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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the fiscal year ended June 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from _____________ to _____________
Commission file number 0-11730
COGNIGEN NETWORKS, INC.
(Name of small business issuer in its charter)
COLORADO 84-0189377
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7001 Seaview Avenue, N.W., Suite 210, Seattle, Washington 98117
--------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(206) 297-6151
---------------------------
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
common stock
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes __|X|__ No ____
<PAGE>
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. _____
State issuer's revenue for its most recent fiscal year: $3,799,713
The aggregate market value of the voting and non-voting common equity
held by non-affiliates at October 11, 2000, computed by reference to the closing
price on the OTC Bulletin Board was $15,963,408.
The number of shares outstanding of each of the issuer's classes of
common equity on October 11, 2000, was 47,182,547.
Transitional Small Business Disclosure Format Yes ____ No __|X|__
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<PAGE>
TABLE OF CONTENTS
PART I.
Item 1. Description of Business.
Item 2. Description of Property.
Item 3. Legal Proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
PART II
Item 5. Market for Common Equity and Related Stockholders Matters.
Item 6. Management's Discussion and Analysis of Financial
Condition or Plan of Operation.
Item 7. Financial Statements.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
Item 10. Executive Compensation.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Item 12. Certain Relationships and Related Transactions.
Item 13. Exhibits and Reports on Form 8-K.
<PAGE>
PART I
Forward Looking Statements.
The discussion in this report contains forward looking statements,
including, without limitation, statements relating to Cognigen Networks, Inc.
and its wholly-owned subsidiary, Cognigen Switching Technologies, Inc. ("CST").
Although we believe that the expectations reflected in the forward looking
statements are reasonable, we can give no assurance that such expectations will
prove to be correct. The forward looking statements involve risks and
uncertainties that affect our business, financial condition and results of
operations, including without limitation, our possible inability to obtain
additional financing, lack of agent growth, the possible loss of key personnel,
rate changes, fee policy or application changes, technological changes and
increased competition. Many of these risks are beyond our control. We are not
entitled to rely on the safe harbor provisions of Section 27A of the Securities
Act of 1933, as amended, or Section 21E of the Securities Exchange Act of 1934,
as amended, when making forward-looking statements.
Item 1. Description of Business.
BUSINESS
We were incorporated in May 1983 in Colorado to engage in the cellular
radio and broadcasting business. In June 1988, we changed our name to
Silverthorne Production Company and commenced operations in the oil and gas
industry. These operations were discontinued in 1989. From 1989 to 1999, we
attempted to locate acquisition prospects and negotiate an acquisition. Our
pursuit of an acquisition did not materialize until August 1999 when we acquired
the assets of Inter-American Telecommunications Holding Corporation ("ITHC").
The acquisition was accounted for as a reverse acquisition.
We currently operate in two distinct channels of direct and indirect
sales of telecommunications and personal technology services. The first is a
multi-faceted network marketing organization which utilizes the Internet as a
platform to provide customers and subscribers with a variety of
telecommunications and technology based products and services. Through a network
of approximately 65,000 independent representatives, we sell direct or
facilitate the sale of third party products and services to more than 275,000
customers and subscribers worldwide. Products such as discount domestic and
international long distance services, prepaid calling cards and paging, wireless
communications, computers and Internet-based telecommunications products make up
a major portion of our product suite. We have contractual agreements with a wide
variety of product and service vendors that provide us with a commission
percentage of any sale made through one of our supported web sites. Our
web-based marketing division sells the products and services of industry leaders
such as AT&T, WorldCom, Sprint, Verizon and Qwest. We provide these services
through our Internet marketing division, which represents a majority of our
distribution power. The second is a recently acquired, facilities based,
national and international telecommunications services provider, CST, which
provides this same customer base and other direct clients with a wide variety of
discount international, phone card and private switching telephonic services.
<PAGE>
In the mid 1990's we recognized the marketing potential of the Internet
and formed what we believe is one of the first companies to create a marketing
operation based exclusively on the Internet. The initial concept, which remains
the foundation of our growth, was to expand marketing potential by increasing
the number of independent representatives working within our corporate network
while at the same time continuing to increase the number of products and
services that these representatives could provide to our worldwide customer
base. To facilitate the manageable growth of this network and to be able to
provide the representatives with the support and marketing edge necessary for
success, we developed and deployed the "self replicating" web page. This
proprietary technology automatically created a high content, personalized set of
e-commerce web pages for each new representative, at the time the representative
becomes a member of our network. Additionally, a 7 x 24 Internet accessible
"private site" is instantly created for the new representative. Each
representative can view the representative's records, activity and account
status on which the representative is working. The private site also contains
customer detail status, recommended training sources, frequently asked questions
("FAQs") and representative benefits. We also adopted a strategy of enabling
each representative to sell telecommunications services and to recruit new
representatives. The original representative receives a sales commission
override on sales generated by the representatives thus recruited. Our
commission structure and plan enables our representatives to earn money without
the necessity of developing a subordinate representative base. Lately, we have
been adding 3,000 to 4,000 representatives each month. Over the past 18 months,
we have observed a positive contribution correlation between the number of our
representatives and our revenue.
In addition to the Internet-based representative network and CST's
direct sales efforts, we are engaged in an effort to develop and support a
variety of affiliate program offerings. In these programs, large affiliate
organizations such as industry service providers and a variety of membership or
club related businesses can be utilized for commission sharing. We currently
have contracts for these programs that represent affiliate/affinity populations
in excess of 600,000 potential buyers. As in any program of this nature, actual
participation and buying rates will be a small subset of the target audience,
but higher than non-affiliated web surfers.
CST is licensed by the Federal Communications Commission ("FCC") as a
global facilities-based/global resale services national and international
carrier. CST provides our customer base and other direct clients with a wide
variety of discount international, phone card and private switching telephonic
services. CST, through its multi-mode enhanced services platform, provides its
customers with discounted domestic and international long distance voice and fax
service, international direct dialing, domestic and international prepaid
calling cards and international toll-free access. CST markets these services to
small and medium sized businesses and residential customers throughout the
world. CST has three fully programmable Cisco-VLO4K multi-protocol circuit
switches, with a combined capability of more than 60 million minutes of traffic
per month, at its headquarters in San Luis Obispo, California. With additional
modest enhancement and CST's incumbent technology, we are well positioned to
deliver the next generation of enhanced packet telephony services to both
individual subscribers and enterprise clients. Targeted functionalities would
include services such as: VOIP, unified messaging, voice and data conferencing
and integrated wireless applications.
<PAGE>
Competition
We compete with all of the companies for whom we sell products as an
agent, a number of companies that are network marketed telecommunication
companies, switching companies and with all providers who retail
telecommunications and personal communications products over the Internet. Many
of our competitors are larger and have greater capital resources than do we.
Regulation
We are not currently subject to any governmental regulations as an
Internet marketer of telecommunications and technology based products and
services. CST is regulated by the FCC as a Section 214 domestic and
international facilities based carrier.
Employees
As of October 11, 2000, we had 18 full time employees and fourteen
part-time employees. In addition, as of October 11, 2000, we had three
consultants.
Item 2. Description of Property.
We currently lease approximately 3,457 square feet of office space at
7001 Seaview Avenue, N.W., 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. We also currently lease 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. CST
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.
Item 3. Legal Proceedings.
There are no material claims or lawsuits currently pending in which we
are, or CST is, a party.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of our securityholders during our
fourth fiscal quarter ended June 30, 2000.
PART II
Item 5. Market for Common Equity and Related Stockholders Matters.
<PAGE>
Our common stock is quoted on the NASD OTC Bulletin Board under the
ticker 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 our common stock not being quoted on Nasdaq or listed on
the exchange, an investor may find it more difficult to dispose of or to obtain
accurate quotations as to the market value of our common stock. In addition, we
are 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 our 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 our common stock, which may affect the ability of
purchasers to sell our common stock in the open market.
As of October 11, 2000, there were approximately 1,339 holders of
record of our common stock. The number of holders of record does not include
holders whose securities are held in street name.
We have never paid and do not anticipate paying any cash dividends on
our common stock in the foreseeable future. We intend to retain any earnings for
use in our business operations and in the expansion of our business.
No securities were sold by us during our fiscal year ended June 30,
2000, that were not registered under the Securities Act of 1933 and that were
not previously reported in our Quarterly Reports on Form 10-QSB.
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation.
Overview
Priorto 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 our acquisition of CST.
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 of 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.
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 our original investment in these databases.
<PAGE>
Item 7. Financial Statements.
Reference is made to the financial statements, the reports thereon and
the notes thereto included as a part of this Annual Report on Form 10-KSB, which
financial statements, reports and notes are incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On March 17, 2000, we engaged Ehrhardt Keefe Steiner & Hottman, P.C., as
our principal independent accountants in place of Daniel Jankowski. On March 17,
2000, we dismissed Daniel Jankowski. The reports of Daniel Jankowski on our
financial statements for the two fiscal years ended June 30, 1999, contain no
adverse opinion or disclaimer of opinion, nor were such reports modified as to
uncertainty, audit scope or accounting principles. There were no disagreements
during our two fiscal years ended June 30, 1999, or any interim period
subsequent thereto between us and Daniel Jankowski on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to the satisfaction of Daniel Jankowski, would
have caused Daniel Jankowski to make reference in its reports to the subject
matter of such disagreements. The decision to change accountants was approved by
our Board of Directors.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
Directors
---------
The name, position with us, age of each of our directors and the period
during which each of our directors has served as one of our directors are as
follows:
Name and Position Age Director Since
----------------- --- --------------
Jimmy L. Boswell 58 September 2000
Executive Vice President and Director
Troy D. Carl 34 September 2000
Vice President of Sales and Marketing
and Director
Darrell H. Hughes 55 January 2000
Chairman of the Board, President
and Director
<PAGE>
Name and Position Age Director Since
----------------- --- --------------
David L. Jackson 62 1990
Senior Vice President of Corporate
and Public Affairs,
Secretary and Director
David G. Lucas 60 September 2000
Treasurer, Chief Financial Officer
and Director
Executive Officers
------------------
Our executive officers are Jimmy L. Boswell, Troy D. Carl, Darrell H.
Hughes, David L. Jackson and David G. Lucas.
Our executive officers are normally appointed annually at the first meeting
of our Board of Directors held after the annual meeting of shareholders. Each
executive officer will hold office until his or her successor duly is elected
and qualified, until his or her death or resignation or until he or she shall be
removed in the manner provided by our bylaws.
There are no arrangements or understandings between any executive officer
and any other person pursuant to which any person was selected as an executive
officer.
<PAGE>
Background
----------
Name of Director
or Officer Principal Occupation for Last Five Years
---------------- ----------------------------------------
Jimmy L. Boswell Mr. Boswell has been our Executive Vice President since July
2000, our Chief Operating Officer since August 1999, one of
our directors since September 2000, was our President from
August 1999 to June 2000 and was one of our directors from
August 1999 to January 2000. From July 1999 to the present,
Mr. Boswell has also been the President, Chief Operating
Officer and a director of ITHC, the net assets of which we
acquired in August 1999. From January 1998 to the present,
Mr. Boswell has also been the President, Chief Executive
Officer and a director of CST, a long distance national and
international telephone carrier that we acquired in April
2000. From November 1993 to September 1997, Mr. Boswell was
the Vice President of Engineering and Chief Technical
Officer of Gateway U.S.A., Inc., an international
telecommunications company. Mr. Boswell graduated with a
degree in management from the University of Redlands.
Troy D. Carl Mr. Carl has been one of our directors since September 2000
and our Vice President of Sales and Marketing since May
2000. Mr. Carl was the Vice President of Sales and Marketing
of our Cognigen Division from September 1999 to May 2000.
From November 1996 to September 1999, Mr. Carl was a Senior
Vice President of World Connect Communications, Inc. a
network marketing company. Prior thereto Mr. Carl was an
Assistant Pastor of Believers Center of Albuquerque. Mr.
Carl graduated with a degree in theology from Word of Faith
Bible College.
Darrell H. Hughes Mr. Hughes has been one of our directors since January 2000,
our Chairman of the Board and President since July 2000 and
our Chief Executive Officer since October 1999. From October
1999 to the present, Mr. Hughes also has been the Chief
Executive Officer of ITHC, the net assets of which we
acquired in August 1999. From April 1997 through October
1999, Mr. Hughes was Vice President of Sales and Service
with AAA Washington, an automobile association. From October
1996 through March 1997, Mr. Hughes was the Vice President
of Engineering with ITL, a long distance telecom company.
From June 1996 through October 1996, Mr. Hughes was a
Manager of Program Development for Siemens Communications,
Inc., a worldwide technology and communications systems
provider. From 1995 until 1996, Mr. Hughes was the Director
of Sales in the Northwest for Ascom Timeplex, a provider of
voice, video and data communications. In September 1993, Mr.
Hughes retired as an executive with GTE, a local exchange
carrier. Mr. Hughes graduated with a bachelors degree in
liberal arts and a masters degree in management from the
University of Redlands.
David L. Jackson Mr. Jackson has been our Senior Vice President of Corporate
and Public Affairs or our Vice President since August 1999
and our Secretary since August 1999 and was our Treasurer
from August 1999 to July 2000, our President and Chairman of
the Board from 1996 to August 1999, our Vice President from
1995 to 1996 and our President and the Chairman of the Board
from 1990 to 1992. From August 1999 to the present, Mr.
Jackson has also been a director and the Secretary of ITHC,
the net assets of which we acquired in August 1999. Mr.
Jackson has been a licensed real estate broker in California
since 1991. Mr. Jackson graduated with a bachelor of arts
degree from Northwest Nazarene University and with a Juris
Doctor degree from the University of Denver, College of Law.
Mr. Jackson was admitted to practice law in the United
States Federal Courts and various state courts. He practiced
in Colorado until 1997 when his name was removed as a result
of disbarment from the list of attorneys authorized to
practice law in the Colorado Courts. Mr. Jackson is an
arbitrator in dispute resolution of commercial and labor
law. He has been on the roster of arbitrators of the Federal
Mediation and Conciliation Service of the United States
Government since March 1994.
David G. Lucas Mr. Lucas has been one of our directors since September
2000, our Treasurer since July 2000 and our Chief Financial
Officer since December 1999. From July 1999 to the present,
Mr. Lucas also has been the Chief Financial Officer and a
director of ITHC, the net assets of which we acquired in
August 1999. From April 1998 to the present, Mr. Lucas has
been the Vice President of Finance of CST, a long distance
national and international telephone carrier that we
acquired in April 2000. From July 1997 through March 1998,
Mr. Lucas was the Controller for U.S. Filter Corp., a water
treatment company. From 1994 to July 1997, Mr. Lucas was the
Controller for Gateway U.S.A., a long distance national and
international telephone carrier. Mr. Lucas graduated with a
bachelor of science degree in business administration from
Wayne State University and is a certified public accountant.
Directorships
-------------
None of our directors is a director of any other entity that has its
securities registered pursuant to Section 12 of the Securities Exchange Act of
1934 or that is subject to the requirements of Section 15(d) of the 1934 Act.
<PAGE>
Consultant
----------
Kevin E. Anderson is not one of our executive officers but makes and is
expected to make a significant contribution to our business. Mr. Anderson, who
is 49, has been a consultant to us and our Board of Directors since August 1999
and the founder and President of Cognigen Corporation since 1999. Mr. Anderson
may be deemed to control us. Mr. Anderson graduated from the University of
California at Los Angeles.
Section 16(a) Beneficial Ownership Reporting Compliance
-------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors and persons who beneficially own more than 10% of our outstanding
common stock to file reports of beneficial ownership with the Securities and
Exchange Commission and to furnish us with copies of the reports.
Based solely on a review of Forms 3, 4 and 5 and amendments thereto
furnished to us during our fiscal year ended June 30, 2000, the persons who were
either one of our directors or officers who beneficially owned more than 10% of
our common stock who failed to file on a timely basis reports required by
Section 16(a) of the Securities Exchange Act of 1934 were: Jimmy L. Boswell who
failed to timely file a Form 3 and failed to timely file three Forms 4, in each
of which Form 4 one transaction was reported; Darrell H. Hughes who failed to
timely file two Forms 4, in each of which one transaction was reported; ITHC
which failed to timely file a Form 3 and two Forms 4, in each of which Form 4
one transaction was reported; David L. Jackson who failed to timely file one
Form 4 in which three transactions were reported and two Forms 4 in each of
which one transaction was reported; and David G. Lucas who failed to timely file
one Form 4 in which one transaction was reported. We are also aware that CTC,
Kevin E. Anderson, the Anderson Family Trust #1 and Peter Tilyou may have been
delinquent in filing a Form 3 and one or more Forms 4 during our fiscal year
ended June 30, 2000.
Item 10. Executive Compensation.
The following table provides certain information pertaining to the
compensation we and our subsidiary paid during our last three fiscal years for
services rendered by David L. Jackson, Jimmy L. Boswell and Darrell H. Hughes,
all of whom were our chief executive officers for certain periods during our
fiscal year ended June 30, 2000.
<PAGE>
Annual Compensation
-------------------
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
------------
Fiscal Other
Year Annual Securities
Name and Ended Compen- Underlying All Other
Principal Position June 30 Salary($) Bonus($) sation($) Options(#) Compensation($)
----------------------- ------- --------- -------- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
David L. Jackson 2000 $ 29,000 -- -- -- -- 1,600,000(a) $24,000(b)
President and Treasurer 1999 -- -- -- -- -- -- -- -- -- --
until August 20, 1999 1998 -- -- -- -- -- -- -- -- -- --
and Vice President and
Secretary thereafter
Jimmy L. Boswell 2000 $103,333 -- -- -- -- 1,600,000(a) -- --
President and Chief 1999 -- -- -- -- -- -- -- -- -- --
Operating Officer from 1998 -- -- -- -- -- -- -- -- -- --
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>
(a) On August 25, 2000, Messrs. Jackson, Boswell and Hughes were each
granted a five-year option to purchase 1,600,000 shares of our common stock at
an exercise price of $0.46. Each option is currently exercisable. However, we do
not have a sufficient number of shares of our common stock authorized for such
persons to be able to exercise their options. We plan to hold a shareholders
meeting in the next few months to propose the adoption of an amendment to our
Articles of Incorporation to increase the number of shares of common stock we
are authorized to issue.
(b) The $24,000 was paid as consulting fees prior to the time Mr. Jackson
became one of our employees.
<PAGE>
Option Grants To Executive Officers
The following table sets forth the individual grants of stock options
made by us during our last fiscal year ended June 30, 2000, to Messrs. Jackson,
Boswell and Hughes:
<TABLE>
<CAPTION>
Number of
Securities Percent of Total
Underlying Options Granted
Options to 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 our common stock held by Messrs. Jackson,
Boswell and Hughes as of June 30, 2000, the end of our 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 $864,000 / $0
Jimmy L. Boswell 1,600,000 / 0 $864,000 / $0
Darrell H. Hughes 1,600,000 / 0 $864,000 / $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
number shares. Does not give consideration to commissions or other expenses of
sale.
Messrs. Jackson, Boswell and Hughes did not exercise any options to
purchase shares of our common stock during the fiscal year ended June 30, 2000.
Stock Option Plan
-----------------
We plan to adopt an incentive and non-statutory option plan. The plan will
authorize the granting of options to our officers, directors, employees and
consultants to purchase shares of our common stock.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth as of October 11, 2000, the number of
shares of our outstanding common stock beneficially owned by each of our current
directors, sets forth the number of shares of our outstanding common stock
beneficially owned by all of our current executive officers and directors as a
group, and sets forth the number of shares of our outstanding common stock owned
by each person who owned of record, or was known to own beneficially, more than
five percent of the outstanding shares of our common stock:
Amount and Nature of
Name and Address Beneficial Ownership(1) Percent of Class
---------------- ----------------------- ----------------
Jimmy L. Boswell 2,618,468(2) 5.4%
Suite 304
3220 South Higuera Street
San Luis Obispo, CA 93401
Troy D. Carl 60,000 0.1%
6751-B Academy Road, N.E.
Albuquerque, New Mexico 87109
Darrell H. Hughes 4,148,883(3) 8.5%
Suite 210
7001 Seaview Avenue N.W.
Seattle, WA 98117
David L. Jackson 2,466,471(4) 5.1%
3707 Calle Cortejo
Rancho Santa Fe, CA 92091
David G. Lucas 2,618,468(5) 5.4%
Suite 304
3220 South Higuera Street
San Luis Obispo, CA 93401
All current executive
officers and directors as 11,904,290(6) 22.2%
a group (5 persons)
Cognigen Corporation 13,290,864(7) 28.2%
2608 Second Avenue, Suite 108
Seattle, Washington 98121
Kevin E. Anderson 24,290,864(8) 41.7%
2608 Second Avenue, Suite 108
Seattle, Washington 98120
Anderson Family Trust #1 24,290,864(8)(9) 41.7%
2608 Second Avenue, Suite 108
Seattle, Washington 98120
Peter Tilyou 28,244,656(10)(11) 47.1%
2608 Second Avenue, Suite 108
Seattle, Washington 98120
(1) Except as indicated below, each person has sole and voting
and/or investment power over the shares listed.
(2) Includes 1,600,000 shares underlying an option. Mr. Boswell
currently owns approximately 2.6% of the outstanding common stock of ITHC.
Pursuant to the terms of the agreement whereby we acquired the assets of ITHC,
ITHC will be entitled to receive 37,298,444 shares of our common stock. At this
time, we do not have a sufficient number of shares of common stock authorized to
issue the 37,298,444 shares of our common stock to ITHC. We plan to hold a
shareholders' meeting in the next few months to propose the adoption of an
amendment to our Articles of Incorporation to increase our authorized common
stock. Mr. Boswell does not have sole or shared voting and/or investment power
over the shares of our common stock that will be owned by ITHC. Therefore, Mr.
Boswell disclaims beneficial ownership of the approximate 981,535 shares of our
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.
(3) Includes 1,600,000 shares underlying an option. Mr. Hughes
currently owns approximately 10.5% of the outstanding common stock of ITHC.
Pursuant to the terms of the agreement whereby we acquired the assets of ITHC,
ITHC will be entitled to receive 37,298,444 shares of our common stock. At this
time, we do not have a sufficient number of shares of common stock authorized to
issue the 37,298,444 shares of our common stock to ITHC. We plan to hold a
shareholders' meeting in the next few months to propose the adoption of an
amendment to our Articles of Incorporation to increase our authorized common
stock. Mr. Hughes does not have sole or shared voting and/or investment power
over the shares of our common stock that will be owned by ITHC. Therefore, Mr.
Hughes disclaims beneficial ownership of the approximate 3,926,150 shares of our
common stock 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.
(4) Includes 1,600,000 shares underlying an option. Mr. Jackson
currently owns approximately 3.5% of the outstanding common stock of ITHC.
Pursuant to the terms of the agreement whereby we acquired the assets of ITHC,
ITHC will be entitled to receive 37,298,444 shares of our common stock. At this
time, we do not have a sufficient number of shares of common stock authorized to
issue the 37,298,444 shares of our common stock to ITHC. We plan to hold a
shareholders' meeting in the next few months to propose the adoption of an
amendment to our Articles of Incorporation to increase our authorized common
stock. Mr. Jackson does not have sole or shared voting and/or investment power
over the shares of our common stock that will be owned by ITHC. Therefore, Mr.
Jackson disclaims beneficial ownership of the approximate 1,295,629 shares of
our 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.
<PAGE>
(5) Includes 1,600,000 shares underlying an option. Mr. Lucas
currently owns approximately 2.6% of the outstanding common stock of ITHC.
Pursuant to the terms of the agreement whereby we acquired the assets of ITHC,
ITHC will be entitled to receive 37,298,444 shares of our common stock. At this
time, we do not have a sufficient number of shares of common stock authorized to
issue the 37,298,444 shares of our common stock to ITHC. We plan to hold a
shareholders' meeting in the next few months to propose the adoption of an
amendment to our Articles of Incorporation to increase our authorized common
stock. Mr. Lucas does not have sole or shared voting and/or investment power
over the shares of our common stock that will be owned by ITHC. Therefore, Mr.
Lucas disclaims beneficial ownership of the approximate 981,535 shares of our
common stock that will be represented by Mr. Lucas's ownership of approximately
2.6% of the outstanding common stock of ITHC. The 981,535 shares are not
included in the above table.
(6) Includes the shares specified in the above footnotes.
(7) Cognigen Corporation currently owns approximately 57.9% of the
outstanding common stock of ITHC. Pursuant to the terms of the agreement whereby
we acquired the assets of ITHC, ITHC will be entitled to receive 37,298,444
shares of our common stock. At this time, we do not have a sufficient number of
shares of common stock authorized to issue the 37,298,444 shares of our common
stock to ITHC. We plan to hold a shareholders' meeting in the next few months to
propose the adoption of an amendment to our Articles of Incorporation to
increase our authorized common stock. Cognigen Corporation will be deemed to
beneficially own the 37,298,444 shares of our common stock that will be
represented by Cognigen Corporation's ownership of approximately 57.9% of the
outstanding common stock of ITHC. The 37,298,444 shares are not included in the
above table.
(8) Includes 11,000,000 shares of our common stock underlying an
option owned by the Anderson Family Trust #1. 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 our common stock that Cognigen Corporation may be deemed to beneficially own.
(9) Represents the 24,290,864 shares that Kevin E. Anderson may be
deemed to beneficially own.
(10) Includes the shares owned by the Anderson Family Trust #1,
915,080 shares owned by Telkiosk, Inc., 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 managing officer/director of CTC and Telkiosk, Mr. Tilyou
has voting and investment power over the shares of our 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.
(11) The information pertaining to the shares of our 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
our shareholder records and information provided to us by Peter Tilyou.
<PAGE>
Item 12. Certain Relationships and Related Transactions.
On August 20, 1999, we completed the first closing of the acquisition of
all of the assets of ITHC in exchange for 29,242,953 shares of our common stock.
On December 27, 1999, we agreed with ITHC that the total number of shares of our
common stock that were to be issued at the first closing was 11,742,953 shares
rather than 29,242,953 shares and the total number of shares to be issued at the
second closing was 37,298,444 shares. Further, we and ITHC made it clear that we
were 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 our common stock
and a previous purchase of 12,602,431 shares of our common stock by ITHC from
David L. Jackson, Patricia A. Jackson, Karrie R. Jackson and Eric J. Sunsvold
for a total of $190,000, ITHC owned 24,345,384 shares, or approximately 54.0%,
of our outstanding shares of common stock. We 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.
The second closing between us and ITHC will be held at such time as we have
enough additional shares authorized to complete the issuance of the additional
37,298,444 shares to ITHC. We understand that ITHC will then distribute the
37,298,444 shares pro rata to its shareholders.
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.
ITHC, which was incorporated in July 1998, acquired the assets it
transferred to us for a total of $1,600,000 in promissory notes, which were
assumed by us, 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 Cognigen Corporation, its e-commerce division, was a major
marketer of long-distance telecommunications services. Operating on the Internet
via thousands of Web sites, Cognigen Corporation marketed both domestic and
international long-distance telephone service as well as prepaid calling cards
through a network of approximately 40,000 independent agents to approximately
157,000 subscribers worldwide.
<PAGE>
On August 20, 1999, and on December 27, 1999, Jimmy L. Boswell and
David G. Lucas were directors, officers and owners of less than 5% of the
outstanding common stock of ITHC. Further, on August 20, 1999, David L. Jackson
and his wife were our sole directors and officers. On December 27, 1999, David
L. Jackson was a director of ITHC and owned less than 5% of the outstanding
common stock of ITHC. As of December 27, 1999, Darrell H. Hughes was an officer
of ITHC and owned approximately 10.5% of the outstanding common stock of ITHC.
As of August 20, 1999, and as of December 27, 1999, Cognigen Corporation owned
approximately 64.7% and 57.9%, respectively, of the outstanding common stock of
ITHC, Inter-American Telecommunications Corp. and Telkiosk, Inc. each owned
approximately 5.9% and 5.3%, respectively, of the outstanding common stock of
ITHC, and CTC owned approximately 7.9% and 7.1%, respectively, of the
outstanding common stock of ITHC. As of August 20, 1999, and as of December 27,
1999, Kevin E. Anderson, through the Anderson Family Trust #1 which owns
approximately 98.9% of the outstanding common stock of Cognigen Corporation,
controlled us and ITHC. Peter Tilyou is the sole trustee of the Anderson Family
Trust #1 but is not a beneficiary of the trust.
We believe that the transaction between us and ITHC on December 27,
1999, at which time we may be deemed to have been affiliated with ITHC, was at
least as fair to us as we could have obtained from an unaffiliated third party.
We did not obtain a fairness opinion in connection with the August 20, 1999 or
December 27, 1999 transactions with ITHC.
On September 14, 1999, Peter Tilyou, pursuant to the authority
previously granted to him by ITHC, amended an agreement dated as of September 1,
1999 between ITHC and CCRI Corp. The agreement specified the compensation CCRI
Corp. was to receive for assisting ITHC in raising capital. The amendment
provided that CCRI Corp. would receive a bonus of 200,000 shares of our common
stock. Of the 200,000 shares, 50,000 shares were to be unrestricted. It was
later determined that CCRI Corp. would assist us in raising additional capital
and that ITHC would not raise any capital. When CCRI Corp. did assist us in
raising additional capital, we felt obligated to provide CCRI Corp. with the
compensation and bonus that ITHC had agreed to pay. We were unable on November
10 and 11, 1999, to provide the 50,000 shares of our unrestricted common stock
for delivery to the two persons affiliated with CCRI Corp. As an accommodation
to us, Peter Tilyou, as Managing Director of Combined Telecommunications
Consultancy, Ltd. ("CTC"), arranged for CTC to deliver 50,000 unrestricted
shares of our common stock to the two persons affiliated with CCRI Corp. In May
2000, Peter Tilyou on behalf of CTC requested that we reimburse CTC for the
value of the 50,000 shares of our common stock. The reimbursement request was
based upon the closing prices of our common stock on November 10 and 11, 1999. A
total of $175,000 was paid to CTC.
We also believe that the transaction between us and CTC was at least as
fair to us as we could have obtained from an independent third party.
On August 25, 1999, we granted five-year options to purchase
approximately 32,400,000 shares of our common stock at $0.46 per share to
various persons including the Anderson Family Trust #1 (12,000,000 shares) which
is affiliated with us and of which Kevin E. Anderson and his family are the sole
beneficiaries, Jimmy L. Boswell (1,600,000 shares), CTC (4,000,000 shares),
Darrell H. Hughes (1,600,000 shares), Inter-American Telecommunications Corp.
(800,000 shares), David L. Jackson (1,600,000 shares), David G. Lucas (1,600,000
shares) and Telkiosk, Inc. (800,000 shares).
<PAGE>
On July 22, 1999, ITHC and CST entered into a Carrier Service Agreement
that was assumed by us in connection with the acquisition by us of all of the
assets of ITHC. Under the terms of the three-year agreement, ITHC agreed to
migrate to CST domestic and international dial-around and callback long distance
subscribers pursuant to a telemarketing campaign to be conducted with ITHC's
personnel. CST agreed to provide office space, long distance telephone service,
PABX and telephone handsets, at its cost, to support up to 12 telemarketing
personnel and workstations. ITHC agreed to provide the computer terminals and
peripherals, furniture and fixtures required for the telemarketing personnel.
CST also agreed to provide customer service personnel. CST agreed to charge ITHC
a rate to each destination equal to CST's cost plus 15%. The rate charged by CST
included all switching services. CST also agreed to provide all accounting
services in connection with the agreement. All accounts sent to CST by ITHC
remained the property of ITHC. ITHC provided CST with advance payments of
approximately $570,000 to help cover CST's cost in providing long distance
services for telemarketing, customer service and carrier transport for the
accounts of ITHC that migrate to CST.
On April 25, 2000, the CST shareholders transferred all of the
outstanding CST shares of common stock to us in exchange for a total of
2,041,445 shares of our common stock. The number of shares of our common stock
issued to the CST shareholders in exchange for CTS shares was determined by
negotiations between CST's shareholders and us and was based on the market price
of our common stock, which on April 25, 2000 had a closing price of $1.00 per
share, the fact our common stock issued in the exchange was not to be registered
and estimates of the value of CST's assets, staff, technology, revenue-producing
capabilities and physical location. CST's assets that were acquired by us
pursuant to the exchange included a facility lease, equipment leases and CST's
customer base.
Jimmy L. Boswell was our President and is our Executive Vice President
and Chief Operating Officer and is Chairman of the Board, President and Chief
Executive Officer of CST. Mr. Boswell was one of the CST shareholders. Prior to
the exchange, Mr. Boswell beneficially owned approximately 18.7% of the CST
shares. Pursuant to the exchange, Mr. Boswell received 381,750 shares of our
common stock. Immediately following the exchange, Mr. Boswell beneficially owned
a total of 1,981,750 shares of our common stock, including 1,600,000 shares
underlying an option. In addition, a promissory note in the amount of
approximately $87,547.50 that was payable to Mr. Boswell by CST was terminated
as a part of the exchange.
David G. Lucas is our Treasurer and Chief Financial Officer and is a
Director, Vice President and Chief Financial Office of CST. Mr. Lucas was one of
the CST shareholders. Prior to the exchange, Mr. Lucas beneficially owned
approximately 18.7% of the CST shares. Pursuant to exchange, Mr. Lucas received
381,750 shares of our common stock. Immediately following the exchange, Mr.
Lucas beneficially owned a total of 1,981,750 shares of our common stock,
including 1,600,000 shares underlying an option. In addition, a promissory note
in the amount of approximately $49,176.92 that was payable to Mr. Lucas by CST
was terminated as a part of the exchange.
Two of the other CST shareholders were our employees. Otherwise, the
other CST shareholders had no affiliation with us.
<PAGE>
We believe that the transaction between us and the CST shareholders was
at least as fair to us as we could have obtained from an unaffiliated party. We
did not obtain a fairness opinion in connection with the transaction.
On October 11, 2000, we entered into an agreement with JVTEL, a joint
venture between Telkiosk and CTC, that gives us the option to sell to JVTEL a
database of off-shore and domestic telephone service subscribers that we
acquired from ITHC. According to the terms of the agreement, in the event that
we have not activated a minimum of 5,000 of the accounts by March 30, 2001, we
have the option to sell the accounts to JVTEL for $1,300,000. The $1,300,000
will be paid to us in such number of shares of our common stock that is equal to
$1,300,000, less the forgiveness of debt and interest due to JVTEL on March 30,
2001, divided by the closing bid price of our common stock on March 30, 2001.
We have employment agreements with Jimmy L. Boswell, Darrell H. Hughes
and David G. Lucas pursuant to which they are paid annual salaries of $120,000,
$125,000 and $90,000, respectively. In addition, Messrs. Boswell and Lucas, who
have employment agreements that commenced on August 1, 2000, and that terminate
on July 31, 2000, were each paid $100,000 as an initial bonus in connection with
their employment agreements. The initial bonus is deemed earned on a pro rata
basis over the two-year period of each employment agreement in the amount of
$4,167 per month. An early termination of the employment agreements by the
employees without cause or by us with cause obligates the employees to return
the unearned portions of their initial bonuses to us. In addition, between
December 1999 and March 31, 2000, we paid David L. Jackson a fee of $6,000 per
month for providing services to us. On April 1, 2000, David L. Jackson became
one of our employees with an annual salary of $120,000. We also have assumed
agreements with Kevin E. Anderson and Peter Tilyou pursuant to which Kevin E.
Anderson Consulting, Inc. and CTC are paid or are to be paid consulting fees of
$14,583 and $10,000 per month, respectively.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits and Index of Exhibits.
EXHIBIT NO. DESCRIPTION AND METHOD OF FILING
----------- --------------------------------
2.1 Stock Purchase and Asset Acquisition Agreement by and among
Inter-American Telecommunications Holding Corporation,
Silverthorne Production Company, et al. (incorporated by
reference to Exhibit 2 to our Current Report on Form 8-K/A dated
August 29, 1999).
2.2 Amendment dated December 27, 1999, to Stock Purchase and Asset
Acquisition Agreement by and among Inter-American
Telecommunications Holding Corporation, Silverthorne Production
Company et al. (incorporated by reference to Exhibit 2 to our
Current Report on Form 8-K dated March 6, 2000).
2.3 Stock for Stock Exchange Agreement dated April 14, 2000, by and
among the shareholders of Aquila International
Telecommunications, Inc. and Silverthorne Production Company
(incorporated by reference to Exhibit 2 to our Current Report on
Form 8-K, dated May 2, 2000).
3.1 Articles of Incorporation filed on May 6, 1983.
3.2 Articles of Amendment to Articles of Incorporation filed on June
23, 1988.
3.3 Articles of Amendment to the Articles of Incorporation filed on
July 12, 2000.
3.4 Bylaws as amended through December 8, 1999 (incorporated by
reference to Exhibit 3.1 to Cognigen's Form 10-Q for the quarter
ended December 31, 1999).
10.1 Employment Agreement dated August 1, 2000, between Cognigen
Networks, Inc. and Jimmy L. Boswell.
10.2 Employment Agreement dated August 1, 2000, between Cognigen
Networks, Inc. and David G. Lucas.
10.3 Employment Agreement dated October 5, 1999, between Cognigen
Networks, Inc. and Darrell H. Hughes.
10.4 Option to Sell Accounts Agreement dated October 6, 2000, between
Cognigen Networks, Inc. and JVTEL.
10.5 Stock Purchase and Asset Sale Agreement dated November 4, 1998,
between Inter-American Telecommunications Corporation and
Combined Telecommunications Consultancy, Ltd.
10.6 Stock Purchase and Asset Sale Agreement dated July 1, 1999,
between Inter-American Telecommunications Corporation and
Cognigen Corporation.
10.7 Form of Option to Purchase Common Stock
16 Letter from Daniel Jankowski (incorporated by reference to
Exhibit 16.0 to Cognigen's Current Report on Form 8-K dated March
21, 2000)
21 Subsidiaries
27 Financial Data Schedule.
(b) Reports on Form 8-K.
On May 5, 2000, we filed a Current Report on Form 8-K, reporting under
Item 2 the acquisition by us of Aquila International Telecommunications, Inc.,
n/k/a Cognigen Switching Technologies, Inc., and filed the Stock for Stock
Exchange Agreement as an exhibit under Item 7.
On June 16, 2000, we filed an amendment to our Current Report on Form
8-K that was filed on May 5, 2000, to file under Item 7 the financial statements
required to be filed in connection with our acquisition of Aquila International
Telecommunications, Inc.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: October 12, 2000
COGNIGEN NETWORKS, INC.
/s/ Darrell H. Hughes
---------------------------------
Darrell H. Hughes, Chairman of the Board,
President, and Chief Executive Officer
/s/ David G. Lucas
-------------------
David G. Lucas, Treasurer,
Chief Financial Officer and Principal
Accounting Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Jimmy L. Boswell
---------------------
Jimmy L. Boswell Director October 12, 2000
/s/ Troy D. Carl
-----------------
Troy D. Carl Director October 12, 2000
/s/ Darrell H. Hughes
-----------------------
Darrell H. Hughes Director October 12, 2000
/s/ David L. Jackson
---------------------
David L. Jackson Director October 12, 2000
/s/ David G. Lucas
-------------------
David G. Lucas Director October 12, 2000
<PAGE>
Cognigen Networks, Inc.
Financial Statements
June 30, 2000
Table of Contents
Page
Independent Auditors' Reports...............................................F-1
Consolidated Financial Statements
Consolidated Balance Sheets........................................F-3
Consolidated Statements of Operations..............................F-4
Consolidated Statements of Stockholders' Equity....................F-5
Consolidated Statements of Cash Flows..............................F-6
Notes to Consolidated Financial Statements..................................F-7
<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 subsidiaries 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 subsidiaries 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
<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 acquirer of Cognigen
Networks, Inc.). 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 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
January 20, 2000
/s/ Comiskey & Company
----------------------
Comiskey & Company
PROFESSIONAL CORPORATION
<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 4) 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 and 46,980,547 issued
and outstanding at June 30, 1999 and 2000, 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.
<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.
<PAGE>
Consolidated Statements of Stockholders' Equity
From July 24, 1998 through June 30, 2000
<TABLE>
<CAPTION>
Total
Common Stock Additional Stockholders'
--------------------------------- Paid-in Accumulated (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.
<PAGE>
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.
<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.
<PAGE>
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 three 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.
<PAGE>
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.
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.
<PAGE>
Note 1 - Description of Business and Summary of Significant Accounting Policies
(continued)
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. Diluted earnings per share reflect the effects of
dilutive common equivalent shares; however, during loss periods these dilutive
securities are exlcuded as their effect is antidilutive. Accordingly, basic and
diluted earnings per share are the same. For the years ended June 30, 2000 and
1999, potential dilutive securities consist of 32,400,000 stock options and
1,500,000 warrants and no stock options or warrants, respectively.
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.
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.
<PAGE>
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
================
<PAGE>
Note 4 - Notes Payable
Notes payable consists of the following:
June 30, June 30,
1999 2000
----------- ----------
8% unsecured promissory notes
payable to a related entity,
principal and interest due
upon maturity at July 1, 2000,
subsequently extended to
July 1, 2001 $ 500,000 $ 200,000
8% unsecured promissory note
payable to a related entity,
principal and interest due
upon maturity at July 1, 2000,
subsequently extended to
July 1, 2001 800,000 310,000
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
=========== ==========
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
=============
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, 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 $ -
============= ============
<PAGE>
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
due November 4, 1999 (and subsequently extended until July 1, 2001 as to the
remaining $200,000 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 due November 4, 1999 (and subsequently extended until
July 1, 2001 as to $310,000 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.
<PAGE>
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. In
October 2000, the Company entered into a sale back agreement relating to these
customer databases (Note 12).
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 valued at $55 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.
<PAGE>
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 valued at $1.32 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)
================ ================
<PAGE>
Note 8 - Stockholders' Equity
Stock Issuances
In connection with certain ITHC executive employment agreements 11,377,366 as
adjusted shares of ITHC stock valued at $30,000 were issued in July 1999 for
services provided by those key employees. In addition, 31,286,894 shares of ITHC
stock were issued in connection with the acquisition of the assets of Cognigen
(Note 7).
During the year ended June 30, 2000, the Company sold 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. 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 $.23 per option.
Assumptions used in the valuation of stock options and warrants 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.
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:
<PAGE>
Note 8 - Stockholders' Equity (continued)
Stock Options (continued)
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 and issued 11,377,137, as
adjusted, shares of common stock valued at $20 in exchange for two long-distance
telephone subscriber databases valued at $1,300,000 (Note 7).
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.
<PAGE>
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.
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.
<PAGE>
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.
