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COGNIGEN NETWORKS, INC.
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED AMENDMENT TO PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement
|_| Confidential for use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
COGNIGEN NETWORKS, INC.
(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which the transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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|_| Fee paid previously with preliminary materials.
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|_| Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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PRELIMINARY COPY
COGNIGEN NETWORKS, INC.
7001 Seaview Avenue NW
Suite 210
Seattle, Washington 98117
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on August 30, 2000
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the
"Meeting") of Cognigen Networks, Inc., a Colorado corporation (the "Company"),
will be held in the Special Events Room on the Second Floor, 7001 Seaview
Avenue, NW, Seattle, Washington 98117, on Wednesday, August 30, 2000, at
10:00 a.m., Pacific Time, for the purpose of considering and voting upon
proposals to:
(1) adopt an amendment to Article THIRD of the Articles of
Incorporation of the Company to delete any reference contained
in the current Article THIRD to an area of business in which the
Company no longer engages and to change the wording of the
provision in the current Article THIRD that confers upon the
Company all of the rights, powers and privileges conferred on
Colorado corporations;
(2) adopt an amendment to Article FOURTH of the Articles of
Incorporation of the Company which, among other things,
increases the authorized shares of common stock of the Company
from 50,000,000 shares to 300,000,000 shares of $0.001 par value
common stock and authorizes 20,000,000 shares of no par value
preferred stock;
(3) adopt an amendment to Section (d)(ii) of Article EIGHTH of the
Articles of Incorporation of the Company to change the vote
required to amend the Articles of Incorporation to a majority
of a quorum;
(4) adopt a new Article NINTH of the Articles of Incorporation of
the Company which limits the liability of the directors of the
Company under certain circumstances;
(5) authorize the Board of Directors of the Company to adopt an
amendment to the Company's Articles of Incorporation at such
time as the Board of Directors deems it appropriate to
effectuate a one-for-two, a one-for-three or a one-for-four
reverse split of the Company's outstanding common stock, the
exact reverse split to be determined by the Board of Directors
of the Company;
(6) approve the Company's 2000 Incentive and Nonstatutory Stock
Option Plan; and
(7) transact such other business as may lawfully come before the
Meeting or any adjournment(s) thereof.
Only shareholders of record at the close of business on June 23, 2000,
are entitled to notice of and to vote at the Meeting and at any adjournment(s)
thereof.
The enclosed Proxy is solicited by and on behalf of the Board of
Directors of the Company. All shareholders are cordially invited to attend the
Meeting in person. Whether you plan to attend or not, please date, sign and
return the accompanying proxy in the enclosed return envelope, to which no
postage need be affixed if mailed in the United States. The giving of a proxy
will not affect your right to vote in person if you attend the Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
DAVID L. JACKSON, SECRETARY
Seattle, Washington
July 28, 2000
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PRELIMINARY COPY
COGNIGEN NETWORKS, INC.
7001 Seaview Avenue NW
Suite 210
Seattle, Washington 98117
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 30, 2000
This proxy statement ("Proxy Statement") is being furnished in
connection with the solicitation of proxies by the Board of Directors of
Cognigen Networks, Inc. (the "Company") to be used at a Special Meeting of
Shareholders (the "Meeting") to be held in the Special Events Room on the
Second Floor, 7001 Seaview Avenue, N.W., Seattle, Washington 98117, on
Wednesday, August 30, 2000, at 10:00 a.m. Pacific Time, and at any
adjournment(s) thereof.
This Proxy Statement and the accompanying Proxy will be mailed to the
Company's shareholders on or about July 28, 2000.
REVOCATION AND VOTING OF PROXY
Any person signing and mailing the enclosed Proxy may revoke it at any
time before it is voted by: (i) giving written notice of the revocation to the
Company's corporate secretary; (ii) voting in person at the Meeting; or (iii)
voting again by submitting a new proxy card. Only the latest dated proxy card,
including one which a person may vote in person at the Meeting, will count. If
not revoked, the Proxy will be voted at the Meeting in accordance with the
instructions indicated on the Proxy by the shareholder, or, if no instructions
are indicated, FOR the proposed amendments to the Company's Articles of
Incorporation; FOR approval of a proposal to authorize the Board of Directors
of the Company to adopt an amendment to the Company's Articles of Incorporation
at such time as the Board of Directors deems it appropriate to effectuate a
one-for-two, a one-for-three, a one-for-four reverse split of the Company's
outstanding common stock, the exact reverse split to be determined by the Board
of Directors of the Company; and FOR approval of the Company's 2000 Incentive
and Nonstatutory Stock Option Plan.
SUMMARY TERM SHEET
One of the proposals that will be considered and voted upon at the
Meeting is a proposal to adopt an amendment to Article FOURTH of the Articles
of Incorporation of the Company to increase the Company's authorized shares of
common stock. One of the reasons to increase the Company's authorized shares
of common stock is so that the Company can pay the balance of the consideration
to be paid in connection with the acquisition of the assets of Inter-American
Telecommunications Holding Corporation ("ITHC"). The following is a summary of
the transaction. The summary does not contain all the information that may be
deemed to be important to a shareholder. Each shareholder should carefully
review the entire proxy statement to fully understand the transaction between
the Company and ITHC.
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Acquisition.
Shareholder Vote. The shareholders of the Company are being asked to
vote to approve an amendment to Article FOURTH of the Company's Articles
of Incorporation to increase the number of authorized shares of common
stock of the Company so that the Company will be able to issue
additional shares of the Company's common stock to ITHC in connection
with the acquisition of all of the assets of ITHC by the Company.
Consideration. The consideration paid and payable by the Company to
ITHC for the assets consists of:
- 11,742,953 shares of the Company's common stock that were issued at
the first closing;
- 37,298,444 shares of the Company's common stock that are to be
issued at the second closing; and
- the assumption by the Company of all of the liabilities of ITHC that
existed on August 20, 2000.
Reason for the Acquisition.
Since 1989, the Company has had no business operations and had been
seeking a business opportunity to acquire. On March 11, 1999, the Company
entered into an agreement to acquire all the outstanding shares of Price
net.com; however, this agreement was terminated on March 30, 1999.
On August 20, 1999, the Company acquired all of the assets of ITHC in
exchange for the Company's common stock. ITHC is engaged in marketing long
distance telecommunications services directly and through the internet.
The directors of the Company believed that the acquisition of the assets of
ITHC would enable the Company to be actively engaged in an existing, on-going
business (not a start-up company) that the directors of the Company believed
had substantial growth potential.
Fairness of the Acquisition.
The then directors of the Company carefully considered the acquisition
of the assets of ITHC and the number of shares of the Company's stock that
would be issued to ITHC in connection with the acquisition. The directors
believed that the Company had found a viable, on-going business (not a start-up
company) and that the number of shares that the Company would have to issue to
ITHC, considering the fact that the Company was unable to complete an
acquisition over the past ten years, was reasonable in light of what the
directors believed was the potential for growth of the business acquired. The
directors did not retain a financial advisor to opine as to the fairness of the
transaction.
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Unanimous Director Recommendation.
The directors unanimously approved the transaction whereby the Company
acquired the assets of ITHC and recommends that the shareholders approve an
amendment to Article FOURTH of the Company's Articles of Incorporation to
increase the authorized shares of common stock of the Company so that the
Company is able to issue the additional 37,298,444 shares to ITHC to complete
the acquisition. There is no penalty imposed upon the Company if the Company
does not increase the authorized number of shares to complete the acquisition.
The Company has been orally advised that shareholders holding approximately 51%
of the outstanding shares of common stock of the Company intend to vote in favor
of increasing the number of authorized shares of the Company.
Interest of Directors in the Transaction.
Just prior to the transaction, Jimmy L. Boswell and David G. Lucas were
directors, officers and owners of less than 5% of the outstanding common stock
of ITHC and David L. Jackson and his wife were the directors and officers of the
Company and David L. Jackson was the owner of less than 5% of the outstanding
common stock of ITHC. Darrell H. Hughes was hired after the transaction with
ITHC was completed and obtained approximately 10.5% of the outstanding common
stock of ITHC. As a result of being shareholders of ITHC, Jimmy L. Boswell,
David G. Lucas, David L. Jackson and Darrell H. Hughes will benefit from the
additional shares to be issued to ITHC.
Contact Information.
If you have any questions regarding this transaction or any other
matters discussed in this proxy statement, please contact:
David L. Jackson
P.O. Box 9345
Rancho Santa Fe, California 92067-4345
Further Information.
For further information pertaining to the transaction between the
Company and ITHC and the proposal to adopt an amendment to Article
FOURTH of the Company's Articles of Incorporation, see "Changes in
Control of the Company", "Certain Information Pertaining to the Company
and ITHC" and "Proposal Number Three."
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VOTING SECURITIES
Voting rights are vested exclusively in the holders of the Company's
$0.001 par value common stock with each share entitled to one vote. Cumulative
voting in the election of directors is not permitted. Only shareholders of
record at the close of business on June 23, 2000, are entitled to notice of and
to vote at the Meeting or any adjournments thereof. On June 23, 2000, the
Company had 47,030,547 shares of common stock outstanding.
PRINCIPAL SHAREHOLDERS AND
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of June 23, 2000, the number of shares
of the Company's outstanding common stock beneficially owned by each of the
Company's current directors and by each person who is expected to become a
director prior to the Meeting, sets forth the number of shares of the Company's
common stock beneficially owned by all of the Company's current executive
officers and directors as a group, and sets forth the number of shares of the
Company's common stock owned by each person who owned of record, or was known to
own beneficially, more than 5% of the outstanding shares of the Company's common
stock:
Amount and Nature of
Name and Address Beneficial Ownership(1) Percent of Class
---------------- ---------------------- ----------------
Jimmy L. Boswell 2,618,468(2)(3) 5.4%
Suite 304
3220 South Higuera Street
San Luis Obispo, CA 93401
Troy D. Carl 0(2) --
6751-B Academy Road, N.E.
Albuquerque,
New Mexico 87109
David L. Jackson 2,460,471(4) 5.1%
16053 Via Viajera
Rancho Santa Fe, CA 92067
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Wilhelm J. Giertsen 559,213(2)(5) 1.2%
Starefossveien
5019 Burgen
Norway
Darrell H. Hughes 4,148,883(6) 8.5%
Suite 210
7001 Seaview Avenue N.W.
Seattle, WA 98117
David G. Lucas 2,618,468(2)(7) 5.4%
Suite 304
3220 South Higuera Street
San Luis Obispo, CA 93401
Mohammed I. Marafi 1,289,474(2)(8) 2.7%
P. O. Box 104
13002 Safat
Kuwait
All current officers and
directors as a group
(5 persons) 11,846,290(9) 22.2%
Combined Telecommunications
Consultancy, Ltd. 5,831,412(10)(15) 11.4%
2608 Second Avenue,
Suite 108
Seattle, Washington 98121
Cognigen Corporation 14,007,864(11) 29.8%
8711 15th Avenue N.W.
Seattle, WA 98117
Kevin E. Anderson 26,007,864(11)(12) 44.1%
2608 Second Avenue,
Suite 108
Seattle, Washington 98120
Anderson Family Trust #1 26,007,864(12)(13) 44.1%
2608 Second Avenue,
Suite 108
Seattle, Washington 98120
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Peter Tilyou 19,586,492(10)(12)(14)(15) 30.7%
2608 Second Avenue,
Suite 108
Seattle, Washington 98120
(1) Except as indicated below, each person has sole and voting and/or
investment power over the shares listed.
(2) It is planned that Messrs. Boswell, Carl, Giertsen, Lucas and Marafi
will be appointed directors of the Company by Messrs. Hughes and Jackson, who
are the current directors of the Company, prior to the Meeting.
(3) Includes 1,600,000 shares underlying an option. Mr. Boswell
currently owns approximately 2.6% of the outstanding common stock of ITHC. If
the proposal to adopt the amendment to Article FOURTH of the Articles of
Incorporation is approved, ITHC will be entitled to receive 37,298,444 shares of
the Company's common stock. Mr. Boswell does not have sole or shared voting
and/or investment power over the shares of the Company's common stock owned by
ITHC. Therefore, Mr. Boswell disclaims beneficial ownership of the approximate
981,535 shares of the Company's common stock that will be represented by Mr.
Boswell's ownership of approximately 2.6% of the outstanding common stock of
ITHC. The 981,535 shares are not included in the above table.
(4) Includes 1,600,000 shares underlying an option. Mr. Jackson
currently owns approximately 3.5% of the outstanding common stock of ITHC. If
the proposal to adopt the amendment to Article FOURTH of the Articles of
Incorporation is approved, ITHC will be entitled to receive 37,298,444 shares of
the Company's common stock. Mr. Jackson does not have sole or shared voting
and/or investment power over the shares of the Company's common stock owned by
ITHC. Therefore, Mr. Jackson disclaims beneficial ownership of the approximate
1,295,629 shares of the Company's common stock that will be represented by Mr.
Jackson's ownership of approximately 3.5% of the outstanding common stock of
ITHC. The 1,295,629 shares are not included in the above table.
(5) Includes 25,000 shares owned by Mr. Giertsen's wife.
(6) Includes 1,600,000 shares underlying an option. Mr. Hughes
currently owns approximately 10.5% of the outstanding common stock of ITHC. If
the proposal to adopt the amendment to Article FOURTH of the Articles of
Incorporation is approved, ITHC will be entitled to receive an additional
37,298,444 shares of the Company's common stock. Mr. Hughes does not have sole
or shared voting and/or investment power over the shares of the Company's common
stock owned by ITHC. Therefore, Mr. Hughes disclaims beneficial ownership of the
approximate 3,926,150 shares of the Company's that will be represented by Mr.
Hughes' ownership of approximately 10.5% of the outstanding common stock of
ITHC. The 3,926,150 shares are not included in the above table.
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(7) Includes 1,600,000 shares underlying an option. Mr. Lucas currently
owns approximately 2.6% of the outstanding common stock of ITHC. If the proposal
to adopt the amendment to Article FOURTH of the Articles of Incorporation is
approved, ITHC will be entitled to receive 37,298,444 shares of the Company's
common stock. Mr. Lucas does not have sole or shared voting and/or investment
power over the shares of the Company's common stock owned by ITHC. Therefore,
Mr. Lucas disclaims beneficial ownership of the approximate 981,535 shares of
the Company is common stock that will be represented by Mr. Lucas' ownership of
approximately 2.6% of the outstanding common stock of ITHC. The 981,535 shares
are not included in the above table.
(8) Includes 100,000 shares underlying a warrant. Does not include
1,241,472 shares owned by companies in which Mr. Marafi has a minority interest.
(9) Includes the shares specified in footnotes (3), (4), (6) and (7)
above.
(10) Includes 4,000,000 shares underlying an option. Combined
Telecommunications Consultancy, Ltd. ("CTC") currently owns approximately 7.1%
of the outstanding common stock of ITHC. If the proposal to adopt the amendment
to Article FOURTH of the Articles of Incorporation is approved, ITHC will be
entitled to receive 37,298,444 shares of the Company's common stock. CTC does
not have sole or shared voting and/or investment power over the shares of the
Company's common stock owned by ITHC. Therefore, CTC disclaims beneficial
ownership of the approximate 2,630,521 shares of the Company's common stock will
be represented by CTC's ownership of approximately 7.1% of the outstanding
common stock of ITHC. The 2,630,521 shares are not included in the above table.
(11) Cognigen Corporation currently owns approximately 57.9% of the
outstanding common stock of ITHC. If the proposal to adopt the amendment to
Article FOURTH of the Articles of Incorporation is approved, ITHC will be
entitled to receive 37,298,444 shares of the Company's common stock. The
37,298,444 shares will be deemed to be beneficially owned by Cognigen
Corporation. The 37,298,444 shares are not included in the above table.
(12) Includes 12,000,000 shares of the Company's common stock
underlying an option owned by the Anderson Family Trust #1. Kevin E. Anderson
has the sole voting and investment power over the shares of the Company's common
stock owned by ITHC. Kevin E. Anderson and members of his family are the
beneficiaries of the Anderson Family Trust #1 which owns approximately 98.9% of
the outstanding common stock of Cognigen Corporation. Therefore, Mr. Anderson
may be deemed to beneficially own the 14,007,864 shares of the Company's common
stock that Cognigen Corporation may be deemed to beneficially own.
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(13) Represents the 26,007,864 shares that Kevin Anderson may be deemed
to beneficially own.
(14) Includes the shares owned by CTC and the Anderson Family Trust
#1,955,080 shares owned by Telkiosk, Inc. and 800,000 shares underlying an
option owned by Telkiosk. Peter Tilyou is the sole trustee, but not a
beneficiary, of the Anderson Family Trust #1. As the managing officer/director
of CTC and Telkiosk, Mr. Tilyou has voting and investment power over the shares
of the Company's common stock beneficially owned by CTC and Telkiosk. Mr. Tilyou
is the beneficial owner of 33% of the outstanding shares of Telkiosk and 25% of
the outstanding shares of CTC.
(15) The information pertaining to the shares of the Company's common
stock beneficially owned by CTC and Telkiosk and the information pertaining to
Peter Tilyou's relationship to both and to the Anderson Family Trust #1 is based
on the shareholder records of the Company and information provided to the
Company by Peter Tilyou.
CHANGE IN CONTROL OF THE COMPANY
On August 20, 1999, the Company completed the first closing of the
acquisition of all of the assets of ITHC in exchange for 29,242,953 shares of
the Company's common stock. On December 27, 1999, the Company and ITHC agreed
that the total number of shares of the Company's common stock that were to be
issued at the first closing was 11,742,953 shares rather than 29,242,953 shares
and that the total number of shares to be issued by the Company to ITHC at the
second closing is 37,298,444 shares. Further, the Company and ITHC made it clear
that the Company was acquiring all of the assets and assuming all of the
liabilities of ITHC as of August 20, 1999.
As a result of ITHC's receipt of the 11,742,953 shares of the Company's
common stock and a previous purchase of 12,452,431 shares of the Company's
common stock by ITHC from David L. Jackson, Patricia A. Jackson, Karrie R.
Jackson, and Eric J. Sunsvold, ITHC owned 24,195,384 shares, or approximately
54.0% of the Company's outstanding shares of common stock. In May 2000, ITHC
distributed the 24,195,384 shares pro rata to its shareholders. If the proposal
to adopt the amendment to Article FOURTH of the Articles of Incorporation is
approved, ITHC will receive 37,298,444 shares, or approximately 44.2% of the
Company's outstanding shares of common stock. It is contemplated that ITHC will
distribute the 37,298,444 shares pro rata to its shareholders.
Kevin E. Anderson and his family are beneficiaries of the Anderson
Family Trust #1 which owns approximately 98.9% of the outstanding common stock
of Cognigen Corporation. Cognigen Corporation currently owns approximately 29.8%
of the outstanding common stock of the Company. Therefore, Kevin E. Anderson may
be deemed to control the Company.
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The assets of ITHC consisted of electronically archived customer data
bases consisting of approximately 95,000 individual residential and business
long-distance telephone service subscriber accounts; agency, reseller and other
agreements and contracts ITHC had with carriers, switched resellers, unswitched
resellers, consolidators or other providers of long-distance and local telephone
service; ITHC's accounts receivable, commissions receivable, future commissions
that may be payable from any of the carriers, switched resellers, unswitched
resellers, consolidators or other providers of long-distance and local telephone
service; ITHC's computer software, proprietary programs and applications,
computers, monitors, peripherals, printers, copiers, telephone PABX systems,
office furniture and fixtures, office leases; customer data bases, customer
lists and print and electronic records relating to customers; ITHC's inventories
and orders for prepaid telephone cards; ITHC's new accounts; ITHC's websites,
pages, links and agreements as well as ITHC's Internet domains and email
addresses; agreements with ITHC's agents and subagents; exclusive use and
control of the name "Cognigen" and its attendant copyright, trade name and
trademark and service mark registrations; ITHC's intellectual property; ITHC's
lines of credit with carriers, prepaid card providers, switched resellers,
switchless resellers and other providers of local and long-distance phone
service, ITHC's cash and all of the outstanding stock of Inter-American
Telecommunications Corporation, a non-operating subsidiary of ITHC. The audited
balance sheets of ITHC as of June 30, 1999, and the audited statements of
operations, cash flows and changes in stockholders' equity of ITHC for the
period July 24, 1998 (inception) through June 30, 1999, the audited balance
sheets of Cognigen Corporation as of June 30, 1999 and 1998 and the audited
statements of income and retained earnings and cash flows of Cognigen
Corporation and unaudited pro forma financial information as of June 30, 1999
for the Company, ITHC and Cognigen Corporation and the unaudited consolidated
balance sheets of the Company as of March 31, 1999 and the unaudited
consolidated statements of operations, unaudited consolidated statement of
shareholders' equity (deficit) and unaudited consolidated statements of
cash flows of the Company for the nine months ended March 31, 1999 are
attached hereto as Exhibit A.
CERTAIN INFORMATION PERTAINING TO THE COMPANY AND ITHC
As indicated under the caption "Change in Control," on August 20, 1999,
the Company acquired all of the assets of ITHC in exchange for 11,742,953 shares
of the Company's common stock that were issued to ITHC and distributed by ITHC
pro rata to its shareholders and 37,298,444 shares of the Company's common stock
that will be issued to ITHC only if the proposal to adopt the amendment to
Article FOURTH of the Articles of Incorporation is approved at the Meeting.
Prior to the acquisition of the assets of ITHC, the Company had no operations,
no assets and minimal liabilities. The audited balance sheets of ITHC as of June
30, 1999, and the audited statements of operations, cash flows and changes in
stockholders' equity of ITHC for the period July 24, 1998 (inception) through
June 30, 1999, the audited balance sheets of Cognigen Corporation as of June 30,
1999 and 1998 and the audited statements of income and retained earnings and
cash flows of Cognigen Corporation and unaudited pro forma financial
information as of June 30, 1999 for the Company, ITHC and Cognigen Corporation
and the unaudited consolidated balance sheets of the Company as of March 31,
1999 and the unaudited consolidated statements of operations and unaudited
consolidated statements of cash flows of the Company for the six months ended
March 31, 1999 are attached hereto as Exhibit A.
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The transaction between the Company and ITHC was structured as a
stock for assets transaction to enable the first closing to be held without the
approval of the Company's shareholders so that the Company could quickly become
engaged in a business.
ITHC, which was incorporated in July 1998, acquired the assets it
transferred to the Company for a total of $1,600,000 in promissory notes, which
were assumed by the Company, and 7,500 shares of ITHC's common stock. ITHC
originally acquired the assets in 1998 and 1999 from Inter-American
Telecommunications Corporation, Telkiosk, Inc., Combined Telecommunications
Consultancy, Ltd. and Cognigen Corporation, all of which were incorporated in
1998.
ITHC, through Cognigen Corporation, its e-commerce division, was a major
marketer of long-distance telecommunications services. Operating on the Internet
via thousands of Web sites, Cognigen Corporation marketed both domestic and
international long-distance telephone service as well as prepaid calling cards
through a network of approximately 40,000 independent agents to approximately
157,000 subscribers worldwide.
Since 1997, the Cognigen Corporation division has experienced growth in
the retail revenue it has generated, in the size of its agent force, and in the
number of subscribers it has acquired and maintained. Cognigen Corporation's
Internet presence operates through proprietary programs that provide for a very
high volume of visits with user friendly procedures that allow on-line
fulfillment of service applications. Typically, a Cognigen Corporation
subscriber is able to apply for, and obtain discount long-distance service
within a matter of hours rather than days.
The Company currently leases approximately 3,457 square feet of office
space at 7001 Seaview Avenue, NW, Suite 210, Seattle, Washington 98117, pursuant
to a lease that will terminate in December 2001 and that currently requires
monthly rental payments of approximately $3,025. The Company also currently
leases approximately 1,007 square feet of office space at 6751 Academy Road, NE,
Suite B, Albuquerque, New Mexico 87109, pursuant to a lease that will terminate
in March 2003 and that currently requires monthly rental payments of $1,390.49.
ITHC had 9 employees at the time the ITHC assets were acquired by the
Company. The employees became employees of the Company. As of June 23, 2000, the
Company had a total of 17 employees.
The Company's common stock is quoted on the OTC Bulletin Board ("OTC").
Even though maintaining a current listing on the OTC, no known significant
trading occurred during the Company's last two fiscal years. The following table
sets forth, for the periods indicated, the high and low closing bid price
quotations for the common stock as reported by the National Quotation Bureau,
LLC. Such quotations reflect inter-dealer prices, but do not include retail
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
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High Closing Bid Low Closing Bid
Quarter ended March 31, 2000 $ 2.625 $ 1.25
Quarter ended December 31, 1999: 3.625 0.8125
Quarter ended September 30, 1999: 1.00 0.1875
Quarter ended June 30, 1999: $ 0.30 $ 0.125
Quarter ended March 31, 1999: 0.2815 0.03125
Quarter ended December 31, 1998: 0.10 0.08
Quarter ended September 30, 1998: 0.125 0.0625
Quarter ended June 30, 1998: $ 0.1875 $ 0.125
Quarter ended March 31, 1998: 0.1875 0.125
Quarter ended December 31, 1997: 0.15625 0.125
Quarter ended September 30, 1997: 0.3125 0.15625
As of June 23, 2000, there were approximately 1,326 holders of record
of the Company's common stock. The number of record holders does not include
holders whose securities are held in street name. The closing price of the
common stock on August 20, 1999, the date of the closing of the agreement with
ITHC, was $0.7187 per share. The closing price of the common stock on June 23,
2000, was $1.00. As of June 23, 2000, the Company had 47,030,547 shares of
common stock outstanding.
The Company has never paid and does not anticipate paying any cash
dividends on its common stock in the foreseeable future. The Company intends to
retain all earnings for use in the Company's business operations and in the
expansion of its business.
ACTIONS TO BE TAKEN AT MEETING
The Meeting has been called by the directors of the Company to consider
and act upon proposals to:
(1) adopt an amendment to Article THIRD of the Articles of
Incorporation of the Company to delete any reference contained
in the current Article THIRD to an area of business in which the
Company no longer engages and to change the wording of the
provision in the current Article THIRD that confers upon the
Company all of the rights, powers and privileges conferred on
Colorado corporations;
(2) adopt an amendment to Article FOURTH of the Articles of
Incorporation of the Company which, among other things,
increases the authorized shares of common stock of the Company
from 50,000,000 shares to 300,000,000 shares of $0.001 par value
of common stock and authorizes 20,000,000 shares of no par value
preferred stock;
11
<PAGE>
(3) adopt an amendment to Section (d)(ii) of Article EIGHTH of the
Articles of Incorporation of the Company to change the vote
required to amend the Articles of Incorporation to a majority
of a quorum;
(4) adopt a new Article NINTH of the Articles of Incorporation of
the Company which limits the liability of the directors of the
Company under certain circumstances;
(5) authorize the Board of Directors of the Company to adopt an
amendment to the Company's Articles of Incorporation at such
time as the Board of Directors deems it appropriate to
effectuate a one-for-two, a one-for-three or a one-for-four
reverse split of the Company's outstanding common stock, the
exact reverse split to be determined by the Board of Directors
of the Company;
(6) approve the Company's 2000 Incentive and Nonstatutory Stock
Option Plan; and
(7) transact such other business as may lawfully come before the
Meeting or any adjournment(s) thereof.
The holders of one-third of the outstanding shares of common stock of
the Company present at the Meeting in person or represented by proxy constitute
a quorum. To be approved, the proposals specified in items (1) through (5) must
receive the affirmative vote of a majority of the outstanding shares. If a
quorum is present, the proposal specified in item (6) must receive the
affirmative vote of a majority of the shares represented in person or by proxy
at the Meeting and entitled to vote thereon. Where brokers have not received any
instruction from their clients on how to vote on a particular proposal, brokers
are permitted to vote on routine proposals but not on nonroutine matters. The
absence of votes on nonroutine matters are "broker nonvotes." Abstentions and
broker nonvotes will be counted as present for purposes of establishing a
quorum, will be counted as present for purposes of the proposals and will count
as votes against all of the proposals.
The Company has been orally advised that each of the persons listed
under "Principal Shareholders and Security Ownership of Management" intends to
vote for the proposals described herein. Therefore, approximately 51% of the
outstanding shares of common stock should be voted in favor of each proposal.
12
<PAGE>
EXECUTIVE COMPENSATION
The following table provides certain information pertaining to the
compensation paid by the Company and its subsidiaries during the Company's last
three fiscal years for services rendered by Jimmy L. Boswell, Darrell H. Hughes
and David L. Jackson, all of whom were chief executive officers of the Company
during the fiscal year ended June 30, 2000.
Annual Compensation
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
----------
Fiscal Other
Year Annual Securities All Other
Name and Ended Compen- Underlying Compen-
Principal Position June 30, Salary($) Bonus($) sation($) Options(#) sation($)
------------------ -------- --------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Jimmy L. Boswell 2000 $ 103,333 - - 1,600,000 (a) -
President and Chief 1999 - - - - -
Operating Officer of 1998 - - - - -
the Company since
August 20, 1999
David L. Jackson 2000 $ 29,000 - - 1,600,000 (a) $ 24,000 (b)
President of the 1999 - - - - -
Company until 1998 - - - - -
August 20, 1999
Darrell H. Hughes 2000 $ 88,542 - - 1,600,000 (a) -
Chief Executive 1999 - - - - -
Officer since 1998 - - - - -
October 13, 1999
</TABLE>
(a) On August 25, 2000, each person was granted a 5 year option to \
purchase 1,600,000 shares of Common Stock at an exercise price of $0.46. Each
option is currently exercisable. However, the Company does not have a sufficient
number of shares for such persons to be able to exercise their options. The
Company is planning to request that its shareholders approve an amendment to the
Company's Articles of Incorporation to increase the number of shares the Company
is authorized to issue.
(b) The $24,000 was paid as consulting fees prior to the time
Mr. Jackson became an employee of the Company.
13
<PAGE>
OPTION GRANTS TO OFFICERS
The following tables sets forth the individual grants of stock options made
during the last completed fiscal year to each of the named executive officers:
<TABLE>
<CAPTION>
Number of
Securities Percent of Total
Underlying Options Granted to
Options Employees in
Name Granted Fiscal Year Exercise Price Expiration Date
---- ---------- ------------------ -------------- ---------------
<S> <C> <C> <C> <C>
Jimmy L. Boswell 1,600,000 25% $0.46 8/25/2000
Darrell H. Hughes 1,600,000 25% $0.46 8/25/2000
David L. Jackson 1,600,000 25% $0.46 8/25/2000
</TABLE>
The following table provides information with respect to the named
executive officers concerning unexercised options to purchase the Company's
common stock held by them as of the end of the fiscal year ended June 30, 2000.
Number of Securities Value of Unexpected
Underlying Unexercised In-the-Money Options
Options at Fiscal Year End at Fiscal Year End
Name Exercisable/Unexercisable Exercisable/Unexercisable
---- -------------------------- -------------------------
Jimmy L. Boswell 1,600,000 / 0 $0 / $0
Darrell H. Hughes 1,600,000 / 0 $0 / $0
David L. Jackson 1,600,000 / 0 $0 / $0
(1) Calculated by multiplying the difference between the exercise price
and the closing bid of $1.00 per share on June 30, 2000 by the applicable
shares. Does not give consideration to commissions or other market conditions.
Messrs. Boswell, Hughes and Jackson did not exercise any options to
purchase shares if the Company's common stock during the fiscal year ended
June 30, 2000.
14
<PAGE>
PROPOSAL NUMBER ONE
APPROVAL OF THE ADOPTION OF AN AMENDMENT TO ARTICLE THIRD
OF THE ARTICLES OF INCORPORATION OF THE COMPANY
Article THIRD of the Company's Articles of Incorporation currently reads as
follows:
"THIRD: (a) Purposes. The nature, objects and purposes for which the
corporation is organized are to engage in the manufacture, assembly, licensing
and sale of cellular radio and communications equipment and accessories, to
engage generally in the cellular communications business, to invest in real and
personal property, and to engage in any other lawful activity permitted under
the laws of the State of Colorado, whether or not connected with any of the
foregoing objects and purposes, which is calculated, directly or indirectly, to
promote the interests of the corporation or to enhance the value of its
property.
(b) Powers. In furtherance of the foregoing purposes the
corporation shall have and may exercise all of the rights, powers, and
privileges now or hereafter conferred upon corporations organized under the laws
of Colorado. In addition, it may do everything necessary, suitable or proper for
the accomplishment of any of its corporate purposes."
The Board of Directors of the Company is recommending Article THIRD be
revised to read as follows:
"THIRD: The corporation shall have and may exercise all of the rights,
powers and privileges now or hereafter conferred upon corporations organized
under the laws of Colorado. In addition, the corporation may do everything
necessary, suitable or proper for the accomplishment of any of its corporate
purposes. The corporation may conduct part or all of its business in any part of
Colorado, the United States or the world and may hold, purchase, mortgage, lease
and convey real and personal property in any of such places."
The Board of Directors is recommending the change in Article THIRD
because the Company is no longer engaged in the business as set forth in
paragraph (a) of the current Article THIRD. Under the Colorado Business
Corporation Act, the Company is not required to set forth any specific business
purpose in its Articles of Incorporation and the proposed Article THIRD provides
a statement similar to the statement contained in paragraph (b) of the current
Article THIRD of the Company's Articles of Incorporation in that it confers upon
the Company all of the rights, powers and privileges conferred on corporations
organized under the laws of Colorado.
15
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE ADOPTION OF
THE AMENDMENT TO ARTICLE THIRD OF THE ARTICLES OF INCORPORATION OF THE COMPANY
AS SET FORTH ABOVE.
PROPOSAL NUMBER TWO
AUTHORIZATION TO ADOPT AN AMENDMENT TO ARTICLE FOURTH
OF THE ARTICLES OF INCORPORATION OF THE COMPANY
The Board of Directors of the Company is recommending that Article
FOURTH of the Company's Articles of Incorporation be revised to read as follows:
"FOURTH (a) The aggregate number of shares which the corporation shall
have authority to issue is 300,000,000 shares of $0.001 par value common stock
("Common Stock") and 20,000,000 shares of no par value preferred stock
("Preferred Stock").
(b) Each holder of Common Stock of record shall have one vote for each
share of Common Stock standing in the shareholder's name on the books of the
corporation and entitled to vote, except that in the election of directors each
holder of Common Stock shall have as many votes for each share of Common Stock
held by the shareholder as there are directors to be elected and for whose
election the shareholder has a right to vote. Cumulative voting shall not be
permitted in the election of directors or otherwise. All holders of Common Stock
shall vote together as a single class on all matters as to which holders of
Common Stock shall be entitled to vote.
(c) Shares of Preferred Stock may be issued from time to time in one or
more series as the Board of Directors may determine, without shareholder
approval, as hereinafter provided. The Board of Directors is hereby authorized,
by resolution or resolutions, to provide from time to time, out of the unissued
shares of Preferred Stock not then allocated to any series of Preferred Stock,
for a series of Preferred Stock. Before any shares of any such series of
Preferred Stock are issued, the Board of Directors shall (i) fix and determine,
and is hereby expressly empowered to fix and determine, by resolution, or
resolutions, the designations, powers, preferences, relative participating,
optional, and other special rights, qualifications, limitations, and
restrictions, of the shares of such series and (ii) make such filings and
recordings with respect thereto as required by the Colorado Business Corporation
Act. Each series of Preferred Stock shall be given a distinguishing
designation.
16
<PAGE>
The Board of Directors is expressly authorized to vary the provisions
relating to the foregoing matters between the various series of Preferred Stock.
All shares of Preferred Stock of any one series shall be identical in all
respects with all shares of such series, except that shares of any one series
issued at different times may differ as to the dates from which any dividends
thereon shall be payable and, if cumulative, shall cumulate.
Unless otherwise provided in the resolution, or resolutions, of the
Board of Directors providing for the issuance thereof, the number of authorized
shares of any series of Preferred Stock may be increased or decreased (but not
below the number of shares thereof then outstanding) by resolution, or
resolutions, by the Board of Directors and appropriate filing and recording to
the extent required by the Colorado Business Corporation Act. In case the number
of shares of any such series of Preferred Stock shall be decreased, the shares
representing such decrease shall, unless otherwise provided in the resolution,
or resolutions, of the Board of Directors providing for the issuance thereof,
resume the status of authorized but unissued shares of Preferred Stock,
undesignated as to series, and may be reissued as part of such series or as part
of any other series of Preferred Stock.
Unless otherwise provided in the resolution, or resolutions, of the
Board of Directors providing for the issuance thereof, shares of any series of
Preferred Stock that shall be issued and thereafter acquired by the corporation
through purchase, redemption (whether through the operation of a sinking fund or
otherwise), conversion, exchange, or otherwise shall have the status of
authorized and unissued shares of Preferred Stock, undesignated as to series,
and may be reissued as part of such series or as part of any other series of
Preferred Stock.
(d) No holder of any shares of the corporation, whether now or
hereafter authorized, shall have any preemptive or preferential right to acquire
any shares or securities of the corporation, including shares or securities held
in the treasury of the corporation."
The Board of Directors is proposing that the Company increase the
authorized shares of its common stock from 50,000,000 shares to 300,000,000
shares of $0.001 par value common stock and authorize 20,000,000 shares of no
par value preferred stock. The relative rights and limitations of the
outstanding common stock would remain unchanged. As is provided in the current
Article FOURTH, the common stock and preferred stock do not and would not have
preemptive rights and cumulative voting is not and would not be permitted in the
election of directors.
As of June 23, 2000, the Company had 47,030,547 shares of common stock
issued and outstanding. In addition, as described under "Change in Control of
the Company," the Company has agreed to issue ITHC an additional 37,298,444
shares of the Company's common stock at such time as the Company has a
sufficient number of shares of common stock authorized to be able to consummate
the issuance. The agreement does not contain a penalty if the Company violates
this agreement. Further, the Company currently has outstanding options to
purchase 31,600,000 shares of the Company's common stock and warrants to
purchase 1,500,000 shares of the Company's common stock that cannot be exercised
until the Company has a sufficient number of shares of common stock authorized
to enable the Company to issue shares upon the exercise of the options and
warrants. The outstanding options to purchase 31,600,000 shares of the Company's
common stock do not include an option to purchase 800,000 shares of the
Company's common stock. It is the position of the Company that this option is
void.
17
<PAGE>
The proposed increase in the authorized common stock has been
recommended by the Board of Directors to assure that an adequate supply of
authorized unissued shares is available for the above needs and for such things
as future stock dividends or stock splits or issuances upon the exercise of
options granted under the Company's proposed 2000 Incentive and Nonstatutory
Stock Option Plan ("2000 Plan"). The additional authorized shares of common
stock or preferred stock could also be used for such purposes as raising
additional capital for the operations of the Company or acquiring other
businesses. The terms of any series of preferred stock to be issued will be
dependent largely on market conditions and other factors existing at the time of
issuance and sale. Except as stated herein, there are currently no plans or
arrangements relating to the issuance of any of the additional shares of common
stock proposed to be authorized or any shares of preferred stock. Such shares
would be available for issuance without further action by the shareholders.
Under proposed Article FOURTH of the Articles of Incorporation, the
Board of Directors will have the authority to issue authorized shares of the
preferred stock in series and to fix the number, designations, relative rights,
preferences and limitations of the shares of each series, subject to applicable
law and the provisions of the proposed Article FOURTH. The authority of the
Board of Directors includes the right to fix for each series the dividend rate,
redemption price, liquidation rights, sinking fund provisions, conversion rights
and voting rights.
The issuance of additional shares of common stock may, among other
things, have a dilutive effect on earnings per share and on the equity and
voting power of existing holders of common stock. Until the Board of Directors
determines the specific rights, preferences and limitations of any shares of
preferred stock to be issued, the actual effect on the holders of common stock
of the issuance of such shares cannot be ascertained. However, such effects
might include restrictions on dividends on the common stock if dividends on
preferred stock are in arrears, dilution of the voting power of the common stock
to the extent that any series of preferred stock has voting rights, and
reduction of amounts available on liquidation as a result of any liquidation
preference granted to any series of preferred stock.
The issuance of additional shares of common stock by the Company also
may potentially have an anti-takeover effect by making it more difficult to
obtain shareholder approval of various actions, such as a merger or removal of
management. Issuance of authorized shares of preferred stock could also make it
more difficult to obtain shareholder approval of such actions as a merger, bylaw
change, removal of a director, or amendment of the Articles of Incorporation
described below, particularly in light of the power of the Board of Directors to
specify certain rights and preferences of the preferred stock, such as voting
rights, without shareholder approval. All series of the preferred stock having
voting rights and the common stock would vote together as one class, unless
otherwise required by law. Under the Colorado Business Corporation Act, the
holders of preferred stock would generally be entitled to vote separately as a
class upon any proposed amendment to the Articles of Incorporation or other
corporate action, such as a merger, which would effect an exchange,
reclassification or cancellation of all or a portion of such preferred stock or
otherwise affect the preferences or relative rights of the preferred stock.
18
<PAGE>
The increase in authorized shares of common shares of common stock and
authorization of preferred stock has not been proposed for an
anti-takeover-related purpose and the Board of Directors and management have no
knowledge of any current efforts to obtain control of the Company or to effect
large accumulations of its common stock.
Section (d) of the revised Article FOURTH is the same as section (e) of
the current Article FOURTH except that the heading has been deleted from section
(d) of the revised Article FOURTH.
In addition to increasing the number of shares of authorized common
stock and authorizing shares of preferred stock, the revised Article FOURTH does
not include two provisions that are in the current Article FOURTH. The first
provision that is not included in the revised Article FOURTH reads as follows:
"(f) Distribution in Liquidation. Upon any liquidation,
dissolution or winding up of the Company, and after paying or
adequately providing for the payment of all its obligations, the
remainder of the assets of the corporation shall be distributed, either
in cash or in kind, pro rata to the holders of the common stock."
Section 7-114-105 of the Colorado Business Corporation Act provides
what happens upon the dissolution of a Colorado corporation so that Section (f)
of the current Article FOURTH is not necessary.
The second provision that is not included in the revised Article FOURTH
reads as follows:
"(g) Partial Liquidation. The Board of Directors may, from time
to time, distribute to the shareholders in partial liquidation, out of stated
capital, or capital surplus of the corporation, a portion of its assets, in cash
or property, subject to the limitations contained in the statutes of Colorado."
Section 7-106-401 of the Colorado Business Corporation Act governs
distributions to shareholders so that Section (g) of the current Article FOURTH
is not necessary.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
ADOPTION OF THE AMENDMENT TO ARTICLE FOURTH TO THE ARTICLES OF INCORPORATION AS
SET FORTH ABOVE.
19
<PAGE>
PROPOSAL NUMBER THREE
APPROVAL OF THE ADOPTION OF AN AMENDMENT TO SECTION (d)(ii)
OF ARTICLE EIGHTH OF THE ARTICLES OF INCORPORATION
Section (d)(ii) of Article EIGHTH of the Company's Articles of
Incorporation currently reads as follows:
"(ii) When, with respect to any action to be taken by
shareholders of this Corporation, the laws of Colorado require the vote
or concurrence of the holders of two-thirds of the outstanding shares,
of the shares entitled to vote thereon, or of any class or series, such
action may be taken by the vote or concurrence of a majority of such
shares or class or series thereof."
The Board of Directors of the Company is recommending that Section
(d)(ii) of Article EIGHTH be revised to read as follows:
"(ii) Except as bylaws adopted by the shareholders may provide
for a greater voting requirement and except as is otherwise provided by
the Colorado Business Corporation Act with respect to action on a plan
of merger or share exchange, on the disposition of substantially all of
the property of the corporation, on the granting of consent to the
disposition of property by an entity controlled by the corporation and
on the dissolution of the corporation, action on a matter other than the
election of directors is approved if a quorum exists and if the votes
cast favoring the action exceed the votes cast opposing the action. Any
bylaw adding, changing or deleting a greater quorum or voting
requirement for shareholders shall meet the same quorum requirement and
be adopted by the same vote required to take action under the quorum and
voting requirements then in effect or proposed to be adopted, whichever
are greater."
If the amendment to Section (d)(ii) of Article EIGHTH is adopted, the
only change will be that amendments to the Company's Articles of Incorporation
will be able to be adopted by a majority of a quorum, which is currently
one-third of the outstanding shares, rather than having to be adopted by a
majority of the outstanding shares. If adopted, the amendment to Section (d)(ii)
will make it easier for the holders of a controlling block of the common stock
of the Company, such as ITHC, to adopt amendments to the Articles of
Incorporation of the Company that could be detrimental to the other
shareholders. The amendment to Section (d)(ii) of Article EIGHTH of the Articles
of Incorporation will enable the Company, as a public company, to more easily
obtain the vote necessary to adopt an amendment to the Company's Articles of
Incorporation in the future. Except for amending the Company's Articles of
Incorporation, the amendment to Section (d)(ii) of Article EIGHTH does not
change the number of shares that must be voted in favor of a proposal for the
proposal to be adopted.
20
<PAGE>
Under the Colorado Business Corporation Act, amendments to articles of
incorporation require the approval of the holders of a majority of a quorum
unless the articles of incorporation, bylaws adopted by the shareholders or the
persons proposing the amendment require a greater vote. The Company's Articles
of Incorporation currently require the vote of a majority of the outstanding
shares of common stock of the Company to amend, repeal or adopt provisions to
the Articles of Incorporation. The requirement set forth in the Company's
Articles of Incorporation was in accordance with the Colorado Corporation Code
which was replaced by the Colorado Business Corporation Act in 1994.
It is proposed to amend the Company's Articles of Incorporation to
permit the stockholders from time to time to amend the Articles of Incorporation
by the affirmative vote of the holders of a majority of a quorum present at a
meeting rather than a majority of the outstanding shares of common stock.
Assuming adoption of the proposed amendment, future amendments would generally
require the affirmative vote of 16.7% of the outstanding shares of common stock
instead of the currently required 50.1% vote, thus reducing by 33.4% the
stockholder vote required for amendments.
The Board of Directors believes that the proposed reduction in the
stockholder vote requirement for amending the Articles of Incorporation would
offer the Company greater flexibility and ease in taking advantage of corporate
developments which may be in the best interests of the Company and its
stockholders. The reduced voting requirement could also enable the Company to
effect future amendments to the Articles of Incorporation at a lower cost to the
Company by reducing proxy solicitation expenses and management time
requirements.
Although the Board of Directors does not consider the amendment an
anti-takeover measure, the proposed amendment could be viewed as having the
effects of such a measure because the adoption of the reduced voting requirement
may increase the likelihood that the Board of Directors could obtain stockholder
approval for anti-takeover amendments to the Articles of Incorporation. Such
amendments, if proposed and adopted, could have the effect of enabling the
Company to discourage or make more difficult an attempt by another person to
remove incumbent management or to acquire control of the Company in a
transaction which a majority of stockholders might deem in their best interests.
However, the Company's Board of Directors believes that such possibilities at
this time are remote and that the advantages in making it easier and less costly
in soliciting stockholder approval of actions which might be proposed by the
Board of Directors outweighs any possible anti-takeover impact.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE IN FAVOR OF
THE ADOPTION OF THE AMENDMENT TO SECTION (d)(ii) OF ARTICLE EIGHTH OF THE
ARTICLES OF INCORPORATION OF THE COMPANY.
21
<PAGE>
PROPOSAL NUMBER FOUR
APPROVAL OF THE ADOPTION OF A NEW ARTICLE NINTH TO THE
ARTICLES OF INCORPORATION
The Board of Directors of the Company is recommending that the Articles
of Incorporation of the Company be amended to add the following Article NINTH:
"NINTH: A director of the corporation shall not be personally liable to
the corporation or to its shareholders for monetary damages for breach of
fiduciary duty as a director. However, this provision shall not eliminate or
limit the liability of a director to the corporation or to its shareholders for
monetary damages otherwise existing for (i) any breach of the director's duty of
loyalty to the corporation or to its shareholders; (ii) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law; (iii) acts specified in Section 7-108-403 of the Colorado Business
Corporation Act, as it may be amended from time to time; or (iv) any transaction
from which the director directly or indirectly derived any improper personal
benefit. If the Colorado Business Corporation Act is hereafter amended to
eliminate or limit further the liability of a director, then, in addition to the
elimination and limitation of liability provided by the preceding sentence, the
liability of each director shall be eliminated or limited to the fullest extent
permitted by the Colorado Business Corporation Act as so amended. Any repeal or
modification of this Article NINTH shall not adversely affect any right or
protection of a director of the corporation under this Article NINTH, as in
effect immediately prior to such repeal or modification, with respect to any
liability that would have accrued, but for this Article NINTH, prior to such
repeal or modification. Nothing contained herein will be construed to deprive
any director of the director's right to all defenses ordinarily available to a
director nor will anything herein be construed to deprive any director of any
right the director may have for contribution from any other director or other
person."
Section 7-108-402 of the Colorado Business Corporation Act permits
Colorado corporations to include in their articles of incorporation a provision
eliminating or limiting the personal liability of directors to the corporation
or its shareholders for monetary damages for certain breaches of the fiduciary
duty of directors. This section is intended, among other things, to encourage
qualified individuals to serve as directors of Colorado corporations. Article
NINTH is designed to take advantage of this section of the Colorado Business
Corporation Act.
In performing their duties, directors of a Colorado corporation owe
fiduciary obligations to the corporation they serve and its shareholders. These
fiduciary obligations include the duty of care and the duty of loyalty. In
simple terms, the duty of care requires that directors exercise the care that an
ordinary prudent person would exercise under similar circumstances and the duty
of loyalty prohibits faithlessness and self-dealing. The so-called business
judgment rule is a specific application of this directorial standard of conduct
to a situation where, after reasonable investigation, disinterested directors
adopt a course of action which, in good faith, they honestly and reasonably
believe will benefit the corporation.
22
<PAGE>
The business judgment rule was and is designed to protect directors of
a corporation from personal liability to the corporation or its shareholders if
their business decisions are subsequently challenged. This rule shields
corporate decision makers and their decisions where the five elements of the
rule-a business decision, disinterestedness, due care, good faith and no abuse
of discretion are present. However, as a practical matter, due to the expense of
defending lawsuits and the frequency in which unwarranted litigation is brought
against directors and officers of corporations, and due to the inevitable
uncertainties with respect to the application of the business judgment rule to a
particular set of facts and circumstances, directors of a corporation must
either rely upon indemnity from or insurance procured by the corporation to
defend such lawsuits. Therefore, although the business judgment rule protects
directors from personal liability to the corporation and its shareholders,
unless such indemnity provisions and/or insurance are available, directors could
find themselves faced with the extraordinary expense of defending themselves in
litigation brought by a shareholder who questions a decision of a director based
upon an objective after-the-fact examination of the facts and circumstances.
The Colorado legislature has recognized that insurance and indemnity
provisions are often a condition of an individual's willingness to serve as a
director of a Colorado corporation. The Colorado Business Corporation Act has,
for some time, specifically permitted corporations to provide indemnity and
procure insurance for its directors. An existing Article of the Company's
Articles of Incorporation presently provides for the indemnification of the
directors of the Company. However, changes in the market for directors'
liability insurance have resulted in the unavailability for directors of many
corporations from obtaining any meaningful liability insurance coverage.
Additionally, insurance carriers have, in many cases, increased premiums to such
an extent that the cost of obtaining such insurance becomes extremely
prohibitive. Moreover, current policies often exclude coverage for areas where
service of qualified directors is most needed. The high cost and sometimes
unavailability of meaningful directors' liability insurance is attributable to
some degree to a number of factors which include, among other things, the
granting of significant damage awards.
The Company to date has not obtained insurance coverage for the
Company's directors due primarily to the prohibitive cost of the insurance
premiums and the limitations on the scope of coverage. The proposed addition of
Article NINTH to the Articles of Incorporation is designed to assure that the
Company's current directors and its future directors are protected to at least
the same extent they would be if such insurance coverage were made available.
Due to the fact that the Company is acting as a self-insuror with respect to
director liability coverage, the Company's assets and equity are at risk if
there should ever be a large damage award for which the directors of the Company
would be entitled to indemnification from the Company.
23
<PAGE>
Proposed Article NINTH would protect the Company's directors against
personal liability for breach of their fiduciary obligations to the Company,
including their duty of care. Under Colorado law, absent the adoption of the
proposed Article NINTH, directors of the Company would continue to be liable for
negligent violations of their fiduciary duties. If adopted by the shareholders,
proposed Article NINTH would absolve the directors of liability for negligence
in the performance of their duties, including gross negligence. One of the
principal effects of the adoption of the proposed Article NINTH would be that
the Company's shareholders would be giving up a cause of action against a
director of the Company for breach of fiduciary duty, including but not limited
to a breach resulting from making grossly negligent business decisions involving
takeover proposals for the Company. In effect, directors would not be required
to prove that their decisions are protected by the business judgment rule.
However, directors would remain liable for breaches of their duty of loyalty,
for any act of omission not in good faith or which involves intentional
misconduct or a knowing violation of law and for any transaction from which the
directors derived an improper personal benefit or for the payment of a dividend
in violation of the Colorado Business Corporation Act. Furthermore, the proposed
Article NINTH would not eliminate or limit liability of directors arising in
connection with causes of action brought under the federal securities laws.
While the proposed Article NINTH provides directors of the Company with
protection from damages for breaches of their duty of care, it does not
eliminate the directors' duty of care. Accordingly, the proposed Article NINTH
would have no effect on the availability of equitable remedies such as an
injunction or rescission based upon a director's breach of the duty of care. As
a practical matter, however, such equitable remedies may be inadequate. Finally,
the proposed Article NINTH would apply only to claims against a director arising
out of his or her role as a director of the Company and would not apply, if he
or she is also an officer, to his or her role as an officer or in any other
capacity other than that of a director of the Company.
There has never been any litigation involving the Company's Board of
Directors or its individual members in their capacities as directors of the
Company nor are such persons aware that any such litigation is threatened.
The Board of Directors of the Company believes that the inability of
the Company to provide meaningful directors' liability insurance at a reasonable
cost may in the future have a damaging effect on the Company's ability to
recruit and obtain highly qualified independent directors. Therefore, the
Company's Board of Directors believes that the Company should take every step
available, such as the adoption of Article NINTH, to assure that the Company
will be able to attract the best possible directors in the future. The proposed
Article NINTH is consistent with the Colorado Business Corporation Act. The
primary purpose of Article NINTH and the reason it is being recommended for
adoption by the shareholders is to ensure that the Company will continue to be
able to attract individuals of the highest quality and ability to serve as its
directors and officers. In addition, each member of the Board of Directors of
the Company has a personal interest in seeing the limited liability provisions
contained in the proposed Article NINTH adopted even though, as explained
previously, there is a potential detriment to the Company's shareholders.
24
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
ADOPTION OF A NEW ARTICLE NINTH OF THE ARTICLES OF INCORPORATION OF THE COMPANY
AS SET FORTH ABOVE.
PROPOSAL NUMBER FIVE
AUTHORIZATION OF BOARD OF DIRECTORS TO ADOPT AN
AMENDMENT TO THE ARTICLES OF INCORPORATION
TO EFFECTUATE A REVERSE STOCK SPLIT
The Company's common stock trades on the Over-The-Counter Bulletin
Board. The Company's Board of Directors believes that it would be beneficial for
the Company and its shareholders if the Company's common stock is listed on the
Nasdaq SmallCap Market in the future.
In order to be listed on the Nasdaq SmallCap Market, the Company will
have to meet several requirements. One of these requirements is that the common
stock have a minimum bid price of $4.00 per share. As of June 23, 2000, the
closing bid price of the common stock was $1.00 per share. As a result, the
Company, based on the recent bid price of the Company's common stock, would not
be able to have its common stock eligible to be listed on the Nasdaq SmallCap
Market without the Company effectuating a reverse split in a sufficient amount
to attempt to assure that the Company's common stock would have a minimum bid
price of at least $4.00 per share. The Board of Directors believes that it is in
the best interests of the Company's shareholders that the Company's common stock
be included on the Nasdaq SmallCap Market or another securities trading market
at a strategic time in the future. Accordingly, in anticipation of such
strategic time, the Board of Directors has requested that the shareholders of
the Company authorize the Board of Directors to adopt an amendment to the
Company's Articles of Incorporation at such time as the Board of Directors deems
it appropriate to effectuate a one-for-two, a one-for-three or a one-for-four
reverse split of the Company's outstanding common stock in such manner as is
deemed necessary by the Board of Directors in order for the Company to be listed
on the Nasdaq SmallCap Market or to obtain a listing on another trading system
of the NASD, a national securities exchange or another securities trading market
as selected by the Board of Directors in its sole discretion. If such authority
is provided to the Board of Directors, it will enable the Board of Directors to
effectuate a one-for-two, a one-for-three or a one-for-four reverse split of the
Company's outstanding common stock without further action by the shareholders
and enable the Company to expeditiously effectuate a reverse split for the
aforementioned purposes. Any fractional shares resulting from any reverse
stock split will be rounded up to the next whole share.
The Board of Directors further believes that the relatively low
per-share market price of the common stock may impair the acceptability of the
common stock to certain institutional investors and other members of the
investing public. Theoretically, the number of shares outstanding should not, by
itself, affect the marketability of the stock, the type of investor who acquires
it or the Company's reputation in the financial community. In practice this is
not necessarily the case, as certain investors view low-priced stock as
unattractive or, as a matter of policy, are precluded from purchasing low-priced
shares. In addition, certain brokerage houses, as a matter of policy, will not
extend margin credit on stocks trading at low prices. On the other hand, certain
other investors may be attracted to low-priced stock because of the greater
trading volatility associated with such securities.
25
<PAGE>
The amount of a reverse split and the date when a reverse split will
occur, if at all, will be determined by the Board of Directors in its sole
discretion. The reverse stock split will result in each shareholder of record,
as of a specific record date to be determined by the Board of Directors, owning
a proportionately smaller number of shares with the end result being that each
shareholder maintains the proportionate number of shares in the Company's common
stock that each shareholder owned prior to such reverse stock split. For
example, with each of the following numbers used for hypothetical purposes only,
if a shareholder owned 1,000,000 shares of the 47,030,547 shares outstanding on
a record date determined by the Board of Directors, and if the Board of
Directors effectuates a one-for-two reverse split stock, then subsequent to the
reverse stock split, such shareholder would own 500,000 shares out of the
25,512,273 shares outstanding. Similarly, the same shareholder would own 333,334
shares of the 15,676,849 shares outstanding or 250,000 shares out of the
11,757,636 shares outstanding if the Board of Directors effectuates a
one-for-three or a one-for-four reverse split, respectively. The shareholder
would maintain the same percentage ownership interest in the outstanding common
stock both prior to and subsequent to the hypothetical reverse stock splits. A
reverse stock split effectuated by the Board of Directors would not, by itself,
result in any taxable distributions or any dilution to the shareholders.
As mentioned above, the closing bid price of the Company's common stock
on June 23, 2000, was $1.00 per share. Assuming the Board of Directors had
effectuated a one-for-two reverse split as of June 23, 2000, theoretically the
closing price that day would have been $2.00 per share. Assuming the Board of
Directors had effectuated a one-for-three reverse split or a one-for-four
reverse split as of June 23, 2000, theoretically the closing price that day
would have been $3.00 or $4.00, respectively. The aforementioned are for
illustration purposes only. There are no assurances that the Company's common
stock would trade after a reverse split at a price directly proportional to the
price that the common stock traded at prior to the reverse split. In most cases,
the public trading price of a security after a reverse split will be less than a
price that is proportional to the price before the reverse split.
The Board of Directors believes that giving authority to the Board of
Directors to effectuate interests of the Company and its stockholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE IN FAVOR OF
THE AUTHORIZATION OF THE BOARD OF DIRECTORS TO ADOPT AN AMENDMENT TO THE
ARTICLES OF INCORPORATION TO EFFECTUATE, A ONE-FOR-TWO, A ONE-FOR-THREE OR A
ONE-FOR-FOUR REVERSE SPLIT.
26
<PAGE>
PROPOSAL NUMBER SIX
APPROVAL OF 2000 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
Summary
The Company's Board of Directors is recommending the adoption of the
2000 Incentive and Nonstatutory Stock Option Plan (the "2000 Plan"). A copy of
the 2000 Plan is attached to this Proxy Statement as Exhibit B. The following is
a brief summary of the 2000 Plan, which is qualified in its entirety by
reference to Exhibit B.
Options granted under the 2000 Plan may be either nonstatutory stock
options ("Nonstatutory Options") or incentive stock options ("Incentive
Options"). The purpose of the 2000 Plan is to advance the interests of the
Company, its shareholders and its subsidiaries by encouraging and enabling
selected officers, directors, employees and consultants of the Company, upon
whose judgment, initiative and effort the Company is largely dependent for the
successful conduct of its business, to acquire and retain a proprietary interest
in the Company by ownership of its stock through the exercise of stock options.
Amount of Common Stock Subject to Options Under the 2000 Plan
The 2000 Plan provides for the grant of stock options covering an
aggregate of 5,000,000 shares of common stock. The aggregate 5,000,000 shares of
common stock is subject to equitable adjustments for any stock dividends, stock
splits, reverse stock splits, combinations, recapitalizations, reclassifications
or any other similar changes which may be required in order to prevent dilution.
Any option which is not exercised prior to expiration or which otherwise
terminates will thereafter be available for further grant under the 2000 Plan.
Administration of the 2000 Plan
The 2000 Plan may be administered by the Board of Directors or by a
committee appointed by the Board of Directors consisting of not fewer than two
non-employee members of the Board of Directors (the "Committee"). Subject to the
conditions set forth in the 2000 Plan, the Board of Directors or the Committee
has full and final authority to determine the number of shares represented by
each option, the individuals to whom and the time or times at which options will
be granted and be exercisable, their exercise prices and the terms and
provisions of the respective agreements to be entered into at the time of grant,
which may vary. The 2000 Plan is intended to be flexible and a significant
amount of discretion is vested in the Board of Directors or the Committee with
respect to all aspects of the options to be granted under the 2000 Plan.
27
<PAGE>
Participants
Nonstatutory Options may be granted under the 2000 Plan to any person
who is or who agrees to become an officer, director, employee or consultant of
the Company or any of its subsidiaries. Incentive Options may be granted only to
persons who are employees of the Company or any of its subsidiaries. As of June
23, 2000, the Company and its subsidiaries had approximately 17 employees. The
participants will not be required to pay any sums for the granting of options,
but may be required to pay the Company for extending the options. No Options
have been granted under the 2000 Plan.
Exercise Price
The exercise price of each Nonstatutory Option granted under the 2000
Plan will be determined by the Board of Directors or the Committee. The exercise
price of each Incentive Option granted under the 2000 Plan will be determined by
the Board of Directors or the Committee and will in no event be less than 100%
(110% in the case of a person who owns directly or indirectly more than 10% of
the common stock) of the fair market value of the shares of common stock on the
date of grant. The payment of the exercise price of an option may be made in
cash or shares of common stock, as more fully described under "Exercise of
Options". Fair market value will be determined by the Board of Directors or the
Committee in accordance with the 2000 Plan and such determination will be
binding upon the Company and upon the holder. The closing price of the common
stock on June 23, 2000 was $1.00 per share.
Terms of Options
Options may be granted for a term of up to 10 years (five years in the
case of Incentive Options granted to a person who owns directly or indirectly
more than 10% of the Company's outstanding common stock), which may extend
beyond the term of the 2000 Plan.
Exercise of Options
The terms governing the exercise of options granted under the 2000 Plan
will be determined by the Board of Directors or the Committee, which may limit
the number of options exercisable in any period. Payment of the exercise price
upon exercise of an option may be made in any combination of cash and shares of
common stock, including the automatic application of shares of common stock
received upon exercise of an option to satisfy the exercise price of additional
options (unless the Board of Directors or the Committee provides otherwise).
Where payment is made in common stock, such common stock will be valued for such
purpose at the fair market value of such shares on the date of exercise.
Nontransferability
Incentive Options granted under the 2000 Plan are not transferable or
assignable, other than by will or the laws of descent and distribution and,
during the lifetime of the holder, options are exercisable only by the holder.
Nonstatutory Options do not have to contain restrictions on transferability.
28
<PAGE>
Termination of Relationship
Except as the Board of Directors or the Committee may expressly
determine otherwise, if the holder of an Incentive Option ceases to be employed
by or to have another qualifying relationship (such as that of director) with
the Company or any of its subsidiaries other than by reason of the holder's
death or permanent disability, all Incentive Options granted to such holder
under the 2000 Plan will terminate immediately, except for Incentive Options
which were exercisable on the date of such termination of relationship which
Incentive Options will terminate three months after the date of such termination
of relationship, unless such Incentive Options specify by their terms an earlier
expiration or termination date. In the event of the death or permanent
disability of the holder of an Incentive Option, options may be exercised to the
extent that the holder might have exercised the options on the date of death or
permanent disability for a period of up to 12 months following the date of death
or permanent disability, unless by their terms the options expire before the end
of such 12 month period.
Amendment and Termination of the 2000 Plan
The Board of Directors may at any time and from time to time amend or
terminate the 2000 Plan, but may not, without the approval of the shareholders
of the Company representing a majority of the voting power present at a
shareholder's meeting or represented and entitled to vote thereon, or by
unanimous written consent of the shareholders, (i) increase the maximum number
of shares of common stock subject to options which may be granted under the 2000
Plan, other than in connection with an equitable adjustment, (ii) change the
class of employees eligible for Incentive Options, or (iii) make any material
amendment under the 2000 Plan that must be approved by the Company's
shareholders for the Board of Directors to be able to grant Incentive Options
under the 2000 Plan. No amendment or termination of the 2000 Plan by the Board
may alter or impair any of the rights under any option granted under the 2000
Plan without the holder's written consent.
Effective Date and Term of the 2000 Plan
Options may be granted under the 2000 Plan during its 10 year term,
which will commence on the date of the Meeting.
Material Federal Income Tax Consequences
The following discussion of the federal income tax consequences is based
on the Company's belief after consultation with the Company's tax advisors. The
Company has not obtained an opinion from legal counsel with respect to the
following matters.
29
<PAGE>
Incentive Options. The Company believes that with respect to Incentive
Options granted under the 2000 Plan, no income generally will be recognized by
an optionee for federal income tax purposes at the time such an option is
granted or at the time it is exercised. If the optionee makes no disposition of
the shares so received within two years from the date the Incentive Options was
granted and one year from the receipt of the shares pursuant to the exercise of
the Incentive Option, the optionee will generally recognize long term capital
gain or loss upon the disposition of the shares of common stock issued upon
exercise of the Incentive Option.
If the optionee disposes of shares of common stock acquired by exercise
of an Incentive Option before the expiration of the applicable holding period,
any amount realized from such a disqualifying disposition will be taxable as
ordinary income in the year of disposition generally to the extent that the
lesser of the fair market value of the shares of common stock on the date the
option was exercised or the fair market value at the time of such disposition
exceeds the exercise price. Any amount realized upon such a disposition in
excess of the fair market value of the shares of common stock on the date of
exercise generally will be treated as long term or short term capital gain,
depending on the holding period of the shares. A disqualifying disposition will
include the use of shares of common stock acquired upon exercise of an Incentive
Option in satisfaction of the exercise price of another option prior to the
satisfaction of the applicable holding period.
The Company will not be allowed a deduction for federal income tax
purposes at the time of the grant or exercise of an Incentive Option. At the
time of a disqualifying disposition by an optionee, the Company will be entitled
to a deduction for federal income tax purposes equal to the amount taxable to
the optionee as ordinary income in connection with such disqualifying
disposition (assuming that such amount constitutes reasonable compensation).
Nonstatutory Options. The Company believes that the grant of a
Nonstatutory Option under the 2000 Plan will not be subject to federal income
tax. Upon exercise, the optionee generally will recognize ordinary income, and
the Company will be entitled to a corresponding deduction for federal income tax
purposes (assuming that such compensation is reasonable), in an amount equal to
the excess of the fair market value of the shares of common stock on the date of
exercise over the exercise price. Gain or loss on the subsequent sale of shares
of common stock received on exercise of a Nonstatutory Option generally will be
long term or short term capital gain or loss, depending on the holding period of
the shares.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
APPROVAL OF THE 2000 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN.
30
<PAGE>
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the next Annual
Meeting of Shareholders must be received by the Company within a reasonable time
prior to the time the Company begins to print and mail the proxy materials for
such Meeting.
SOLICITATION OF PROXIES
The cost of soliciting proxies, including the cost of preparing,
assembling and mailing this proxy material to shareholders, will be borne by the
Company. Solicitations will be made only by use of the mails, except that, if
necessary to obtain a quorum, officers and regular employees of the Company may
make solicitations of proxies by telephone or electronic facsimile or by
personal calls. Brokerage houses, custodians, nominees and fiduciaries will be
requested to forward the proxy soliciting material to the beneficial owners of
the Company's shares held of record by such persons and the Company will
reimburse them for their charges and expenses in this connection.
OTHER BUSINESS
The Company's Board of Directors does not know of any matters to be
presented at the Meeting other than the matters set forth herein. If any other
business should come before the Meeting, the persons named in the enclosed form
of Proxy will vote such Proxy according to their judgment on such matters.
BY ORDER OF THE BOARD OF DIRECTORS
DAVID L. JACKSON, SECRETARY
Seattle, Washington
July 28, 2000
31
<PAGE>
PRELIMINARY COPY
PROXY
COGNIGEN NETWORKS, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD AUGUST 30, 2000
The undersigned hereby constitutes and appoints Darrell H. Hughes and
David L. Jackson, and each of them, the true and lawful attorneys and proxies of
the undersigned with full power of substitution and appointment, for and in the
name, place and stead of the undersigned, to act for and to vote all of the
undersigned's shares of $0.001 par value common stock ("common stock") of
Cognigen Networks, Inc, a Colorado corporation (the "Company") at the Special
Meeting of Shareholders (the "Meeting") to be held in the Special Events Room on
the Second Floor, 7001 Seaview Avenue, NW, Seattle, Washington 98117, on
Wednesday, August 30, 2000, at 10:00 a.m., Pacific Time, and at all
adjournment(s) thereof for the following purposes:
(1) adoption of an amendment to Article THIRD of the Articles of
Incorporation of the Company to delete any reference contained in the current
Article THIRD to an area of business in which the Company no longer engages and
to change the wording of the provision in the current Article THIRD that confers
upon the Company all of the rights, powers and privileges conferred on Colorado
corporations;
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
(2) adoption of an amendment to Article FOURTH of the Articles of
Incorporation of the Company which, among other things, increases the authorized
shares of common stock of the Company from 50,000,000 shares to 300,000,000
shares of $0.001 par value common stock and authorizes 20,000,000 shares of no
par value preferred stock;
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
(3) adoption of an amendment to Section (d)(ii) of Article EIGHTH of
the Articles of Incorporation of the Company to change the vote required to
amend the Articles of Incorporation to a majority of a quorum;
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
<PAGE>
(4) adoption of a new Article NINTH of the Articles of Incorporation of
the Company which limits the liability of the directors of the Company under
certain circumstances;
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
(5) approval of a proposal to authorize the Board of Directors of the
Company to adopt an amendment to the Company's Articles of Incorporation at such
time as the Board of Directors deems it appropriate to effectuate a one-for-two,
a one-for-three or a one-for-four reverse split of the Company's outstanding
common stock, the exact reverse split to be determined by the Board of Directors
of the Company;
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
(6) approval of the 2000 Incentive and Nonstatutory Stock Option Plan;
and
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
(7) transact such other business as may lawfully come before the
Meeting or any adjournment(s) thereof.
The undersigned hereby revokes any proxies as to said shares heretofore
given by the undersigned and ratifies and confirms all that said attorneys and
proxies lawfully may do by virtue hereof.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED. IF NO
SPECIFICATION IS MADE, THEN THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED
AT THE MEETING FOR THE ITEMS LISTED ABOVE.
It is understood that this proxy confers discretionary authority in
respect to matters not known or determined at the time of the mailing of the
Notice of Special Meeting of Shareholders to the undersigned. The proxies and
attorneys intend to vote the shares represented by this proxy on such matters,
if any, as determined by the Board of Directors.
2
<PAGE>
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Shareholders and the Proxy Statement furnished therewith.
Dated and Signed: ______________, 2000
--------------------------------------
--------------------------------------
Signature(s) should agree with the
name(s) stenciled hereon. Executors,
administrators, trustee, guardians and
attorneys should so indicate when
signing. Attorneys should submit powers
of attorney.
3
<PAGE>
EXHIBIT A
SILVERTHORNE PRODUCTION COMPANY
Index to Financial Statements and
Management's Discussion and Analysis
Silverthorne Unaudited Financial Statements, March 31, 2000.................F-1
Management's Discussion and Analysis, March 31, 2000 Results...............F-10
Silverthorne Financial Statements, June 30, 1999...........................F-16
Management's Discussion and Analysis, June 30, 1999 Results................F-23
Aquila Financial Statements, December 31, 1999 and 1998....................F-24
Proforma Financial Information -
Aquila International Telecommunications, Inc. Acquisition.........F-36
Inter-American Telecommunications Holding Corporation -
Financial Statements, June 30, 1999...............................F-41
Cognigen Financial Statements, June 30, 1999...............................F-54
Proforma Financial Information - Inter-American Telecommunications
Holding Corporation Reverse Acquisition...........................F-63
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
Unaudited Consolidated Statements of Operations
Three Months Ended
March 31,
--------------------------
1999 2000
--------------------------
Revenue
Prepaid cards and pins $ - $ 82,632
Marketing commissions - 707,193
Other - 129,504
Allowances - (10,731)
----------- ----------
Total revenue - 908,598
----------- ----------
Operating expenses
Prepaid cards and pins - 170,798
Marketing commissions - 457,062
Selling, general and
administrative - 826,184
----------- ----------
Total operating expenses - 1,454,044
----------- ----------
Loss from operations - (545,446)
Other income (expense)
Other income - 42,452
Interest expense (16,953) (39,517)
----------- ----------
Loss before income taxes (16,953) (542,511)
Income taxes 4,132 -
----------- ----------
Net loss $ (12,821) $ (542,511)
=========== ==========
Loss per common share - basic
and diluted $ - $ (0.01)
=========== ==========
Weighted average number of common
shares outstanding - basic and diluted 14,411,039 82,287,546
=========== ==========
See notes to unaudited consolidated financial statements.
F - 1
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
Unaudited Consolidated Statements of Operations
Nine Months Ended
March 31,
----------------------------------
1999 2000
----------------------------------
Revenue
Prepaid cards and pins $ - $ 846,427
Marketing commissions - 1,642,400
Other - 131,874
Allowances - (28,512)
----------- ------------
Total revenue - 2,592,189
----------- ------------
Operating expenses
Prepaid cards and pins - 710,389
Marketing commissions - 1,198,675
Selling, general and
administrative - 7,756,564
----------- ------------
Total operating expenses - 9,665,628
----------- ------------
Loss from operations - (7,073,439)
Other income (expense)
Other income - 59,179
Interest expense (50,859) (107,767)
----------- ------------
Loss before income taxes (50,859) (7,122,027)
Income taxes 12,396 -
----------- ------------
Net loss $ (38,463) $ (7,122,027)
=========== ============
Loss per common share - basic and
diluted $ - $ (0.09)
=========== ============
Weighted average number of common
shares outstanding - basic and
diluted 14,411,039 76,736,355
=========== ============
See notes to unaudited consolidated financial statements.
F - 2
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
Unaudited Consolidated Balance Sheets
June 30, March 31,
1999 2000
-------------------------------
Assets
Current assets
Cash $ - $ 1,983,745
Accounts receivable - 160,569
Advances - related party - 570,000
Employee receivable - 20,000
Commissions receivable - 399,764
Inventory - 66,808
Other current assets - 108,698
----------- -----------
Total current assets - 3,309,584
----------- -----------
Property and equipment, net - 254,038
----------- -----------
Other assets
Intangibles and other assets, net 1,316,551 1,532,954
----------- -----------
Total other assets 1,316,551 1,532,954
----------- -----------
Total assets $ 1,316,551 $ 5,096,576
=========== ===========
Liabilities and Stockholders' (Deficit) Equity
Current liabilities
Interest payable $ 67,814 $ 165,564
Current portion of long-term debt 700,000 510,000
Accounts payable - 22,906
Deferred revenue - 149,262
Commissions payable - 289,691
Payroll taxes payable - 124,424
Income taxes payable - 13,387
----------- -----------
Total current liabilities 767,814 1,275,234
Long-term debt 600,000 180,000
----------- -----------
Total liabilities 1,367,814 1,455,234
Stockholders' (deficit) equity
Common stock $.001 par value,
50,000,000 shares authorized;
14,411,039 and 44,989,102 issued
and outstanding at June 30, 1999
and March 31, 2000, respectively,
and 37,298,444 to be issued at
March 31, 2000 20 112,287
Additional paid in capital - 10,702,365
Accumulated deficit (51,283) (7,173,310)
----------- ----------
Total stockholders' (deficit)
equity (51,263) 3,641,342
----------- ----------
Total liabilities and
stockholders' (deficit) equity $ 1,316,551 $5,096,576
=========== ==========
See notes to unaudited consolidated financial statements.
F - 3
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
Unaudited Consolidated Statement of Shareholders' Equity (Deficit)
For the Nine Months Ended March 31, 2000
<TABLE>
<CAPTION>
Common Stock
------------------------- Total
Additional Shareholders'
Paid-in Accumulated Equity
Shares Amount Capital Deficit (Deficit)
---------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance
June 30, 1999 11,377,137 $ 20 $ - $ (51,283) $ (51,263)
Stock issued in
connection with
employment agreements
and the acquisition
of Cognigen assets
(Note 5) 42,664,260 30,055 - - 30,055
Reverse acquisition
(Note 5) 15,757,047 69,723 (261,957) - (192,234)
Common stock issued
for cash net of
$727,474 of expenses
(Note 6) 12,489,102 12,489 5,127,598 - 5,140,087
Options issued for
services to non-
employees
(Note 6) - - 5,836,724 - 5,836,724
Net loss - - - (7,122,027) (7,122,027)
---------- ---------- ------------ ------------ -----------
Balance,
March 31, 2000 82,287,546 $ 112,287 $ 10,702,365 $ (7,173,310) $ 3,641,342
========== ========== ============ ============ ===========
</TABLE>
See notes to unaudited consolidated financial statements.
F - 4
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
Unaudited Consolidated Statements of Cash Flows
Nine Months Ended
March 31,
-------------------------------
1999 2000
-------------------------------
Cash flows from operating
activities
Net loss $ (38,463) $ (7,122,027)
--------- ------------
Adjustments to reconcile
net loss to net cash
provided by operating
activities
Depreciation and
amortization - 20,962
Stock options granted
to non employees and
stock issued to
employees for services - 5,866,724
Changes in assets and
liabilities
Receivables - (300,826)
Inventory - (41,732)
Other current assets - (107,946)
Interest payable 50,859 97,750
Accounts payable - 93,669
Deferred revenue - 77,499
Deferred income taxes - 16,531
Commissions payable - 105,423
Income taxes payable - (383)
--------- ------------
50,859 5,827,671
--------- ------------
Net cash used in operations 12,396 (1,294,356)
--------- ------------
Cash flows from investing activities
Capital expenditures - (187,628)
Intangible assets (12,396) (25,606)
Cash acquired in acquisition - 21,248
Advances to related party - (570,000)
--------- ------------
Net cash used in investing
activities (12,396) (761,986)
--------- ------------
Cash flows from financing activities
Net proceeds from stock issuance - 5,140,087
Distribution related to reverse
acquisition - (190,000)
Payments on notes payable - (910,000)
--------- ------------
Net cash provided by
financing activities - 4,040,087
--------- ------------
Net increase in cash - 1,983,745
Cash and cash equivalents-
beginning of period - -
--------- ------------
Cash and cash equivalent-
end of period $ - $ 1,983,745
========= ============
Non-cash investing and financing activities (Note 8).
See notes to unaudited consolidated financial statements.
F - 5
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
Notes to Unaudited Consolidated Financial Statements
Note 1 - Description of Business
The Company was incorporated in May 1983 in the State of Colorado to engage in
the cellular radio and communications business and to engage in any other lawful
activity permitted under Colorado law. In June 1988, the Company changed its
name to Silverthorne Production Company and commenced operations in the oil and
gas industry. These operations were discontinued in 1989. Since 1989, the
Company has attempted to locate acquisition prospects and negotiate an
acquisition. The Company's pursuit of an acquisition did not materialize until
August 20, 1999.
Note 2 - Summary of Significant Accounting Policies
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, have been made to (a) the results of consolidated
operations for the three and nine month periods ended March 31, 2000 and 1999,
respectively, (b) the consolidated balance sheet at March 31, 2000 and (c) the
consolidated statements of cash flows for the nine month periods ended March 31,
2000 and June 30, 1999, respectively, in order to make the financial statements
not misleading.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for financial
statements. For further information, refer to the audited consolidated financial
statements and notes thereto for the year ended June 30, 1999, included in
Silverthorne Production Company's ("Company") Annual Report on Form 10-K/A filed
with the Securities and Exchange Commission and the audited financial statements
of Inter-American Telecommunications Holding Corporation (ITHC) and Cognigen
Corporation (Cognigen) for the year ended June 30, 1999 included in the
Company's Current Report on Form 8-K/A filed with the Securities and Exchange
Commission on March 8, 2000.
Note 3 - Basis of Presentation
These unaudited consolidated financial statements include the accounts of
Inter-American Telecommunications Corporation, ITHC, Cognigen and the Company.
All significant intercompany balances and transactions have been eliminated in
consolidation.
All common stock share amounts have been retroactively adjusted to reflect the
ratio of shares issued by the Company in connection with the reverse acquisition
of ITHC (Note 5). The ratio of shares issued of 5,688.57 shares of the Company
to each share of ITHC stock represents 54,041,397 newly issued shares and shares
to be issued in exchange for 9,500 shares of ITHC common stock.
All per share amounts reflect the 37,298,444 shares the Company has a legal
obligation to issue in connection with the reverse acquisition of ITHC, and have
been treated as outstanding from the date of acquisition.
F - 6
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
Notes to Unaudited Consolidated Financial Statements
Note 4 - Long-Term Debt
Long-term debt consists of the following:
June 30, March 31,
1999 2000
----------- -----------
8% unsecured promissory notes
payable, principal and
interest due upon maturity
in July 2000. $ 1,300,000 $ 510,000
8% unsecured promissory note
payable, principal and
interest due upon maturity
in November 2000. - 180,000
----------- -----------
1,300,000 690,000
Less current portion of
long-term debt (700,000) (510,000)
----------- -----------
$ 600,000 $ 180,000
=========== ===========
Note 5 - Business Acquisitions
On July 1, 1999, ITHC entered into an agreement with Cognigen to purchase all of
Cognigen's net assets. The purchase price included 31,286,894, as adjusted,
shares of ITHC common stock, as determined by negotiations between the parties,
($.01 par value) and a $300,000 note payable due October 1, 1999. The agreement
also calls for a four-year employment contract between the Company and Kevin
Anderson, the founder of Cognigen, with an annual base salary of $175,000. Mr.
Anderson was not previously affiliated with ITHC prior to the acquisition and
will continue with the Company and perform functions equivalent to that of a
chief operating officer. The transaction was accounted for as a purchase. ITHC
acquired net assets of $86,230 and recorded goodwill of $213,770. The goodwill
will be amortized over a life of 20 years.
On August 20, 1999, the Company completed the acquisition of all of the net
assets of ITHC (an unaffiliated company) in exchange for up to 49,041,397 shares
of the Company's common stock in a negotiated transaction. For financial
statement purposes, this business combination was accounted for as an additional
capitalization of ITHC (a reverse acquisition in which ITHC was the accounting
acquirer). ITHC is considered the surviving entity and the historical financial
statements prior to the acquisition are those of ITHC. The Company's net book
value prior to the transaction was $0. The issuance of the stock must be
completed in two closings due to the limited amount of authorized stock
available for issuance under the Company's articles of incorporation. The first
closing resulted in the issuance of 11,742,953 shares while the remaining
37,298,444 shares will be issued after a shareholder vote to increase the
authorized number of shares or after a reverse stock split is effected. The
Company issued 5,000,000 shares of the Company's common stock as finders' fees
in connection with the transaction to unrelated individuals. The shares were
valued at $.38 a share for a total of $1,900,000 and treated as a cost of the
reverse acquisition.
F - 7
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
Notes to Unaudited Consolidated Financial Statements
Note 5 - Business Acquisitions (continued)
Additionally in August 1999, ITHC purchased 12,602,431 shares of the Company's
common stock for a price of $190,000 from certain existing shareholders of the
Company. This was recorded as a charge to additional paid-in-capital in the
amount of $190,000 and treated as a constructive dividend.
The Company is the legal survivor and plans to change its name to Cognigen
Networks, Inc.
Note 6 - Stockholders' Equity
Shares of ITHC stock issued prior to reverse acquisition
In connection with certain ITHC executive employment agreements 11,377,366, as
adjusted, shares of ITHC stock valued at $30,000 were issued in July 1999 for
services provided by those key employees. In addition 31,286,894, as adjusted,
shares of ITHC stock were issued in connection with the acquisition of Cognigen
(Note 5).
Shares Issued Subsequent to Reverse Acquisition
During the six months ended December 31, 1999, the Company received
subscriptions for 12,489,102 shares of the Company's common stock at prices of
$0.38 per share (11,562,302 shares) and $1.60, which approximated market at date
of issue, per share (926,800 shares) from various persons. These shares were
issued by March 31, 2000. The Company agreed to pay a fee of 12% of the total
proceeds received from the sale of the common stock to a distributor and issue
warrants to purchase up to a maximum of 1,500,000 shares of the Company's common
stock to various persons in connection with the sales which are exercisable at
$1.60, which approximated market at date of issue, and expire December 31, 2001.
These warrants were valued at $347,400 based on a value of $.23 per warrant
using the Black-Scholes option pricing model. Assumptions used in the valuation
include: volatility of 109%, 2 year lives, dividend yield of 0% and a risk free
rate of 5.5%. This fee was accounted for as a cost of the sale of those common
shares. The Company paid a total of $727,474 related to the total fee due and
other expenses associated with the offering. There are no remaining unpaid fees
as of March 31, 2000.
Stock Options
In August 1999, the Company issued 31,600,000 options entitling the holders to
purchase the Company's common stock at $0.46 per share, which approximated
market value at date of issue. The options vest immediately and expire five
years from the date issued. The options cannot be exercised until the Company
amends it articles of incorporation or effects a reverse split of its common
stock so that it has sufficient shares available for issuance upon the exercise
of these options. 25,200,000 of these options were issued to non-employees for
various professional services provided (of which 12,000,000 were issued to a
trust of which the founder is one of the beneficiaries) while the remaining
options were issued to employees and directors. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized for the stock options issued to employees and
directors. $5,836,724 of compensation expense was recorded in connection with
the options granted to non employees based on a value of $.23 per option using
the Black-Scholes option pricing model. Assumptions used in the valuation
include; volatility of 109%, 3 year lives, dividend yield of 0%, and a risk-free
rate of 5.5%.
F - 8
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
Notes to Unaudited Consolidated Financial Statements
Note 7 - Related Party Activities
The Company advanced $570,000 from September 1999 through March 31, 2000 to
Aquila International Telecommunications, Inc ("Aquila") (an unrelated
telecommunication carrier company). These advances bear no interest and have no
specific repayment terms. The Company had entered into a letter-of-intent to
acquire Aquila and, after completing its due diligence review, completed the
acquisition in April 2000 by issuing 2,041,445 shares of its common stock for
all the stock of Aquila.
Note 8 - Non-Cash Investing and Financing Activities
During the nine months ended March 31, 2000:
The Company acquired net assets of 86,230 and recorded goodwill in the amount of
$213,770 by issuing a note for $300,000 in connection with a business
acquisition (Note 5).
During the nine months ended March 31, 1999:
The Company issued notes of $1,300,000 in exchange for customer lists valued at
of $1,300,000.
F - 9
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
Results for March 31, 2000
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
Certain of the information discussed in this quarterly report, and in particular
in this section entitled "Management's Discussion and Analysis or Plan of
Operation," contains forward-looking statements that involve risks and
uncertainties that might adversely affect the operating results of Silverthorne
Production Company ("Company") in the future in a material way. Such risks and
uncertainties include, without limitation, rate changes, fee policy or
application changes, technological changes and competition. Many of these risks
are beyond the control of the Company. The Company is not entitled to rely on
the safe harbor provisions of Section 27A of the Securities Act of 1933, as
amended, or Section 21E of the Securities Exchange Act of 1934, as amended, when
making forward-looking statements.
Overview
The Company was incorporated on May 6, 1983, in Colorado. On August 20, 1999,
the Company completed the acquisition of all of the net assets of ITHC in
exchange for up to 49,041,397 shares of the Company's common stock. For
financial statement purposes, this business combination was accounted for as an
additional capitalization of ITHC (a reverse acquisition in which ITHC was the
accounting acquirer). For accounting purposes, ITHC is considered the surviving
entity and the historical financial statements prior to the acquisition are
those of ITHC. The Company's net book value prior to the transaction was $0.
Inter-American Telecommunications Holding Corporation (ITHC) was incorporated on
July 24, 1998 in Delaware. Since its inception, ITHC has directed its efforts
toward the acquisition of assets that would allow it to be engaged in direct and
multilevel agency marketing and sale of long distance service and products as
well as the switching and transport of voice, fax and data telephone and
internet traffic and related services. On July 1, 1999, ITHC acquired the net
assets of Cognigen Corporation (Cognigen) in exchange for 31,286,894, as
adjusted, shares of its common stock and a note payable of $300,000. Cognigen
was actively marketing long distance telephone services over the internet.
The Company intends to seek an increase in its authorized number of shares and
the authorization for a 1-2, 1-3 or 1-4 reverse stock split as the Board deems
appropriate. The Company intends to take these actions at its next annual
shareholder meeting anticipated to be held in 2000.
F - 10
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
Results for March 31, 2000
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
ITHC was a developmental stage company since its inception on July 24, 1998
through June 30, 1999. During this stage, ITHC generated no revenues and
incurred only minimal operational costs. ITHC focused its efforts on the pursuit
of the acquisition of business opportunities. On July 1, 1999, ITHC completed
the acquisition of all the net assets of Cognigen in a transaction accounted for
as a purchase. Additionally, in a transaction accounted for as a reverse
acquisition, ITHC acquired control of the Company, a non-operating public shell
corporation. Therefore, the results of operations for the three and nine months
ended March 31, 2000 are comprised entirely of the operations generated from the
net assets purchased from Cognigen on July 1, 1999. As no operations existed for
ITHC for the three and nine month periods ended March 31, 1999, no meaningful
comparisons can be made.
For purposes of this Management's Discussion and Analysis or Plan of Operation,
the Company believes that the unaudited results of operations for Cognigen for
the three and nine months ended March 31, 1999 shown below provide a more
meaningful basis for analysis. Therefore, all comparisons and analysis included
in this Management's Discussion and Analysis or Plan of Operation are based upon
these unaudited results of operations for Cognigen for the three and nine months
ended March 31, 1999.
F - 11
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
Results for March 31, 2000
Unaudited Results of Operations
<TABLE>
<CAPTION>
Unaudited Results of Unaudited Results
Operations for of Operations
The Company for Cognigen
------------------------------------ ------------------------------------
Three Months Nine Months Three Months Nine Months
Ended March 31, Ended March 31, Ended March 31, Ended March 31,
2000 2000 1999 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenue
Prepaid cards and pins $ 82,632 $ 846,427 $ 226,616 $ 657,003
Marketing commissions 707,193 1,642,400 277,596 434,707
Other 129,504 131,874 - -
Allowances (10,731) (28,512) - -
--------------- --------------- --------------- ---------------
Total revenue 908,598 2,592,189 504,212 1,091,710
Operating expenses
Prepaid cards and pins 170,798 710,389 193,883 450,007
Marketing commissions 457,062 1,198,675 205,334 321,367
Sales, general and administrative 826,184 7,726,564 138,234 359,023
--------------- --------------- --------------- ---------------
Total operating expenses 1,454,044 9,635,628 537,451 1,130,397
--------------- --------------- --------------- ---------------
Loss from operations (545,446) (7,043,439) (33,239) (38,687)
Other income (expense)
Other income 42,452 59,179 - -
Interest expense (39,517) (107,767) - -
--------------- --------------- --------------- ---------------
Net income (loss) $ (542,511) $ (7,092,027) $ (33,239) $ (38,687)
=============== =============== =============== ===============
</TABLE>
F - 12
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
Results for March 31, 2000
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 2000.
Total revenue for the three months ended March 31, 2000 was $908,598 compared to
$504,212 for the three months ended March 31, 1999. Total revenue for the 2000
period consisted of $82,632 related to prepaid cards and pins and $707,193
related to commissions. Total revenue for the comparable period in 1999
consisted of $226,616 related to prepaid cards and pins and $277,596 related to
commissions. The $143,984, or 63%, decrease in prepaid cards and pins is due to
reduced tariff calls as a result of competition. The $429,597, or 155%, increase
in commissions is due to an increase in agents of 20% or 236 new agents.
Operating costs related to prepaid cards and pins for the three months ended
March 31, 2000 decreased $23,085, or 12%, to $170,798 from $193,883 during the
three months ended March 31, 1999. Operating costs related to commissions for
the three months ended March 31, 2000 increased $251,728, or 123%, to $457,062
from $205,334 during the three months ended March 31, 1999. The changes in cost
increases are directly related to the changes in the related sales revenue.
General and administrative operating expenses increased $687,950, or 498%, to
$826,184 during the three months ended March 31, 2000 from $138,234 during the
three months ended March 31, 1999. This increase is due to increased salaries of
$164,706, or 182%, as a result of more headcount, increased legal and
professional expenses of $101,031, or 131%, due to acquisitions and increased
commissions paid of $51,200, or 13%.
The Company incurred a loss from operations of $545,446 for the three months
ended March 31, 2000 compared to $33,239 for the three months ended March 31,
1999. The decrease in operating loss during the current period is directly
related to the increase in general and administrative expenses discussed above.
Net interest income for the three months ended March 31, 2000 of $2,935 compares
to net interest income during the same three months ended March 31, 1999 of $0.
The reason for this increase is due to larger cash balances earning interest
from an increase in deposits. After interest income, the net loss for the three
months ended March 31, 2000 was $542,511, or a $.01 loss per share, compared to
net income of $33,239 for the three months ended March 31, 1999.
Nine Months Ended March 31, 2000 Compared to Nine Months Ended March 31, 1999
Total revenue for the nine months ended March 31, 2000 was $2,592,189 compared
to $1,091,710 for the nine months ended March 31, 1999. Total revenue in 2000
consisted of $846,427 related to prepaid cards and pins and $1,642,400 related
to commissions. Total revenue for the comparable period in 1999 consisted of
$657,003 related to prepaid cards and pins and $434,707 related to commissions.
The $189,424, or 29%, increase in prepaid cards and pins is due to an increase
in sales agents of approximately 800 agents. The $1,207,693, or 278%, increase
in commissions is also directly related to the increase in agents.
F - 13
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
Results for March 31, 2000
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Operating costs related to prepaid cards and pins for the nine months ended
March 31, 2000 increased $260,382, or 58%, to $710,389 from $450,007 during the
nine months ended March 31, 1999. Operating costs related to commissions for the
nine months ended March 31, 2000 increased $877,308, or 273%, to $1,198,675 from
$321,367 during the nine months ended March 31, 1999. The cost increases are
directly related to the increases in revenues.
General and administrative operating expenses increased $7,367,541, or 1,952%,
to $7,726,564 during the nine months ended March 31, 2000 from $359,023 during
the nine months ended March 31, 1999. This increase is due to a non-cash charge
for options granted to non-employees of $5,836,724 in addition to increased
salaries resulting from significant Company growth and increased legal and
professional costs from business acquisitions and related public filings.
The Company incurred a loss from operations of $7,043,439 for the nine months
ended March 31, 2000 compared with an operating loss of $38,687 for the nine
months ended March 31, 1999. The increase in operating loss during the period is
also related to the increase in general and administrative costs discussed
above.
Net interest expense for the nine months ended March 31, 2000 of $48,588
compares to net interest expense during the nine months ended March 31, 1999 of
$0. The reason for this increase is due to an increase in outstanding debt.
After interest expense, the net loss for the nine months ended March 31, 2000
was $7,092,027, or a $0.09 loss per share, compared to net loss of $38,687 for
the nine months ended March 31, 1999.
Liquidity and Capital Resources:
The Company has funded its operations to date primarily from shareholder
advances and stock subscriptions received. At March 31, 2000, the Company had
cash and cash equivalents of $1,983,745 and working capital of $2,034,350.
Cash used by the Company for operating activities during the nine months ended
March 31, 2000 was $1,294,356. A primary component of the use of cash during the
nine months was the Company's net loss of $7,092,027 adjusted for non-cash
adjustments for depreciation and amortization of $20,962 and stock option
expense of $5,836,724. Additional uses of operating cash for the nine months
included increases in the Company's accounts receivable of $300,826, inventory
of $41,732 and other current assets of $107,946. The uses in operating cash were
partially offset by cash provided of $97,750 from interest payable, $93,669 of
accounts payable, deferred revenue of $77,499 and commissions payable of
$105,423. Sources of cash from investing activities include $21,248 from the
acquisition of Cognigen. Additional sources and uses of cash during the nine
months ended March 31, 2000 also include net proceeds from the receipt of stock
subscriptions of $5,140,087, capital expenditures of $187,628, payments on notes
payable of $910,000 and a distribution in connection with the reverse
acquisition.
F - 14
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
Results for March 31, 2000
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company currently has three 8% unsecured promissory notes payable with total
outstanding balances of $690,000. Two of these notes are due in July 2000 while
the remaining note is due November 2000.
The Company believes its current liquidity requirement primarily will be to meet
working capital requirements. The Company has no planned significant capital
expenditures in the foreseeable future. Cash generated from operations was not
sufficient to meet working capital requirements for the nine months ended March
31, 2000, and may not be sufficient to meet working capital requirements for the
foreseeable future. Therefore, additional debt or equity financing may be
required for the Company to satisfy its short term capital needs. There can be
no assurances that the Company will be able to generate additional debt or
equity financing if needed.
The Company advanced $570,000 to Aquila International Telecommunications, Inc.
(Aquila) in connection with a carrier service agreement. This agreement was for
performing services for migrating customers from the Company's customer lists to
active status switching services and full customer maintenance. The Company
acquired all of the outstanding common stock of Aquila in April 2000 by issuing
2,041,445 shares of its common stock. The required financial statements and pro
forma information will be included in the Company's Current Report on Form 8K/A
anticipated to be filed with the Securities and Exchange Commission within the
required timeline.
F - 15
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors,
SILVERTHORNE PRODUCTION COMPANY
I have audited the accompanying balance sheet of SILVERTHORNE PRODUCTION COMPANY
(a Colorado Corporation) as of June 30, 1999 and 1998 and the related statements
of operations, stockholders, equity and cash flows for each of the three years
in the period ended June 30, 1999. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial presentation. I believe
that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of SILVERTHORNE PRODUCTION COMPANY as
of June 30, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended June 30, 1999, in conformity
with generally accepted accounting principles.
/s/ Daniel Jankowski
Daniel Jankowski, CPA, CNA, MCSE
August 17, 1999
F - 16
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
(A Developmental Stage Company)
Comparative Balance Sheets
June 30,
--------------------------
Notes 1999 1998
------- ---------- ----------
Assets
Current assets
Cash $ - $ -
---------- ----------
Total assets $ - $ -
========== ==========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable 2 $ 2,234 $ 7,018
---------- ----------
Total current liabilities 2,234 7,018
Shareholders' equity
Common stock, par value
$.001 per share; authorized
50,000,000 shares, of which
15,757,047 shares are issued
and outstanding 15,757 15,757
Capital paid in excess of par 748,230 748,230
Retained earnings deficit
From regular operations (617,286) (617,286)
Accumulated during
developmental stage 5 (148,935) (153,719)
---------- ----------
Total shareholders' equity (deficit) (2,234) (7,018)
========== ==========
Total liabilities and shareholders' equity $ - $ -
========== ==========
See notes to financial statements.
F - 17
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
(A Developmental Stage Company)
Statement of Operations
<TABLE>
<CAPTION>
For the Years Ended
June 30,
------------------------------------
Notes 1999 1998 1997
------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Miscellaneous revenue
Reversal of accounts payable $ 3,212 $ - $ 44,127
Net earnest money deposit 12,807 - -
---------- ---------- ----------
$ 16,019 $ - $ 44,127
========== ========== ==========
Expenses
Administrative expenses $ 3,929 $ 7,236 $ 12,087
Interest - 6,906 2,583
Legal fees 3 6,806 69,800 -
Auditing fees 500 1,560 -
Consulting - 8,500 -
---------- ---------- ----------
Total expenses 11,235 94,002 14,670
---------- ---------- ----------
Net income (loss) $ 4,784 $ (94,002) $ 29,457
========== ========== ==========
Earnings per share
Net income from operations 4 $ 0.0004 $ 0.0098 $ 0.0084
========== ========== ==========
Weighted average common shares outstanding 15,757,047 9,631,047 3,505,047
========== ========== ==========
</TABLE>
See notes to financial statements.
F - 18
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
(A Developmental Stage Company)
Statement of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended
June 30,
----------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 4,784 $ (94,002) $ 29,457
Increase (decrease) in accounts payable (4,784) - 12,122
Non-cash write-off notes/account payable - - (44,127)
Increase in accrued interest - - 2,583
--------- --------- ---------
Net cash flows from operation - (94,002) 35
--------- --------- ---------
Cash flows from financing activities
Debt converted to common stock - 93,976 -
--------- --------- ---------
Net cash flows from investment activities - 93,976 -
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents - (26) 35
Cash or bank overdraft at beginning of period - 26 (9)
--------- --------- ---------
$ - $ - $ 26
========= ========= =========
</TABLE>
See notes to financial statements.
F - 19
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
(A Developmental Stage Company)
Statements of Shareholders' Equity (Deficit)
For Fiscal Years Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Total
Common Stock Additional hareholders'
----------------------------- Paid-in Accumulated Equity
Shares Amount Capital Deficit (Deficit)
---------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1996 3,580,047 $ 3,580 $ 907,257 $ (706,460) $ 204,377
Net income (loss) from
fiscal year ended
June 30, 1997 - - - 29,457 29,457
Net income (loss) from
fiscal year ended
June 30, 1998 12,252,000 12,252 140,898 (94,002) 59,148
Redemption/reversal (75,000) (75) (299,925) - (300,000)
June 30, 1999 - - - 4,784 4,784
---------- ----------- ------------ ------------- -------------
Balance, June 30, 1999 15,757,047 $ 15,757 $ 748,230 $ (766,221) $ (2,234)
========== =========== ============ ============= =============
</TABLE>
See notes to financial statements.
F - 20
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
(A Developmental Stage Company)
Notes to Financial Statements
Note 1 - Organization and Significant Accounting Policies
Organization
Company was incorporated in May 1983 in the State of Colorado, to engage in the
cellular radio and communications business; and to "engage in any other lawful
activity permitted." In June 1988, Company changed its name to Silverthorne
Production Company and commenced operations in the oil an gas industry. During
1993-96, Company attempted to locate acquisition prospects and negotiate
acquisition or exchange of assets, including activity in the fuel industry.
Company's pursuit of business opportunities through acquisition by stock
exchange or merger did not materialized during year ended June 30, 1999.
Basis of Financial Statement Presentation
Company is a development stage company. Company has no operations and is
critically short of cash. Its ability to continue development stage activities
is in question, except for the efforts of the current officers/directors.
Note 2 - Accounts Payable
Company's accounts payable include obligations to Company's legal counsel on
Securities and Exchange (SEC) matters, the registered agent and depository trust
company.
Note 3 - Related Party Transactions
Company officers from time to time obtained funds from shareholders to pay for
expenses, including this audit, as well as pursuit of Company business
opportunities.
Note 4 - Earnings Per Share
Earnings per share is calculated by dividing the net income (loss) from
operations, by total weighted shares outstanding at June 30, 1999.
F - 21
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
(A Developmental Stage Company)
Notes to Financial Statements
Note 5 - Income Taxes
In the cellular radio communications business, Company accumulated a loss carry
forward of about $243,000. Company's loss carry forward from the oil and gas
industry increased by approximately $376,000. From 1989 through June 30, 1997,
development stage activities in pursuit of acquisition and merger opportunities,
Company accumulated an additional loss carry forward of approximately $148,000.
Therefore the total loss carry forward is approximately $762,000 through June
30, 1999. Company may not be able to utilize part of these loss carry forwards,
depending on the nature of future operations. Company has prepared and is filing
its federal income tax returns for the year ended June 30, 1999,
contemporaneously with publication of this audited report.
Note 6 - Change in Control of the Company
A proposed merger/acquisition by Company with certain third-parties was
negotiated subject to final approval, but was terminated before closing,
therefore, the proposed change in control did not formally occur and returned to
status quo following termination of the proposed transaction.
F - 22
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
(A Developmental Stage Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF SILVERTHORNE PRODUCTION COMPANY FINANCIAL STATEMENTS.
During the fiscal year ended June 30, 1999 and since 1989, the Company has
engaged in no significant operations other than the search for, and
identification and evaluation of, possible acquisition candidates. No revenues
were received by the Company during the fiscal year, except for a deposit on the
Pricenet.com transaction which was terminated. The Company experienced a net
income of $4,784 during the fiscal year ended June 30, 1999, since the deposit
received from the Pricenet.com transaction exceeded the expenses for that
transaction in addition to the remaining legal and administrative fees for the
year.
The Company anticipates that until a business combination is completed with an
acquisition candidate, it will not generate revenues, and may continue to
operate at a loss after completing a business combination, depending upon the
performance of the acquired business.
As of June 30, 1999, the Company had no material commitments for capital
expenditures.
F - 23
<PAGE>
AQUILA INTERNATIONAL
TELECOMMUNICATIONS, INC.
FINANCIAL STATEMENTS
December 31, 1999 and 1998
F - 24
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders
Aquila International Telecommunications, Inc.
San Luis Obispo, California
We have audited the accompanying balance sheets of Aquila International
Telecommunications, Inc., (a California corporation), as of December 31, 1999
and 1998, and the related statements of income, shareholders' equity, and cash
flows for the year ended December 31, 1999 and for the period from March 23,
1998 (date of inception) through December 31, 1998. 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 generally accepted auditing
standards. 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 made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aquila International
Telecommunications, Inc., as of December 31, 1999 and 1998, and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
McGowan Guntermann
Santa Barbara, California
February 3, 2000
F - 25
<PAGE>
AQUILA INTERNATIONAL TELECOMMUNICATIONS, INC.
BALANCE SHEETS
December 31, 1999 and 1998
ASSETS
1999 1998
------------ ------------
CURRENT ASSETS
Cash (Note 1F) $ 20,392 $ 302
Accounts receivable 38,750 345
Other receivables 200 3,000
Total current assets 59,342 3,647
------------ ------------
PROPERTY AND EQUIPMENT -
net (Note 3) 170,830 212,366
OTHER ASSETS
Deposits 76,318 21,007
TOTAL ASSETS $306,490 $ 237,020
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 42,894 $ 3,606
Accrued expenses 393,873 312,605
Deposits received 5,306 -
Loan from shareholder
(Note 7) 25,900 32,972
Current portion -
long-term liabilities 102,969 89,538
------------ ------------
Total Current Liabilities 570,942 438,721
LONG-TERM LIABILITIES -
net of current portion (Note 4) 854,332 241,828
------------ ------------
Total Liabilities 1,425,274 680,549
------------ ------------
SHAREHOLDERS' DEFICIT
Common stock - $1 par value,
5,000,000 shares authorized 12,000 12,000
Retained deficit (1,130,784) (455,529)
------------ ------------
Total Shareholders' Deficit (1,118,784) (443,529)
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' DEFICIT $ 306,490 $ 237,020
============ ============
The accompanying notes are an integral part of these financial statements.
F - 26
<PAGE>
AQUILA INTERNATIONAL TELECOMMUNICATIONS, INC.
STATEMENTS OF INCOME
For the Year Ended December 31, 1999 and for
the Period from March 23, 1998 (Date of
Inception) through December 31, 1998
1999 1998
------------ ------------
INCOME $ 124,023 $ 345
------------ ------------
COST OF SALES 262,568 8,699
------------ ------------
GROSS PROFIT (138,545) (8,354)
------------ ------------
OPERATING EXPENSES
Advertising 3,797 215
Automobile 14,469 -
Bank charges 2,880 988
Credit card fees 7,255 435
Depreciation 90,835 40,524
Employee benefits 23,788 10,349
Freight 530 -
Insurance 4,259 15
Interest 54,040 3,436
Legal and professional 7,077 8,330
Miscellaneous 495 (630)
Office 5,275 2,678
Postage and delivery 717 372
Rent facility 25,365 8,025
Repairs 447 1,149
Salaries 261,489 340,298
Software 1,430 6,015
Supplies 5,017 2,235
Taxes and license 8,534 3,146
Telephone 11,737 8,014
Travel 3,092 11,213
Utilities 4,182 368
------------ ------------
Total operating expenses 536,710 447,175
------------ ------------
NET LOSS $ (675,255) $ (455,529)
============ ============
The accompanying notes are an integral part of these financial statements.
F - 27
<PAGE>
AQUILA INTERNATIONAL TELECOMMUNICATIONS, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
For the Year Ended December 31, 1999 and for the Period
from March 23, 1998
(Date of Inception) through December 31, 1998
<TABLE>
<CAPTION>
Common Retained
Shares Stock Earnings Total
------ ------- ------------ -----------
<S> <C> <C> <C> <C>
BALANCE - March 23, 1998 - $ - $ - $ -
Shares issued 12,000 12,000 - 12,000
Net loss - - (455,529) (443,529)
------ ------- ----------- -----------
BALANCE - December 31, 1998 12,000 12,000 (455,529) (433,529)
Shares issued 4,025 - - -
Net loss - - (675,255) (675,255)
------ ------- ----------- -----------
BALANCE - December 31, 1999 16,025 $12,000 $(1,130,784) $(1,118,784)
====== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 28
<PAGE>
AQUILA INTERNATIONAL TELECOMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1999 and for
the Period from March 23, 1998 (Date of
Inception) through December 31, 1998
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $ (675,255) $ (455,529)
---------- ----------
Adjustments to reconcile
net loss to net cash
provided by operating
activities
Depreciation expense 90,835 40,524
Changes in
Accounts receivable (35,605) (3,345)
Prepaid and deferred charges (55,311) (21,006)
Accounts payable and accrued
expenses 161,786 316,212
---------- ----------
Total Adjustments 161,705 332,385
---------- ----------
NET CASH USED BY OPERATING ACTIVITIES (513,550) (123,144)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital stock issuance - 12,000
Loan from related parties (Note 4E) 212,928 127,972
Advance from ITHC (Note 4F) 435,000 -
Principal payments on capital leases (91,366) (3,635)
NET CASH PROVIDED BY FINANCING
ACTIVITIES 556,562 136,337
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (22,922) (12,891)
---------- ----------
INCREASE IN CASH 20,090 302
CASH - beginning of year 302 -
---------- ----------
end of year $ 20,392 $ 302
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for
income taxes $ 800 $ 800
Cash paid during the year for interest $ 14,892 $ 3,436
NONCASH TRANSACTIONS
Fixed assets purchased with capital
leases $ 24,594 $ 223,777
The accompanying notes are an integral part of these financial statements.
F - 29
<PAGE>
AQUILA INTERNATIONAL TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Method of Accounting
The Company uses the accrual method of accounting for recording
income and expenses.
B. Property and Equipment
Property and equipment are recorded at cost. Depreciation is
computed using the straight-line method for financial reporting
purposes and amounted to $90,835 and $40,524 for 1999 and 1998,
respectively. Estimated useful lives of the assets are:
Computer software 3 years
Computer equipment 3 years
Office furniture 7 years
Telephone equipment 5 years
Leasehold improvements 5 years
C. Income Taxes
The Company has elected to be taxed under the provision of
Subchapter S of the Internal Revenue Code. Under those
provisions, the Company generally does not pay Federal
Corporate tax on its taxable income. Instead, taxes on the
operating profits and losses are the individual responsibility
of the shareholders.
For California state franchise tax purposes the Company is
treated as an S Corporation. Under this election, the net
profits or losses flow to the shareholders and the Company is
taxed directly on its income at a rate of 1.5% for
December 31, 1999 and 1998.
The provision for income taxes consists of state taxes currently
due and, if material, deferred taxes resulting from differences
in the accounting methods used for financial reporting purposes
and those used for income tax reporting. There are no material
deferred income tax items, as determined under Statement of
Financial Accounting Standards No. 109, for 1999 and 1998.
D. Allowance for Doubtful Accounts
No allowance for doubtful accounts has been provided as no
material write-offs are expected at December 31, 1999 and 1998.
The accompanying notes are an integral part of these financial statements.
F - 30
<PAGE>
AQUILA INTERNATIONAL TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
E. 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 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.
F. Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and in
checking and savings accounts.
G. Advertising
The Company expenses advertising costs as they are incurred.
Advertising expenses for the years ended December 31, 1999 and
1998 were $3,797 and $215 respectively.
Note 2 - BUSINESS
The Company is a FCC licensed long distance carrier. It services
primarily long distance telephone communications to a world-wide
customer base through callback and debit and credit card
applications.
Note 3 - PROPERTY AND EQUIPMENT
1999 1998
--------- ---------
Property and equipment consists
of the following:
Furniture and fixtures $ 1,342 $ 1,127
Leasehold improvements 12,931 -
Computer equipment 64,533 34,395
Switch equipment 217,368 217,368
Computer software 6,015 -
--------- ---------
302,189 252,890
Less: accumulated
depreciation (131,359) (40,524)
--------- ---------
Total $ 170,830 $ 212,366
========= =========
The accompanying notes are an integral part of these financial statements.
F - 31
<PAGE>
AQUILA INTERNATIONAL TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
Note 4 - LONG-TERM LOANS PAYABLE
1999 1998
---------- ----------
A. Dell Financial, two capital
leases of computer equipment,
payable $925 per month
including interest at 24%,
through July, 2000 and
May, 2001 $ 13,683 $ 20,564
B. Cisco, capital lease of
switching equipment, payable
at $7,227 per month, including
interest at 4%, through
June, 2001 125,911 205,605
C. Dimension Funding, two capital
leases of computer equipment,
payable at $1,100 per month,
including interest at 24 and
21%, through September, 2001
and November, 2002 24,561 10,197
D. Lucent Technologies Product
Financing, capital lease of
telephone equipment, payable
at $332 per month, including
interest at 21%, through
April, 2002 7,222 -
E. Ladia, LLC, a related party
shareholder as of 1999, note
payable secured by corporate
assets, no monthly payments,
due February 12, 2001, interest
at 12%, including accrued
interest of $35,924 at
December 31, 1999 350,924 95,000
F. ITHC, loan advance, no
repayment terms, no interest
charged 435,000 -
---------- ----------
Total Loans Payable 957,301 331,366
Less: portion due in one year 102,969 89,538
---------- ----------
Total Long-Term Loans Payable $ 854,332 $ 241,828
========== ==========
The accompanying notes are an integral part of these financial statements.
F - 32
<PAGE>
AQUILA INTERNATIONAL TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
Note 4 - LONG-TERM LOANS PAYABLE (continued)
Maturities of long-term debt (exclusive of the capital lease),
for each of the five years succeeding December 31, 1999, are as
follows:
Year
----
2001 $ 350,924
Thereafter 435,000
---------------
Total $ 785,924
===============
Future minimum lease payments under the capital lease for each
of the five years succeeding December 31, 1999, are as follows:
Year
----
2000 $ 113,849
2001 64,567
2002 8,744
---------------
187,160
Less imputed interest (15,783)
---------------
Total $ 171,377
===============
Note 5 - REVENUES FROM MAJOR CUSTOMERS
One customer accounts for all of the revenue for both periods.
Note 6 - DEVELOPMENT STAGE
The company was formed March 23, 1998, and was in the
development stage until July, 1999.
Note 7 - RELATED PARTY TRANSACTIONS
In addition to the loan to shareholder (Note 4E) which has
accrued interest of $34,275 as of December 31, 1999, another
shareholder has loaned $25,900, accruing interest at 10%, with
$3,973 accrued at December 31, 1999. No interest has been paid
on either loan as of December 31, 1999.
The accompanying notes are an integral part of these financial statements.
F - 33
<PAGE>
AQUILA INTERNATIONAL TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
Note 8 - LEASE COMMITMENTS
Operating Leases
The Company has entered into two leases for office and switching
room space in one facility. The terms of the lease are until
February 14, 2000 for one lease at $850 per month, and until
September 30, 2001 for the other lease at $954 per month until
October 1, 2000, and $1,002 per month thereafter. Rent expense
for December 31, 1999 and 1998 is $25,365 and $8,025,
respectively.
Future minimum lease payments on the operating lease are as
follows:
Year
----
2000 $ 13,207
2001 9,020
-----------------
Total $ 22,227
=================
Capital Leases
The Company purchased equipment which is financed through
leasing arrangements. The equipment was placed in service from
1998 to 1999 and is being depreciated over three years. The
total cost of the equipment is $266,377 and $240,000 at
December 31, 1999 and 1998, respectively. The accumulated
depreciation is $124,396 and $40,000 at December 31, 1999 and
1998, respectively. Depreciation expense for assets under
capital leases is $84,396 and $40,000, for the years ended
December 31, 1999 and 1998, respectively. See Note 4.
The accompanying notes are an integral part of these financial statements.
F - 34
<PAGE>
AQUILA INTERNATIONAL TELECOMMUNICATIONS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF
OPERATIONS AND UNAUDITED PRO FORMA
COMBINED BALANCE SHEETS
The following unaudited pro forma combined statements of operations for the year
ended June 30, 1999 and the nine month period ended March 31, 2000 and the
unaudited pro forma combined balance sheets as of June 30, 1999 and March 31,
2000, give effect to the business combination of Silverthorne Production Company
and Aquila International Telecommunications, Inc.. The transaction between
Silverthorne Production Company and Aquila International Telecommunications,
Inc. has been accounted for as a combination of companies under the purchase
method. The unaudited pro forma statements of operations have been prepared as
if the proposed transaction occurred on July 1, 1998. The unaudited pro forma
balance sheets have been prepared as if the proposed transaction occurred June
30, 1999 and March 31, 2000, respectively. These pro forma statements are not
necessarily indicative of the results of operations or the financial position as
they may be in the future or as they might have been had the transactions become
effective on the above-mentioned dates.
The unaudited pro forma combined statements of operations for the year ended
June 30, 1999 and the nine month period ended March 31, 2000 include the results
of operations of Aquila International Telecommunications, Inc., Silverthorne
Production Company and previous acquisitions reported in amendments to Current
Reports on Form 8-K that were previously filed during 1999.
The unaudited pro forma combined statements of income and the unaudited pro
forma combined balance sheets should be read in conjunction with the separate
historical financial statements and notes thereto of Silverthorne Production
Company, Aquila International Telecommunications, Inc. and those previous
acquisitions in 1999 reported as amendments to Current Reports on Form 8-K.
F - 35
<PAGE>
Unaudited Pro Forma Combined Balance Sheet
As of March 31, 2000
<TABLE>
<CAPTION>
Pro Forma Adjustments
------------------------------------
Silverthorne (2) Aquila Total Debit Credit Combined
---------------- ------------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Current assets $ 3,309,584 $ 59,194 $ 3,368,778 $ 67,666 (3) $ (59,194) (3) $ 3,377,250
Property and
equipment, net 254,038 151,018 405,056 142,135 (3) (151,018) (3) 396,173
Other assets 1,532,954 76,996 1,609,950 3,086,217 (3) (76,996) (3) 4,619,171
------------- ------------ ----------- ----------- ----------- -----------
Total assets $ 5,096,576 $ 287,208 $ 5,383,784 $ 3,296,018 $ (287,208) $ 8,392,594
============= ============ =========== =========== =========== ===========
Liabilities
and
Share-
holders'
equity
Total current
liabilities $ 1,275,234 $ 195,926 $ 1,471,160 $ 195,926 (3) $ (210,260) (3) $ 1,485,494
Long-term debt 180,000 1,302,672 1,482,672 1,302,672 (3) (406,361) (3) 586,361
------------- ------------ ----------- ----------- ----------- -----------
Shareholders'
equity
(deficit) 3,641,342 (1,211,390) 2,429,952 - (3,890,787) (3) 6,320,739
------------- ------------ ----------- ----------- ----------- -----------
Total
liabilities
and equity $ 5,096,576 $ 287,208 $ 5,383,784 $ 1,498,598 $(4,507,408) $ 8,392,594
============= ============ =========== =========== =========== ===========
</TABLE>
F - 36
<PAGE>
Unaudited Pro Forma Combined Balance Sheet
As of June 30, 1999
<TABLE>
<CAPTION>
Pro Forma Adjustments
--------------------------------
Silverthorne (1) Aquila Total Debit Credit Combined
---------------- -------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Current assets $ 326,583 $ 15,981 $ 342,564 $ 67,666 (3) $ (15,981) (3) $ 394,249
Property and
equipment, net 79,356 32,159 111,515 142,135 (3) (32,159) (3) 221,491
Other assets 1,517,644 30,077 1,547,721 3,086,217 (3) (30,077) (3) 4,603,861
---------- ---------- ---------- ---------- ----------- ----------
Total assets $1,923,583 $ 78,217 $2,001,800 $3,296,018 $ (78,217) $5,219,601
========== ========== ========== ========== =========== ==========
Liabilities and
Shareholders'
Equity
Total current
liabilities $1,985,148 $ 108,777 $2,093,925 $ 108,777 (3) $ (210,260) (3) $2,195,408
Long-term debt - 683,137 683,137 683,137 (3) (406,361) (3) 406,361
---------- ---------- ---------- ---------- ----------- ----------
Shareholders'
equity
(deficit) (61,565) (713,697) (775,262) - (3,393,014) (3) 2,617,832
---------- ---------- ---------- ---------- ----------- ----------
Total
liabilities
and equity $1,923,583 $ 78,217 $2,001,800 $ 791,914 $(4,009,715) $5,219,601
========== ========== ========== ========== =========== ==========
</TABLE>
F - 37
<PAGE>
Unaudited Pro Forma Combined Statement of Operations
For the Nine Months Ended March 31, 2000
<TABLE>
<CAPTION>
Pro Forma Adjustments
-----------------------------------
Silverthorne (2) Aquila Total Debit Credit Combined
---------------- --------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 2,592,189 229,151 $ 2,821,340 $ - $ - $ 2,821,340
Cost of
revenues 1,909,064 335,346 2,244,410 - - 2,244,410
----------- --------- ----------- ------------ ---------- -----------
Gross profit
(loss) 683,125 (106,195) 576,930 - - 576,930
----------- --------- ----------- ------------ ---------- -----------
Operating
expenses
Selling,
general
and admin 7,756,564 356,068 8,112,632 171,815 (5) (76,381) (4) 8,208,066
Interest
expense 107,767 24,607 132,374 - (14,367) (4) 118,007
----------- --------- ----------- ------------ ---------- -----------
Total
operating
expenses 7,864,331 380,675 8,245,006 171,815 (90,748) 8,326,073
----------- --------- ----------- ------------ ---------- -----------
Income (loss)
from
operations (7,181,206) (486,870) (7,668,076) 171,815 (90,748) (7,749,143)
----------- --------- ----------- ------------ ---------- -----------
Other income
(expense) 59,179 - 59,179 - - 59,179
Income (loss)
before taxes (7,122,027) (486,870) (7,608,897) 171,815 (90,748) (7,689,964)
Income tax
expense
(benefit) - - - - - -
----------- --------- ----------- ------------ ---------- -----------
Net income
(loss) $(7,122,027) $(486,870) $(7,608,897) $ 171,815 $ (90,748) $(7,689,964)
============ ========= =========== ============ ========== ===========
Basic earnings
per share $ (0.09) $ (0.10)
=========== ===========
Weighted
average pro
forma shares
outstanding
- basic 76,736,355 2,041,445 (3) 78,777,800
=========== ============ ===========
Diluted
earnings per
share $ (0.09) $ (0.10)
=========== ===========
Weighted
average pro
forma shares
outstanding
- diluted 76,736,355 2,041,445 (3) 78,777,800
=========== ============ ===========
</TABLE>
F - 38
<PAGE>
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended June 30, 1999
<TABLE>
<CAPTION>
Pro Forma Adjustments
--------------------------------
Silverthorne (1) Aquila Total Debit Credit Combined
---------------- --------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 1,807,401 $ 1,538 $ 1,808,939 $ - $ - $ 1,808,939
Cost of
revenues 1,232,950 47,449 1,280,399 - - 1,280,399
------------ --------- ----------- ---------- --------- -----------
Gross profit
(loss) 574,451 (45,911) 528,540 - - 528,540
------------ --------- ----------- ---------- --------- -----------
Operating
expenses
Selling,
general
and admin 730,302 752,713 1,483,015 229,087 (5) (101,841) (4) 1,610,261
Interest
expense 67,814 31,315 99,129 - (29,635) (4) 69,494
------------ --------- ----------- ---------- --------- -----------
Total
operating
expenses 798,116 784,028 1,582,144 229,087 (131,476) 1,679,755
------------ --------- ----------- ---------- --------- -----------
Income (loss)
from operations (223,665) (829,939) (1,053,604) 229,087 (131,476) (1,151,215)
------------ --------- ----------- ---------- --------- -----------
Other income
(expense) (4,784) - (4,784) - - (4,784)
Income (loss)
before taxes (228,449) (829,939) (1,058,388) 229,087 (131,476) (1,155,999)
Income tax
expense
(benefit) (85,211) - (85,211) 85,211 (6) - -
------------ --------- ----------- ---------- --------- -----------
Net income
(loss) $ (143,238) $(829,939) $ (973,177) $ 314,298 $(131,476) $(1,155,999)
============ ========= =========== ========== ========= ===========
Basic earnings
per share $ (0.01) $ (0.04)
============ ===========
Weighted
average pro
forma shares
outstanding
- basic 27,500,000 2,041,445 (3) 29,541,445
============ ========== ===========
Diluted
earnings per
share $ (0.01) $ (0.04)
============ ===========
Weighted
average pro
forma shares
outstanding -
diluted 27,500,000 2,041,445 (3) 29,541,445
============ ========== ===========
</TABLE>
F - 39
<PAGE>
Notes to Unaudited Pro Forma Combined Financial Statements
The following notes and adjustments are related to the business combination
between Silverthorne Production Company (Silverthorne) and Aquila Internal
Telecommunications, Inc (Aquila).
1. Reflects the pro forma amounts, which gives effect to Silverthorne's reverse
acquisition with Inter-American Telecommunication Holding Corporation as
reported in a Current Report on Form 8-K/A dated March 8, 2000.
2. Reflects the March 31, 2000 unaudited balance sheet and statement of
operations for the nine months ended March 31, 2000 of Silverthorne as
filed in a Quarterly Report on Form 10-QSB on May 24, 2000.
3. Records the acquisition of Aquila for $2,697,397. To finance the acquisition,
Silverthorne issued 2,041,445 shares of its common stock. The purchase price
has been allocated as follows:
Asset Category
Cash $ 13,652
Accounts receivable 54,014
Property and equipment 142,135
Intangible assets 3,009,900
Deposits 76,317
Accounts payable (40,886)
Accrued expenses (169,374)
Debt (406,361)
-------------
$ 2,679,397
=============
4. To eliminate depreciation and interest expense which will not continue
following the business combination.
5. To record depreciation and amortization of fixed assets and intangibles
acquired. Fixed assets are depreciated over a five-year life, intangible
assets over fifteen years.
6. No pro forma income tax adjustment is provided for net operating losses
generated as it is currently more likely than not these will not be utilized
in the near future.
F - 40
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Inter-American Telecommunications Holding Corporation
Seattle, Washington
We have audited the accompanying consolidated balance sheet of Inter-American
Telecommunications Holding Corporation (a development stage company) as of June
30, 1999, and the related consoidated statements of operations, cash flows and
changes in stockholders' equity for the period from inception (July 24, 1998)
through June 30, 1999. 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 audit.
We conducted our audit in accordnace with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for out opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Inter-American
Telecommunications Holding Corporation as of June 30, 1999, and the consolidated
results of its operations, its cash flows and its changes in stockholders'
equity for the period from inception (July 24, 1998) through June 30, 1999 in
conformity with generally accepted accounting principles.
Denver, Colorado
January 20, 2000
(except for Note 7 which
is dated February 10, 2000)
By:/s/Comiskey & Company
------------------------
PROFESSIONAL CORPORATION
F-41
<PAGE>
INTER-AMERICAN TELECOMMUNICATIONS HOLDING CORPORATION
(A Development Stage Company)
(Accounting Acquirer of Silverthorne Production Company)
Consolidated Balance Sheet
June 30, 1999
Assets
Other assets
Goodwill $ 5
Deferred tax 16,531
Customer lists 1,300,015
-----------
Total assets $ 1,316,551
===========
Liabilities and Stockholders' Equity
Current liabilities
Interest payable $ 67,814
Notes payable - related parties 700,000
-----------
Total current liabilities 767,814
Notes payable - related parties,
due in more than one year 600,000
Stockholders' equity
Common stock; $0.01 par value,
10,000 shares authorized; 2,000
shares (11,377,137 shares, as
adjusted) issued and outstanding 20
Deficit accumulated during the
development stage (51,283)
-----------
(51,263)
-----------
Total liabilities and stockholders'
equity $ 1,316,551
===========
See notes to financial statements.
F - 42
<PAGE>
INTER-AMERICAN TELECOMMUNICATIONS HOLDING CORPORATION
(A Development Stage Company)
(Accounting Acquirer of Silverthorne Production Company)
Consolidated Statement of Operations
For the Period July 24, 1998 (Inception) through June 30, 1999
Revenue $ -
Interest expense 67,814
----------
Loss before income taxes (67,814)
Income tax benefit 16,531
----------
Net loss $ (51,283)
==========
Basic and diluted earnings per share $ (0.01)
==========
Weighted average shares outstanding, as adjusted 11,377,137
==========
See notes to financial statements.
F - 43
<PAGE>
INTER-AMERICAN TELECOMMUNICATIONS HOLDING CORPORATION
(A Development Stage Company)
(Accounting Acquirer of Silverthorne Production Company)
Consolidated Statement of Cash Flows
For the Period July 24, 1998 (Inception) through June 30, 1999
Cash flows from operating activities
Net loss $ (51,283)
---------
Adjustments to reconcile net income to net
cash flows from operating activities
Deferred tax benefit (16,531)
Changes in assets and liabilities
Interest payable 67,814
---------
51,283
Net cash flows from operating activities -
---------
Cash flows from investing activities
Net cash flows from investing activities -
---------
Cash flows from financing activities
Net cash flows from financing activities -
---------
Net change in cash -
Cash and cash equivalents, beginning of period -
---------
Cash and cash equivalents, end of period $ -
=========
See notes to financial statements.
F - 44
<PAGE>
INTER-AMERICAN TELECOMMUNICATIONS HOLDING CORPORATION
(A Development Stage Company)
(Accounting Acquirer of Silverthorne Production Company)
Consolidated Statement of Changes in Stockholders' Equity
For the Period July 24, 1998 (Inception) through June 30, 1999
Common Stock
----------------------
Deficit
Accumulated
During the Total
Number of Development Stockholders'
Shares Amount Stage Equity
----------- ------ ----------- ----------
As Adjusted
Common stock issued
for intangible
assets,
November 4, 1998 11,377,137 $ 20 $ - $ 20
Net loss for the
period
July 24, 1998
to June 30, 1999 - - (51,283) (51,283)
----------- ------ ----------- -----------
Balance,
June 30, 1999 11,377,137 $ 20 $ (51,283) $ (51,263)
=========== ====== =========== ===========
See notes to financial statements.
F - 45
<PAGE>
INTER-AMERICAN TELECOMMUNICATIONS HOLDING CORPORATION
(A Development Stage Company)
(Accounting Acquirer of Silverthorne Production Company)
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies and Organization and
Presentation
Description of Business and Operations
Inter-American Telecommunications Holding Corporation ("ITHC" or the "Company")
was incorporated in the state of Delaware on July 24, 1998. ITHC was organized
for the purpose of consolidating the operations of certain enterprises engaged
in the commerce and transmission of domestic and international long distance
telephone and related services.
During the period ended June 30, 1999, ITHC acquired customer lists from
Telkiosk, Inc. ("Telkiosk") and Combined Telecommunications Consultancy, Ltd.
("CTC") that will be utilized to build a customer base for telecommunication
sales. These companies were unrelated to ITHC prior to the transaction. As a
result of these transactions, Telkiosk and CTC became shareholders of the
Company. On November 4, 1998, in a transaction accounted for as a purchase, the
Company issued 2,844,285 common shares (as adjusted) to acquire Inter-American
Telecommunications Corporation ("ITC"), an unrelated, inactive corporation with
no assets or liabilities. The shares were valued at an aggregate consideration
of $5, which was recorded as goodwill. ITC will provide backroom support
services for the Company's operations. On July 1, 1999, ITHC acquired all of the
assets and liabilities of Cognigen Corporation, an on-line marketer of a variety
of telecommunications services; see Note 7.
As of June 30, 1999, the Company is in the development stage as defined in
Statement of Financial Accounting Standards No. 7 - Accounting and Reporting by
Development Stage Enterprises. Since its inception, the Company has geared its
efforts toward the acquisition of assets that will allow it to be engaged in
direct and multilevel agency marketing and sale of long distance service and
products as well as the switching and transport of voice, fax and data telephone
and Internet traffic and related services. At June 30, 1999, operations had not
commenced.
Customer lists
Customer databases acquired for debt have been recorded at the face amount of
the debt issued in the acquisition. Customer databases will be amortized into
income over a period not to exceed 3 years from the migration date.
Long Lived Assets
The Company assesses its long-lived assets for impairment on a quarterly basis.
Impairment is considered possible when management's projections of future cash
flows to be derived from the long lived asset is less than the carrying amount
of the asset. Impairment is recorded as the difference between the carrying
amount of the asset and the present value of projected future cash flows using
the Company's incremental borrowing rate.
F-46
<PAGE>
INTER-AMERICAN TELECOMMUNICATIONS HOLDING CORPORATION
(A Development Stage Company)
(Accounting Acquirer of Silverthorne Production Company)
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies and Organization and
Presentation (continued)
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109
"Accounting for Income Taxes" which requires that deferred income tax expenses
be provided based upon estimated future tax effects of differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes calculated based upon provisions of
enacted tax laws.
Financial Instruments
Unless otherwise indicated, the fair value of all reported assets and
liabilities, which represent financial instruments (none of which are held for
trading purposes) approximate the carrying values of such amounts.
Use of Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in these financial statements
and accompanying notes. Actual results could differ from these estimates.
Loss Per Share
Loss per common share has been computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. Shares
issued in the initial capitalization of the Company have been treated as
outstanding since inception.
Principles of Consolidation
The accompanying financial statements include all of the accounts of the Company
and its wholly owned subsidiary, Inter-American Telecommunications Corporation,
an inactive corporation with no assets or liabilities. All intercompany amounts
have been eliminated in consolidation.
F - 47
<PAGE>
INTER-AMERICAN TELECOMMUNICATIONS HOLDING CORPORATION
(A Development Stage Company)
(Accounting Acquirer of Silverthorne Production Company)
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies and Organization and
Presentation (continued)
Stockholders' Equity
As more fully explained in footnote 8 to the financial statements, the company
engaged in a reverse acquisition by Silverthorne Production Company whereby the
company received or will receive at the second closing a total of 54,041,397
newly issued Silverthorne common shares. The effect of the transaction is
presented in the accompanying financial statements as a pro-rata restatement of
ITHC common shares outstanding. Unless otherwise indicated, all ITHC common
share and per- share amounts in these financial statements have been restated to
reflect a 5,688.57 to 1 increase in the number of common shares outstanding.
Newly Issued Accounting Pronouncements
In June 1998, the FASB issued FAS 133, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, which establishes accounting and
reporting standards for all derivative instruments and for hedging activities.
FAS 133 requires that an entity measure all derivatives at fair value and
recognize those derivatives as either assets or liabilities on the balance
sheet. The change in a derivative's fair value is generally to be recognized in
current period earnings. However, if certain conditions are met, a derivative
may be specifically designated as a hedge of an exposure to changes in fair
value, variability of cash flows, or certain foreign currency exposures. Based
on the hedge designation, special hedge accounting rules allow the derivative's
change in value to be recognized either in current period earnings, together
with the offsetting change in value of the risk being hedged, or, to the extent
the hedge is effective, in comprehensive income and subsequently reclassified
into earnings when the hedged item affects earnings.
FAS 133, as amended by FAS 137, is effective for all fiscal years beginning
after June 15, 2000 (calendar year 2001), with early adoption permitted. The
Company does not currently use derivatives for trading or speculative purposes
or for hedging and does not anticipate that the adoption of this standard will
have a significant impact on its operating results.
Note 2 - Statements of Cash Flows
There were no cash payments made for interest or income taxes in 1999. Non-cash
investing and financing activities consisted of the following:
Issuance of promissory notes $1,300,000
Issuance of common stock 20
Purchase of customer lists (1,300,015)
Goodwill (5)
F - 48
<PAGE>
INTER-AMERICAN TELECOMMUNICATIONS HOLDING CORPORATION
(A Development Stage Company)
(Accounting Acquirer of Silverthorne Production Company)
Notes to Consolidated Financial Statements
Note 3 - Long-term Debt
At June 30, 1999, the Company had the following notes payable to related
parties:
Current Long-term
--------- ---------
8% unsecured promissory note
payable to Telkiosk, with
principal and interest due
upon maturity at
November 4, 1999, partially
refinanced to July 1, 2000 $ 200,000 $ 300,000
8% unsecured promissory note
payable to CTC, with
principal and interest due
upon maturity at
November 4, 1999, partially
refinanced to July 1, 2000. 500,000 300,000
--------- ---------
$ 700,000 $ 600,000
========= =========
Note 4 - Income Taxes
The Company computes and records taxes payable based upon determination of
taxable income, which is different from pre-tax financial statement income. Such
differences arise from the reporting of financial statement amounts in different
periods for tax purposes. The timing differences are a result of different
accounting methods being used for financial and tax reporting.
The Company's total deferred tax assets, deferred tax liabilities, and deferred
tax valuation allowance at June 30, 1999 are as follows:
Deferred tax assets
Non-benefited tax losses and credits $ 16,531
Valuation allowance -
----------
Net deferred tax asset $ 16,531
==========
F - 49
<PAGE>
INTER-AMERICAN TELECOMMUNICATIONS HOLDING CORPORATION
(A Development Stage Company)
(Accounting Acquirer of Silverthorne Production Company)
Notes to Consolidated Financial Statements
Note 4 - Income Taxes (continued)
The provision for income taxes was different than the amount computed using the
statutory income tax rate for the reasons following:
Tax computed at statutory rate
State taxes $ 10,172
Valuation allowance 6,359
---------
Income tax benefit $ 16,531
=========
Note 5 - Commitments and Contingencies
Presentation as a going concern
The Company is in the development stage and at June 30, 1999, had no liquid
assets with which to satisfy its acquisition liabilities and ongoing working
capital commitments. After year end, as discussed in Note 8, the Company
acquired a controlling interest in Silverthorne Production Company, a publicly
traded shell company. Between September and December of 1999, Silverthorne
Production Company raised a total of $5.85 million through the sale of its
common stock, the proceeds of which will be used to fund ITHC's operating
capital requirements, as well as to make additional planned acquisitions.
Note 6 - Related Party Transactions
Acquisition of customer databases
On November 4, 1998, ITHC acquired a customer database of 54,034 individual
subscribers from TelKiosk in exchange for 2,844,285, as adjusted shares of ITHC
common stock, plus a cash payment of $500,000 in the form of a promissory note
payable November 4, 1999 (and subsequently extended until July 1, 2000 as to the
remaining $300,000 balance due). TelKiosk is partially owned by Peter Tilyou, a
former officer and director of ITHC. This is an electronically archived database
containing 54,034 individual, comma-delimited records of residential and
business accounts of long distance telephone subscribers using the callback or
call-reorigination system. The domiciles of these accounts are located primarily
outside the United States, including Japan, Italy, France, Argentina, Brazil,
Spain, Israel, Russia and CIS countries, Guatemala, Venezuela and Singapore. The
customers in the database use primarily U.S.origination - foreign termination
callback long distance services.
F - 50
<PAGE>
INTER-AMERICAN TELECOMMUNICATIONS HOLDING CORPORATION
(A Development Stage Company)
(Accounting Acquirer of Silverthorne Production Company)
Notes to Consolidated Financial Statements
Note 6 - Related Party Transactions (continued)
Also on November 4, 1998, ITHC acquired a customer database of 41,415 individual
subscribers from CTC in exchange for 5,688,570, as adjusted shares of ITHC
common stock plus a cash payment of $800,000 in the form of a promissory note
payable November 4, 1999 (and subsequently extended until July 1, 2000 as to
$300,000 of the remaining balance due). CTC is partially owned by Peter Tilyou,
a former officer and director of ITHC. This is an electronically archived
database containing 41,415 individual, comma-delimited records of residential
and business accounts of long distance telephone subscribers. The domiciles of
these accounts are all located within the United States. Approximately 90% of
these accounts have an affinity to a foreign country, and the accounts are held
by persons of Russian, Romanian, Czech, Slovakian, Slovenian, Polish, Bulgarian,
German, Japanese and Filipino national origin.
Migration of customers will commence when the solicitation process is complete.
The lists were originally purchased by CTC and TelKiosk in an arm's length
transaction from an independent international long distance reseller and
customer base consolidator. The purchase price to ITHC was determined with
respect to amounts paid or payable to the original seller of the lists.
Note 7 - Subsequent Event
Acquisition of Cognigen Corporation
On July 1, 1999, the Company entered into an agreement with Cognigen Corporation
("Cognigen") to purchase all of Cognigen's assets. The purchase price included
31,286,894, as adjusted shares of ITHC common stock, and a $300,000 note payable
due October 1, 1999. The agreement also calls for a four-year employment
contract between the Company and Kevin Anderson, the founder of Cognigen with an
annual base salary of $175,000. Mr. Anderson was not previously affiliated with
ITHC prior to the acquisition, and will continue with the Company and will
perform functions equivalent to that of a chief operating officer. The agreement
also calls for the Company to expend a total of $600,000 over a three year
period on business expansion. The transaction will be accounted for as a
purchase.
F - 51
<PAGE>
INTER-AMERICAN TELECOMMUNICATIONS HOLDING CORPORATION
(A Development Stage Company)
(Accounting Acquirer of Silverthorne Production Company)
Notes to Consolidated Financial Statements
Note 7 - Subsequent Event (continued)
The following Pro Forma combined, condensed financial information reflects the
acquisition of Cognigen as if it occurred as of July 24, 1998 (the beginning of
the period).
Total assets $ 1,923,583
Total liabilities 1,982,914
Stockholders' equity (59,331)
Revenues 1,807,401
Net loss (37,049)
Loss per adjusted share (0.0003)
Acquisition of controlling interest in Silverthorne Production Company
On August 20, 1999, pursuant to a Stock Purchase and Asset Acquisition Agreement
by and among Silverthorne Production Company ("Silverthorne"), certain
shareholders of Silverthorne, and the Company, ITHC acquired a total of
24,345,384 shares, or approximately 58%, of the outstanding and to be issued
shares of common stock of Silverthorne in exchange for all of ITHC's assets and
liabilities. In a second closing which is to occur after the annual meeting of
the shareholders of Silverthorne, ITHC will receive an additional 37,298,444
Silverthorne common shares. Silverthorne is a publicly-traded shell company with
no assets or liabilities prior to the transaction with ITHC as described herein.
Of the shares acquired in August, 11,742,953 were acquired directly from
Silverthorne and 12,602,431 shares were acquired from certain shareholders of
Silverthorne in exchange for $190,000 in cash and 1,706,571, as adjusted shares
of ITHC common stock.
The transaction will be accounted for as a reverse acquisition, with ITHC being
the accounting acquirer of Silverthorne. Unless otherwise indicated, all share
and per share amounts in the accompanying financial statements have been
restated to reflect the issuance by Silverthorne of a total of 54,041,397 common
shares to ITHC in the transaction, which equates to a total of 5,688.57 shares
of Silverthorne for each outstanding common share of ITHC.
Shares issued for employment agreements
On July 22, 1999 ITHC executed a one-year employment agreement for the positions
of Chief Operating Officer ("COO") and Chief Financial Officer ("CFO"). Included
in these agreements were the rights to receive 11,377,366, as adjusted, shares
of ITHC common stock in consideration of past services. On July 22, 1999, these
shares were issued and have been valued at $30,000 or .003 per share (as
adjusted), which approximated market value at the date of issue.
F - 52
<PAGE>
INTER-AMERICAN TELECOMMUNICATIONS HOLDING CORPORATION
(A Development Stage Company)
(Accounting Acquirer of Silverthorne Production Company)
Notes to Consolidated Financial Statements
Note 7 - Subsequent Event (continued)
Aquila Agreement
On July 22, 1999, ITHC entered into a three-year carrier service agreement with
Aquila International Telecommunications, Inc. ("Aquila"), a company partially
owned by Jimmy Boswell and David G. Lucas who are officers and directors of the
Company. ITHC provided an advance payment of $400,000 in connection with this
agreement.
In January 2000, Silverthorne entered into a letter of intent to acquire Aquila,
subject to the execution of a definitive agreement and other conditions.
F - 53
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Cognigen Corporation
Seattle, Washington
We have audited the accompanying balance sheets of Cognigen Corporation as of
June 30, 1999 and 1998, and the related statements of income and retained
earnings, and cash flows for each of the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements base on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonbale
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cognigen Corporation as of
June 30, 1999 and 1998, and the results of its operations and its cash flows for
each of the years then ended in conformity with generally accepted accounting
principles.
Denver, Colorado
January 20, 2000
By:/s/Comiskey & Company
------------------------
PROFESSIONAL CORPORATION
F-54
<PAGE>
COGNIGEN CORPORATION
(A Business Acquired by Inter-American Telecommunications Holding Corporation)
Balance Sheets
June 30,
---------------------------
1999 1998
--------- ---------
Assets
Current assets
Cash and cash equivalents $ 21,248 $ 14,390
Commissions receivable 279,507 19,956
Inventory 25,076 38,301
Prepaid excise taxes 752 1,149
--------- ---------
Total current assets 326,583 73,796
--------- ---------
Equipment - at cost
Telephone system 3,035 -
Computers 17,804 -
Furniture 790 -
Capitalized software 125,000 125,000
--------- ---------
146,629 125,000
Less accumulated depreciation (67,273) (37,500)
--------- ---------
79,356 87,500
--------- ---------
Other assets
Deferred income tax asset 74 2,718
Deposits 1,500 -
--------- ---------
1,574 2,718
--------- ---------
Total assets $ 407,513 $ 164,014
========= =========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 1,024 $ -
Commissions payable 184,268 40,346
Deferred revenue 71,763 31,451
Income taxes payable 13,770 2,032
Payroll taxes payable 50,403 22,918
--------- ---------
Total current liabilities 321,228 96,747
--------- ---------
Stockholders' equity
Common stock; $0.01 par value,
100,000 shares authorized;
91,000 shares issued and
outstanding 910 910
Additional paid-in capital 124,100 124,100
Retained deficit (38,725) (57,743)
--------- ---------
Total stockholders' equity 86,285 67,267
--------- ---------
Total liabilities and
stockholders' equity $ 407,513 $ 164,014
========= =========
See notes to financial statements.
F - 55
<PAGE>
COGNIGEN CORPORATION
(A Business Acquired by Inter-American Telecommunications Holding Corporation)
Statements of Income and Retained Earnings
For the Years Ended
June 30,
---------------------------
1999 1998
---------------------------
Revenues
Commission income $ 765,416 $ 615,090
Calling card sales 1,041,985 237,113
---------- ---------
1,807,401 852,203
---------- ---------
Cost of revenues
Commissions 553,086 409,657
Calling card cost of revenue 679,864 110,268
---------- ---------
1,232,950 519,925
---------- ---------
Gross profit 574,451 332,278
Selling, general and administrative
expenses 541,051 381,885
---------- ---------
Income (loss) before income taxes 33,400 (49,607)
Provision for income taxes 14,382 (1,918)
---------- ---------
Net income (loss) 19,018 (47,689)
Retained deficit
Balance, beginning of the year (57,743) (10,054)
---------- ---------
Balance, end of year $ (38,725) $ (57,743)
========== =========
Basic earnings per share $ .21 $ (.52)
========== =========
See notes to financial statements.
F - 56
<PAGE>
COGNIGEN CORPORATION
(A Business Acquired by Inter-American Telecommunications Holding Corporation)
Statements of Cash Flows
For the Years Ended
June 30,
---------------------------
1999 1998
---------------------------
Cash flows from operating
activities
Net income (loss) $ 19,018 $ (47,689)
--------- ---------
Adjustments to reconcile
net income to net cash
provided by operating
activities
Depreciation 29,773 25,000
Deferred income taxes 2,644 (2,718)
Changes in assets and
liabilities
Commissions receivable (259,551) 58,824
Inventory 13,225 (38,301)
Prepaid excise taxes 397 (1,149)
Deposits (1,500) -
Accounts payable 1,024 (579)
Commissions payable 143,922 (20,783)
Deferred revenue 40,312 31,451
Income taxes payable 11,738 800
Payroll taxes payable 27,485 22,918
--------- ---------
9,469 75,463
--------- ---------
Net cash provided by
operating activities 28,487 27,774
--------- ---------
Cash flows from investing
activities
Acquisition of equipment (21,629) -
--------- ---------
Net cash used by
investing activities (21,629) -
--------- ---------
Cash flows from financing activities
Net cash provided by
financing activities - -
--------- ---------
Net increase in cash 6,858 27,774
Cash and cash equivalents,
beginning of year 14,390 (13,384)
--------- ---------
Cash and cash equivalents,
end of year $ 21,248 $ 14,390
========= =========
See notes to financial statements.
F - 57
<PAGE>
COGNIGEN CORPORATION
(A Business Acquired by Inter-American Telecommunications Holding Corporation)
Notes to Financial Statements
Note 1 - Summary of Significant Accounting Policies and Organization and
Presentation
Description of Business and Operations
Cognigen Corporation, previously Cognigen Communications, was incorporated in
the state of Nevada in February 1998. Cognigen's predecessor, Cognigen
Communications, was incorporated in the state of California in February 1997.
All references to the "Company" or "Cognigen" refer to Cognigen Corporation and
include its predecessor. Cognigen is an on-line marketer of a variety of
telecommunication services.
Telecommunication services that are offered for sale include both domestic and
international long distance, international callback service, high bandwidth web
hosting service, IP telephony service and prepaid calling cards. Services other
than prepaid calling cards are provided by telecommunication companies with
which Cognigen has on-going relationships. Commissions are paid to Cognigen
based on the sale and usage of these telecommunication services. The commission
rates vary among the providers. Calling cards are purchased from various vendors
at a discount from the face value. Revenue is generated upon the sale of the
calling cards.
Cognigen services are marketed via a network of over thirty thousand agents
worldwide. Each agent has a personalized Web page that is accessed by customers
and potential customers looking for lower cost telecommunication services.
Commissions are paid on a sliding scale to agents on both direct and downline
sales.
Revenue Recognition
The Company records commission income when the underlying telecommunication
service is rendered. Commission income does not include amounts paid separately
to carriers for telecommunication services provided.
Calling card revenue is recorded when the calling cards are shipped. The
Company's policy is to delay shipment of calling cards for a two week period
after receipt of cash to allow for processing. This delay results in deferred
revenue which is recorded as liability until the calling cards are shipped.
Calling card revenues include amounts paid for the cost of the telecommunication
services provided by third-party carriers.
General and administrative expenses are charged as incurred to periodic income.
Statement of Cash Flows
For the purpose of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
F - 58
<PAGE>
COGNIGEN CORPORATION
(A Business Acquired by Inter-American Telecommunications Holding Corporation)
Notes to Financial Statements
Note 1 - Summary of Significant Accounting Policies and Organization and
Presentation (continued)
Commissions Receivable
Commissions receivable represent amounts due from providers for
telecommunication services used by subscribers. Typically providers pay
commissions due to Cognigen forty-five days after the usage month end to allow
for billing and collection.
No allowance for doubtful accounts has been established by the Company and no
bad debt expense has been recorded in either 1998 or 1999.
Inventory
Inventory consists of prepaid calling cards held for resale and is valued at the
lower of cost or market. Calling cards are purchased from a variety of vendors
at a discount from the face value. Excise tax of 3% of the face value is paid at
the time of purchase. When the calling card is sold, the excise tax is collected
and offset against the prepaid excise tax.
Property and Equipment
Property and equipment is stated at cost and depreciated using the straight-line
method over the following estimated useful lives:
Telephone system 5 years
Computers 3 years
Furniture 5 years
Capitalized software 5 years
Software developed to support the self-replicating Web pages used to market
telecommunication services and administer agents' sales and related commissions
has been capitalized according to the provisions of AICPA Statement of Position
98-1 "Accounting for Costs of Computer Software Developed or Obtained for
Internal Use". Such software was contributed in exchange for stock in the
Company in February 1997.
Commissions Payable
Commissions payable represent amounts due to agents as commission related to the
usage for which the Company is due commission income from its providers. It is
the Company's policy to pay commission to its agents only after receiving
commission due from its providers. This policy results in approximately two
months commission payable as of each year end.
F - 59
<PAGE>
COGNIGEN CORPORATION
(A Business Acquired by Inter-American Telecommunications Holding Corporation)
Notes to Financial Statements
Note 1 - Summary of Significant Accounting Policies and Organization and
Presentation (continued)
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109
"Accounting for Income Taxes" which requires that deferred income tax expenses
be provided based upon estimated future tax effects of differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes calculated based upon provisions of
enacted tax laws.
Concentration of Credit Risk
The Company sells the telecommunication services of various providers. Based on
the sales efforts of the Company's agents, a concentration of revenue and/or
receivables can arise at various times. As of June 30, 1999 and 1998,
commissions receivable from two providers comprised 64% and 95%, respectively,
of the total commissions receivable. For the year ended June 30, 1998, 97% of
commission income was generated from one provider. For the year ended June 30,
1999, this provider's proportionate share of revenue had decreased to 21%, while
a new provider contributed 42% of the total revenue.
Financial Instruments
Unless otherwise indicated, the fair value of all reported assets and
liabilities which represent financial instruments (none of which are held for
trading purposes) approximate the carrying values of such amounts.
Use of Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in these financial statements
and accompanying notes. Actual results could differ from these estimates.
Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards No. 128
Earnings per Share" (SFAS No. 128) that requires the calculation of basic
earnings per common share, which is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period,
and diluted earnings per common share, which is computed using the weighted
average number of shares of common stock and common stock equivalents.
F - 60
<PAGE>
COGNIGEN CORPORATION
(A Business Acquired by Inter-American Telecommunications Holding Corporation)
Notes to Financial Statements
Note 2 - Statements of Cash Flows
There were no cash payments made for interest or income taxes in either 1999 or
1998.
Note 3 - Income Taxes
The Company computes and records taxes payable based upon determination of
taxable income which is different from pre-tax financial statement income. Such
differences arise from the reporting of financial statement amounts in different
periods for tax purposes. The timing differences are a result of different
accounting methods being used for financial and tax reporting.
The components of income tax expense (benefit) are:
June 30,
-------------------------
1999 1998
-------------------------
Taxes currently payable $ 11,738 $ 800
Change in deferred tax assets 2,644 (2,718)
-------- -------
$ 14,382 $ (1,918)
======== ========
The Company's total deferred tax assets, deferred tax liabilities, and deferred
tax valuation allowance at June 30, 1999 and 1998 are as follows:
June 30,
-------------------------
1999 1998
-------------------------
Deferred tax assets
Deductible temporary differences $ 74 $ -
Non-benefited tax losses and credits - 2,718
------ -------
Total deferred tax assets 74 2,718
------ -------
Net deferred tax assets $ 74 $ 2,718
====== =======
The provision for income taxes was different than the amount computed using the
statutory income tax rate for the reasons following:
June 30,
------------------------
1999 1998
------------------------
Tax computed at statutory rate $ 5,010 $ (7,441)
State taxes 5,744 -
Other, non-deductible expenses 3,628 5,523
------- --------
Provision for income taxes $ 14,382 $ (1,918)
======== ========
F - 61
<PAGE>
COGNIGEN CORPORATION
(A Business Acquired by Inter-American Telecommunications Holding Corporation)
Notes to Financial Statements
Note 5 - Commitments and Contingencies
The Company leases certain office space under an operating lease expiring
September 30, 1999 with monthly payments of $900 and an option to renew on a
month-to-month basis at $945 per month. Total expense for the years ended June
30, 1999 and 1998 was $7,815 and $0, respectively.
The Company is not involved in any lawsuits or litigation.
Note 6 - Related Parties
Prior to October 1, 1998, the corporate offices of the Company were in the
personal residence of the two of the Company's directors. No rent was charged
for the use of the space.
Note 7 - Subsequent Event
On July 1, 1999, the Company entered into an agreement with Inter-American
Telecommunications Corporation ("ITHC") to sell all of its assets to ITHC. The
purchase price included 31,286,894 shares of ITHC common stock (as adjusted for
ITHC's reverse acquisition of Silverthorne Production Company, see notes to the
ITHC financial statements at June 30, 1999), and a $300,000 note payable due
October 1, 1999. The agreement also calls for a four-year employment contract
between ITHC and Kevin Anderson, Cognigen's founder, who was not related to ITHC
prior to the acquisition.
ITHC was incorporated on July 24, 1998 and had no operations during the year
ended June 30, 1999. Proforma financial results would include only the results
of operations of Cognigen.
F-62
<PAGE>
<TABLE>
<CAPTION>
Silverthorne ITHC Cognigen
June 30, 1999 June 30, 1999 June 30, 1999 Pro Forma Pro Forma
Historical Historical Historical Adjustments Combined
-------------- -------------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Current Assets $ - $ - $ 326,583 $ 326,583
Equipment - - 79,356 79,356
$ 213,770 a
Other Assets - 1,316,551 1,574 (14,251) b 1,517,644
-------------- -------------- ------------- ----------
Total Assets $ - $ 1,316,551 $ 407,513 $1,923,583
============== ============== ============= ==========
300,000 a
Current Liabilities $ 2,234 $ 1,367,814 $ 321,228 (6,128) c $1,985,148
(8,123) b,c
Stockholders' Equity (2,234) (51,263) 86,285 (86,230) a (61,565)
-------------- -------------- ------------- ----------
Total Liabilities and
Equity $ - $ 1,316,551 $ 407,513 $1,923,583
============== ============== ============= ==========
Revenues $ - $ - $ 1,807,401 $1,807,401
Cost of revenues - - 1,232,950 1,232,950
-------------- -------------- ------------- ----------
Gross profit - - 574,451 574,451
SG&A - - 541,051 $ 14,251 b 730,302
175,000 c
Interest - 67,814 - 67,814
Other income/expense 4,784 - - 4,784
-------------- -------------- ------------- ----------
Net income (loss)before
tax 4,784 (67,814) 33,400 (228,449)
Tax (expense) benefit - 16,531 (14,382) 83,062 d 85,211
-------------- -------------- ------------- ----------
Net income $ 4,784 $ (51,283) $ 19,018 $ (143,238)
============== ============== ============= ==========
Income (loss) per share:
Basic $ 0.00 $ (0.01)
============== ==========
Diluted $ 0.00 $ (0.01)
============== ==========
Weighted average shares
outstanding, as adjusted 15,757,047 11,742,953 e 27,500,000
============== =========== ============
</TABLE>
Pro Forma Adjustments:
a. To record acquisition of Cognigen for $300,000 debt plus $55 stock
b. To amortize goodwill ratably over a 15 year recovery period
c. Employment contract of $175,000 annually, in which no prior salary amounts
have been included in the historical financial statements.
d. Tax effect at 37.3% combined statutory rate
e. Newly issued Silverthorne shares acquired by ITHC.
F - 63
<PAGE>
EXHIBIT B
COGNIGEN NETWORKS, INC.
2000 INCENTIVE AND NONSTATUTORY
STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this 2000 Incentive and Nonstatutory
Stock Option Plan are to attract and retain the best available personnel
for positions of substantial responsibility, to provide additional
incentive to the Employees and Consultants of the Company and to promote
the success of the Company's business. Options granted hereunder may be
either "incentive stock options," as defined in Section 422 of the Internal
Revenue Code of 1986, as amended, or "nonstatutory stock options," at the
discretion of the Board and as reflected in the terms of the written stock
option agreement.
2. Definitions. As used herein, the following definitions shall apply:
a. "Board" shall mean the Committee, if one has been appointed, or the
Board of Directors of the Company if no Committee is appointed.
b. "Code" shall mean the Internal Revenue Code of 1986, as amended.
c. "Common Stock" shall mean the $0.001 par value common stock of the
Company.
d. "Company" shall mean Cognigen Networks, Inc., a Colorado corporation.
e. "Committee" shall mean the Committee appointed by the Board in
accordance with paragraph (a) of Section 4 of the Plan, if one is
appointed, or the Board if no committee is appointed.
f. "Consultant" shall mean any person who is engaged by the Company or
any Subsidiary to render consulting services and is compensated for
such consulting services, but does not include a director of the
Company who is compensated for services as a director only with the
payment of a director's fee by the Company.
g. "Continuous Status as an Employee" shall mean the absence of any
interruption or termination of service as an Employee. Continuous
Status as an Employee shall not be considered interrupted in the case
of sick leave, military leave, or any other leave of absence approved
by the Board; provided that such leave is for a period of not more
than 90 days or reemployment upon the expiration of such leave is
guaranteed by contract or statute.
<PAGE>
h. "Employee" shall mean any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company.
The payment of a director's fee by the Company shall not be sufficient
to constitute "employment" by the Company.
i. "Incentive Stock Option" shall mean an Option which is intended to
qualify as an incentive stock option within the meaning of Section 422
of the Code.
j. "Non-Employee Director" shall mean a director who:
(i) Is not currently an officer (as defined in Section 16a-1(f) of
the Securities Exchange Act of 1934, as amended) of the Company
or a Parent or Subsidiary of the Company, or otherwise currently
employed by the Company or a Parent or Subsidiary of the Company.
(ii) Does not receive compensation, either directly or indirectly,
from the Company or a Parent or Subsidiary of the Company, for
services rendered as a Consultant or in any capacity other than
as a director, except for an amount that does not exceed the
dollar amount for which disclosure would be required pursuant to
Item 404(a) of Regulation S-K adopted by the United States
Securities and Exchange Commission.
(iii)Does not possess an interest in any other transaction for which
disclosure would be required pursuant to Item 404(a) of
Regulation S-K adopted by the United States Securities and
Exchange Commission.
k. "Nonstatutory Stock Option" shall mean an Option granted under this
Plan which does not qualify as an Incentive Stock Option. To the
extent that the aggregate fair market value of Optioned Stock to which
Incentive Stock Options granted under Options to an Employee are
exercisable for the first time during any calendar year (under the
Plan and all plans of the Company or any Parent or Subsidiary) exceeds
$100,000, such Options shall be treated as Nonstatutory Stock Options
under the Plan. The aggregate fair market value of the Optioned Stock
shall be determined as of the date of grant of each Option and the
determination of which Incentive Stock Options shall be treated as
qualified incentive stock options under Section 422 of the Code and
which Incentive Stock Options exercisable for the first time in a
particular year in excess of the $100,000 limitation shall be treated
as Nonstatutory Stock Options shall be determined based on the order
in which such Options were granted in accordance with Section 422(d)
of the Code.
l. "Option" shall mean an Incentive Stock Option, a Nonstatutory Stock
Option or both.
m. "Optioned Stock" shall mean the Common Stock subject to an Option.
2
<PAGE>
n. "Optionee" shall mean an Employee or other person who is granted an
Option.
o. "Parent" shall mean a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
p. "Plan" shall mean this 2000 Incentive and Nonstatutory Stock Option
Plan.
q. "Share" shall mean a share of the Common Stock of the Company, as
adjusted in accordance with Section 11 of the Plan.
r. "Stock Option Agreement" shall mean the agreement to be entered into
between the Company and each Optionee which shall set forth the terms
and conditions of each Option granted to each Optionee, including the
number of Shares underlying such Option and the exercise price of each
Option granted to such Optionee under such agreement.
s. "Subsidiary" shall mean a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of the
Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 5,000,000 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock. If an Option should
expire or become unexercisable for any reason without having been exercised
in full, the unpurchased Shares which were subject thereto shall, unless
the Plan shall have been terminated, become available for future grant
under the Plan.
4. Administration of the Plan.
a. Procedure. The Plan shall be administered by the Board or a Committee
appointed by the Board consisting of two or more Non-Employee
Directors to administer the Plan on behalf of the Board, subject to
such terms and conditions as the Board may prescribe.
(i) Once appointed, the Committee shall continue to serve until
otherwise directed by the Board (which for purposes of this
paragraph (a)(i) of this Section 4 shall be the Board of
Directors of the Company). From time to time the Board may
increase the size of the Committee and appoint additional members
thereof, remove members (with or without cause) and appoint new
members in substitution therefor, fill vacancies however caused,
or remove all members of the Committee and thereafter directly
administer the Plan.
(ii) Members of the Board who are granted, or have been granted,
Options may vote on any matters affecting the administration of
the Plan or the grant of any Options pursuant to the Plan.
3
<PAGE>
b. Powers of the Board. Subject to the provisions of the Plan, the Board
shall have the authority, in its discretion:
(i) To grant Incentive Stock Options and Nonstatutory Stock Options
or both as provided and identified in a separate written Stock
Option Agreement to each Optionee granted such Option or Options
under the Plan; provided however, that in no event shall an
Incentive Stock Option and a Nonstatutory Stock Option granted to
any Optionee under a single Stock Option Agreement be subject to
a "tandem" exercise arrangement such that the exercise of one
such Option affects the Optionee's right to exercise the other
Option granted under such Stock Option Agreement;
(ii) To determine, upon review of relevant information and in
accordance with Section 8(b) of the Plan, the fair market value
of the Common Stock;
(iii)To determine the exercise price per Share of Options to be
granted, which exercise price shall be determined in accordance
with Section 8(a) of the Plan;
(iv) To determine the Employees or other persons to whom, and the time
or times at which, Options shall be granted and the number of
Shares to be represented by each Option;
(v) To interpret the Plan;
(vi) To prescribe, amend and rescind rules and regulations relating to
the Plan;
(vii)To determine the terms and provisions of each Option granted
(which need not be identical) and, with the consent of the holder
thereof, modify or amend each Option;
(viii) To accelerate or defer (with the consent of the Optionee) the
exercise date of any Option, consistent with the provisions of
Section 7 of the Plan;
(ix) To authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant of an Option
previously granted by the Board; and
(x) To make all other determinations deemed necessary or advisable
for the administration of the Plan.
4
<PAGE>
c. Effect of Board's Decision. All decisions, determinations and
interpretations of the Board shall be final and binding on all
Optionees and any other permissible holders of any Options granted
under the Plan.
5. Eligibility.
a. Persons Eligible. Options may be granted to any person selected by the
Board. Incentive Stock Options may be granted only to Employees. An
Employee, who is also a director of the Company, its Parent or a
Subsidiary, shall be treated as an Employee for purposes of this
Section 5. An Employee or other person who has been granted an Option
may, if he is otherwise eligible, be granted an additional Option or
Options.
b. No Effect on Relationship. The Plan shall not confer upon any Optionee
any right with respect to continuation of employment or other
relationship with the Company nor shall it interfere in any way with
his right or the Company's right to terminate his employment or other
relationship at any time.
6. Term of Plan. The Plan became effective on the date the Plan is approved by
the shareholders of the Company in accordance with Section 422 of the Code.
It shall continue in effect until a date that is 10 years after such
approval, unless sooner terminated under Section 13 of the Plan.
7. Term of Option. The term of each Option shall be 10 years from the date of
grant thereof or such shorter term as may be provided in the Stock Option
Agreement. However, in the case of an Option granted to an Optionee who, at
the time the Option is granted, owns stock representing more than 10% of
the total combined voting power of all classes of stock of the Company or
any Parent or Subsidiary, if the Option is an Incentive Stock Option, the
term of the Option shall be five years from the date of grant thereof or
such shorter time as may be provided in the Stock Option Agreement.
8. Exercise Price and Consideration.
a. Exercise Price. The per Share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be such price as is
determined by the Board, but the per Share exercise price under an
Incentive Stock Option shall be subject to the following:
(i) If granted to an Employee who, at the time of the grant of such
Incentive Stock Option, owns stock representing more than 10% of
the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall not be
less than 110% of the fair market value per Share on the date of
grant.
(ii) If granted to any other Employee, the per Share exercise price
shall not be less than 100% of the fair market value per Share on
the date of grant.
5
<PAGE>
b. Determination of Fair Market Value. The fair market value per Share on
the date of grant shall be determined as follows:
(i) If the Common Stock is listed on the New York Stock Exchange, the
American Stock Exchange or such other securities exchange
designated by the Board, or admitted to unlisted trading
privileges on any such exchange, or if the Common Stock is quoted
on a National Association of Securities Dealers, Inc. system that
reports closing prices, the fair market value shall be the
closing price of the Common Stock as reported by such exchange or
system on the day the fair market value is to be determined, or
if no such price is reported for such day, then the determination
of such closing price shall be as of the last immediately
preceding day on which the closing price is so reported;
(ii) If the Common Stock is not so listed or admitted to unlisted
trading privileges or so quoted, the fair market value shall be
the average of the last reported highest bid and the lowest asked
prices quoted on the National Association of Securities Dealers,
Inc. Automated Quotations System or, if not so quoted, then by
the National Quotation Bureau, Inc. on the day the fair market
value is determined; or
(iii)If the Common Stock is not so listed or admitted to unlisted
trading privileges or so quoted, and bid and asked prices are not
reported, the fair market value shall be determined in such
reasonable manner as may be prescribed by the Board.
c. Consideration and Method of Payment. The consideration to be paid for
the Shares to be issued upon exercise of an Option, including the
method of payment, shall be determined by the Board and may consist
entirely of cash, check, other shares of Common Stock having a fair
market value on the date of exercise equal to the aggregate exercise
price of the Shares as to which said Option shall be exercised, or any
combination of such methods of payment, or such other consideration
and method of payment for the issuance of Shares to the extent
permitted under the Colorado Business Corporation Act.
9. Exercise of Option.
a. Procedure for Exercise: Rights as a Shareholder. Any Option granted
hereunder shall be exercisable at such times and under such conditions
as determined by the Board, including performance criteria with
respect to the Company and/or the Optionee, and as shall be
permissible under the terms of the Plan.
In the sole discretion of the Board, at the time of the grant of an
Option or subsequent thereto but prior to the exercise of an Option,
an Optionee may be provided with the right to exchange, in a cashless
transaction, all or part of the Option for Common Stock of the Company
on terms and conditions determined by the Board.
6
<PAGE>
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of
the Option by the person entitled to exercise the Option and full
payment for the Shares with respect to which the Option is exercised
has been received by the Company. Full payment, as authorized by the
Board, may consist of a consideration and method of payment allowable
under Section 8(c) and this Section 9(a) of the Plan. Until the
issuance (as evidenced by the appropriate entry on the books of the
Company or of the duly authorized transfer agent of the Company) of
the stock certificate evidencing such Shares, no right to vote or
receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of
the Option. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the stock certificate
is issued, except as provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes
of the Plan and for sale under the Option, by the number of Shares as
to which the Option is exercised.
b. Termination of Status as an Employee. In the case of an Incentive
Stock Option, if any Employee ceases to serve as an Employee, he may,
but only within such period of time not exceeding three months as is
determined by the Board at the time of grant of the Option after the
date he ceases to be an Employee, exercise his Option to the extent
that he was entitled to exercise it at the date of such termination.
To the extent that he was not entitled to exercise the Option at the
date of such termination, or if he does not exercise such Option
(which he was entitled to exercise) within the time specified herein,
the Option shall terminate.
c. Disability of Optionee. In the case of an Incentive Stock Option,
notwithstanding the provisions of Section 9(b) above, in the event an
Employee is unable to continue as an Employee as a result of his total
and permanent disability (as defined in Section 22(e)(3) of the Code),
he may, but only within such period of time not exceeding 12 months as
is determined by the Board at the time of grant of the Option from the
date of termination, exercise his Option to the extent he was entitled
to exercise it at the date of such termination. To the extent that he
was not entitled to exercise the Option at the date of termination, or
if he does not exercise such Option (which he was entitled to
exercise) within the time specified herein, the Option shall
terminate.
d. Death of Optionee. In the case of an Incentive Stock Option, in the
event of the death of the Optionee:
(i) During the term of the Option if the Optionee was at the time of
his death an Employee and had been in Continuous Status as an
Employee or Consultant since the date of grant of the Option, the
Option may be exercised, at any time within 12 months following
the date of death, by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or
inheritance, but only to the extent of the right to exercise that
would have accrued had the Optionee continued living and remained
in Continuous Status as an Employee 12 months after the date of
death; or
7
<PAGE>
(ii) Within such period of time not exceeding three months as is
determined by the Board at the time of grant of the Option after
the termination of Continuous Status as an Employee, the Option
may be exercised, at any time within 12 months following the date
of death, by the Optionee's estate or by a person who acquired
the right to exercise the Option by bequest or inheritance, but
only to the extent of the right to exercise that had accrued at
the date of termination.
10. Nontransferability of Options. Unless permitted by the Code, in the case
of an Incentive Stock Option, the Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other
than by will or by the laws of descent and distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee.
11. Adjustments Upon Changes in Capitalization or Merger. Subject to any
required action by the shareholders of the Company, the number of Shares
covered by each outstanding Option, and the number of Shares which have
been authorized for issuance under the Plan but as to which no Options have
yet been granted or which have been returned to the Plan upon cancellation
or expiration of any Option, as well as the price per Share covered by each
such outstanding Option, shall be proportionately adjusted for any increase
or decrease in the number of issued Shares resulting from a stock split,
reverse stock split, stock dividend, combination or reclassification of the
Common Stock, or any other increase or decrease in the number of issued
shares of Common Stock effected without receipt of consideration by the
Company; provided, however, that conversion of any convertible securities
of the Company shall not be deemed to have been "effected without receipt
of consideration." Such adjustment shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares
of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of Shares subject to an Option.
In the event of the proposed dissolution or liquidation of the Company, the
Option will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Board. The Board may, in
the exercise of its sole discretion in such instances, declare that any
Option shall terminate as of a date fixed by the Board and give each
Optionee the right to exercise his Option as to all or any part of the
Optioned Stock, including Shares as to which the Option would not otherwise
be exercisable. In the event of the proposed sale of all or substantially
all of the assets of the Company, or the merger of the Company with or into
another corporation in a transaction in which the Company is not the
survivor, the Option shall be assumed or an equivalent option shall be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation, unless the Board determines, in the exercise of its
sole discretion and in lieu of such assumption or substitution, that the
Optionee shall have the right to exercise the Option as to all of the
Optioned Stock, including Shares as to which the Option would not otherwise
be exercisable. If the Board makes an Option fully exercisable in lieu of
assumption or substitution in the event of such a merger or sale of assets,
the Board shall notify the Optionee that the Option shall be fully
exercisable for a period of 30 days from the date of such notice, and the
Option will terminate upon the expiration of such period.
8
<PAGE>
12. Time of Granting Options. The date of grant of an Option shall, for all
purposes, be the date on which the Board makes the determination granting
such Option. Notice of the determination shall be given to each Employee or
other person to whom an Option is so granted within a reasonable time after
the date of such grant. Within a reasonable time after the date of the
grant of an Option, the Company shall enter into and deliver to each
Employee or other person granted such Option a written Stock Option
Agreement as provided in Sections 2(r) and 16 hereof, setting forth the
terms and conditions of such Option.
13. Amendment and Termination of the Plan.
a. Amendment and Termination. The Board may amend or terminate the Plan
from time to time in such respects as the Board may deem advisable;
provided that, the following revisions or amendments shall require
approval of the shareholders of the Company in the manner described in
Section 17 of the Plan:
(i) An increase in the number of Shares subject to the Plan above the
number of Shares set forth in Section 3 of the Plan, other than
in connection with an adjustment under Section 11 of the Plan;
(ii) Any change in the designation of the class of Employees eligible
to be granted Incentive Stock Options; or
(iii)Any material amendment under the Plan that would have to be
approved by the shareholders of the Company for the Board to
continue to be able to grant Incentive Stock Options under the
Plan.
b. Effect of Amendment or Termination. Any such amendment or termination
of the Plan shall not affect Options already granted and such Options
shall remain in full force and effect as if the Plan had not been
amended or terminated, unless mutually agreed otherwise between the
Optionee and the Board, which agreement must be in writing and signed
by the Optionee and the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to
the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities
Act of 1933, as amended, the Securities Exchange Act of 1934, as amended,
the rules and regulations promulgated thereunder, applicable state
securities laws, and the requirements of any stock exchange upon which the
Shares may then be listed, and shall be further subject to the approval of
legal counsel for the Company with respect to such compliance.
9
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As a condition to the existence of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares and such
other representations and warranties which in the opinion of legal counsel
for the Company, are necessary or appropriate to establish an exemption
from the registration requirements under applicable federal and state
securities laws with respect to the acquisition of such Shares.
15. Reservation of Shares. The Company, during the term of this Plan, will at
all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. Inability of the
Company to obtain authority from any regulatory body having jurisdiction,
which authority is deemed by the Company's legal counsel to be necessary
for the lawful issuance and sale of any Share hereunder, shall relieve the
Company of any liability relating to the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
16. Option Agreement. Each Option granted to an Employee or other persons shall
be evidenced by a written Stock Option Agreement in such form as the Board
shall approve.
17. Information to Optionees. The Company shall provide to each Optionee,
during the period for which such Optionee has one or more Options
outstanding, copies of all annual reports and other information which are
provided to all shareholders of the Company. The Company shall not be
required to provide such information if the issuance of Options under the
Plan is limited to key employees whose duties in connection with the
Company assure their access to equivalent information.
18. Gender. As used herein, the masculine, feminine and neuter genders shall be
deemed to include the others in all cases where they would so apply.
19. CHOICE OF LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND
INTERPRETATION OF THIS PLAN AND THE INSTRUMENTS EVIDENCING OPTIONS WILL BE
GOVERNED BY THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF
DELAWARE.
IN WITNESS WHEREOF, the Company has caused its duly authorized officer to
execute this Plan effective as of _______________, 2000.
COGNIGEN NETWORKS, INC.,
a Colorado corporation
By:
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Jimmy L. Boswell, President
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