision whereby the sellers may earn additional amounts if the cumulative
collected gross sales revenue reach certain levels, (the "Earn Out Rights"), as
follows:
(a) When collected gross sales revenue reach Ten Million ($10,000,000),
the sellers will be paid an additional Fifty Cents ($0.50) per share
totaling $317,647.
(b) When collected gross sales revenue reach Twenty Million ($20,000,000),
the sellers will be paid and additional One Dollar ($1.00) per share
totaling $635,295.
(c) When collected gross sales revenue reach thirty-six Million
($36,000,000), the sellers will be paid an additional One-Dollar
($1.00) per share totaling $635,590.
(d) In no event will the Purchase Price exceed the amount of Two Dollars
and fifty-one Cents per share totaling $1,594,590.
Collected gross sales revenues through September 30, 2000 are approximately
$6,400,000. Management expects the $ 10,000,000 gross sales revenue to be
achieved in the year 2001
NOTE 9 - RESTATED FINANCIAL STATEMENTS - BUSINESS COMBINATION OF PRESTIGE
INVESTMENTS, INC.
On June 21, 2000 the Company acquired Prestige Investments, Inc. and its wholly
owned subsidiary, Zenex Long Distance, Inc. in a business combination which was
accounted for as a pooling of interest. Condensed consolidated financial
information of Prestige which is included in the restated December 31, 1999
consolidated balance sheet and the three months ending March 31, 2000, which is
included in the nine months ending September 30, 2000 statement of operations is
as follows:
<TABLE>
<S> <C>
DECEMBER 31, 1999 BALANCE SHEET
Current assets $ 198,153
Property and equipment (net) 935,108
Other assets 902,490
----------
Total assets $2,035,751
==========
Current liabilities $1,043,839
Stockholders' equity 991,912
----------
Total liabilities and stockholders' equity $2,035,751
==========
</TABLE>
15
<PAGE> 16
LONE WOLF ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
LONE
PRESTIGE WOLF
----------- -----------
<S> <C> <C>
MARCH 31, 2000 STATEMENTS OF OPERATIONS
Revenue $ 1,295,054 $ 1,195,366
Cost of sales 1,092,966 442,596
----------- -----------
Gross profit 202,088 752,770
Operating expenses 360,565 63,053
----------- -----------
Net income (loss) before taxes (158,477) 689,717
Provision for income taxes -- 271,000
----------- -----------
Net income (loss) $ (158,477) $ 418,717
=========== ===========
</TABLE>
The December 31, 1999 balance sheet has been restated to reflect the inclusion
of Prestige Investments, Inc. under the pooling of interest basis of accounting.
Additionally the three month period ended March 31, 2000 of Prestige is included
in the nine month period ended September 30, 2000 as reflected above.
NOTE 10 - EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Primary Earnings Per Share:(in thousands)
Common shares outstanding 35,886 27,220 35,886 27,220
======= ======= ======= =======
Weighted average shares outstanding 35,886 27,220 30,957 27,220
======= ======= ======= =======
Earnings per share nil $ 0.02 nil nil
======= ======= ======= =======
Fully Diluted Earnings Per Share:
Common shares outstanding 35,886 27,220 35,886 27,220
======= ======= ======= =======
Weighted average shares outstanding 35,886 27,220 31,596 27,220
======= ======= ======= =======
Earnings per share nil $ 0.02 nil nil
======= ======= ======= =======
</TABLE>
NOTE 11 - STOCK OPTIONS
In April 1999 a five year option was granted to Federal bank Centre to
purchase 500,000 shares of the Companys' common for $0.15 per share.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
accompanying financial statements.
EQUIPMENT SALES; DISCONTINUATION OF EQUIPMENT SALES. During 1999 and
through February 2000, the Company's only business activity was pursuant to a
Master Equipment Sales Agreement between the Company, as seller, and Eagle
Capital, Inc. (OTCBB:ECIC). The Master Equipment Sales Agreement, signed in
February 1999, obligated the Company to sell ten mobile block plants and five
portable Q-Bond plants (used in producing patented IMSI blocks for mortarless
dry stack construction) over the following three years. In April 1999 Eagle
ordered the first plant and made payments on the first plant through March 2000.
Payments during 1999 in connection with the first plant were $120,893.
In February 2000, the Company and Eagle Capital agreed to terminate the
Master Equipment Sales Agreement. Pursuant to the agreement to terminate, Eagle
Capital executed and delivered a promissory note for termination charges in the
amount of $1 million. The outstanding principal on the note is $900,000 at
September 30, 2000 and is payable $50,000 monthly plus interest @12% through
August 2001 when the balance is due.
Operating revenues in the Lone Wolf segment of the Company through
September 30, 2000 were $25,173 with costs directly related to this operation of
$12,089. The company also had gross profits from the termination of the Master
Sales Agreement of in the first quarter of $733,479. All of this revenue
reported for the nine months ended September 30, from the Lone Wolf segment of
the business is from the first quarter of 2000. In addition, the Company has
terminated this line of business and will not receive revenue or income from
this line of business in the future The Company had interest revenue of $30,250
in this segment of the business in the September 30, 2000 quarter from the sale
of the Master Agreement. Quarterly operating expenses for this segment of the
business are approximately $100,000 which is an increase from prior quarters due
to the cost of managing the other segments of the business.
ACQUISITIONS; NEW LINES OF BUSINESS. Since March 2000, the Company has
entered into agreements for various acquisitions for new lines of business. Each
acquisition is operated as a separate subsidiary or business unit, as follows:
EP Distributing Co. In March 2000 the Company purchased the assets of
EP Distributing Company for. The assets are currently operated as a division of
the Company.
The division sells nutritional products (with its primary line being
Earths' Pharmacy products) and brokers sales of medical supplies. Revenues and
cost of sales for the division are separately shown in the accompanying
financial statements. The divisions revenues increased to $99,000 in the quarter
ended September 30, 2000 from $34,000 in the quarter ended June 30, 2000.
Operating expenses in the quarter ended September 30, 2000 were 117,000 compared
to $56,000 in the quarter ended June 30, 2000. The net pre-tax loss for the
division was $17,000 in the quarter ended September 30, 2000 compared to $22,000
in the quarter ended June 30, 2000. The Company received The proper regulatory
approval to begin marketing a product on November 1, 2000 which it believes will
significantly increase revenues and profits in future quarters.
The ability of the division to become profitable will depend on
marketing its nutritional products and medical supplies to a broad base of
customers. The Company believes it has sufficient internal funds to finance the
operations of the division for the next twelve months. The Company does not
currently plan any material research and development expenses or any material
purchases of plant and equipment for the division in the next twelve months.
Currently, there is one employee assigned to the division. Additional employees
will be added as needed.
Zenex Communications, Inc. On June 21, 2000, the Company completed its'
acquisition of Zenex Communications, Inc. The Company l issued 15,550,000 shares
of its Common Stock as the purchase price for this acquisition. The acquisition
has been treated as a pooling of interest and as such its' results of operations
are consolidated with the Companys' as if it had always been a part of Lone
Wolf.
Revenues for the three months ended September 30, 2000 were $1,750,000
compared to $2,385,000 for the three months ended June 30, 2000. This compares
to less than $1,000,000 in revenues in all of 1999. Cost of sales were
17
<PAGE> 18
$1,672,000 in the quarter ended September 30, 2000 compared to $2,148,000 in the
quarter ended June 30, 2000. This decrease was from lower cost of sale due to
lower revenues for the quarter. General and administrative expenses were
decreased to $290,000 in the quarter ended September 30, 2000 down $54,000 from
$342,000 in the quarter ended June 30, 2000. The quarter ended September 30,
2000 included in other expense a cost of $68,000 for merger related cost and
$40,000 additional in this expenses in the quarter ended September 30, 2000. The
changes in revenues and expenses from 1999 are not comparable due to the total
change in the way the business is now conducted. Other income in 1999 resulted
in better net earnings in 1999 than in 2000 and was from settlement of old debts
from the new owners. The revenue reduction in the quarter ended September 30,
2000 was due to reduced minute use on the Companys' switch. This period of
reduced traffic on the switch has allowed the Company to develop and test new
products which the Company believes will result in increased profit margins and
a more diversified customer bases in the future. The reduction in general and
administrative costs is from cost cutting measures put in place by the new
management. Costs have been paired as much as is practical and further cuts are
not expected. All this resulted in net pre-tax operating income for the quarter
ended September 30, 2000 of $79,000 as compared to $237,000 for the quarter
ended June 30, 2000 from this subsidiary.
Zenex currently has a working capital deficit of approximately $400,000
but the Company believes it can manage the deficit through management of its'
receivables and payables. The Company does not currently plan any material
research and development expenses or any material purchases of plant and
equipment in the next twelve months. Zenex has 8 full-time employees. Additional
employees will be added if needed.
Churchlink.com, Inc. On May 11, 2000, the Company acquired
Churchlink.com, Inc. Churchlink is operating as a subsidiary of the Company.
Churchlink is an online communications hub for churches and their members.
Churchlink is currently conducting beta tests with selected churches and
updating its software and plans a national rollout of its product in early 2001.
The Company projects that Churchlink will need approximately $500,000 to test
and launch its product. The Company is currently negotiating financing for such
costs with external sources. Included in this estimate is $100,000 of additional
programming and equipment. Through September 30, 2000 the Company has spent
$154,000 on this project which are included as other expense in the financial
statements. General operating costs for this division run about $30,000 monthly.
The Company ran into some programming problems in the quarter and has hired a
new software development firm to complete the project. Churchlink has three
full-time employees. It is anticipated an undetermined number of full time
employees will be added in the near future.
OTHER. The Company's immediate plan of operation is to focus on the
operations of the foregoing acquisitions and assimilate them into the Company's
operations. Except as discussed above, the Company has no current plans for
capital expenditures or research and development. The Company currently has two
full-time employees (other than those noted above) and has no plans to add
additional employees except as noted above.
FORWARD LOOKING STATEMENTS AND BUSINESS. This Form 10-QSB includes
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended. The words "anticipate," "believe," "expect," "plan," "intend,"
"project," "forecast," "could" and similar expressions are intended to identify
forward-looking statements. All statements other than statements of historical
facts included in this Form 10-QSB regarding our financial position, business
strategy, budgets and plans and objectives of management for future operations
are forward-looking statements. Although we believe that the expectations
reflected in such forward-looking statements are reasonable, no assurance can be
given that actual results may not differ materially from those in the
forward-looking statements herein for reasons including the effect of
competition, the level of sales and renewal certifications, marketing, product
development and other expenditures, economic conditions, the legislative and
regulatory environment and the condition of the capital and equity markets.
Readers are cautioned to consider the specific business factors described in our
annual report on Form 10-KSB for the fiscal year ended December 31, 1999 and not
to place undue reliance on the forward-looking statements contained herein,
which speak only as of the date hereof. We undertake no obligation to publicly
revise forward-looking statements to reflect events or circumstances that arise
after the date hereof.
18
<PAGE> 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Change in Securities
The following securities were issued in the three month period ended
September 30, 2000.
<TABLE>
<CAPTION>
Number
Date of
Security Issued Issued Issued To Shares Purpose
--------------- ------ --------- --------- -------
<S> <C> <C> <C> <C>
Common stock 7/5/00 FuturOmega, L.L.C. 1,315,790 Conversion of $250,000 promissory note
Common stock 7/26/00 Joyce and Tom Boyer. 600,000 Shares issued for April 1999 loan guarantee
---------
1,915,790
=========
</TABLE>
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
Exhibits
None
Reports on Form 8-K
The Company filed an 8-K on July 5, 2000 announcing the acquisition of
Zenex Communications, Inc. through the acquisition of its' parent, Prestige
Investments, Inc.
The Company filed an 8-K on August 2, 2000 amending the 8-K filed on July
5, 2000 regarding the acquisition of Zenex Communications and setting forth the
financial information of Zenex and its parent Prestige Investments, Inc. and the
effects to the Company.
19
<PAGE> 20
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.
LONE WOLF ENERGY, INC.
/s/ Douglas A. Newman
----------------------------
By: Douglas A. Newman, Sec,y
Date: November 13, 2000
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
