UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended June 30, 2001
[] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission file number: 0-23823
PIPELINE TECHNOLOGIES, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-1313024
-------- ----------
(State of incorporation) (I.R.S. Identification No.)
1001 Kings Avenue, Suite 200, Jacksonville, FL 32207
----------------------------------------------- -----
(Address of principle executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 346-0170
--------------
Securities registered under Section 12 (b) of the Exchange Act: None
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock, $.001 par value
-----------------------------
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
[X] Yes [] No
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [ ].
The aggregate market value of the 2,451,114 shares of common stock held by
non-affiliates of the Company was approximately $3,186,448 on September 27,
2001, calculated using the average between the closing high bid and low asked
price thereof of $1.30 as reported on the OTC Bulletin Board.
On September 27, 2001, a total of 10,179,375 shares of common stock were
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The Proxy Statement for the Annual Meeting of Shareholders to be held
December 10, 2001 is incorporated by reference herein into Part III, Items 9
through 12.
Transitional Small Business Disclosure Format: [ ] Yes [ X ] No
i
TABLE OF CONTENTS
PART I........................................................................1
------
ITEM 1. DESCRIPTION OF BUSINESS..........................................1
---------------------------------
ITEM 2. DESCRIPTION OF PROPERTY.........................................11
---------------------------------
ITEM 3. LEGAL PROCEEDINGS...............................................11
---------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............11
-------------------------------------------------------------
PART II......................................................................11
-------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........11
------------------------------------------------------------------
ITEM 6. MANAGEMENTS' DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.......12
-------------------------------------------------------------------
ITEM 7. FINANCIAL STATEMENTS............................................20
------------------------------
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................20
---------------------------------------------
PART III.....................................................................20
--------
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............20
-------------------------------------------------------------
ITEM 10. EXECUTIVE COMPENSATION........................................20
----------------------------------
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................................21
----------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................21
---------------------------------------------------------
PART IV......................................................................21
-------
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K...............................21
-------------------------------------------
PART F/S....................................................................F-1
--------
SIGNATURES...................................................................24
----------
ii
Additional Information
Descriptions in this Report are qualified by reference to the contents of
any contract, agreement or other documents described herein and are not
necessarily complete. Reference is made to each such contract, agreement or
document filed as an exhibit to this Report, or previously filed by the Company
pursuant to regulations of the Securities and Exchange Commission (the
"Commission"). (See "Item 13. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K.").
Forward Looking Statements
See "Special Note Regarding Forward-Looking Statements." At the end of
"Item 6. Management's Discussion and Analysis or Plan of Operation" for
cautionary statements concerning forward-looking information contained in this
report.
iii
PART I
Item 1. Description of Business
General
Pipeline Technologies, Inc. ("we" or the "Company") is a Colorado
corporation. We were originally founded as Wallstreet Racing Stables, Inc. to
acquire and race thoroughbred racehorses. In June of 2000, our subsidiary, WRS
Merger Corp., was merged into Pipeline Technologies, Inc., a Florida corporation
("Pipeline - Florida"), and we began operation in the communications industry.
At that time, we began doing business under the name Pipeline Technologies and
formally changed our name to Pipeline Technologies, Inc. in October of 2000.
Pipeline - Florida was organized under the laws of the State of Florida in
December 1999. All references to our company include our wholly owned
subsidiary, Pipeline - Florida. We are located at 1001 Kings Avenue, Suite 200,
Jacksonville, Florida 32207, telephone number (904) 346-0170. Our web site can
be found at www.integriss.com.
Our Service
We currently offer nationwide, voice over Internet protocol ("VoIP") based,
monthly flat-rate long distance communications service. Our services are
marketed under the tradename "Integriss." Customers who subscribe to our service
are offered long distance service for a flat monthly rate that varies between
residential and commercial customers. We sell packages based upon light, average
and heavy usage, with each package essentially capping the total average minutes
of usage permitted. Our service is distinguished from that of traditional
telephone companies, as we offer flat-rate long distance service where
traditional telephony companies bill on a per-minute basis.
Our VoIP service utilizes a private network to transmit voice in a manner
similar to information transmitted over the public Internet. However, we believe
our technology offers advantages to using the Internet as a network. We utilize
this emerging technology to provide flat rate, long distance service to affinity
groups and members of the general public.
We are a recent entrant into the competitive communications industry. We
began offering our service in May 2000, following execution of an agreement with
a network provider. Our marketing focus is geared to residential and small
commercial customers. However, as of fiscal year end June 30, 2001, we had very
few customers and very limited revenues. We are subject to all the risks
inherent in our status as a new entrant into the communications industry. (See
Item 6., Management's Discussion and Analysis of Financial Condition and Results
of Operation for a description of some of these risks).
Voice communication is currently conducted primarily through telephone
lines operated by regional telephone companies. Despite substantial competition
among these carriers and their resellers, traditional forms of long distance
voice communication remains relatively expensive. The reason for this is that
traditional voice communication takes place over independent circuits that must
be open throughout the conversation. As only one conversation can be conducted
1
over a circuit, the cost to complete the call is relatively expensive.
Additionally, traditional phone service customers pay a universal service fee
and a federal excise tax totaling approximately 15%. These taxes are not
currently required of VoIP or Internet telephony companies.
In its simplest form, VoIP service involves conversion of electronic voice
impulses to digitized data, which is subsequently compressed and transmitted
over a private network. Upon reaching its destination, this data is unscrambled
and transmitted. With the technology enabled by the Internet, this voice data
can be transmitted over private networks such that communication can occur on a
real time basis. We believe this technology provides a substantial advantage to
either traditional telephone transmission or voice-over-Internet service.
In order to attract a large number of customers and grow our services
rapidly, we hope to develop national brand recognition for our company and our
service through an aggressive campaign of marketing and advertising. If we are
successful in penetrating the market for domestic long distance service, we hope
to expand our service to include international long distance. However, this will
require additional agreements with companies that can provide international
service.
During the 2001 fiscal year, our customer base ranged up to approximately
3500 individuals or entities. Our original network provider unexpectedly ceased
its service midway through our fiscal year, and we acted as an agent for a
company providing traditional telephone service during the time period that we
located and contracted with a replacement network provider. We did not market
aggressively during this time period, because of the diminished competitiveness
of this interim provider. Additionally, the ultimate service provider during
that time period billed many of our customers excessively. These additional
charges were billed without our knowledge or permission and in violation of our
contract for services. We filed a lawsuit against the entity we had contracted
with in an effort to, among other things, correct the billing errors. Although
the lawsuit is ongoing and we cannot be assured of its success, we believe that
the customer billing issues will ultimately be resolved satisfactorily. Because
of the billing problems, we lost a significant amount of customers during the
third quarter of our fiscal year when our services were provided by the interim
traditional service carrier.
We also concentrated our efforts during the 2001 fiscal year on internal
organizational issues. We initially outsourced many of our departments such as
customer service and information technology, but found that it is more cost
effective to provide these services directly. Additionally, we were dissatisfied
with the level of service provided and our lack of control over the quality of
service provided by independent third parties. We no longer outsource our
customer service or other departments.
On March 21, 2001, we contracted with a new network provider, allowing us
to return to our original business plan of providing flat-rate long distance
services using VoIP. Our service is currently enabled by a private network owned
and operated by a network provider whose principal offices are located in the
southeastern United States. The third party owns most of the equipment and the
other assets necessary to provide this service. We market the service and
provide customer support, billing and other administrative services to the
2
customers. Our network provider has constructed and configured a network of
fiber optic cable and various switches that enable the transmission of voice
communication in a highly efficient manner.
We provide customer service to our customers via a direct telephone number
to our executive offices in the event they are not satisfied with the service
for any reason. Our customer service department is currently staffed from 9:00
a.m. to 6:00 p.m. Eastern time, Monday through Friday, and we are in the process
of implementing a fully automated system for use by customers during
non-business hours that provides answers and solutions to the most common
customer questions and issues. We intend to continue to add in-house customer
service representatives and expand our hours of availability as we grow and our
resources permit.
Billing for our customers is done directly to credit cards, eliminating
many accounts receivable problems. Since the customer pays a flat monthly rate
for domestic long distance service, it is easy for them to budget monthly fees.
This should also help reduce accounts receivable problems, as we will be
notified immediately of non-payment and can choose to discontinue service if
necessary.
Our web site is fully interactive, in that it provides customers with
information regarding all of our products and services, and allows them to
contract for services directly through the site. The site also allows our
agents, sales representatives and customer service representative to access
select customer information through the site through designated passwords
specifying the clearance level of the user. We believe we have installed
appropriate safeguards to protect the integrity of the site and privacy of our
customers. We have an Information Technology department that constantly works to
monitor and upgrade our system. The software running our website was developed
and created specifically for our use and benefit.
In the future, it is our intention to expand our service to include a more
complete array of communication services. In addition to domestic long distance
which we currently provide, we hope to add the following services in the future
as working capital permits and our development allows:
o VoIP based, monthly flat rate international long distance service. We
plan to continue to explore various strategic alliances or
relationships with network operators in an effort to obtain access to
international markets. Current providers include unrelated entities
such as ITXC Corp., the operator of an international network with
locations in numerous countries throughout the world. It is our hope
to execute one or more agreements with an international provider in
order to obtain international service for our customers. The
international market is large, accounting for billions of dollars of
revenue on an annual basis. We hope to add international service as a
complement to our existing domestic service in the future.
o Calling Card services. We also hope to offer VoIP based prepaid long
distance calling cards to customers throughout the United States.
Similar to calling cards offered by a variety of other companies, we
hope to offer prepaid and/or credit-based long distance calling cards
permitting calls anywhere in the U.S.
3
o Next generation unified communications products. Various evolving
technologies allow customers an array of unified messaging services
through one identification number. Customers can access e-mail, voice
mail, fax and additional services through one number that tracks the
customer throughout his or her daily routine. We hope to offer this
service to our customers in the future.
All of these additional services are currently in the planning stage and
there is no assurance that we will be successful in implementing any or all of
the services.
Network Technology.
The backbone of our current service is the private network operated by our
network provider. A copy of our agreement with this provider has been filed as
an exhibit to this Report. This agreement provides us access to the network and
equipment maintained by our network provider in order to provide certain of our
services.
The network operated by our provider is co-located in major
telecommunication companies' sites covering over 145 major metropolitan areas
and approximately 70% of the United States. It is based on a hub and spoke
topography and represents what we believe to be one of the largest, privately
operated fiber optic networks in the country, assembled by agreement with other
network providers throughout the country. It consists of these connected
networks together with VoIP switches placed in the facilities of
telecommunications companies in various metropolitan areas. Coverage includes
intracity, intrastate and interstate.
Following is a depiction of the network operated by our provider:
[[GRAPHIC OF PROVIDER NETWORK]]
The agreement with our provider allows us to offer a variety of services to
our existing and potential customers. These include the flat rate voice services
currently provided, along with unified messaging services we hope to provide in
4
the future. These services are described in more detail above. For our fee, our
network provider has agreed to provide us access to the network and equipment
necessary to facilitate our services. Our network provider agrees to provide
this service on a timely basis, to secure, operate and maintain such services
and facilities as shall be necessary to provide us this service and to maintain
all necessary and appropriate relationships with other network and service
providers.
We have agreed to pay for the service in accordance with a schedule that we
negotiated with our network provider. This schedule, originally set as a flat
rate charge, is currently being charged to us on a usage-sensitive basis for
access to the network. The rates agreed to in the schedule are subject to change
at the discretion of our network provider in the event that the rates and
charges paid by it for services and facilities are increased at any time. Our
network provider may also increase rates as a result of charges paid to
governmental authorities or local exchange carriers in conjunction with
providing its service. Upon any such rate increase, we have seven days to accept
or reject the new pricing, and terminate the contract if we do not agree to the
new pricing.
Our arrangement with our network provider may be terminated at certain
times and upon certain conditions. It may be terminated by our network provider
in the event that we fail to pay any amounts due under the agreement, in the
event that we engage in conduct or activity detrimental to the business of our
network provider or if we violate any material term or provision of the
agreement. The initial term of our agreement with our network provider is one
year, and may be renewed for similar terms thereafter.
Recent Developments
-------------------
Because our service is wholly dependent upon access to a network, we
believe that our business would be enhanced by acquisition of such a network.
Toward that end, we executed an agreement dated September 27, 2001 to acquire
Achieve Networks, Inc., of Dallas, Texas ("Achieve"). Achieve operates a private
IP network that would allow us to control the routing of calls and strictly
control calling quality. The network is comprised of a switch owned by Achieve
connected to a fiber optic network owned by a third party. The acquisition would
create a network footprint to cover all of the United States and 192 countries
around the world. We would also be able to acquire bandwidth that is
point-to-point and is dedicated solely to our use. Through a strategic alliance
with Genuity, Inc., Achieve's private network architecture incorporates the
latest gateway technologies available.
The agreement with Achieve provides that we will acquire a minimum of 81%
of the company at the initial closing, anticipated for November 1, 2001. We will
issue a total of 3,000,000 shares of our common stock in exchange for 100% of
Achieve, prorated for the 81% that we intend to acquire in the initial step of
the transaction. Closing is subject to a number of contingencies, including
continuing due diligence and execution of necessary closing documents.
Acquisition of the remaining 19% is subject to necessary regulatory approval and
consent of those Achieve shareholders.
The agreement also requires us, following the closing and subject to
certain conditions, to advance funds to Achieve for operating expenses in an
amount not to exceed $500,000. Such maximum amount will be reduced by any
5
advances made by the Company prior to closing. All amounts may be repaid to us
by Achieve in the form of access time on its IP network at rate equal to
Achieve's cost plus 20%. We have agreed to purchase a minimum of 50,000 minutes
per month on this network.
As a result of the acquisition, Achieve would become a subsidiary of
Pipeline, operating out of Dallas, Texas. Pipeline's corporate offices will
remain in Jacksonville, Florida.
Assuming successful acquisition of Achieve, and as working capital permits,
we will implement a plan to continue to expand and upgrade Achieve's network
access. The implementation of the acquisition will remove our dependence on
third parties, and permit us to control our access costs. Our contract with our
current network provider permits use of other network providers and does not
require a minimum purchase or usage.
Marketing, Advertising and Distribution.
In keeping with our strategic plan, our marketing and distribution is
geared to reach customers in the residential and small business market. Our
marketing efforts are designed to establish brand recognition and emphasize the
superior customer support we hope to provide.
Our efforts during the 2001 fiscal year were focused on the use of dealers
and agents to advertise our services and acquire customers. Our efforts were
less successful than we had hoped, in part because of the problems experienced
with our network providers. The use of dealers was neither as successful nor as
cost effective as we had hoped. The dealers we contracted with were unable to
bring in the level of customers they had promised, and the costs to us for the
customers they did bring to us were greater than anticipated. We no longer use
dealers to market our services.
Our recent efforts to use independent agents have shown greater success. In
June of 2001, shortly before the end of our fiscal year, we contracted with
certain agents to market our services. Those agents exposed our services to
consumers nationwide and produced a significant number of new or potential
customers through an outbound telemarketing process. Although we cannot be
assured of the number of customers we will maintain or the additional number of
new customers per month that we will acquire, we believe that we require a
minimum of 15,000 customers per month to break even.
In order to develop and enhance our goal of nationwide brand recognition,
we have recently retained the services of a marketing firm with substantial
experience in the telecommunications industry. While working within the limits
of our capital resources, this firm has committed to work with our employees to
develop our image and brand identification on a nationwide basis. Such efforts
may include graphic design and traditional means of advertising, such as
television, radio, billboard and other mass communication, as well as electronic
advertising through websites and various Internet portals. We hope to quickly
establish ourselves as a nationally recognized communications company with
appeal in many different markets.
6
We have developed a multi-faceted marketing plan that first targets
residential customers through direct marketing, such as opt-in e-mail, direct
mail and out-bound telemarketing. We hope these efforts will drive consumers to
our web site, where they can thoroughly review our product and service line and
select the service of their choice. We have also implemented a series of radio
advertisements that run during major sporting event pre-game and half-time
programs.
Our second marketing focus is on affinity groups. Examples of affinity
groups include state or national trade organizations, such as insurance trade
groups, banking organizations or credit unions, and colleges and alumni
associations. In each case, the organization will earn residual income from the
ultimate sales of our services through their sponsorship. In essence, we hope
that the organizations will act as defacto distributors on our behalf in an
effort to reach the members within each group. We have recently entered into
contracts with certain organizations, but these contracts have not yet been
implemented.
We are also negotiating with various entities to promote our products as
part of a package of goods and services offered to consumers or small
businesses. Examples of this marketing focus may include packages such as
security systems or the advertisement and distribution of our services in retail
outlets that carry telephone and office equipment.
Additionally, we are utilizing commissioned independent marketing agents to
"upsell" our services. Essentially, when these agents contact or are contacted
by consumers regarding other products or services in which the consumer has
expressed an interest, the agents will introduce our services as well. Our
services may be offered in conjunction with unified messaging services, prepaid
local phone services, certain prepaid credit card services, and other products.
Finally, we hope to form agreements with smaller competitive local exchange
carriers ("CLECs"), essentially local phone companies serving markets from
10,000 to 200,000 customers, to sell minutes to either the CLECs themselves who
can then provide their customers with both local and long distance service, or
who will promote our long distance service to their local calling customers.
Regulation.
Voice-over-Internet telephony is currently unregulated by the Federal
Communications Commission (FCC). However, efforts to regulate this service may
increase. On May 16, 2000, the House passed H.R. 1291, the Internet Access
Charge Prohibition Act. The bill prohibits the FCC from imposing on Internet
service providers any access fees to support the Universal Service Fund that are
imposed on telephone companies - if the "contribution" would be based on a
measure of the time that telecommunications services are used in the provision
of Internet access service.
Despite the prohibition against access surcharges, the bill does allow the
FCC to charge access fees for Internet telephone services, regardless of whether
a telephone or other apparatus is used to place a call. The bill failed in
7
limiting the FCC to flat rate charges on Internet phone use. Thus, the FCC can
choose any method it wants, including a fee based on the per-minute usage by
consumers. Although no rulings regarding any limitations have yet been made by
the FCC, there is no assurance such regulations may not be adopted in the
future.
The FCC is currently considering whether to impose surcharges or other
common carrier regulations upon certain providers of Internet telephony,
primarily those that provide Internet telephony services to end users located
within the U.S. While the FCC has presently decided that information service
providers, including Internet telephony providers, are not telecommunications
carriers, various companies have challenged that decision. Congressional
dissatisfaction with FCC conclusions could result in requirements that the FCC
impose greater or lesser regulation, which in turn could materially adversely
affect our business, financial condition, operating results and future
prospects.
The FCC has expressed an intention to examine the question of whether
certain forms of phone-to-phone Internet telephony are information services or
telecommunications services. The two are treated differently in several
respects, with certain information services being regulated to a lesser degree.
The FCC has noted that certain forms of phone-to-phone Internet telephony appear
to have the same functionality as non-Internet telecommunications services and
lack the characteristics that would render them information services.
If the FCC were to determine that certain Internet-related services
including Internet telephony services are subject to FCC regulations as
telecommunications services, the FCC could subject providers of such services to
traditional common carrier regulation, including requirements to make universal
service contributions, and/or pay access charges to local telephone companies.
It is also possible that the FCC may adopt a regulatory framework other than
traditional common carrier regulation that would apply to Internet telephony
providers. Any such determinations could materially adversely affect our
business, financial condition, operating results and future prospects to the
extent that any such determinations negatively affect the cost of doing business
over the Internet or otherwise slow the growth of the Internet.
State regulatory authorities may also retain jurisdiction to regulate the
provision of intrastate Internet telephony services. Several state regulatory
authorities have initiated proceedings to examine the regulation of such
services. Others could initiate proceedings to do so.
International. The regulatory treatment of Internet telephony outside of
the U.S. varies widely from country to country. A number of countries that
currently prohibit competition in the provision of voice telephony also prohibit
Internet telephony. Other countries permit but regulate Internet telephony. Some
countries will evaluate proposed Internet telephony services on a case-by-case
basis and determine whether it should be regulated as a voice service or as
another telecommunications service. Finally, in many countries, Internet
telephony has not yet been addressed by legislation. Increased regulation of the
Internet and/or Internet telephony providers or the prohibition of Internet
telephony in one or more countries could materially adversely affect our
business, financial condition, operating results and future prospects.
8
Proprietary Rights.
Proprietary rights are important to our potential success and our
competitive position. We have registered one trademark in the U.S., "Ride the
Pipe," which we market our services under on college campuses. In addition, we
have trademark or salesmark registration applications pending for "Integriss,"
"Voicesync," "Hearing is believing" and "Freedom is calling." The laws of some
foreign countries do not protect our proprietary rights to the same extent as do
the laws of the U.S., and effective copyright, trademark and trade secret
protection may not be available in such jurisdictions. In general, our efforts
to protect our intellectual property rights through copyright, trademark and
trade secret laws may not be effective to prevent misappropriation of our
content, and our failure to protect our proprietary rights could materially
adversely affect our business, financial condition, operating results and future
prospects. Despite such protection, a third party could, without authorization,
copy or otherwise appropriate our proprietary property.
Our agreements with employees and others who participate in development
activities could be breached, we may not have adequate remedies for any breach,
and our trade secrets may otherwise become known or independently developed by
competitors, subjecting us to potential adverse business affects.
We have developed much of our own software to operate our interactive web
site, but we rely upon license agreements with respect to our use of software
and hardware provided to us by our vendors. Those license agreements may not
continue to be available to us on acceptable terms, or at all.
Our Competition.
The long distance telephony market is highly competitive. There are several
large and numerous small competitors, and we expect to face continuing
competition based on price and service offerings from existing competitors and
new market entrants in the future. The principal competitive factors in our
market include price, quality of service, breadth of geographic presence,
customer service, reliability, network size and capacity and the availability of
enhanced communications services. Our competitors include major and emerging
telecommunications carriers in the U.S. and foreign telecommunications carriers.
o Traditional Long Distance Carriers.We consider our biggest competition
to be traditional PSTN (public switched telephone networks) companies
such at AT&T, Sprint, MCI WorldCom and the like. These companies have
tremendous financial resources and current customer bases. They have a
national presence and a traditional product understood and accepted by
the general population.
o Calling Card Providers. There are numerous companies ranging in size
from new market entrants to some of the same large entities with
substantial resources that provide prepaid calling cards and/or
credit-based billable calling cards. These cards provide customers
with some similar benefits as our products in that they may have lower
per minute rates than traditional long-distance carriers, or, if
prepaid, lessen the billing uncertainties to the consumer.
9
o 10-10 Dial Around Providers. There are hundreds of companies offering
per minute long-distance rates to consumers via the use of a 10-10
dial around number. That is, the consumer dials "10-10" plus a
designated access number and is charges according to the agreement
with the provider. Many of these per minute charges are significantly
lower than traditional per minute long-distance carrier charges, and
may or may not have minimum call charges as part of the plans.
o Internet Protocol and Internet Telephony Service Providers. During the
past several years, a number of companies have introduced services
that make Internet telephony or voice services over the Internet
available to businesses and consumers. Many Internet service providers
(ISPs) exist, but currently transmit only data and not voice. It would
be possible for these ISPs to compete if they invested in the
necessary hardware to transmit voice or teamed with entities willing
to provide the switches that translate voice to data.
o VoIP Providers. Other United States providers of VoIP long-distance
services to consumers include Net2Phone, IconnectHere
(DeltaThree.com's consumer product, CNM Networks, Inc., and
Wherever.net. Many providers utilize the public Internet, which cannot
offer the quality of transmission of private networks, and certain
providers only offer PC to PC or PC to phone products, as opposed to
phone to phone VoIP services.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we
have. As a result, certain of these competitors may be able to adopt more
aggressive pricing policies that could hinder our ability to market our VoIP
services. We believe that our key competitive advantages are our ability to
deliver reliable, high quality voice service in a cost-effective manner. We
cannot assure you, however, that this advantage will enable us to succeed
against comparable service offerings from our competitors.
Employees.
We currently employ a total of 24 individuals, including ten in customer
development/customer service, two in finance and accounting, including our Chief
Financial Officer, three in administration, including our Chief Executive
Officer, five in our information technology department and four in marketing.
Our two executive officers serve us pursuant to written employment contracts for
a period of four years. Most other employees are employed at- will. None of our
employees are covered by collective bargaining agreements, and we believe we
enjoy excellent relations with our employees.
We anticipate adding additional employees as our working capital
permits and the needs of our business dictate. Additional individuals will be
retained to service significant accounts that we successfully obtain in the
future. We also expect to retain additional assistance in customer service,
technology and operations.
10
Item 2. Description of Property.
The Company owns no real property as of the date of this report. We
currently lease 4,500 square feet of office space under a 60-month lease through
March 31, 2005. The lease provides for two five-year renewal options at the
prevailing market rate. The current monthly rental is $5,213 plus sales tax,
utilities and maintenance expenses. The lease provides for annual monthly
increases of $188 per month (i.e. an annual escalation of 50 cents per square)
that commenced in March of 2001. We anticipate that we may need to lease
additional space as our customer base grows; however, we believe our space is
adequate for our needs for the foreseeable future. Additional space is available
in our building and we believe that, if needed, we could lease additional space
at comparable rates.
Item 3. Legal Proceedings.
We are unaware of any material litigation pending or threatened against us
or in which any of our officers or directors are parties adverse to our
interest. In the future, we may be party to routine matters of litigation
relating to our business that we do not believe will have a material effect on
our financial condition or operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to the security holders, through solicitation of
proxies or otherwise, during the fourth quarter of the fiscal year covered by
this Report.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Our common stock currently trades over the counter and quotations are
currently reported on the "Bulletin Board" maintained by the NASD. The following
table shows the range of high and low bids for our common stock for the last two
fiscal years or portions thereof as reported by the NASD. Prices represent
quotations between dealers, do not include retail mark-ups, markdowns or
commissions and do not necessarily represent prices at which actual transactions
occurred.
Fiscal Quarter Ended High Low
---- ---
1999
September 30 $ 5.13 $ 2.88
December 31 3.78 2.19
11
Fiscal Quarter Ended High Low
---- ---
2000
March 31 9.63 2.56
June 30 7.25 3.25
September 30 6.69 4.88
December 30 6.06 2.50
2001
March 31 4.50 1.96
June 30 6.45 2.10
As of June 30, 2001 there were approximately 39 record holders of our
common stock. No dividends have been paid with respect to our common stock and
we have no plans to pay dividends in the foreseeable future. Payment of future
dividends, if any, will be at the discretion of our Board of Directors after
taking into account various factors, including our financial condition, results
of operations, current and anticipated cash needs and plans for expansion.
Item 6. Managements' Discussion and Analysis or Plan of Operation.
Overview
Effective June 21, 2000, we acquired all of the outstanding stock of
Pipeline, then a privately held Florida corporation. This acquisition was
accomplished through a merger of our wholly owned subsidiary, WRS Merger Corp.,
with Pipeline. As a result of that transaction, Pipeline became our wholly owned
subsidiary. Pipeline was originally organized in December 1999 to operate in the
communications industry.
Effective with the date of acquisition, we issued 8,453,425 shares of our
common stock to the former shareholders of Pipeline, representing approximately
89.5% of our then-issued and outstanding common stock. Because of the number of
shares issued in connection with the acquisition, the transaction has been
treated for accounting purposes as a recapitalization of Pipeline as though
Pipeline were the acquiring entity, although from a legal standpoint, we were
the acquiring entity. The transaction was essentially treated as a reverse
acquisition for accounting purposes, as if Pipeline had acquired us.
Historically, Pipeline had a fiscal year end of December 31. Because
Pipeline was deemed the acquiring entity for accounting purposes, its fiscal
year survives for reporting purposes under relevant rules of the Commission. On
August 22, 2000, a determination was made to change the fiscal year end of
Pipeline from December 31 to June 30. The decision was made by the Company's
Board of Directors and was effective for the period ending June 30, 2000.
Consequently, the financial statements for the period ended June 30, 2000 are
for a six -month period, rather than twelve months, as would normally be the
case. Our shareholders approved changing our name to Pipeline Technologies, Inc.
at our shareholders' meeting held in October of 2000.
Results of Operations
Year ended June 30, 2001. During the year ended June 30, 2001, we realized
a net loss of $3,988,518, or $(.39) per share, on revenue of $389,873. While we
recorded sufficient revenue such that we are no longer considered in the
development stage for accounting purposes, our costs of sales, operating and
12
other expenses far exceeded our revenue, resulting in a substantial net loss.
The net loss for the year ended June 30, 2001 represents an increase of
$3,009,471, or approximately 310 %, from the six month period ended June 30,
2000. One reason for the substantial increase in the net loss is that we are
comparing a twelve-month period ended June 30, 2001 to a six-month period ended
June 30, 2000.
As was the case during the six months ended June 30, 2000, our revenue for
the year ended June 30, 2001 was insufficient to cover cost of sales. During the
2001 fiscal year, we realized a negative gross profit of $355,408, which means
our cost of revenue exceeded our revenue by that amount. The primary reason for
this shortfall has been our inability to obtain access to a reliable network at
an acceptable cost. Our business model contemplates contracting with an
independent, third party network provider to avoid the capital expenditure
necessary to develop our own network. However, the proposed acquisition of
Achieve Networks would allow us to control our network access, and hopefully
reduce our cost of sales substantially in the future.
On May 1, 2000, we contracted with a network provider that we considered an
affordable, reliable source of serving our customers. Unfortunately, that
provider became insolvent during the fiscal year. We were forced to quickly find
an alternative provider, and utilized a traditional service provider as a
temporary solution. For a brief period, we acted as an agent for this licensed
carrier. Unfortunately, our customers, who had already paid us a flat fee for
long distance service, received additional bills from the licensed carrier. This
billing was done without our knowledge or control, and we are still working to
remedy the overbilling by the licensed carrier. As a result, we lost
approximately two-thirds of our former customers.
We subsequently contracted with a new Internet telephony provider to gain
network access. While we do not have a monthly minimum payment, as we did with
our first provider, our costs under the contract are not as competitive as we
had hoped. Our marketing efforts for the last quarter of the 2001 fiscal year
were marginally successful in gaining additional customers. Subsequent to
year-end, we have improved our success based on a telemarketing campaign by an
independent agent. While it is too early to determine how many of these
customers we will retain, we believe revenue from these customers will improve
over the comparable period of the 2001-year.
Our inability to find an acceptable network provider has been the primary
obstacle to our operations since our inception. It is also a primary impetus for
the proposed acquisition of Achieve Networks, Inc., discussed elsewhere under
Item 1, Recent Events. While there is no assurance that this acquisition will be
successfully completed, we hope it will remedy the problems we have experienced
in the past with independent network providers.
In addition to costs of sales, operating expenses included selling, general
and administrative expenses in the amount of $2,734,962. Material operating
expenses included approximately $1,230,000 in compensation expenses, including
salaries, payment for contract labor, insurance, and payroll taxes. This
represents an increase of $1,148,262, or 1400%, compared to the six months ended
June 30, 2000. This increase reflects an increase from seven employees for the
previous six-month period to twenty-four full-time employees at the end of the
13
2001 fiscal year. We also recorded $520,000 in non-cash expenses in connection
with the issuance of stock to consultants for services rendered to us. An
additional $98,000 was incurred in commissions to agents for the 2001 fiscal
year, a 100% increase over the previous period when we paid no commission. We
first utilized telemarketing agents to assist in obtaining customers during the
2001 year. Investment banking fees decreased by $54,500 for the 2001 fiscal year
and legal fees of $248,000 reflected an increase of $213,659, attributable to a
dispute with a former service provider. Rent accounted for $76,000, advertising
and promotions approximately $58,000 and $50,000 for travel expenses. These
expenses remained relatively level when compared on an annual basis.
We also incurred approximately $900,000 in interest and financing expenses
($700,000 in financing costs and $200,000 in interest) associated with
outstanding debt. These also were non-cash expenses. Due to our inability to
obtain equity financing to meet operating expenses, we have borrowed
substantially to meet cash flow requirements. We currently have outstanding
approximately $2,700,000 in debt, bearing interest at 12% per annum and due on
demand. We hope to convert some or all of this outstanding indebtedness to
equity, but no specific arrangements have been made with the lenders.
Accordingly, interest continues to accrue on the outstanding balance.
We expect to incur losses until such time as our revenue is sufficient to
cover our cost of service and our general and administrative expenses. However,
due to our limited operating history, we are unable to predict with any degree
of accuracy when that time will come.
Six months ended June 30, 2000. During the six month period ended June 30,
2000, we realized a net loss of $979,047, or $(.12) per share, on $1,095 of
total revenue. We remained in the development stage during that time, without
significant revenue from operations.
During the six months ended June 30, 2000, general and administrative
expenses represented our greatest expense. A majority of those expenses, in
turn, were related to costs of our merger with Pipeline and resolution of a
dispute with former shareholders of another communications company. We paid a
total of $611,860 in connection with the merger and to resolve that dispute, all
of which was expensed during the six-month period. Salaries accounted for
approximately $75,000 of expense during the six months, while advertising and
promotion added approximately $34,000 of expense. We also paid $137,500 in
investment banking fees in connection with financing which we obtained during
the period.
Inception through December 31, 1999. During the period from inception
(December 2, 1999) through December 31, 1999, we realized a net loss of $9,608,
or $0.00 per share, on no revenue. During that period, we were only recently
organized and had not yet implemented our business plan. Our loss was related to
general and administrative expenses associated with our business, including
rent, salary and office expense.
Liquidity and Capital Resources.
June 30, 2001. Our financial condition at June 30, 2001 continued to
decline from the previous fiscal year end. At June 30, 2001, we had a working
capital deficit of $(3,655,894), consisting of current assets of $21,332 and
14
current liabilities of $3,677,226. This represents a decrease of $2,888,822, or
approximately 376%, from fiscal year end June 30, 2000. We also reported a
deficit in shareholders' equity of $(3,503,214) at June 30, 2001.
Based in part on the deficit in our working capital and shareholders'
equity, the report of our independent accountants contains a contingency about
our ability to continue as a going concern. We have also incurred substantial
losses from operations since inception. Our efforts to rectify our adverse
financial condition and improve operations include those outlined above under
Results of Operations, as well as our continuing efforts to obtain financing
from outside sources. We believe our ability to obtain additional capital is
dependent on our success in generating additional customers. As mentioned above,
we have experienced some success subsequent to fiscal year end 2001. We will
continue efforts toward that end, as well as seeking additional opportunities to
increase capital. However, there is no assurance those efforts will be
successful.
All of our debt is due on demand, and is accordingly classified as
short-term. We continue to work with the owners of this debt in an effort to
refinance or convert the debt into equity. We are also negotiating to determine
the extent of our obligation to issue warrants to the holder of some debt in
connection with a commitment that we made at the time the debt was issued.
Again, there is no assurance that these efforts will be successful.
During the year ended June 30, 2001, we financed substantially all of our
operations from the proceeds of notes payable. A substantial portion of such
amount was issued to a single individual. Our experience during the year ended
June 30, 2001 is substantially similar to the period ended June 30, 2000, when
we issued a net amount of $1,200,000 in short-term debt to finance operations.
We believe our efforts to obtain capital through equity financing was adversely
affected by our operations, as well as declines in the stock market in general,
as well as the telecom industry specifically.
The need to finance substantially all of our operations by debt financing
is due in part to our failure to close two equity financings that we had planned
during the fiscal year. Each offering, totaling up to $10 million, was designed
to provide cash for operations to continue our business plan and provide a
contingency for the future. However, we were unable to complete either
transaction, perhaps reflecting the adverse economy and conditions in the
capital markets.
During the year ended June 30, 2001, we issued 200,000 shares of our common
stock at a total value of $700,000 in connection with short-term loans that we
received. We also issued 480,000 shares valued at $520,000 for consulting
services. That entire amount was charged to operations. Partially offsetting
these transactions, a shareholder donated a total of 450,000 to our treasury,
which shares were subsequently cancelled.
Our continuing needs for working capital include cost of sales, general and
administrative expenses, repayment of debt and interest.
June 30, 2000. At June 30, 2000, we had a deficit in working capital of
$(767,072), consisting of current assets of $246,256 and current liabilities of
15
$1,013,328. We also had a substantial deficit in shareholders' equity of
$(734,696). At June 30, 2000, we were still in the development stage with very
limited revenue.
Our greatest needs for capital as we entered the 2001 fiscal year included
contract payments to our network provider, payment of general and administrative
expenses and retirement of short-term debt. Our agreement with our
communications network provider at the time required minimum monthly payments of
$50,000. That network provider subsequently failed, and, while relieved from
that monthly payment, we had to obtain alternative network access.
During the six month period ended June 30, 2000, we borrowed $1,000,000
from private individuals or entities, $925,000 of which remained outstanding at
June 30, 2000. The proceeds of those loans were utilized to pay operating
expenses and to settle certain litigation. These notes are payable in full on
June 21, 2001. We also require cash for payment of general and administrative
expenses, including ongoing salaries, legal and accounting fees.
We financed the remainder of our capital requirements during the six months
ended June 30, 2000 through the sale of our common stock in a private
transaction. We sold 500,000 shares of our common stock to two private investors
in exchange for cancellation of promissory notes in the amount of $252,952,
including principal and interest. The proceeds of that financing were used to
defer operating expenses set forth in more detail below.
Special Note Regarding Forward-Looking Statements
Certain statements contained herein constitute "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward looking statements are identified by words such as "hopes," "expects,"
"anticipates," "plans" and the like and include, without limitation, statements
regarding our plan of business operations and related expenditures, receipt of
working capital, potential contractual arrangements, anticipated revenues,
related expenditures and completion of proposed acquisitions. Factors that could
cause actual results to differ materially include, among others, the following:
receipt of additional working capital, acceptance of the Company's service in
the market place, competition, new regulations which might be adopted by Federal
or state governments, our costs and the pricing of our services, the level of
demand for our services, changes in our business strategies and other factors
set forth herein. Additional factors are outlined immediately below. Most of
these factors are outside the control of the Company. Investors are cautioned
not to put undue reliance on forward-looking statements. Except as otherwise
required by applicable securities statutes or regulations, the Company disclaims
any intent or obligation to update publicly these forward looking statements,
whether as a result of new information, future events or otherwise. Because
forward-looking statements involve future risks and uncertainties, there are
factors that could cause actual results to differ materially from those
expressed or implied. Some of these risks include, among others, the following:
We are entirely dependent on a third party for access to the network. Due
to our limited working capital and operating experience, we are entirely
dependent on our network provider for access to the network essential to
providing our service. As a result, we are entirely dependent on our network
16
provider to operate our business. An interruption or failure in their network or
termination of service would adversely affect our customers and results of
operation. We essentially act as a reseller of service made possible through our
network provider. While we believe other network providers may be available,
there is no assurance that such access can be obtained on terms which are
acceptable or which would result in profit. Furthermore, there is no assurance
that our agreement with our network provider can be renewed following its
expiration. We are negotiating an acquisition of an entity that acts as a
network provider, but we cannot be assured that acquisition will be successfully
consummated.
Our success depends on our ability to keep up with rapidly changing
technology. We depend on a network, computers, telecommunications equipment and
software capabilities to run our business. However, we do not have sufficient
capital to invest in development of our own equipment or software. Consequently,
we are dependent on the resources of third parties to maintain our technological
advantage. Our failure to maintain the competitiveness of our technological
capabilities or respond effectively to technological change could negatively
affect our business, results of operation or financial condition. We do not
invest funds in research and development. We primarily depend on products and
services developed by independent third parties for our technology. Our future
viability and profitability will depend on numerous factors, including our
ability to (i) market our existing technology to a sufficient number of
customers; (ii) increase our service offerings to attract additional customers;
and (iii) keep up with technological change in our industry. We cannot assure
that technologies or services developed by our competitors, especially those in
the voice-over-Internet arena, will not render our products or services
non-competitive or obsolete.
In the event we experience difficulty managing our operations, our chances
of achieving profitability may be reduced. Our future performance will depend,
in part, on our ability to manage our anticipated growth effectively. To that
end, we will have to undertake the following tasks:
o Continue to develop our operating, administrative, financial and accounting
systems and controls;
o Improve coordination among our accounting, finance, marketing and
operations personnel;
o Enhance our management information systems capabilities;
o Evaluate and perfect our customer service; and
o Hire and train additional qualified personnel.
If we cannot accomplish these tasks, our chances of achieving profitability will
be diminished.
Our use of independent agents to market our service raises the risk that
customers may only use our service on a temporary basis or demand refunds of the
related charges. Although we endeavor to manage and perform as much marketing
through our own employees as possible, we must also depend on the efforts of
third-party agents to contact customers and acquaint them with our services. We
17
simply do not have the financial resources at this time to hire and maintain a
marketing staff sufficient to perform these functions. Pursuant to the terms of
our arrangements, these independent agents may contract with customers directly,
without our knowledge or approval. Because these agents are paid on a commission
basis, they may be motivated to use aggressive tactics in an effort to engage
more customers. In addition, customers who contract on the basis of a
telemarketing call, rather than through their own investigation, have a higher
likelihood of canceling the service after a trial period. We continually monitor
the sales practices of these agents in an effort to insure that their tactics
are appropriate. None-the-less, customers may cancel our service shortly after
commencement and we may be forced to refund charges to customers who notify us
that they obtained our service without their consent. Because of the potential
incidents of customer cancellations, our customer and revenue level may vary
dramatically from month to month.
We may be unable to complete anticipated acquisitions. We have recently
executed an agreement to acquire a majority interest in a network operator in an
effort to compliment our business plan. While the definitive agreement
anticipates closing on November 1, 2001, there is no assurance that the
acquisition will be successfully completed. Closing is subject to certain
conditions, including continuing due diligence and execution of appropriate
closing documents. We are presently working to satisfy those conditions.
However, our failure or inability to complete this acquisition may result in our
loss of access to the network, increased costs for network access and/or other
adverse effects on our business and operations.
Because we are unable to predict the volume of usage on the network that we
lease, we may be forced to enter into disadvantageous contracts that would
reduce our operating margins. Because of our limited operating history, we are
unable to predict with any degree of accuracy the volume of usage on the network
that we lease. Furthermore, since we do not own the network, we are unable to
control access by third parties. This may result in overuse of the network,
impeding or impairing call quality or transmission. While our network provider
has pledged to increase the capacity as our usage increases, there is no
assurance it will successfully complete that expansion. We may therefore have to
enter into other long-term agreements for leased capacity. Long-term agreements
for network capacity may adversely effect our operations and financial
performance.
Our business may suffer if we lose the service of any key personnel. We
depend on the continued services of a key management employee. This individual
is Timothy J. Murtaugh, President and Chief Executive Officer. Mr. Murtaugh
founded the Company and is primarily responsible for marketing the Company's
service. The loss of the services of Mr. Murtaugh could adversely affect our
business. While we have an employment agreement with Mr. Murtaugh for a period
of four years, we maintain no "key man" life insurance on his life. The loss of
this individual would adversely affect our business.
Our failure to attract and retain affiliates, distributors and customers
will negatively affect our business. If we are unable to attract and retain
affiliates, distributors and customers, our revenues will suffer and adversely
affect our results of operations. Our business is dependent on attracting
affiliates or affinity groups who we hope will help market our service to their
members. These potential affiliates include credit unions, colleges and
18
universities, social, fraternal, trade and other organizations. We also hope to
reach additional agreements with distributors to assist in marketing our service
to end-users. However, our ability to attract affiliates and customers will
depend on a number of factors, including:
o Our ability to reach agreement with affinity groups, telephony resellers
and individual customers regarding the terms and conditions applicable to
our business relationship;
o Our success in marketing our service to potential new and existing
affiliates and customers;
o Pricing by traditional carriers;
o The rate at which we are able to deploy our service;
o Consolidation in the telecommunications industry; and
o The quality of the customer and technical support we provide.
Any damage to or failure of our system or operations could result in
reductions in, or termination of, our service. Our success depends on our
ability to provide efficient and uninterrupted, high quality service. The
network which we lease, our systems and operations are vulnerable to damage or
interruption from natural disasters, power loss, telecommunications failures,
physical or electronic break-ins, sabotage, intentional acts of vandalism or
similar events that may or may not be beyond our control. The occurrence of any
or all of these events could hurt our reputation and cause us to lose customers.
Changes in governmental regulation of VoIP services could result in a loss
of competitive advantage. Our success depends on our ability to provide a
competitive product. If government regulations provide for the imposition of
surcharges to VoIP providers such as access or universal service fund
contributions, or other regulations that impose an additional cost of doing
business or charge to the end-user will negatively impact our ability to offer a
competitively priced product. Without a competitively priced product, our
ability to compete, gain market share, and attain or maintain profitability may
be seriously compromised. While we are not aware of any legislation currently
pending that may impose such charges, the FCC continues to examine issues
relating to emerging technologies and how to categorize the companies that
provide such technology.
19
Item 7. Financial Statements.
Reference is made to the Index of Financial Statements following Part IV of
this Report for a listing of the Company's financial statements and notes
thereto.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Changes in our accountants
We retained Stark Tinter & Associates, LLC, independent accountants, now
known as Stark Winter Schenkein & Co., LLP, to audit our financial statements
for the period ended June 30, 2000. Stark Winter replaced Kish Leake &
Associates, P.C., who acted as the accountant for us and audited our financial
statements for the year ended December 31, 1999. The dismissal of Kish Leake &
Associates, P.C. and retention of Stark Winter was approved by our Board of
Directors.
The reports of Kish Leake & Associates, P.C. for the two fiscal years ended
December 31, 1999 did not contain an adverse opinion or a disclaimer of opinion
and were not qualified or modified as to any uncertainty, audit scope or
accounting principles.
During the two fiscal years ended December 31, 1999 and the interim period
prior to their dismissal, there were no disagreements with Kish Leake &
Associates, P.C. on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which, if not resolved to
the satisfaction of Kish Leake & Associates, P.C., would have caused Kish Leake
& Associates, P.C. to make reference to the matter in their report. Further,
there were no reportable events as that term is described in Item
304(a)(1)(iv)(B) of Regulation S-B.
During the two fiscal years and the subsequent interim period prior to
their engagement, the Company had not consulted Stark Winter regarding any
matter requiring disclosure.
PART III
Item 9. Directors and Executive Officers of the Registrant.
The information required by this item is incorporated herein by reference
from the Company's proxy statement for the annual meeting of shareholders to be
held December 10, 2001.
Item 10. Executive Compensation.
The information required by this item is incorporated herein by reference
from the Company's proxy statement for the annual meeting of shareholders to be
held December 10, 2001.
20
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated herein by reference
from the Company's proxy statement for the annual meeting of shareholders to be
held December 10, 2001.
Item 12. Certain Relationships and Related Transactions.
The information required by this item is incorporated herein by reference
from the Company's proxy statement for the annul meeting of shareholders to be
held December 10, 2001.
PART IV
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
The following is a list of exhibits filed or incorporated by reference into
this Report:
No. Description
2.1(1) Articles of Merger, Pipeline Technologies, Inc., as the survivor and
WRS Merger Corp., dated April 28, 2000, as filed with the Secretary of
State of the State of Colorado on June 21, 2000.
2.2* Share Exchange Agreement and Plan of Reorganization between the Company
and Achieve Networks, Inc. dated September 27, 2001.
3.1(2) Articles of Incorporation, of Wallstreet Racing Stables, Inc. as filed
on July 18, 1995 with the Colorado Secretary of State.
3.2(2) Articles of Amendment to the Articles of Incorporation of Wallstreet
Racing Stables, Inc., as filed on September 13, 1995 with the Colorado
Secretary of State.
3.3(6) Articles of Amendment to the Articles of Incorporation of Wallstreet
Racing Stables, Inc., as filed on October 27, 2000 with the Colorado
Secretary of State.
3.4* Articles of Amendment to the Articles of Incorporation of Pipeline
Technologies, Inc., as filed on November 16, 2000 with the Colorado
Secretary of State.
3.5(2) Bylaws of Wallstreet Racing Stables, Inc.
3.6(2) Amendment to the Bylaws of Wallstreet Racing Stables, Inc.
4(2) Form of Certificate for Common Stock.
21
9 Not applicable.
10.1(5) Employment Agreement between Pipeline Technologies, Inc. and Timothy
J. Murtaugh dated May 1, 2000.
10.2(5) Employment Agreement between Pipeline Technologies, Inc. and Robert
L. Maige dated July 1, 2000.
10.3(5) Lease between Pipeline Technologies, Inc. and Upchurch-Sutton, Inc.,
dated February 28, 2000.
10.4(*4) Services Agreement dated March 28, 2001 between Pipeline Technologies,
Inc. and a network provider.
10.5(5) Form of Convertible Loan Agreement dated June 21, 2000.
10.6(2) Non-Qualified Stock Option and Grant Plan dated August 1, 1995.
11 Not applicable.
13 Not applicable.
16(3) Letter, dated August 21, 2000, from former certifying accountant, Kish
Leake & Associates, P.C.
18 Not applicable.
21(5) List of subsidiaries.
22 Not applicable.
23 Not applicable.
24 Not applicable.
25 Not applicable.
26 Not applicable.
99 Not applicable.
-------------------------
* Filed herewith.
(1) Filed as an Exhibit to Form 8-K dated July 5, 2000 and incorporated herein
by reference.
22
(2) Filed as an Exhibit to Form SB-2, File No. 333-29859, on June 20, 1997 and
incorporated herein by reference.
(3) Filed as an Exhibit to Form 8-K/A dated July 24, 2000 and incorporated
herein by reference.
(4) Material identifying the party to this agreement has been omitted pursuant
to a request for confidential treatment and filed separately with the
Commission.
(5) Filed as an Exhibit to our Transitional Report on Form 10-KSB for the period
ended June 30, 2000, and incorporated herein by reference.
(6) Filed as an Exhibit to Form 10-QSB for the quarter ended September 30, 2000,
and incorporated herein by reference.
(b) Reports on Form 8-K.
The Company has not filed any Reports on Form 8-K during the fourth
quarter of the fiscal year covered by this report.
23
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Pipeline Technologies, Inc.
Jacksonville, Florida
We have audited the accompanying consolidated balance sheets of Pipeline
Technologies, Inc. as of June 30, 2001, and the related consolidated statements
of operations, stockholders' (deficit) and cash flows for the period from
December 2, 1999 (inception) to December 31, 1999, the six months ended June 30,
2000 and the year ended June 30, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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 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 Pipeline
Technologies, Inc. as of June 30, 2001, and the results of its operations and
cash flows for the period December 2, 1999 (inception) to December 31, 1999, the
six months ended June 30, 2000 and the year ended June 30, 2001, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
has a stockholders' deficit and has negative working capital. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also discussed in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Stark Winter Schenkein & Co., LLP
-------------------------------------
Stark Winter Schenkein & Co., LLP
Denver, Colorado
September 6, 2001
F-1
Pipeline Technologies, Inc
Consolidated Balance Sheet
June 30, 2001
Assets
Current assets:
Cash $ 2,312
Accounts receivable 11,141
Other current assets 7,879
-----------
Total current assets 21,332
-----------
Property and equipment, net 87,567
-----------
Other assets:
Deposits 65,113
-----------
$ 174,012
===========
Liabilities and stockholders' (deficit)
Current liabilities:
Accounts payable $ 528,882
Accounts payable - affiliates 18,474
Accrued expenses 430,427
Deferred revenue 27,060
Notes payable 2,672,383
-----------
3,677,226
-----------
Stockholders' (deficit)
Common stock, $.001 par value,
15,000,000 shares authorized,
10,179,375 shares issued and outstanding 10,179
Additional paid in capital 1,463,780
Accumulated deficit (4,977,173)
-----------
(3,503,214)
-----------
$ 174,012
===========
F-2
Pipeline Technologies, Inc.
Consolidated Statements of Operations
For the Year Ended June 30, 2001, the
Six Months Ended June 30, 2000
and the Period From Inception (December 2, 1999) to December 31, 1999
Inception
December 2,
Year Ended Six Months 1999 to
June 30, Ended June 30, December 31,
2001 2000 1999
------------ ------------ ------------
Revenue $ 389,873 $ 1,095 $ --
------------ ------------ ------------
Operating expenses:
Cost of sales 745,281 2,137 --
Selling, general and administrative expenses 2,734,962 972,309 9,608
------------ ------------ ------------
3,480,243 974,446 9,608
------------ ------------ ------------
Other Expenses:
Interest and financing 898,148 5,696 --
------------ ------------ ------------
Net (Loss) $ (3,988,518) $ (979,047) $ (9,608)
============ ============ ============
Per share information - basic and fully diluted:
Weighted average shares outstanding 10,098,742 8,502,406 8,453,425
============ ============ ============
Net (loss) per share $ (0.39) $ (0.12) $ (0.00)
============ ============ ============
F-3
Pipeline Technologies, Inc.
Consolidated Statement of Stockholders' (Deficit)
For the Period From Inception (December 2, 1999) to June 30, 2001
Common Stock
-------------------------- Paid in Accumulated
Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- -----------
Beginning balance -- $ -- $ -- $ -- $ --
Issuance of common shares at inception 8,453,425 1,000 -- -- 1,000
Net loss for the period -- -- -- (9,608) (9,608)
----------- ----------- ----------- ----------- -----------
Balance December 31, 1999 8,453,425 1,000 -- (9,608) (8,608)
Shares issued for reorganization 995,950 -- -- -- --
Shares issued for conversion of notes 500,000 500 252,459 -- 252,959
Reclassification of paid in capital -- 8,449 (8,449)
Net (loss) for the period -- -- -- (979,047) (979,047)
----------- ----------- ----------- ----------- -----------
Balance June 30, 2000 9,949,375 9,949 244,010 (988,655) (734,696)
Shares issued for financing costs 200,000 200 699,800 -- 700,000
Shares issued for consulting services 480,000 480 519,520 -- 520,000
Shares returned and retired (450,000) (450) 450 -- --
Net (loss) for the year -- -- -- (3,988,518) (3,988,518)
----------- ----------- ----------- ----------- -----------
Balance at June 30, 2001 10,179,375 $ 10,179 $ 1,463,780 $(4,977,173) $(3,503,214)
=========== =========== =========== =========== ===========
F-4
Pipeline Technologies, inc.
Consolidated Statements of Cash Flows
For the Year Ended June 30, 2001, the
Six Months Ended June 30, 2000
and the Period From Inception (December 3, 1999) to December 31, 1999
Inception
December 2,
Year Ended Six Months 1999 to
June 30, Ended June 30, December 31,
2001 2000 1999
----------- ----------- -----------
Net (loss) $(3,988,518) $ (979,047) $ (9,608)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation 22,603 1,005 --
Common stock issued for financing costs 700,000 -- --
Common stock issued for services 520,000 -- --
Changes in assets and liabilities:
Accounts receivable (11,141) -- --
Other current assets (7,879) -- --
Deposits (65,113) -- --
Accounts payable and accrued expenses 884,308 74,405 596
Deferred revenue 27,060 -- --
Accounts payable - affiliates 23,348 (13,281) 8,407
----------- ----------- -----------
Net cash (used in) operating activities (1,895,332) (916,918) (605)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (77,794) (33,381) --
----------- ----------- -----------
Net cash (used in) investing activities (77,794) (33,381) --
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 1,822,383 1,252,959 --
Repayments of notes payable (75,000) (75,000) --
Proceeds from stock issuance -- -- 1,000
----------- ----------- -----------
Net cash provided by financing activities 1,747,383 1,177,959 1,000
----------- ----------- -----------
Net increase (decrease) in cash (225,743) 227,660 395
Beginning - cash balance 228,055 395 --
----------- ----------- -----------
Ending - cash balance $ 2,312 $ 228,055 $ 395
=========== =========== ===========
Supplemental cash flow information:
Cash paid for income taxes $ -- $ -- $ --
Cash paid for interest $ 6,362 $ -- $ --
F-5
Pipeline Technologies, Inc.
Notes to the Consolidated Financial Statements
June 30, 2001
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
On December 2, 1999, the Company was incorporated under the laws of Colorado.
The Company is in the business of providing telecommunications services.
On June 21, 2000, Pipeline Technologies, Inc. (Pipeline) completed a
reorganization with Wallstreet Racing Stables, Inc., which at that time had no
assets or liabilities. In conjunction therewith, Wallstreet Racing Stables, Inc.
issued 8,453,425 shares of its common stock (89%) for all of the issued and
outstanding common shares of Pipeline. This reorganization has been accounted
for as though it were a recapitalization of Pipeline and sale by Pipeline of
995,950 shares of common stock (11%) in the exchange for the net assets of
Wallstreet Racing Stables, Inc.
Basis of Reporting
The Company's financial statements are presented on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business.
The Company has experienced recurring losses from operations as a result of its
general and administrative expenses necessary to achieve its operating plan
which is long-range in nature. For the period December 2, 1999 (inception)
through June 30, 2001, the Company realized net losses of $4,977,173. In
addition, the Company has a working capital deficit of $3,655,894 and a
stockholders' deficit of $3,503,214 at June 30, 2001.
The Company's ability to continue as a going concern is contingent upon its
ability to secure financing from outside sources, implement its business plan
and attain profitable operations. In addition, the Company's ability to continue
as a going concern must be considered in light of the problems, expenses and
complications frequently encountered by entrance into established markets.
The Company is pursuing financing for its operations in the form of private
placement investment. Failure to secure such financing or to raise additional
private placement investment may result in the Company depleting its available
funds and not being able pay its obligations or continue operations.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the possible inability of
the Company to continue as a going concern.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
F-6
Pipeline Technologies, Inc.
Notes to the Consolidated Financial Statements
June 30, 2001
Depreciation
Property and equipment are depreciated or amortized using the straight-line
method over the following estimated useful lives:
Furniture and office equipment 3-5 years
Leasehold Improvements 5 years
Depreciation expense for the year ended June 30, 2001 and the six months ended
June 30, 2000 was $22,603 and $1,005. There was no depreciation expense for the
period December 2, 1999 (inception) through December 31, 1999.
Fair Value of Financial Instruments
Fair value estimates discussed herein are based upon certain market assumptions
and pertinent information available to management as of June 30, 2001. The
respective carrying value of certain on-balance-sheet financial instruments
approximated their fair values. These financial instruments include cash,
accounts receivable, accounts payable, accrued expenses, and notes payable. Fair
values were assumed to approximate carrying values for these financial
instruments because they are short term in nature and their carrying amounts
approximate fair values or they are receivable or payable on demand.
Impairment of Long-Lived Assets
The Company periodically reviews the carrying amount of its identifiable assets
to determine whether current events or circumstances warrant adjustments to such
carrying amounts. If an impairment adjustment is deemed necessary, such loss is
measured by the amount that the carrying value of such assets exceed their fair
value. Considerable management judgement is necessary to estimate the fair value
of assets, accordingly, actual values could vary significantly from such
estimates. Assets to be disposed of are carried at the lower of their financial
statement carrying amount or fair value less costs to sell. As of June 30, 2001,
management does not believe there is any impairment of the carrying amounts of
assets.
Revenue Recognition
Revenue is recognized when telecommunications service are performed.
Advertising Costs
The Company expenses all costs of advertising as incurred. Total advertising
expense for the year ended June 30, 2001, the six months ended June 30, 2000 and
the period December 2, 1999 (inception) through December 31, 1999 was $58,812,
$34,449 and $6,767.
F-7
Pipeline Technologies, Inc.
Notes to the Consolidated Financial Statements
June 30, 2001
Stock-based Compensation
The Company accounts for stock based compensation in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation." The provisions of SFAS No. 123
allow companies to either expense the estimated fair value of stock options or
to continue to follow the intrinsic value method set forth in APB Opinion 25,
"Accounting for Stock Issued to Employees" ("APB 25") but disclose the pro forma
effects on net income (loss) had the fair value of the options been expensed.
The Company has elected to continue to apply APB 25 in accounting for its stock
option incentive plans.
Reclassifications
Certain items previously reported in the prior year have been reclassified to
conform to current year presentation.
Income Taxes
The Company follows Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes" ("SFAS No. 109") for recording the provision for
income taxes. Deferred tax assets and liabilities are computed based upon the
difference between the financial statement and income tax basis of assets and
liabilities using the enacted marginal tax rate applicable when the related
asset or liability is expected to be realized or settled. Deferred income tax
expenses or benefits are based on the changes in the asset or liability each
period. If available evidence suggests that it is more likely than not that some
portion or all of the deferred tax assets will not be realized, a valuation
allowance is provided to reduce the deferred tax assets to the amount that is
more likely than not to be realized. Future changes in such valuation allowance
are included in the provision for deferred income taxes in the period of change.
Net (Loss) per Common Share
The Company calculates net income (loss) per share as required by SFAS No. 128,
"Earnings per Share." Basic earnings (loss) per share is calculated by dividing
net income (loss) by the weighted average number of common shares outstanding
for the period. Diluted earnings (loss) per share is calculated by dividing net
income (loss) by the weighted average number of common shares and dilutive
common stock equivalents outstanding. During the periods when they are
anti-dilutive, common stock equivalents are not considered in the computation.
Comprehensive Income
The Company follows Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in the financial statements.
Segment Reporting
The Company follows Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information." The
Company operates as a single segment and will evaluate additional segment
disclosure requirements as it expands its operations.
F-8
Pipeline Technologies, Inc.
Notes to the Consolidated Financial Statements
June 30, 2001
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual amounts could differ from
those estimates.
Note 2. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at cost, less accumulated
depreciation at June 30, 2001:
Furniture and equipment $ 93,150
Leasehold improvements 18,025
--------
111,175
Less: Accumulated depreciation 23,608
--------
Total $ 87,567
========
Note 3. NOTES PAYABLE
Convertible notes payable were issued for cash to be used for operations.
The following are summaries of notes payable at June 30, 2001 which are all due
on demand:
12% convertible notes, interest payable semi-annually, conver-
tible including accrued interest, at the holders' discretion
into shares of Common Stock at rate of $2.00 per share $2,672,383
==========
Of this amount $2,522,383 is due to affiliates and $150,000 is due to unrelated
parties (see Note 6).
Accrued interest related to these notes aggregated $191,786 at June 30, 2001.
Note 4. STOCKHOLDERS' (DEFICIT)
At inception, the Company issued 8,453,425 shares of common stock for cash
aggregating $1,000.
During the six months ended June 30, 2000, the Company issued 500,000 shares of
common stock for the conversion of notes payable aggregating $252,959 and issued
995,950 shares of common stock pursuant to the reorganization described in Note
1.
F-9
Pipeline Technologies, Inc.
Notes to the Consolidated Financial Statements
June 30, 2001
During the year ended June 30, 2001 the Company issued 200,000 shares of common
stock valued at $700,000 for financing costs related to certain short term
loans. Of these shares, 100,000 shares valued at $400,000 were issued to an
existing stockholder. Also, the Company issued 480,000 shares of common stock
for services valued at $520,000. The value assigned to the common stock was the
fair market value of the shares at the time it was agreed that they would be
issued.
In addition, 450,000 shares of common stock were returned to the Company for no
consideration and retired.
Note 5. INCOME TAXES
The Company has a federal net operating loss carryforward of approximately
$5,000,000, which will expire between the years 2018 and 2020. The deferred tax
asset relating to the tax benefit of this net operating loss has been offset by
a full allowance for realization. The difference between income taxes computed
at the federal statutory rate and the actual income tax expense results from the
net operating loss.
Note 6. RELATED PARTY TRANSACTIONS
Certain officers of the Company loan money to the Company at various times
during the year when cash is needed. The balance due these officers was $18,474
at June 30, 2001.
During the year ended June 30, 2001 and the six months ended June 30, 2000, the
Company borrowed an aggregate of $1,672,383 and $850,000 from certain
shareholders of the Company. These amounts are included in the total of
$2,672,383 described in Note 3 above.
NOTE 7. LEASE OBLIGATION
The Company leases office space under an operating lease arrangement. The lease
expires on March 31, 2005.
Minimum future lease payments on the office lease are as follows:
Year Amount
---- --------
2002 $ 64,239
2003 66,492
2004 68,739
2005 17,325
--------
$216,795
========
For the year ended June 30, 2001 and the six months ended June 30, 2000, the
amount charged to operations for rent expense was $61,992 and $5,352. There was
no rent expense charged to operations for the period December 2, 1999
(inception) to December 31, 1999.
F-10
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized in Jacksonville, Florida
on the 15th day of October 2001.
Pipeline Technologies, Inc.
By: /s/ Timothy J. Murtaugh
----------------------------------
Timothy J. Murtaugh, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed by the following persons in the capacities
and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Timothy J. Murtaugh President, Chief Executive October 15, 2001
------------------------ Officer and Director
Timothy J. Murtaugh
/s/ Robert L. Maige, Jr. Chief Financial and Accounting October 15, 2001
------------------------ Officer, Treasurer and Director
Robert L. Maige, Jr.
/s/ Pieter Both
------------------------ Director October 15, 2001
Pieter Both
24