THOMAS S. SMITH
(303) 629-3406
FAX (303) 629-3450
[email protected]
October 31, 2000
Via EDGAR
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Cognigen Networks, Inc.
File No. 000-11730
Revised Preliminary Proxy Materials for Special Meeting of Shareholders
Ladies and Gentlemen:
Enclosed for filing are copies of a revised preliminary Notice of Special
Meeting of Shareholders, Proxy Statement and Proxy to be used in connection with
a Special Meeting of Shareholders of Cognigen Networks, Inc. ("Company") to be
held in December 2000.
Please contact me with any comments the Staff may have on the revised
preliminary proxy materials as soon as possible so that the Company can make any
changes and proceed with the mailing.
Sincerely yours,
/s/ Thomas S. Smith
Thomas S. Smith
TSS/pg
Enclosures
cc: Cognigen Networks, Inc.
Attn: Darrell H. Hughes
David L. Jackson
<PAGE>
COGNIGEN NETWORKS, INC.
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN 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:
--------------------------------------------------------------------------------
(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:
--------------------------------------------------------------------------------
|_| Fee paid previously with preliminary materials.
--------------------------------------------------------------------------------
|_| 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:
--------------------------------------------------------------------------------
(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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<PAGE>
PRELIMINARY COPY
COGNIGEN NETWORKS, INC.
7001 Seaview Avenue NW
Suite 210
Seattle, Washington 98117
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on December __, 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 ____________, December __, 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 November ___,
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
November __, 2000
<PAGE>
PRELIMINARY COPY
COGNIGEN NETWORKS, INC.
7001 Seaview Avenue NW
Suite 210
Seattle, Washington 98117
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER ___, 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 ___________,
December ___, 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 November ___, 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.
<PAGE>
Acquisition.
o 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.
o 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, 1999.
Percentages Owned by ITHC
As a result of ITHC's receipt of the 11,742,953 shares of the Company's
common stock from the Company and a previous purchase of 12,602,431 shares of
the Company's common stock from four individuals, ITHC owned 24,345,384 shares,
or what would have been approximately 75.0% of the Company's outstanding shares
of common stock as of August 20, 1999. Subsequently, 150,000 shares were
transferred by ITHC to two persons who were affiliated with CCRI Corp. and were
instrumental in CCRI Corp. assisting the Company in raising additional capital.
In May 2000, ITHC distributed the remaining 24,195,354 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 43.0% of the Company's then outstanding shares of common stock. It
is contemplated that ITHC will distribute the 37,298,444 shares pro rata to its
shareholders.
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<PAGE>
Reason for the Acquisition.
From 1989 to August 20, 1999, the Company 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.
Unanimous Director Recommendation.
The directors unanimously approved the transaction whereby the Company
acquired the assets of ITHC and recommend 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
48.7% 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 August 20, 1999, 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 employed after August 20, 1999, 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.
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<PAGE>
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."
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 November ___, 2000, are entitled to notice of
and to vote at the Meeting or any adjournments thereof. On November ___, 2000,
the Company had 47,182,547 shares of common stock outstanding.
PRINCIPAL SHAREHOLDERS AND
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of November ___, 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:
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<PAGE>
Amount and Nature of Percent
Name and Address Beneficial Ownership(1) of Class
---------------- ----------------------- --------
Jimmy L. Boswell
Suite 304 2,618,468 (3) 5.4%
3220 South Higuera Street
San Luis Obispo, CA 93401
Troy D. Carl
6751-B Academy Road, N.E. 60,000 0.1%
Albuquerque, NM 87109
Darrell H. Hughes
Suite 210 4,148,883 (4) 8.5%
7001 Seaview Avenue N.W.
Seattle, WA 98117
David L. Jackson
16053 Via Viajera 2,460,471 (5) 5.0%
Rancho Santa Fe, CA 92067
David G. Lucas
Suite 304 2,618,468 (6) 5.4%
3220 South Higuera Street
San Luis Obispo, CA 93401
Wilhelm J. Giertsen
Starefossveien 559,213 (2)(7) 1.2%
5019 Bergen
Norway
Mohammed I. Marafi
P. O. Box 104 2,289,474 (2)(8) 4.8%
13002 Safat
Kuwait
All current officers and directors as a
group (5 persons) 11,904,290 (9) 22.2%
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<PAGE>
Cognigen Corporation
2608 Second Avenue, Suite 108 13,492,864 (10) 28.6%
Seattle, Washington 98121
Kevin E. Anderson
2608 Second Avenue, Suite 108 24,492,864 (11) 42.1%
Seattle, Washington 98120
Anderson Family Trust #1
2608 Second Avenue, Suite 108 24,492,864 (12) 42.1%
Seattle, Washington 98120
Peter Tilyou
2608 Second Avenue, Suite 108 28,446,656 (13)(14) 42.1%
Seattle, Washington 98120
--------------------
(1) Except as indicated below, each person has sole and voting and/or
investment power over the shares listed.
(2) Prior to the meeting, it currently is planned that Messrs. Giertsen and
Marafi will be appointed directors of the Company by the five current directors
of the Company.
(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. 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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(5) 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.
(6) 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.
(7) Includes 25,000 shares owned by Mr. Giertsen's wife.
(8) Includes 1,100,000 shares underlying a warrant and an option. 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), (5) and (6) above.
(10) 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.
(11) Includes the shares owned by Cognigen Corporation and 11,000,000
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
13,290,864 shares of the Company's common stock that Cognigen Corporation owns.
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(12) Represents the 24,290,864 shares that Kevin Anderson may be deemed to
beneficially own.
(13) Includes the shares owned by the Anderson Family Trust #1, 915,080
shares owned by Telkiosk, Inc. and 750,000 shares underlying an option owned by
Telkiosk, 1,288,712 shares owned by Combined Telecommunications Consultancy,
Ltd. ("CTC") and 1,000,000 shares underlying an option owned by CTC. 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.
(14) 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 12,602,431 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 24,385,384 shares, or what would have
been approximately 75% of the Company's outstanding shares of common stock on
August 20, 1999. Subsequently, 150,000 shares were transferred by ITHC to two
persons who were affiliated with CCRI Corp. and who were instrumental in CCRI
Corp. assisting the Company in raising additional capital. The Company loaned
ITHC $190,000 to purchase the 12,602,431 shares. The loan has not yet been
repaid. In May 2000, ITHC distributed the remaining 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 43.0% 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.
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<PAGE>
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 28.6%
of the outstanding common stock of the Company. Therefore, Kevin E. Anderson may
be deemed to control the Company.
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 sheet of ITHC as of June 30, 1999, and the audited consolidated
statements of operations, cash flows and changes in stockholders' equity of ITHC
for the period July 24, 1998 (inception) through July 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 for the two years ended June 30, 1999 and unaudited pro forma
financial information as of June 30, 1999 for the Company, ITHC and Cognigen
Corporation and the audited consolidated balance sheet of the Company as of June
30, 2000, and the audited consolidated statements of operations and consolidated
statements of cash flows of the Company for the year ended June 30, 2000, 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 sheet of ITHC as of June
30, 1999, and the audited consolidated statements of operations, cash flows and
changes in stockholders' equity of ITHC for the period July 24, 1998 (inception)
through July 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 audited consolidated balance sheet of the Company as of June
30, 2000, and the audited consolidated statements of operations and consolidated
statements of cash flows of the Company for the year ended June 30, 2000 are
attached hereto as Exhibit A.
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<PAGE>
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, CTC and Cognigen Corporation, all of
which were incorporated in 1998.
ITHC, through its Cognigen e-commerce division, was a major marketer of
long-distance telecommunications services. Operating on the Internet via
thousands of Web sites, the Cognigen division 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 division has experienced growth in the retail
sales it has made for third parties, in the size of its agent force and in the
number of subscribers it has acquired and maintained. The Cognigen division's
Internet presence operates through proprietary programs that provide for a high
volume of visits with user friendly procedures that allow on-line fulfillment of
service applications. Typically, a Cognigen division 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.
The Company's subsidiary, Cognigen Switching Technologies, Inc., leases
approximately 1,760 square feet of office space at 3220 South Higuera Street,
Suite 304, San Luis Obispo, California 93401, pursuant to a lease that will
terminate in April 2002 and that currently requires monthly rental payments of
$2,832.20.
ITHC had 9 employees at the time the ITHC assets were acquired by the
Company. The employees became employees of the Company. As of November ___,
2000, the Company had ___ full-time employees and ____ part-time employees. In
addition, as of November ___, 2000, the Company had ___ consultants.
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The Company's common stock is quoted on the NASD OTC Bulletin Board
under the symbol "CGNT." 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.
High Closing Bid Low Closing Bid
---------------- ---------------
Quarter ended June 30, 2000 $ 1.28125 $ 0.75
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
--------------
As a result of the Company's common stock not being quoted on Nasdaq or
listed on an exchange, an investor may find it more difficult to dispose of or
to obtain accurate quotations as to the market value of the Company's common
stock. In addition, the Company is subject to a rule promulgated by the
Securities and Exchange Commission. The rule provides that various sales
practice requirements are imposed on broker/dealers who sell the Company's
common stock to persons other than established customers and accredited
investors. For these types of transactions, the broker/dealer has to make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transactions prior to sale. Consequently, the
rule may have an adverse effect on the ability of broker/dealers to sell the
Company's common stock, which may affect the ability of purchasers to sell the
Company's common stock in the open market.
As of November ___, 2000, there were approximately _____ 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
November ___, 2000, was $____. As of November ___, 2000, the Company had
47,182,547 shares of common stock outstanding.
11
<PAGE>
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;
(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.
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.
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Long Term
Compensation
Awards
-------------
Fiscal Other
Year Annual Securities All Other
Name and Ended Compen- Underlying Compensa-
Principal Position June 30, Salary($) Bonus($) sation($) Options(#) tion($)
------------------ -------- -------- ------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
David L. Jackson 2000 $ 29,000 -- -- -- -- 1,600,000(a) $24,000(b)
President and 1999 -- -- -- -- -- -- -- -- -- --
Treasurer of the 1998 -- -- -- -- -- -- -- -- -- --
Company until
August 20, 1999,
and Vice President
and Secretary
thereafter
Jimmy L. Boswell 2000 $103,333 -- -- -- -- 1,600,000(a) -- --
President and Chief 1999 -- -- -- -- -- -- -- -- -- --
Operating Officer of the 1998 -- -- -- -- -- -- -- -- -- --
Company from August 20,
1999
through June 30, 2000
Darrell H. Hughes 2000 $ 88,542 -- -- -- -- 1,600,000(a) -- --
President since July 1999 -- -- -- -- -- -- -- -- -- --
2000 and Chief Executive 1998 -- -- -- -- -- -- -- -- -- --
Officer since October
13, 1999
</TABLE>
13
<PAGE>
(a) On August 25, 1999, Messrs. Jackson, Boswell and Hughes were each
granted a five year option to purchase 1,600,000 shares of the Company's 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 requesting 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.
OPTION GRANTS TO EXECUTIVE OFFICERS
The following tables sets forth the individual grants of stock options made
by the Company during the Company's fiscal year ended June 30, 2000, to Messrs.
Jackson, Boswell and Hughes:
14
<PAGE>
<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>
David L. Jackson 1,600,000 25% $0.46 8/25/2004
Jimmy L. Boswell 1,600,000 25% $0.46 8/25/2004
Darrell H. Hughes 1,600,000 25% $0.46 8/25/2004
</TABLE>
The following table provides information with respect to the
unexercised options to purchase the Company's common stock held by Messrs.
Jackson, Boswell and Hughes as of June 30, 2000, the end of the Company's last
fiscal year.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-the-Money
Options at Fiscal Year End Options at Fiscal Year End
Name Exercisable/Unexercisable Exercisable/Unexercisable(1)
---- -------------------------- ---------------------------------
<S> <C> <C>
David L. Jackson 1,600,000 / 0 $846,000 / $0
Jimmy L. Boswell 1,600,000 / 0 $846,000 / $0
Darrell H. Hughes 1,600,000 / 0 $846,000 / $0
</TABLE>
(1) Calculated by multiplying the difference between the exercise price
and the closing bid price of $1.00 per share on June 30, 2000, by the applicable
shares. Does not give consideration to commissions or other market conditions.
Messrs. Jackson, Boswell and Hughes did not exercise any options to
purchase shares of the Company's common stock during the fiscal year ended June
30, 2000.
15
<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.
16
<PAGE>
The Company has been orally advised that Jimmy L. Boswell, Troy D. Carl,
Darrell H. Hughes, David L. Jackson, David G. Lucas, Wilhelm Giertsen and his
wife, Mohammed I. Marafi, Cognigen Corporation, Telkiosk and CTC intend to vote
their total 22,951,633 shares, or approximately 48.6% of the shares entitled to
be voted at the meeting, for the adoption of the amendment to Article THIRD of
the Articles of Incorporation of the Company.
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.
17
<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 November ___, 2000, the Company had 47,182,547 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. The Company has agreed to issue an additional 2,200,000 shares
of the Company's common stock to unaffiliated parties as finders' fees when the
Company issues the additional 37,298,444 shares. Further, the Company currently
has outstanding options to purchase 32,400,000 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.
18
<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 have, among other
things, 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 effects 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.
19
<PAGE>
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.
The increase in authorized 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.
20
<PAGE>
The Company has been orally advised that Jimmy L. Boswell, Troy D. Carl,
Darrell H. Hughes, David L. Jackson, David G. Lucas, Wilhelm Giertsen and his
wife, Mohammed I. Marafi, Cognigen Corporation, Telkiosk and CTC intend to vote
their total 22,951,633 shares, or approximately 48.6% of the shares entitled to
be voted at the meeting, in favor of the adoption of the amendment to Article
FOURTH of the Articles of Incorporation of the Company.
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.
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."
21
<PAGE>
If the amendment to Section (d)(ii) of Article EIGHTH is adopted, one
change will be that abstentions will be treated as abstentions whereas currently
abstentions are treated as negative votes. Currently, for those proposals where
the affirmative vote of two-thirds of the outstanding shares is required, an
abstention is not an affirmative vote and, therefore, is treated as a negative
vote. Under the proposed amendment, the vote on an action other than an action
set forth in the proposed Section (d)(ii) of the Article EIGHTH will be able to
be approved if the votes cast favoring the action exceed the votes cast opposing
the action. Abstentions will have no effect on the vote because they will only
be counted to determine whether or not a quorum exists and not as negative
votes. The proposed Section (d)(ii) will make it easier for the holders of a
block of the common stock of the Company to approve a proposal.
If the amendment to Section (d)(ii) of Article EIGHTH is adopted, the
only other substantive 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 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.
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.
22
<PAGE>
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 Company has been orally advised that Jimmy L. Boswell, Troy D. Carl,
Darrell H. Hughes, David L. Jackson, David G. Lucas, Wilhelm Giertsen and his
wife, Mohammed I. Marafi, Cognigen Corporation, Telkiosk and CTC intend to vote
their total 22,951,633 shares, or approximately 48.6% of the shares entitled to
be voted at the meeting, in favor of the adoption of the amendment to Section
(d)(ii) of Article EIGHTH of the Articles of Incorporation of the Company.
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 AS SET FORTH ABOVE.
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."
23
<PAGE>
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.
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.
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<PAGE>
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 has applied for insurance coverage for the Company's
directors, but has not yet obtained 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.
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.
25
<PAGE>
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 possible 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.
The Company has been orally advised that Jimmy L. Boswell, Troy D. Carl,
Darrell H. Hughes, David L. Jackson, David G. Lucas, Wilhelm Giertsen and his
wife, Mohammed I. Marafi, Cognigen Corporation, Telkiosk and CTC intend to vote
their total 22,951,633 shares, or approximately 48.6% of the shares entitled to
be voted at the meeting, in favor of the adoption of a new Article NINTH of the
Articles of Incorporation of the Company.
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.
26
<PAGE>
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 November ___, 2000, the
closing bid price of the common stock was $____ 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.
27
<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 47,182,547 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
23,591,273 shares outstanding. Similarly, the same shareholder would own 333,334
shares of the 15,727,515 shares outstanding or 250,000 shares out of the
11,795,636 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 November ___, 2000, was $____ per share. Assuming the Board of Directors had
effectuated a one-for-two reverse split as of November ___, 2000, theoretically
the closing price that day would have been $____ per share. Assuming the Board
of Directors had effectuated a one-for-three reverse split or a one-for-four
reverse split as of November ___, 2000, theoretically the closing price that day
would have been $____ or $____, 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 a one-for-two, a one-for-three or a one-for-four reverse
split at such time as the Board of Directors deems it appropriate is in the best
interests of the Company and its stockholders. The Board of Directors will not
effectuate any such reverse split with a view to, or in connection with, any
plan or purpose of effecting a transaction specified in Rule 13e-3 adopted under
the Securities Exchange Act of 1934.
The Company has been orally advised that Jimmy L. Boswell, Troy D.
Carl, Darrell H. Hughes, David L. Jackson, David G. Lucas, Wilhelm Giertsen and
his wife, Mohammed I. Marafi, Cognigen Corporation, Telkiosk and CTC intend to
vote their total 22,951,633 shares, or approximately 48.6% of the shares
entitled to be voted at the meeting, 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 stock split.
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 STOCK SPLIT.
28
<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.
29
<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
November ___, 2000, the Company and its subsidiaries had approximately ___
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 November ___, 2000 was $_____ 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.
30
<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.
31
<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 Company has been orally advised that Jimmy L. Boswell, Troy D. Carl,
Darrell H. Hughes, David L. Jackson, David G. Lucas, Wilhelm Giertsen and his
wife, Mohammed I. Marafi, Cognigen Corporation, Telkiosk and CTC intend to vote
their total 22,951,633 shares, or approximately 48.6% of the shares entitled to
be voted at the meeting, in favor of the approval of the 2000 Incentive and
Nonstatutory Stock Option Plan.
32
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
APPROVAL OF THE 2000 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN.
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
November ___, 2000
33
<PAGE>
PRELIMINARY COPY
PROXY
COGNIGEN NETWORKS, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER ___, 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
__________, December ___, 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
COGNIGEN NETWORKS, INC.
(Formerly Silverthorne Production Company)
Index to Financial Statements and
Management's Discussion and Analysis
Cognigen Networks, Inc. Financial Statements, June 30, 2000.................F-1
Management's Discussion and Analysis or Plan of Operation,
June 30, 2000 Results.....................................................F-21
Inter-American Telecommunications Holding Corporation
Financial Statements, June 30, 1999...............................F-24
Cognigen Corporation Financial Statements, June 30, 1999...................F-37
Proforma Financial Information - Inter-American Telecommunications
Holding Corporation Reverse Acquisition...........................F-46
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Cognigen Networks, Inc.
Seattle, Washington
We have audited the accompanying consolidated balance sheet of Cognigen
Networks, Inc. and subsidiary as of June 30, 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cognigen Networks,
Inc. and subsidiary as of June 30, 2000, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
Ehrhardt Keefe Steiner & Hottman PC
August 25, 2000, except the first paragraph of Note 12, as to which the date is
October 10, 2000
Denver, Colorado
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Inter-American Telecommunications
Holding Corporation
Seattle, Washington
We have audited the accompanying consolidated statements of operations, cash
flows, and changes in stockholders' equity for the period from inception (July
24, 1998) through June 30, 1999 of Inter-American Telecommunications Holding
Corporation (a development stage company) (accounting acquiror of Cognigen
Networks, Inc.). These financial statements are the responsibility of the
Company's management (accounting acquiror of Cognigen Networks, Inc.). Our
responsibility is to express an opinion on these financial statements based 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 reasonable
assurance about whether the financial statements are free of material
misstatement. An audit included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also included
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 consolidated financial statements referred to above present
fairly, in all material respects, 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
August 23, 2000
/s/ Comiskey & Company
----------------------
Comiskey & Company
PROFESSIONAL CORPORATION
F-2
<PAGE>
COGNIGEN NETWORKS, INC.
Consolidated Balance Sheet
June 30, 2000
Assets
Current assets
Cash $ 717,344
Accounts receivable, net of allowance for
doubtful accounts of $5,000 61,046
Commissions receivable, net of allowance
for doubtful accounts of $25,000 538,163
Employee receivable 1,661
Inventory 133,486
Other current assets 417,028
Deferred tax asset - current (Note 6) -
----------------
Total current assets 1,868,728
----------------
Property, plant and equipment, net of
accumulated depreciation of $363,121
(Note 3) 486,291
----------------
Other assets
Deposits and other assets 88,552
Goodwill, net 3,655,017
Customer lists 1,300,000
Deferred tax asset - non current -
----------------
Total other assets 5,043,569
----------------
Total assets $ 7,398,588
================
Liabilities and Stockholders' (Deficit) Equity
Current liabilities
Accounts payable $ 97,420
Other accrued liabilities 108,324
Interest payable 239,421
Commissions payable 326,681
Payroll taxes payable 21,179
Current portion of capital leases (Note 5) 106,551
Current portion of notes payable (Note 4) 315,000
----------------
Total current liabilities 1,214,576
Long-term portion of capital leases (Note 5) 12,152
Long-term portion of notes payable (Note 6) 510,000
----------------
Total liabilities 1,736,728
----------------
Commitments and Contingencies (Note 11)
Stockholders' (deficit) equity
Common stock $.001 par value, 50,000,000
shares authorized; 14,411,039 (1999)
and 46,980,547 (2000) issued and
outstanding at and 37,298,444 to be
issued shares (2000) (Note 2) 84,278
Additional paid-in capital 13,594,051
Accumulated deficit (8,016,469)
----------------
Total stockholders' (deficit) equity 5,661,860
----------------
Total liabilities and stockholders' (deficit) equity $ 7,398,588
================
See notes to consolidated financial statements.
F-3
<PAGE>
COGNIGEN NETWORKS, INC.
Consolidated Statements of Operations
For the Years Ended
June 30,
----------------------------
1999 2000
---------- ------------
Revenue
Prepaid cards and pins $ - $ 1,138,165
Marketing commissions - 2,598,008
Other - 63,540
---------- ------------
Total revenue - 3,799,713
---------- ------------
Operating expenses
Prepaid cards and pins - 950,727
Marketing commissions - 1,657,195
Selling, general and administrative - 8,734,444
Depreciation and amortization - 261,510
---------- ------------
Total operating expenses - 11,603,876
---------- ------------
Loss from operations - (7,804,163)
Interest expense 67,814 144,492
---------- ------------
Loss before income taxes (67,814) (7,948,655)
Income taxes (Note 6) 16,531 (16,531)
---------- ------------
Net loss $ (51,283) $ (7,965,186)
========== ============
Loss per common share - basic and diluted $ - $ (0.10)
========== ============
Weighted average number of common shares
outstanding - basic and diluted 11,377,137 78,549,437
========== ============
See notes to consolidated financial statements.
F-4
<PAGE>
COGNIGEN NETWORKS, INC.
Consolidated Statements of Stockholders' Equity
From July 24, 1998 through June 30, 2000
<TABLE>
<CAPTION>
Common Stock (Deficit)
----------------------------------
Shares Amount Capital Deficit Equity
-------------- ---------------- ---------------- ---------------- ------------
(as adjusted
Note 2)
<S> <C> <C> <C> <C> <C>
Balance July 24, 1998 (inception) - $ - $ - $ - $ -
Common stock issued for
intangible assets (Note 7) 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)
Stock issued in connection with
Cognigen acquisition and
employment agreements
(Notes 7 and 8) 42,664,260 55 30,000 - 30,055
Reverse acquisition (Note 7) 15,757,047 69,723 (261,957) - (192,234)
Common stock issued for cash net
of $727,474 in expenses 12,489,102 12,489 5,127,598 - 5,140,087
Value of options issued for
services (Note 8) - - 6,022,004 - 6,022,004
Retirement of stock at cost (50,000) (50) (18,950) (19,000)
Stock issued in connection with
acquisition of Cognigen
Switching (Note 7)
2,041,445 2,041 2,695,356 - 2,697,397
Net loss - - - (7,965,186) (7,965,186)
-------------- -------------- -------------- -------------- --------------
Balance at June 30, 2000 84,278,991 $ 84,278 $ 13,594,051 $ (8,016,469) $ 5,661,860
============== ============== ============== ============== ==============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
COGNIGEN NETWORKS, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
June 30,
-------------------------------------------
1999 2000
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (51,283) $ (7,965,186)
------------------- -------------------
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization - 261,510
Stock options granted to non-employees and stock issued to employees for
services - 6,052,004
Deferred taxes (16,531) 16,531
Changes in assets and liabilities
Receivables - 218,461
Commission receivable - (484,149)
Inventory - (108,410)
Other current assets - (340,120)
Accounts payable - 53,276
Other accrued expenses 67,814 218,919
Other assets - (89,971)
------------------- -------------------
51,283 5,798,051
------------------- -------------------
Net cash used in operations - (2,167,135)
------------------- -------------------
Cash flows from investing activities
Capital expenditures - (400,594)
Cash paid in business acquisitions net of cash acquired (Note 7) - (555,100)
------------------- -------------------
Net cash used in investing activities - (955,694)
------------------- -------------------
Cash flows from financing activities
Net proceeds from stock issuance - 5,140,087
Distribution related to reverse acquisition - (190,000)
Payments on notes payable (1,090,000)
Payment on capital leases - (914)
Retirement of stock - (19,000)
------------------- -------------------
Net cash used in financing activities - 3,840,173
------------------- -------------------
Net increase in cash - 717,344
Cash and cash equivalents - beginning of period - -
------------------- ------------------
Cash and cash equivalents - end of period $ - $ 717,344
=================== ===================
</TABLE>
Cash paid for interest was $19,834 (2000) and $0 (1999). Cash paid for income
taxes was $0 in 2000 and 1999.
Non-cash investing and financing activities (Note 9).
See notes to consolidated financial statements.
F-6
<PAGE>
COGNIGEN NETWORKS, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
-------------------------------------------------------------------------------
The Company was incorporated in May 1983 in the State of Colorado to engage in
the cellular radio and broadcasting 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 (Silverthorne) and commenced operations
in the oil and gas industry. These operations were discontinued in 1989. Since
1989, Silverthorne has attempted to locate acquisition prospects and negotiate
an acquisition. Silverthorne's pursuit of an acquisition did not materialize
until August 20, 1999, with the purchase of the assets of Inter-American
Telecommunications Holding Corporation (ITHC), which was accounted for as a
reverse acquisition. The surviving entity changed its name to Cognigen Networks,
Inc. in July 2000.
Cognigen Networks, Inc. (the Company) is engaged in the business of providing
telecommunications products and services to worldwide markets. The Company's
activities include selling prepaid calling cards, providing call switching
services, and Internet marketing of telecommunications products and services,
pagers, and computers.
Principles of Consolidation
---------------------------
These consolidated financial statements include the accounts of Inter-American
Telecommunications Corporation (ITHC), Cognigen Corporation (Cognigen), and the
Company. Also included are the accounts and results of operations of Cognigen
Switching Technologies, Inc. (Cognigen Switching) from April 15, 2000 through
year-end. All significant intercompany balances and transactions have been
eliminated in consolidation.
The comparative June 30, 1999, financial statements reflect those of ITHC, the
accounting acquirer, in the reverse acquisition (Note 7). ITHC was in the
development stage in prior years.
Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and in checking and savings accounts at financial institutions. On occasion
these balances exceed federally insured limits. At June 30, 2000, the Company
had approximately $709,000 in excess of federally insured limits.
Inventories
-----------
Inventory consists of advertising supplies and 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.
F-7
<PAGE>
COGNIGEN NETWORKS, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
-------------------------------------------------------------------------------
(continued)
-----------
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method for financial reporting purposes at rates based on the
following estimated useful lives:
Years
-----
Furniture and fixtures 3 - 7
Computer equipment 3 - 5
Equipment 3 - 5
Leasehold improvements 3 - 5
Capitalized software 3 - 5
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".
Intangible Assets
-----------------
Intangible assets are stated at cost and consist of goodwill and customer lists.
Goodwill is amortized using the straight-line method over five years. Customer
lists will be amortized over five years, once they are utilized in operations.
Valuation of Long-Lived Assets
------------------------------
The Company assesses valuation of long-lived assets in accordance with Statement
of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be disposed of. The Company
periodically evaluates the carrying value of long-lived assets to be held and
used, including goodwill and other intangible assets, when events and
circumstances warrant such a review. The carrying value of a long-lived asset is
considered impaired when the anticipated undiscounted cash flow from such asset
is separately identifiable and is less than its carrying value. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the
fair market value of the long-lived asset. Fair market value is determined
primarily using the anticipated cash flows discounted at a rate commensurate
with the risk involved.
Commissions Receivable
----------------------
Commissions receivable represent amounts due from providers for
telecommunication services used by subscribers. Typically providers pay
commissions due to the Company forty-five days after the usage month-end to
allow for billing and collection.
F-8
<PAGE>
COGNIGEN NETWORKS, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
-------------------------------------------------------------------------------
(continued)
-----------
Commissions Receivable (continued)
----------------------------------
An allowance for doubtful accounts of $0 and $25,000 at June 30, 1999 and 2000,
respectively, has been established by the Company to provide for potential
uncollectible accounts and is deemed to be adequate by management based on
historical results.
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 commissions to its agents only after receiving
commissions due from its providers. This policy results in approximately two
months commission payable at any point in time.
Income Taxes
------------
The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
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 a liability until the calling cards are shipped.
Calling card revenue includes amounts paid for the cost of the
telecommunications services provided by third-party carriers.
Revenue from long distance phone services is recorded when services are
rendered.
F-9
<PAGE>
COGNIGEN NETWORKS, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
-------------------------------------------------------------------------------
(continued)
-----------
Use of Estimates
----------------
The preparation of consolidated 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those 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.
Advertising Costs
-----------------
Advertising costs are expensed as incurred. Total advertising costs for the
years ended June 30, 2000 and 1999, were $200,127 and $0, respectively.
Recently Issued Accounting Pronouncements
-----------------------------------------
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair market value. Gains or losses resulting from
changes in the values of those derivatives are accounted for depending on the
use of the derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value or cash flows. SFAS No.
133 is effective for fiscal years beginning after June 15, 2000. Management
believes that the adoption of SFAS No. 133 will have no material effect on the
Company's financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44"), which was
effective July 1, 2000, except that certain conclusions in this Interpretation,
which cover specific events that occur after either December 15, 1998 or January
12, 2000 are recognized on a prospective basis from July 1, 2000. This
Interpretation clarifies the application of APB Opinion 25 for certain issues
related to stock issued to employees. The Company believes its existing stock
based compensation policies and procedures are in compliance with FIN 44, and
therefore, the adoption of FIN 44 had no material impact on the Company's
financial condition, results of operations or cash flows.
F-10
<PAGE>
COGNIGEN NETWORKS, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
-------------------------------------------------------------------------------
(continued)
-----------
Recently Issued Accounting Pronouncements (continued)
-----------------------------------------------------
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") 101, which provides guidance on applying generally
accepted accounting principles to selected revenue recognition issues.
Management believes that the Company's revenue recognition policies are in
accordance with SAB 101.
Note 2 - Basis of Presentation
------------------------------
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 7). 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 the future in connection with the reverse acquisition of
ITHC, and have been treated as outstanding from the date of acquisition (Note
12).
Note 3 - Property and Equipment
--------------------------------
Property and Equipment consists of the following:
June 30,
2000
----------------
Furniture and fixtures $ 19,063
Computer equipment 137,905
Equipment 373,281
Leasehold Improvements 180,996
Software 138,167
----------------
849,412
Less accumulated depreciation (363,121)
----------------
Total $ 486,291
================
F-11
<PAGE>
COGNIGEN NETWORKS, INC.
Notes to Consolidated Financial Statements
Note 4 - Notes Payable
----------------------
Notes payable consists of the following:
<TABLE>
<CAPTION>
June 30,
---------------------------------------
1999 2000
--------------- ---------------
<S> <C> <C>
8% unsecured promissory notes payable to a related entity, principal and
interest due upon maturity at July 1, 2000. $ 500,000 $ 200,000
8% unsecured promissory note payable to a related entity, principal and interest
due upon maturity at July 1, 2000. 800,000 310,000
Subsequent to year-end, the above notes were extended to July 1, 2001.
12% secured promissory note payable to a related entity, principal and interest
due upon maturity at February 12, 2001. - 315,000
--------------- ---------------
1,300,000 825,000
Less current portion (700,000) (315,000)
--------------- ---------------
$ 600,000 $ 510,000
=============== ===============
</TABLE>
Note 5 - Capital Lease Obligations
----------------------------------
The Company leases certain equipment under non-cancelable lease agreements. The
monthly payments on these leases range from $332 to $7,227, including interest,
and these leases expire in various years through 2003. The property under
capital leases as of June 30, 2000, has a cost of $266,378 and accumulated
depreciation of $185,953.
The future minimum lease payments under capital leases and the net present
values of the future minimum lease payments are as follows:
Year Ending June 30, Amount
-------------------- ----------------
2001 $ 114,417
2002 13,024
2003 3,372
----------------
Total 130,813
Less amount representing interest (12,110)
----------------
Present value of minimum lease payments 118,703
Less current portion (106,551)
----------------
Long-term capital lease obligation $ 12,152
================
F-12
<PAGE>
COGNIGEN NETWORKS, INC.
Notes to Consolidated Financial Statements
Note 6 - Income Taxes
---------------------
Deferred tax liabilities and assets are determined based on the difference
between the financial statement assets and liabilities and tax basis assets and
liabilities using the tax rates in effect for the year in which the differences
occur. The measurement of deferred tax assets is reduced, if necessary, by the
amount of any tax benefits that, based on available evidence, are not expected
to be realized.
The components of the provision for income tax expense (benefit) are as follows:
June 30,
--------------------------------------
1999 2000
-------------- --------------
Current $ $ -
Deferred (16,531) 16,531
-------------- --------------
$ (16,531) $ 16,531
============== ==============
The deferred income tax assets and liabilities result primarily from differing
depreciation and amortization periods of certain assets, provision for doubtful
accounts, provision for product returns and allowances, net operating loss
carryforwards and the recognition of certain expenses for financial statement
purposes and not for tax purposes. The Company has approximately $1,913,000 of
net operating loss carryforwards, which expire through 2020 if unused.
The net current and long-term deferred tax liabilities in the accompanying
balance sheet include the following items:
June 30,
-----------------------------
1999 2000
---------- ----------
Current deferred tax asset $ - $ 9,325
Current deferred tax liability - -
---------- ----------
Valuation allowance - (9,325)
---------- ----------
$ - $ -
========== ==========
Long-term deferred tax asset $ 16,531 $ 713,487
Long-term deferred tax liability - -
Valuation allowance - (713,487)
---------- ----------
$ 16,531 $ -
========== ==========
F-13
<PAGE>
COGNIGEN NETWORKS, INC.
Notes to Consolidated Financial Statements
Note 6 - Income Taxes (continued)
---------------------------------
Rate Reconciliation
-------------------
The reconciliation of income tax expense (benefit) by applying the Federal
statutory rates to the Company's effective income tax rate is as follows:
June 30,
------------------------------
1999 2000
----------- -----------
Federal statutory rate (25.0)% (34.0)%
State tax on income, net of federal
income tax benefit (3.3) (3.3)
Nondeductible expenses 3.9 28.1
Valuation allowance - 9.4
----------- -----------
(24.4)% 0.2%
=========== ===========
Note 7 - Business Acquisitions
------------------------------
Acquisition of Customer Databases
---------------------------------
On November 4, 1998, ITHC acquired a customer database of 54,034 individual
subscribers from TelKiosk Inc. (TelKiosk) in exchange for 2,844,285, as
adjusted, shares of ITHC common stock, and a $500,000 promissory note payable
November 4, 1999 (and subsequently extended until July 1, 2001 as to the
remaining $300,000 balance due). TelKiosk is partially owned by 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.
Also on November 4, 1998, ITHC acquired a customer database of 41,415 individual
subscribers from Combined Telecommunications Consultancy, Ltd. (CTC) in exchange
for 5,688,570, as adjusted, shares of ITHC common stock and an $800,000
promissory note payable November 4, 1999 (and subsequently extended until July
1, 2001 as to $300,000 of the remaining balance due). CTC is partially owned by
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.
F-14
<PAGE>
COGNIGEN NETWORKS, INC.
Notes to Consolidated Financial Statements
Note 7 - Business Acquisitions (continued)
------------------------------------------
Acquisition of Customer Databases (continued)
---------------------------------------------
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.
Cognigen Acquisition
--------------------
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 shares, as
adjusted, of ITHC common stock and a $300,000 note payable. Additionally, ITHC
entered into a four-year employment contract with the founder of Cognigen, which
provides for an annual base salary of $175,000. The transaction was accounted
for as a purchase. ITHC acquired net assets of $86,285 and recorded goodwill of
$213,770. The goodwill is being amortized over a life of 5 years.
Reverse Acquisition
-------------------
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). ITHC is considered the surviving entity and the
historical financial statements prior to the acquisition are those of ITHC. The
15,757,047 shares reflected in the statement of stockholders' equity reflect
those shares of Company's common stock outstanding immediately prior to the
reverse acquisition. 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 the
authorized number of shares is increased 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 $1,900,000, or $.38 per share, and reported on a net basis
in additional paid-in-capital.
Additionally on August 20, 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 paid-in capital in
the amount of $190,000.
The Company is the legal survivor and changed its name to Cognigen Networks,
Inc. in July 2000.
F-15
<PAGE>
COGNIGEN NETWORKS, INC.
Notes to Consolidated Financial Statements
Note 7 - Business Acquisitions (continued)
------------------------------------------
Cognigen Switching Acquisition
------------------------------
On April 15, 2000, the Company purchased the outstanding stock of Cognigen
Switching (f.k.a. Aquila International Telecommunications, Inc.) for 2,041,445
shares and $590,000 in previous cash advances to Cognigen Switching for a total
purchase price of $3,287,397. This transaction was accounted for as a purchase.
Intangible assets acquired are amortized over five years. The results of
operations have been included from the date of acquisition forward in the
accompanying financial statements.
The combined aggregate purchase price of the Company's acquisition of Cognigen
Switching and Cognigen have been allocated to the assets acquired and
liabilities assumed based on the fair market values on the date of acquisition,
as follows:
Cash $ 34,900
Accounts receivable 318,521
Property and equipment 205,777
Intangible assets 3,809,934
Deposits and other 103,719
Accounts payable (41,910)
Accrued expenses (408,872)
Debt (434,617)
---------------
$ 3,587,452
===============
The following table depicts the unaudited pro forma results of the Company
giving effect to the Company's two acquisitions in 1999 and 2000 as if they
occurred on July 1, 1998. The unaudited pro forma information is not necessarily
indicative of the results of operations of the Company had these acquisitions
occurred at the beginning of the years presented, nor is it necessarily
indicative of future results.
Years Ended
June 30,
------------------------------------------
1999 2000
---------------- ----------------
(unaudited)
Revenue $ 1,808,939 $ 4,033,864
================ ================
Net loss $ (1,600,073) $ (9,017,938)
================ ================
Loss per share $ (.05) $ (.11)
================ ================
F-16
<PAGE>
COGNIGEN NETWORKS, INC.
Notes to Consolidated Financial Statements
Note 8 - Stockholders' Equity
-----------------------------
Stock Issuances
---------------
In connection with certain ITHC executive employment agreements 11,377,366
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 shares of ITHC stock
were issued in connection with the acquisition of the assets of Cognigen (Note
7).
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 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. These warrants were valued at $347,400 based on a value of $.23
per warrant. 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.
Stock Options
-------------
In August 1999, the Company issued 32,400,000 options entitling the holders to
purchase the Company's common stock at $0.46 per share. The options vested
immediately and expire five years from the date issued. Most of these options
cannot be exercised until the Company amends it articles of incorporation or
affects a reverse split of its common stock so that it has sufficient shares
available for issuance upon the exercise of these options. 26,000,000 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 a
beneficiary) 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. $6,022,004 of compensation expense was
recorded in connection with the options granted to non-employees based on a
value of $.2316 per option. Assumptions used in the valuation of stock options
include volatility of 109%, 3-year lives, dividend yield of 0% and a risk-free
rate of 5.5%. The weighted average remaining lives are 2.17 years with weighted
average exercise prices of $.46.
F-17
<PAGE>
COGNIGEN NETWORKS, INC.
Notes to Consolidated Financial Statements
Note 8 - Stockholders' Equity (continued)
-----------------------------------------
Stock Options (continued)
-------------------------
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for stock options issued.
Had compensation cost for the Company's stock options issued been determined
based on the fair value at the grant date for awards consistent with the
provisions of SFAS No. 123, the Company's net loss and loss per share would have
been increased to the pro forma amounts indicated below:
June 30,
-----------------------------------
1999 2000
------------- --------------
Net loss - as reported $ (51,283) $ (7,965,186)
Net loss - pro forma (51,283) (9,477,529)
Basic loss per share - as reported (0.0) (0.10)
Basic loss per share - pro forma (0.0) (0.11)
Note 9 - Non-Cash Investing and Financing Activities
----------------------------------------------------
During the year ended June 30, 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 7).
The Company acquired the outstanding common stock of a business by issuing
2,041,445 shares valued at $2,697,397 and paying cash of $590,000 (Note 7).
During the year ended June 30, 1999:
The Company assumed notes totaling $1,300,000 in exchange for two long-distance
telephone subscriber databases valued at $1,300,000 (Note 7).
F-18
<PAGE>
COGNIGEN NETWORKS, INC.
Notes to Consolidated Financial Statements
Note 10 - Operating Leases
--------------------------
The Company leases office space under operating lease agreements, which provide
for aggregate monthly payments of $11,274 and expire through March 2003.
Year Ending June 30, Amount
-------------------- -----------
2001 87,688
2002 62,049
2003 12,514
-----------
$ 162,251
===========
Rent expense under these operating leases totaled $59,478 and $0 during the
years ended June 30, 2000 and 1999, respectively.
Note 11 - Commitments and Contingencies
---------------------------------------
Commitments
-----------
Employment Agreements
During the year ended June 30, 2000, the Company entered into an employment
agreement with one key employee. This employment agreement runs over a
three-year period starting in October of 1999 and provides for an annual salary
of $125,000. If the Company terminates the agreement without cause it would be
obligated to pay all remaining amounts under the remaining terms of the
contract.
In August of 2000, the Company entered into additional employment agreements
with other key employees. Under these agreements, the employees are paid an
annual salary ranging from $100,000 to $120,000, receive bonuses of $100,000
each, which have been pre-paid and are earned prorata over the two-year terms of
the agreements and the agreements are subject to termination with cause (as
defined). If the employee terminates the employee's agreement without cause or
if the Company terminates the agreement with cause, the employee would be
obligated to pay all remaining amounts due under the remaining terms of the
agreement.
Consulting Agreements
The Company also has consulting agreements with two individuals, which provide
for annual compensation of $175,000 and $120,000 and have terms of four and
three years, respectively.
F-19
<PAGE>
COGNIGEN NETWORKS, INC.
Notes to Consolidated Financial Statements
Note 11 - Commitments and Contingencies (continued)
---------------------------------------------------
Contingencies
-------------
The Company has an obligation to issue 37,298,444 shares of common stock in
connection with the reverse acquisition described in Note 7. The Company also
has 32,400,000 stock options and warrants to purchase up to 1,500,000 shares of
the Company's common stock outstanding. Currently, the Company does not have
sufficient authorized capital to legally issue these additional common shares.
The holders of options and warrants and those entitled to receive shares in a
second future closing are aware of the Company's lack of authorized capital. The
Company is using its best efforts to obtain shareholder approval at a meeting of
shareholders to increase the authorized capital of the Company. Management does
not believe this condition will have a material adverse effect as the Company's
financial condition.
Note 12 - Subsequent Events
---------------------------
Investment in Customer Databases
--------------------------------
In October 2000, the Company entered into a sale back agreement with an entity
formed by the sellers of its customer databases described in Note 7. The
agreement provides that if the Company has not been able to establish at least
5,000 active telecommunication subscribers from the combined lists by March 30,
2001, the entity will repurchase the customer lists from the Company in an
amount not below its original investment in such lists through the forgiveness
of any outstanding remaining debt and accrued interest which totaled
approximately $604,000 at October 2000, with the remainder of the balance made
up by the return of Company shares held by the sellers at the then market value.
This agreement was reached in an effort by management to protect the Company and
its shareholders interests in such customer databases. If the transformation of
at least 5,000 names into active customers is not reached by the Company, the
Company will be able to recover its original investment in these lists
collectively. Management of the Company believes it will be successful in the
activation of at least 5,000 customer names. Management believes that the
signing of this agreement was a positive step in protecting the investment the
Company and its shareholders have made in acquiring these lists.
F-20
<PAGE>
COGNIGEN NETWORKS, INC.
(Formerly Silverthorne Production Company)
Results for June 30, 2000
Management's Discussion and Analysis or Plan of Operation
Overview
Prior to July 1, 1999 we were a publicly held shell that had no operations. On
August 20, 1999 we acquired all of the net assets of ITHC in exchange for up to
49,041,397 shares of our common stock. These assets primarily consisted of the
operating assets of Cognigen Corporation that had previously been acquired on
July 1, 1999 by ITHC. On April 14, 2000 we acquired all of the stock of CST in
exchange for 2,041,445 shares of our common stock. These acquisitions
transformed us into a thriving telecommunications company with specialties in
the sale through the Internet of calling cards, various local and long distance
services and discount circuit switched telecommunications services. We also
provide innovative custom designed service plans.
ITHC was incorporated on July 24, 1998 in Delaware. Since its inception, ITHC
had 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 in exchange for 5,500 shares of
ITHC's common stock and a note payable of $300,000. Cognigen Corporation was
actively marketing long distance telephone services over the Internet.
On July 11, 2000 we amended our Articles of Incorporation to change our name
from Silverthorne Production Company to Cognigen Networks, Inc.
Results of Operations
ITHC was a developmental stage company from 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 Corporation in a transaction
accounted for as a purchase. Additionally, in a transaction accounted for as a
reverse acquisition, ITHC acquired control of us. We were a non-operating public
shell corporation. As no operations existed for ITHC for the year ended June 30,
1999, no meaningful comparisons can be made.
For purposes of this Management's Discussion and Analysis or Plan of Operations,
we believe that a discussion regarding the major components of our results of
operations for the year ended June 30, 2000 will provide a more meaningful basis
for analysis.
Fiscal Year Ended June 30, 2000
Total revenue for the year ended June 30, 2000 was $3,779,713, which consisted
of $1,138,165 of prepaid calling card revenue, and marketing commissions of
$2,598,008 related to commissions received for sales of telecommunication
products through links provided from our web site. These revenue streams were
acquired in connection with the Cognigen Corporation acquisition. We also
generated other revenue of $63,540, which relates primarily to long distance
telecommunication revenue generated through callback services for two and a half
months from the our acquisition of CST.
F-21
<PAGE>
COGNIGEN NETWORKS, INC.
(Formerly Silverthorne Production Company)
Results for June 30, 2000
Management's Discussion and Analysis or Plan of Operation
Our operating costs consist of prepaid cards and pins of $950,727 related to the
cost of service provided by third party carriers. Marketing commissions of
$1,657,195 are commissions paid to agents associated with the telecommunications
product sales commissions received by us through our web site links.
Selling, general and administrative (SG&A) expenses were $8,734,444 for the year
ended June 30, 2000. Non-cash stock based compensation charges of $6,052,004 are
included in SG&A expenses and are related to stock issued to employees for
services valued at $30,000 and stock options issued to non-employees for
services valued at $6,022,004 using the Black-Scholes option pricing model. The
remainder of SG&A expenses includes salaries, consulting and other professional
fees, travel and related costs, and rents for our three offices. Our management
believes that our current infrastructure can support increases in capacity of
two to three times current sales levels without having to add significant
additional costs. There can be no assurances that we will not incur significant
additional SG&A costs as a result of future growth.
Depreciation and amortization was $ 261,510 for the year ended June 30, 2000 and
consists of depreciation on furniture and telecommunications equipment and
amortization of goodwill. These costs are a direct result of our business
acquisitions during the year.
Interest expense was $144,492 for the year ended June 30, 2000 resulting in an
increase from June 30, 1999 of $76,678, which is a direct result of additional
debt assumed in our business acquisitions during the year.
Fiscal Year Ended June 30, 1999
During the fiscal year ended June 30, 1999, we engaged in no significant
operations other than the search for, and identification and evaluation of,
possible acquisition candidates. No revenue was received by us during the fiscal
year. We realized a net loss of $51,283 during the fiscal year ended June 30,
1999.
Liquidity and Capital Resources
-------------------------------
We have funded our operations to date from the sale of common stock. At June 30,
2000 we had cash and cash equivalents of $717,344 and working capital of
$734,152.
Cash used by us for operating activities during the year ended June 30, 2000 was
$2,167,135. Additional sources and uses of cash during the year ended June 30,
2000 include net proceeds of $5,140,087 from stock issuances, debt and capital
lease payments of $1,090,914,capital expenditures of $400,594 and acquisition
costs of $745,100 related to businesses acquired during the year.
F-22
<PAGE>
COGNIGEN NETWORKS, INC.
(Formerly Silverthorne Production Company)
Results for June 30, 2000
Management's Discussion and Analysis or Plan of Operation
We currently have three notes payable and various capital leases with total
outstanding balances of $943,703 at June 30, 2000. Two of the notes are due July
1, 2001 and one is due February 12, 2001. We have maturities of capital leases
and notes payable of $421,551 required during the next twelve months.
Cash generated from operations was not sufficient to meet our working capital
requirements for the year ended June 30, 2000,and may not be sufficient to meet
our working capital requirements for the foreseeable future. As a result, we are
exploring various bridge financing and/or additional equity financing to meet
current operating requirements until operations can generate sufficient cash to
become self-sustaining. There can be no assurances that we will be able to
secure additional debt or equity financing or that operations will produce
adequate cash flows to allow us to meet all of our future obligations.
We have no significant planned capital expenditures covering the next twelve
months.
We maintain two customer databases containing archived names with historical
records of long distance telecommunication service users, to which we intend to
devote substantial efforts during the next twelve months to transform these
names into active CST customer accounts. We have been in negotiations with a
telemarketing firm to assist in the transformation of these names into active
accounts. We anticipate an initial cost of approximately $93,000 for these
telemarketing services and have received a verbal commitment from a third party
to assist in funding these telemarketing costs, as necessary.
We have also entered into an option agreement with a joint venture consisting of
the sellers of the customer databases, which provides that if certain targeted
levels of active customers cannot be transformed from the databases, our
original investment in these databases will be refunded through the forgiveness
of the remaining debt outstanding and the return of our shares to us. We believe
this agreement is a major step in protecting the recoverability of the original
investment in these databases.
F-23
<PAGE>
INTER-AMERICAN TELECOMMUNICATIONS HOLDING CORPORATION
(A Development Stage Company)
(Accounting Acquirer of Silverthorne Production Company)
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 consolidated 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 accordance 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 our 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)
/s/Comiskey & Company
---------------------
Comiskey & Company
PROFESSIONAL CORPORATION
F-24
<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-25
<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-26
<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-27
<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
<TABLE>
<CAPTION>
Common Stock
--------------------------------
Deficit
Accumulated
During the Total
Number of Development Stockholders'
Shares Amount Stage Equity
------------- ------------- ------------- ---------------
As Adjusted
<S> <C> <C> <C> <C>
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)
============= ============= ============= ===============
</TABLE>
See notes to financial statements.
F-28
<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 assets are 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-29
<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-30
<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-31
<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-32
<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-33
<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 acquisitions, 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-34
<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 (0.003)
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, 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-35
<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-36
<PAGE>
COGNIGEN CORPORATION
(A Business Acquired by International Telecommunications Holding Corporation)
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 based 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 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 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
/s/Comiskey & Company
---------------------
Comiskey & Company
PROFESSIONAL CORPORATION
F-37
<PAGE>
COGNIGEN CORPORATION
(A Business Acquired by International 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-38
<PAGE>
COGNIGEN CORPORATION
(A Business Acquired by International 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-39
<PAGE>
COGNIGEN CORPORATION
(A Business Acquired by International Telecommunications Holding Corporation)
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended
June 30,
---------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
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
=============== ===============
</TABLE>
F-40
<PAGE>
COGNIGEN CORPORATION
(A Business Acquired by International 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 downlink
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-41
<PAGE>
COGNIGEN CORPORATION
(A Business Acquired by International 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-42
<PAGE>
COGNIGEN CORPORATION
(A Business Acquired by International 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-43
<PAGE>
COGNIGEN CORPORATION
(A Business Acquired by International 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-44
<PAGE>
COGNIGEN CORPORATION
(A Business Acquired by International 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-45
<PAGE>
COGNIGEN NETWORKS, INC.
(Formerly Silverthorne Production Company)
Pro Forma Financial Information
Results for June 30, 1999
<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>
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 15,757,047 11,742,953 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-46
<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 "non-statutory 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.
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 therefore,
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.
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.
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.
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.
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
(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. Non-transferability 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.
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 holding a majority of the outstanding
voting stock of the Company, who are present or represented and entitled to
vote thereon, or by unanimous written consent of the shareholders:
(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.
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:
------------------------------
Darrell H. Hughes, President
