COGNIGEN NETWORKS, INC.
EXHIBIT A
Index to Financial Statements and
Management's Discussion and Analysis
Cognigen Networks, Inc. Unaudited Financial Statements, September 30, 2000
Management's Discussion and Analysis or Plan of Operation, September 30, 2000
Cognigen Networks, Inc. Financial Statements, June 30, 2000
Management's Discussion and Analysis or Plan of Operation, June 30, 2000
Inter-American Telecommunications Holding Corporation
Financial Statements, June 30, 1999
Cognigen Corporation Financial Statements, June 30, 1999
COGNIGEN NETWORKS, INC.
Unaudited Consolidated Statements of Operations
Three Months Ended
September 30,
----------------------------
1999 2000
---------- ----------
(Restated) (Restated)
Revenue
Prepaid cards and pins $ 445,090 $ 181,212
Call back and switching services - 118,792
Commissions 445,133 871,647
Allowances (5,379) 5,059
---------- ----------
Total revenue 884,844 1,176,710
---------- ----------
Operating expenses
Prepaid cards and pins 302,637 130,830
Call back and switching services - 129,569
Marketing commissions 345,043 457,217
Sales, general and administrative 6,547,289 1,026,672
---------- ----------
Total operating expenses 7,194,969 1,744,288
---------- ----------
Loss from operations (6,310,125) (567,578)
Other income (expense)
Interest expense (35,550) (19,650)
---------- ----------
Loss before income taxes (6,345,675) (587,228)
Income taxes - -
---------- ----------
Net loss $(6,345,675) $ (587,228)
=========== ==========
Loss per common share - basic and diluted $ (.26) $ (.01)
=========== ==========
Weighted average number of common shares outstanding -
basic and diluted 24,123,524 84,278,991
=========== ==========
See notes to unaudited consolidated financial statements.
COGNIGEN NETWORKS, INC.
Unaudited Consolidated Balance Sheet
June 30, September 30,
2000 2000
----------- ------------
(Restated) (Restated)
Assets
Current assets
Cash $ 717,344 $ 275,630
Accounts receivable, net of allowance for doubtful
accounts of $5,000 61,046 215,392
Commissions receivable, net of allowance for doubtful
accounts of $25,000 538,163 676,795
Employee receivable 1,661 2,957
Inventory 133,486 128,229
Other current assets 417,028 473,450
Deferred tax asset - current - -
--------- ---------
Total current assets 1,868,728 1,772,453
--------- ---------
Property, plant and equipment, net of accumulated
depreciation of $363,121 at June 30, 2000 and $430,
592 at September 30, 2000 486,291 422,472
--------- ---------
Other assets
Deposits and other assets 88,552 100,867
Goodwill, net 3,655,017 3,506,103
Customer databases, net of $300,000 and
$375,000 of amortization 1,000,000 925,000
Deferred tax asset - noncurrent - -
--------- ---------
Total other assets 4,743,569 4,531,970
--------- ---------
Total assets $ 7,098,588 $ 6,726,895
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 97,420 $ 198,423
Other accrued liabilities 108,324 88,561
Interest payable 239,421 256,354
Commissions payable 326,681 470,389
Payroll taxes payable 21,179 24,108
Current portion of capital leases 106,551 77,276
Current portion of notes payable 315,000 825,000
--------- ---------
Total current liabilities 1,214,576 1,940,111
--------- ---------
Long-term portion of capital leases 12,152 12,152
Long-term portion of notes payable 510,000 -
--------- ---------
Total liabilities 1,736,728 1,952,263
--------- ---------
Commitments and contingencies
Stockholders' equity
Common stock $.001 par value, 50,000,000 shares
authorized; 46,980,547 and 46,980,547 issued and
outstanding at June 30, 2000 and September 30, 2000,
and 37,298,444 to be issued shares (2000) 84,278 84,278
Additional paid-in capital 13,594,051 13,594,051
Accumulated deficit (8,316,469) (8,903,697)
--------- ---------
Total stockholders' equity 5,361,860 4,774,632
--------- ---------
Total liabilities and stockholders' equity $ 7,098,588 $ 6,726,895
=========== ===========
See notes to unaudited consolidated financial statements.
COGNIGEN NETWORKS, INC.
Unaudited Consolidated Statements of Cash Flows
Three Months Ended
September 30,
---------------------------
1999 2000
----------- ----------
(Restated) (Restated)
Cash flows from operating activities
Net loss $(6,345,675) $ (587,228)
----------- ----------
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization 99,908 291,385
Stock options granted for services to nonemployees 5,836,724 -
Changes in assets and liabilities
Accounts receivable 88,979 (154,346)
Commissions receivable - (138,632)
Inventory 4,083 5,257
Other assets - (57,718)
Deposits - (12,315)
Interest payable 35,550 16,933
Accounts payable 11,887 101,003
Accrued expenses - (19,763)
Deferred revenue 1,926 -
Commissions payable 35,844 143,708
Payroll taxes payable 3,436 2,929
----------- ----------
6,118,337 178,441
----------- ----------
Net cash used in operations (227,338) (408,787)
----------- ----------
Cash flows from investing activities
Cash acquired in acquisition 21,248 -
Purchases of fixed assets - (3,652)
Advances to related party (200,000) -
----------- ----------
Net cash provided by (used by) investing
activities (178,752) (3,652)
----------- ----------
Cash flows from financing activities
Proceeds from subscriptions received 884,289 -
Payments on notes payable (315,000) -
Proceeds from notes payable 125,000 -
Payments on capital leases - (29,275)
----------- ----------
Net cash provided by financing activities 694,289 (29,275)
----------- ----------
Net increase in cash and cash equivalents 288,199 (441,714)
Cash and cash equivalents-beginning of period - 717,344
----------- ----------
Cash and cash equivalents-end of period $ 288,199 $ 275,630
=========== ==========
See notes to unaudited consolidated financial statements.
COGNIGEN NETWORKS, INC.
Notes to Unaudited Consolidated Financial Statements
Note 1 - Description of Business
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.
Note 2 - Summary of Significant Accounting Policies
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, have been made to (a) the results of consolidated
operations for the three month periods ended September 30, 2000 and 1999,
respectively, (b) the consolidated balance sheet at September 30, 2000 and
(c) the consolidated statements of cash flows for the three month periods
ended September 30, 2000 and 1999, respectively, in order to make the
financial statements not misleading.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting
principles for financial statements. For further information, refer to the
audited consolidated financial statements and notes thereto for the year
ended June 30, 2000, included in the Company's Annual Report on Form 10-KSB
filed with the Securities and Exchange Commission.
The results for the three-month period ended September 30, 2000 may not
necessarily be indicative of the results for the fiscal year ended June 30,
2001.
Note 3 - Basis of Presentation
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 4 - 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 vest
immediately and expire five years from the date issued. The options cannot be
exercised until the Company amends it articles of incorporation or effects a
reverse split of its common stock so that it has sufficient shares available
for issuance upon the exercise of these options. 25,200,000 of these options
were issued to non-employees 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.
$6,022,044 of compensation expense was recorded in connection with the
options granted to non-employees based on a value of $.23 per option.
Note 5 - Customer Databases
The Company maintains two customer databases which were originally compiled in
October 1998. These customer databases were acquired in connection with the
initial capitalization of Inter-American Telecommunications Holding Corporation
(ITHC), which acquired from Telkiosk, Inc. and Combined Telecommunications
Consultancy, LTD (CTC) customer databases valued at $500,000 and $800,000,
respectively, through the issuance of $500,000 and $800,000 in notes payable,
and by issuing 500 (2,844,285 as adjusted) and 1,000 (5,688,570 as adjusted)
shares of common stock, respectively. ITHC also issued 500 (2,844,285 as
adjusted) shares of common stock to Inter-American Telecommunications
Corporation (ITC) as part of its initial capitalization for backroom support to
be provided to ITHC in the future. The customer databases were originally
recorded at their predecessor cost of $1,300,000, with the shares of common
stock issued being recorded at their nominal par value ($.001) of $20. The
Company intends to migrate these names into active long distance customers of
Cognigen Switching Technologies, Inc. (CST), the Company's wholly owned
subsidiary. The Company's plans for the solicitation process are currently
underway and the Company plans to be completed by October 2001. In October 2000,
the Company also entered into an option agreement with an entity formed by the
entities which originally sold the Company's customer databases to the Company's
predecessor. The agreement provides that if the Company has not been able to
establish at least 5,000 active telecommunications subscribers from the combined
lists by March 30, 2001, the Company has the option to require the entity to
repurchase the customer lists from the Company to enable the Company to recover
its investment in these databases.
Note 6 - Amortization of Customer Databases
The Company changed its method of amortizing customer databases during fiscal
2000. Previously the Company did not begin to amortize its customer databases
until the migration of these names into active customers had begun. However,
effective July 1, 1999 as a result of the significant uncertainties surrounding
the commencement of the migration process, the Company has reflected
amortization of these databases over their estimated remaining useful lives of
4.33 years (through November 1, 2003). The effects of this correction on
previously reported quarterly amounts was $75,000 of additional amortization
expense as follows:
Net Loss Loss Per Share Stockholders' Equity
--------------- ------------------ -----------------------
Three months ended
September 30, 2000,
as reported $ (512,228) $(.01) $5,149,632
=========== ===== ==========
Three months ended
September 30, 2000,
as adjusted $ (587,228) $(.01) $4,774,632
=========== ===== ==========
Three months ended
September 30, 1999,
as reported $(6,270,675) $(.26) $ 206,896
=========== ===== ==========
Three months ended
September 30, 1999,
as adjusted $(6,345,675) $(.26) $ 131,896
=========== ===== ==========
COGNIGEN NETWORKS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
Certain of the information discussed herein, and in particular in this section
entitled "Management's Discussion and Analysis or Plan of Operation," contains
forward-looking statements that involve risks and uncertainties that might
adversely affect the operating results of the Company in the future in a
material way. Such risks and uncertainties include, without limitation, the
Company's possible inability to obtain additional financing, lack of agent
growth, loss of key personnel, rate changes, fee policy or application changes,
technological changes and increased competition. Many of these risks are beyond
the control of the Company. The Company is not entitled to rely on the safe
harbor provisions of Section 27A of the Securities Act of 1933, as amended, or
Section 21E of the Securities Exchange Act of 1934, as amended, when making
forward-looking statements.
Overview
The Company 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.
The Company was incorporated on May 6, 1983, in Colorado. On August 20, 1999,
the Company completed the acquisition of all of the net assets of Inter-American
Telecommunications Holding Corporation (ITHC) in exchange for up to 49,041,397
shares of the Company's common stock. For financial statement purposes, this
business combination was accounted for as an additional capitalization of ITHC
(a reverse acquisition in which ITHC was the accounting acquirer). For
accounting purposes, ITHC is considered the surviving entity and the historical
financial statements prior to the acquisition are those of ITHC.
Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999.
Total revenue for the three months ended September 30, 2000 was $1,176,710
compared to $884,844 for the three months ended September 30, 1999. Total
revenue for the 2000 period consisted of $181,212 related to prepaid cards and
pins and $871,647 related to commissions. Total revenue for the comparable
period in 1999 consisted of $445,090 related to prepaid cards and pins and
$445,133 related to commissions. The $263,878, or 59%, decrease in prepaid cards
and pins is due to reduced tariff calls as a result of competition. The
$426,514, or 96%, increase in commissions is due to an increase of approximately
36,900 new agents. Call back and switching revenue for the three months ended
September 30, 2000 was $118,792 for which there was no comparable revenue for
1999.
Operating costs related to prepaid cards and pins for the three months ended
September 30, 2000 decreased $171,807, or 57%, to $130,830 from $302,637 during
the three months ended September 30, 1999. Operating costs related to
commissions for the three months ended September 30, 2000 increased $112,174, or
33%, to $457,217 from $345,043 during the three months ended September 30, 1999.
The cost increases are directly related to the increases in sales revenue. The
call back and switching services costs were $129,569 for the three months ended
September 30, 2000 for which there were no comparable costs for 1999.
General and administrative operating expenses decreased $5,520,617, or 84%, to
$1,026,672 during the three months ended September 30, 2000 from $6,547,289
during the three months ended September 30, 1999. This decrease is due to
$5,836,724 of stock based compensation for the three months ended September 30,
1999 that was not repeated in the three months ended September 30, 2000 and is
offset by increased salaries of $123,130 as a result of more headcount and
depreciation and amortization of $291,385.
The Company incurred a loss from operations of $567,578 for the three months
ended September 30, 2000 compared to $6,310,125 for the three months ended
September 30, 1999. The decrease in operating loss during the current period is
directly related to the expense of stock options granted for services to
non-employees of $5,836,724 recognized during the three months ended September
30, 1999.
Interest expense decreased $15,900, or 45%, to $19,650 for the three months
ended September 30, 2000 from $35,550 for the three months ended September 30,
1999. The reduction is a result of the payoff of a portion of debt. After
interest expense, the net loss for the three months ended September 30, 2000 was
$587,228, or $.01 loss per share, compared to a net loss of $6,345,675, or $.26
loss per share, for the three months ended September 30, 1999.
Liquidity and Capital Resources:
The Company has funded its operations to date primarily from shareholder
advances and stock subscriptions received. At September 30, 2000, the Company
had cash and cash equivalents of $275,630 and negative working capital of
$179,810.
Cash used by the Company for operating activities during the three months ended
September 30, 2000 was $408,787. A primary component of the use of cash during
the three months was the Company's net loss of $587,228 adjusted for non-cash
adjustments for depreciation and amortization of $291,385. Additional uses of
operating cash for the three months included increases in the Company's accounts
receivable of $154,346, commissions receivable of $138,632, other assets of
$57,718, and deposits of $12,315. The uses in operating cash were partially
offset by cash provided of $101,003 from accounts payable, $143,708 of
commissions payable, and $16,933 of interest payable. Cash used for investing
activities includes $3,652 for the purchase of fixed assets. Additional uses of
cash during the three months ended September 30, 2000 include payments on
capital leases of $29,275.
The Company currently has three notes payable and various capital leases with
total outstanding balances of $914,428 at September 30, 2000. Two of the notes
are due July 1, 2001 and one is due February 12, 2001. The Company has
maturities of capital leases and notes payable of $902,276 required during the
next twelve months
Cash generated from operations was not sufficient to meet the Company's working
capital requirements for the quarter ended September 30, 2000, and may not be
sufficient to meet the Company's working capital requirements for the
foreseeable future. As a result, the Company is exploring various bridge
financing and/or additional equity financing to meet current operating
requirements until operations can generate sufficient cash for the Company to
become self-sustaining. There can be no assurances that the Company will be able
to secure additional debt or equity financing or that operations will produce
adequate cash flows to allow the Company to meet all of its future obligations.
However, management believes the Company will be successful in producing
sufficient cash flows from all collective sources to continue for the next
twelve months.
The Company has no significant planned capital expenditures covering the next
twelve months.
The Company maintains two customer databases originally compiled in October
1998, containing archived names with historical records of long distance
telecommunication service users, to which the Company intends to devote
substantial efforts during the next twelve months to transform these names into
active CST customer accounts. The Company has been in negotiations with a
telemarketing firm to assist in the transformation of these names into active
accounts. The Company anticipates an initial cost of approximately $93,000 for
these telemarketing services and has received a verbal commitment from a third
party to assist in funding these telemarketing costs, as necessary.
The Company has also entered into an option agreement with a joint venture
consisting of the sellers of the customer databases to the Company's
predecessor. The agreement provides that if certain targeted levels of active
customers cannot be transformed from the databases by March 30, 2001, the
Company has the option to have the joint venture repurchase the databases
through the forgiveness of the remaining debt outstanding and the return of
Company shares to the Company. The Company believes this agreement is a major
step in protecting the recoverability of the Company's original investment in
these databases.
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.
The Company has corrected a previous error in the 2000 financial statements
relating to the amortization of its customer lists as described in Note 3.
/s/Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
August 25, 2000, except the first paragraph of Note 13,
as to which the date is October 10, 2000
Denver, Colorado
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 (accounting acquirer of Cognigen Networks, Inc.). Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also included
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of its operations,
its cash flows and its changes in stockholders' equity for the period from
inception (July 24, 1998) through June 30, 1999 in conformity with generally
accepted accounting principles.
Denver, Colorado
August 23, 2000
/s/ Comiskey & Company
Comiskey & Company
PROFESSIONAL CORPORATION
COGNIGEN NETWORKS, INC.
Consolidated Balance Sheet
June 30, 2000
(Restated)
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 -
----------------
Total current assets 1,868,728
----------------
Property, plant and equipment, net of
accumulated depreciation of $363,121 486,291
----------------
Other assets
Deposits and other assets 88,552
Goodwill, net of $154,917 of amortization 3,655,017
Customer databases, net of $300,000 of amortization 1,000,000
Deferred tax asset - noncurrent -
----------------
Total other assets 4,743,569
----------------
Total assets $ 7,098,588
================
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 106,551
Current portion of notes payable 315,000
----------------
Total current liabilities 1,214,576
Long-term portion of capital leases 12,152
Long-term portion of notes payable 510,000
----------------
Total liabilities 1,736,728
----------------
Commitments and Contingencies
Stockholders' (deficit) equity
Common stock $.001 par value, 50,000,000
shares authorized; 14,411,039 (1999)
and 46,980,547 (2000) issued and
outstanding at and 37,298,444 to be
issued shares (2000) 84,278
Additional paid-in capital 13,594,051
Accumulated deficit (8,316,469)
----------------
Total stockholders' (deficit) equity 5,361,860
----------------
Total liabilities and stockholders' (deficit) equity $ 7,098,588
================
See notes to consolidated financial statements.
COGNIGEN NETWORKS, INC.
Consolidated Statements of Operations
For the Years Ended
June 30,
----------------------------
1999 2000
---------- ------------
(Restated)
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 - 561,510
---------- ------------
Total operating expenses - 11,903,876
---------- ------------
Loss from operations - (8,104,163)
Interest expense 67,814 144,492
---------- ------------
Loss before income taxes (67,814) (8,248,655)
Income taxes 16,531 (16,531)
---------- ------------
Net loss $ (51,283) $ (8,265,186)
========== ============
Loss per common share - basic and diluted $ - $ (0.11)
========== ============
Weighted average number of common shares
outstanding - basic and diluted 11,377,137 78,549,437
========== ============
See notes to consolidated financial statements.
COGNIGEN NETWORKS, INC.
Consolidated Statements of Stockholders' Equity
From July 24, 1998 through June 30, 2000
Total
Common Stock Additional Stockholders'
----------------------- Paid-in Accumulated (Deficit)
Shares Amount Capital Deficit Equity
------------- ------- ----------- ----------- -------------
(as adjusted) (restated)
Balance July 24, 1998 (inception) - $ - $ - $ - $ -
Common stock issued for
intangible assets 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 42,664,260 55 30,000 - 30,055
Reverse acquisition 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 - - 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 2,041,445 2,041 2,695,356 - 2,697,397
Net loss - - - (8,265,186) (8,265,186)
------------- ------- ----------- ----------- -------------
Balance at June 30, 2000 84,278,991 $84,278 $13,594,051 $(8,316,469) $ 5,361,860
============= ======= =========== =========== =============
See notes to consolidated financial statements.
COGNIGEN NETWORKS, INC.
Consolidated Statements of Cash Flows
June 30,
------------------------
1999 2000
-------- -----------
(Restated)
Cash flows from operating activities
Net loss $(51,283) $(8,265,186)
-------- -----------
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation and amortization - 561,510
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 6,098,051
-------- -----------
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
======== ===========
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.
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. on July 12, 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 8). 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.
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
databases. Goodwill is amortized using the straight-line method over five years.
Customer databases 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.
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.
Loss Per Share
Loss per common share has been computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. Shares
issued in the initial capitalization of the Company have been treated as
outstanding since inception.
Advertising Costs
Advertising costs are expensed as incurred. Total advertising costs for the
years ended June 30, 2000 and 1999, were $200,127 and $0, respectively.
Recently Issued Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair market value. Gains or losses resulting from
changes in the values of those derivatives are accounted for depending on the
use of the derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value or cash flows. SFAS No.
133 is effective for fiscal years beginning after June 15, 2000. Management
believes that the adoption of SFAS No. 133 will have no material effect on the
Company's financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44"), which was
effective July 1, 2000, except that certain conclusions in this Interpretation,
which cover specific events that occur after either December 15, 1998 or January
12, 2000 are recognized on a prospective basis from July 1, 2000. This
Interpretation clarifies the application of APB Opinion 25 for certain issues
related to stock issued to employees. The Company believes its existing stock
based compensation policies and procedures are in compliance with FIN 44, and
therefore, the adoption of FIN 44 had no material impact on the Company's
financial condition, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") 101, which provides guidance on applying generally
accepted accounting principles to selected revenue recognition issues.
Management believes that the Company's revenue recognition policies are in
accordance with SAB 101.
Note 2 - Basis of Presentation
All common stock share amounts have been retroactively adjusted to reflect the
ratio of shares issued by the Company in connection with the reverse acquisition
of ITHC (Note 7). The ratio of shares issued of 5,688.57 shares of the Company
to each share of ITHC stock represents 54,041,397 newly issued shares and shares
to be issued in exchange for 9,500 shares of ITHC common stock.
All per share amounts reflect the 37,298,444 shares the Company has a legal
obligation to issue in the future in connection with the reverse acquisition of
ITHC, and have been treated as outstanding from the date of acquisition (Note
12).
Note 3 - Amortization of Customer Databases
The Company changed its method of amortizing customer databases during fiscal
2000. Previously the Company did not begin to amortize its customer databases
until the migration of these names into active customers had begun. However,
effective July 1, 1999 as a result of the continued uncertainties surrounding
the commencement of the migration process, the Company has reflected
amortization of these databases over their remaining estimated useful lives of
4.33 years (through November 1, 2003). The effects of this correction on
previously reported amounts are as follows:
Net Loss Loss Per Share Stockholders' Equity
--------------- ------------------ -----------------------
June 30, 2000,
as previously
reported $(7,965,186) $(.10) $5,661,860
Correction to
amortization expense $ (300,000) $(.01) $ (300,000)
----------- ----- ----------
June 30, 2000,
as adjusted $(8,265,186) $(.11) $5,331,860
=========== ===== ==========
The effect of this correction on previously reported quarterly amounts was
$75,000 of additional amortization expense as follows:
Net Loss Loss Per Share Stockholders' Equity
--------------- ------------------ -----------------------
Three months ended
September 30, 1999,
as reported $(6,270,675) $(.26) $206,896
=========== ===== ==========
Three months ended
September 30, 1999,
as adjusted $(6,345,675) $(.26) $131,896
=========== ===== ==========
Three months ended
December 31, 1999,
as reported $ (347,414) $(.01) $4,132,413
=========== ===== ==========
Three months ended
December 31, 1999,
as adjusted $ (422,414) $(.01) $3,982,413
=========== ===== ==========
Six months ended
December 31, 1999,
as reported $(6,618,089) $(.23) $4,132,413
=========== ===== ==========
Six months ended
December 31, 1999,
as adjusted $(6,768,089) $(.24) $3,982,413
=========== ===== ==========
Three months ended
March 31, 2000,
as reported $ (527,989) $(.01) $3,617,291
=========== ===== ==========
Three months ended
March 31, 2000
as adjusted $ (602,989) $(.01) $3,392,291
=========== ===== ==========
Nine months ended
March 31, 2000,
as reported $(7,146,078) $(.09) $3,617,291
=========== ===== ==========
Nine months ended
March 31, 2000
as adjusted $(7,371,078) $(.10) $3,392,291
=========== ===== ==========
Note 4 - 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
================
Note 5 - Notes Payable
----------------------
Notes payable consists of the following:
June 30,
------------------------------
1999 2000
------------ ------------
8% unsecured promissory notes payable to a
related entity, principal and interest due
upon maturity at July 1, 2000. $ 500,000 $ 200,000
8% unsecured promissory note payable to a
related entity, principal and interest
due upon maturity at July 1, 2000. 800,000 310,000
Subsequent to year-end, the above notes
were extended to July 1, 2001.
12% secured promissory note payable to a
related entity, principal and interest
due upon maturity at February 12, 2001. - 315,000
------------ ------------
1,300,000 825,000
Less current portion (700,000) (315,000)
------------ ------------
$ 600,000 $ 510,000
============ ============
Note 6 - 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 7 - Income Taxes
Deferred tax liabilities and assets are determined based on the difference
between the financial statement assets and liabilities and tax basis assets and
liabilities using the tax rates in effect for the year in which the differences
occur. The measurement of deferred tax assets is reduced, if necessary, by the
amount of any tax benefits that, based on available evidence, are not expected
to be realized.
The components of the provision for income tax expense (benefit) are as follows:
June 30,
--------------------------------------
1999 2000
-------------- --------------
Current $ $ -
Deferred (16,531) 16,531
-------------- --------------
$ (16,531) $ 16,531
============== ==============
The deferred income tax assets and liabilities result primarily from differing
depreciation and amortization periods of certain assets, provision for doubtful
accounts, provision for product returns and allowances, net operating loss
carryforwards and the recognition of certain expenses for financial statement
purposes and not for tax purposes. The Company has approximately $1,913,000 of
net operating loss carryforwards, which expire through 2020 if unused.
The net current and long-term deferred tax liabilities in the accompanying
balance sheet include the following items:
June 30,
-----------------------------
1999 2000
---------- ----------
Current deferred tax asset $ - $ 9,325
Current deferred tax liability - -
---------- ----------
Valuation allowance - (9,325)
---------- ----------
$ - $ -
========== ==========
Long-term deferred tax asset $ 16,531 $ 713,487
Long-term deferred tax liability - -
Valuation allowance - (713,487)
---------- ----------
$ 16,531 $ -
========== ==========
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 8 - 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 500 (2,844,285, as
adjusted), shares of ITHC common stock, and a $500,000 promissory note payable
November 4, 1999 (and subsequently extended until July 1, 2001 as to the
remaining 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 1,000 (5,688,570, as adjusted), shares of ITHC common stock and an $800,000
promissory note payable November 4, 1999 (and subsequently extended until July
1, 2001 as to 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.
These customer databases were originally compiled in October 1998. The databases
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 customer databases were acquired in connection with the
initial capitalization of ITHC with the customer databases being recorded at
$1,300,000 representing predecessor cost. The Company's plans for the
solicitation process are currently underway and the Company entered into an
option agreement with an entity formed by the sellers of its customer databases
(Note 13). The agreement provides that if the Company has not been able to
establish at least 5,000 active telecommunications subscribers from the combined
databases by March 30, 2001, the entity will repurchase the customer lists from
the Company allowing the Company to recover its investment in these databases.
Total shares issued in connection with the acquisition of these customer
databases and the initial capitalization of ITHC were 2,000 (11,377,140 as
adjusted), including 500 (2,844,285 as adjusted) shares issued to ITC in
connection with its anticipated backroom support function. The 2000
(unadjusted) shares issued were recorded at their nominal par value ($.001) of
$20.
Cognigen Acquisition
On July 1, 1999, ITHC entered into an agreement with Cognigen to purchase all of
Cognigen's net assets. The purchase price included 31,286,894 shares, as
adjusted, of ITHC common stock and a $300,000 note payable. Additionally, ITHC
entered into a four-year employment contract with the founder of Cognigen, which
provides for an annual base salary of $175,000. The transaction was accounted
for as a purchase. ITHC acquired net assets of $86,285 and recorded goodwill of
$213,770. The goodwill is being amortized over a life of 5 years.
Reverse Acquisition
On August 20, 1999, the Company completed the acquisition of all of the net
assets of ITHC in exchange for up to 49,041,397 shares of the Company's common
stock. For financial statement purposes, this business combination was accounted
for as an additional capitalization of ITHC (a reverse acquisition in which ITHC
was the accounting acquirer). ITHC is considered the surviving entity and the
historical financial statements prior to the acquisition are those of ITHC. The
15,757,047 shares reflected in the statement of stockholders' equity reflect
those shares of Company's common stock outstanding immediately prior to the
reverse acquisition. The Company's net book value prior to the transaction was
$0. The issuance of the stock must be completed in two closings due to the
limited amount of authorized stock available for issuance under the Company's
articles of incorporation. The first closing resulted in the issuance of
11,742,953 shares while the remaining 37,298,444 shares will be issued after the
authorized number of shares is increased or after a reverse stock split is
effected. The Company issued 5,000,000 shares of the Company's common stock as
finders' fees in connection with the transaction to unrelated individuals. The
shares were valued at $1,900,000, or $.38 per share, and reported on a net basis
in additional paid-in-capital.
Additionally on August 20, 1999, ITHC purchased 12,602,431 shares of the
Company's common stock for a price of $190,000 from certain existing
shareholders of the Company. This was recorded as a charge to paid-in capital in
the amount of $190,000.
The Company is the legal survivor and changed its name to Cognigen Networks,
Inc. on July 12, 2000.
Cognigen Switching Acquisition
On April 15, 2000, the Company purchased the outstanding stock of Cognigen
Switching (f.k.a. Aquila International Telecommunications, Inc.) for 2,041,445
shares and $590,000 in previous cash advances to Cognigen Switching for a total
purchase price of $3,287,397. This transaction was accounted for as a purchase.
Intangible assets acquired are amortized over five years. The results of
operations have been included from the date of acquisition forward in the
accompanying financial statements.
Purchase Price Allocation and Pro Forma Results
The combined aggregate purchase price of the Company's acquisition of Cognigen
Switching ($3,287,397) and Cognigen ($300,055) 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
Goodwill - Cognigen 213,770
Goodwill - Cognigen Switching 3,596,164
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)
================ ================
Note 9 - Stockholders' Equity
Stock Issuances
In connection with certain ITHC executive employment agreements 11,377,366
shares of ITHC stock valued at $30,000 were issued in July 1999 for services
provided by those key employees. In addition, 31,286,894 shares of ITHC stock
were issued in connection with the acquisition of the assets of Cognigen (Note
8).
During the six months ended December 31, 1999, the Company received
subscriptions for 12,489,102 shares of the Company's common stock at prices of
$0.38 per share (11,562,302 shares) and $1.60 per share (926,800 shares) from
various persons. These shares were issued by March 31, 2000. The Company agreed
to pay a fee of 12% of the total proceeds received from the sale of the common
stock to a distributor and issue warrants to purchase up to a maximum of
1,500,000 shares of the Company's common stock to various persons in connection
with the sales. These warrants were valued at $347,400 based on a value of $.23
per warrant. This fee was accounted for as a cost of the sale of those common
shares. The Company paid a total of $727,474 related to the total fee due and
other expenses associated with the offering.
Stock Options
In August 1999, the Company issued 32,400,000 options entitling the holders to
purchase the Company's common stock at $0.46 per share. The options vested
immediately and expire five years from the date issued. Most of these options
cannot be exercised until the Company amends it articles of incorporation or
affects a reverse split of its common stock so that it has sufficient shares
available for issuance upon the exercise of these options. 26,000,000 of these
options were issued to non-employees for various professional services provided
(of which 12,000,000 were issued to a trust of which the founder is a
beneficiary) while the remaining options were issued to employees and directors.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock options
issued to employees and directors. $6,022,004 of compensation expense was
recorded in connection with the options granted to non-employees based on a
value of $.2316 per option. Assumptions used in the valuation of stock options
include volatility of 109%, 3-year lives, dividend yield of 0% and a risk-free
rate of 5.5%. The weighted average remaining lives are 2.17 years with weighted
average exercise prices of $.46.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for stock options issued.
Had compensation cost for the Company's stock options issued been determined
based on the fair value at the grant date for awards consistent with the
provisions of SFAS No. 123, the Company's net loss and loss per share would have
been increased to the pro forma amounts indicated below:
June 30,
-----------------------------------
1999 2000
------------- --------------
Net loss - as reported $ (51,283) $ (8,265,186)
Net loss - pro forma (51,283) (9,777,529)
Basic loss per share - as reported (0.0) (0.11)
Basic loss per share - pro forma (0.0) (0.12)
Note 10 - 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 8).
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 8).
During the year ended June 30, 1999:
The Company issued notes totaling $1,300,000 in exchange for two long-distance
telephone subscriber databases valued at $1,300,000 (Note 8).
Note 11 - Operating Leases
The Company leases office space under operating lease agreements, which provide
for aggregate monthly payments of $11,274 and expire through March 2003.
Year Ending June 30, Amount
-------------------- -----------
2001 87,688
2002 62,049
2003 12,514
-----------
$ 162,251
===========
Rent expense under these operating leases totaled $59,478 and $0 during the
years ended June 30, 2000 and 1999, respectively.
Note 12 - 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 8. The Company also
has 32,400,000 stock options and warrants to purchase up to 1,500,000 shares of
the Company's common stock outstanding. Currently, the Company does not have
sufficient authorized capital to legally issue these additional common shares.
The holders of options and warrants and those entitled to receive shares in a
second future closing are aware of the Company's lack of authorized capital. The
Company is using its best efforts to obtain shareholder approval at a meeting of
shareholders to increase the authorized capital of the Company. Management does
not believe this condition will have a material adverse effect as the Company's
financial condition.
Note 13 - Subsequent Events
Investment in Customer Databases
In October 2000, the Company entered into an option agreement with an entity
formed by the sellers of its customer databases described in Note 8. The
agreement provides that if the Company has not been able to establish at least
5,000 active telecommunication subscribers from the combined databases by
March 30, 2001, the Company has the option to require the entity to repurchase
the customer databases from the Company in an amount not below its original
investment in such databases 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 databases 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 databases.
COGNIGEN NETWORKS, INC.
(Formerly Silverthorne Production Company)
Results for June 30, 2000
Management's Discussion and Analysis or Plan of Operation
Forward-Looking Statements
Certain of the information discussed herein, and in particular in this section
entitled "Management's Discussion and Analysis or Plan of Operation," contains
forward-looking statements that involve risks and uncertainties that might
adversely affect the operating results of the Company in the future in a
material way. Such risks and uncertainties include, without limitation, the
Company's possible inability to obtain additional financing, lack of agent
growth, loss of key personnel, rate changes, fee policy or application changes,
technological changes and increased competition. Many of these risks are beyond
the control of the Company. The Company is not entitled to rely on the safe
harbor provisions of Section 27A of the Securities Act of 1933, as amended, or
Section 21E of the Securities Exchange Act of 1934, as amended, when making
forward-looking statements.
Overview
Prior to July 1, 1999 we were a publicly held shell that had no operations. On
August 20, 1999 we acquired all of the net assets of ITHC in exchange for up to
49,041,397 shares of our common stock. These assets primarily consisted of the
operating assets of Cognigen Corporation that had previously been acquired on
July 1, 1999 by ITHC. On April 14, 2000 we acquired all of the stock of CST in
exchange for 2,041,445 shares of our common stock. These acquisitions
transformed us into a thriving telecommunications company with specialties in
the sale through the Internet of calling cards, various local and long distance
services and discount circuit switched telecommunications services. We also
provide innovative custom designed service plans.
ITHC was incorporated on July 24, 1998 in Delaware. Since its inception, ITHC
had directed its efforts toward the acquisition of assets that would allow it to
be engaged in direct and multilevel agency marketing and sale of long distance
service and products as well as the switching and transport of voice, fax and
data telephone and internet traffic and related services. On July 1, 1999, ITHC
acquired the net assets of Cognigen Corporation in exchange for 5,500 shares of
ITHC's common stock and a note payable of $300,000. Cognigen Corporation was
actively marketing long distance telephone services over the Internet.
On July 11, 2000 we amended our Articles of Incorporation to change our name
from Silverthorne Production Company to Cognigen Networks, Inc.
Results of Operations
ITHC was a developmental stage company from its inception on July 24, 1998
through June 30, 1999. During this stage, ITHC generated no revenues and
incurred only minimal operational costs. ITHC focused its efforts on the pursuit
of the acquisition of business opportunities. On July 1, 1999, ITHC completed
the acquisition of all the net assets of Cognigen Corporation in a transaction
accounted for as a purchase. Additionally, in a transaction accounted for as a
reverse acquisition, ITHC acquired control of us. We were a non-operating public
shell corporation. As no operations existed for ITHC for the year ended June 30,
1999, no meaningful comparisons can be made.
For purposes of this Management's Discussion and Analysis or Plan of Operations,
we believe that a discussion regarding the major components of our results of
operations for the year ended June 30, 2000 will provide a more meaningful basis
for analysis.
Fiscal Year Ended June 30, 2000
Total revenue for the year ended June 30, 2000 was $3,779,713, which consisted
of $1,138,165 of prepaid calling card revenue, and marketing commissions of
$2,598,008 related to commissions received for sales of telecommunication
products through links provided from our web site. These revenue streams were
acquired in connection with the Cognigen Corporation acquisition. We also
generated other revenue of $63,540, which relates primarily to long distance
telecommunication revenue generated through callback services for two and a half
months from the our acquisition of CST.
Our operating costs consist of prepaid cards and pins of $950,727 related to the
cost of service provided by third party carriers. Marketing commissions of
$1,657,195 are commissions paid to agents associated with the telecommunications
product sales commissions received by us through our web site links.
Selling, general and administrative (SG&A) expenses were $8,734,444 for the year
ended June 30, 2000. Non-cash stock based compensation charges of $6,052,004 are
included in SG&A expenses and are related to stock issued to employees for
services valued at $30,000 and stock options issued to non-employees for
services valued at $6,022,004 using the Black-Scholes option pricing model. The
remainder of SG&A expenses includes salaries, consulting and other professional
fees, travel and related costs, and rents for our three offices. Our management
believes that our current infrastructure can support increases in capacity of
two to three times current sales levels without having to add significant
additional costs. There can be no assurances that we will not incur significant
additional SG&A costs as a result of future growth.
Depreciation and amortization was $561,510 for the year ended June 30, 2000 and
consists of depreciation on furniture and telecommunications equipment and
amortization of goodwill and customer lists. 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
from operations 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 the Company to meet all of its future
obligations. However, management believes the Company will be successful in
producing sufficient cash flows from all collective sources to continue for the
next twelve months.
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, the
Company has the option to have its original investment in these databases be
refunded through the forgiveness of the remaining debt outstanding and the
return of Company shares. The Company believes this agreement is a major step in
protecting the recoverability of the original investment in these databases.
INTER-AMERICAN TELECOMMUNICATIONS HOLDING CORPORATION
(A Development Stage Company)
(Accounting Acquirer of Silverthorne Production Company)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Inter-American Telecommunications
Holding Corporation
Seattle, Washington
We have audited the accompanying consolidated balance sheet of Inter-American
Telecommunications Holding Corporation (a development stage company) as of
June 30, 1999, and the related consolidated statements of operations, cash
flows, and changes in stockholders' equity for the period from inception
(July 24, 1998) through June 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Inter-American
Telecommunications Holding Corporation as of June 30, 1999, and the
consolidated results of its operations, its cash flows and its changes in
stockholders' equity for the period from inception (July 24, 1998) through
June 30, 1999 in conformity with generally accepted accounting principles.
Denver, Colorado
January 20, 2000
(except for Note 7 which
is dated February 10, 2000)
/s/Comiskey & Company
Comiskey & Company
PROFESSIONAL CORPORATION
INTER-AMERICAN TELECOMMUNICATIONS HOLDING CORPORATION
(A Development Stage Company)
(Accounting Acquirer of Silverthorne Production Company)
Consolidated Balance Sheet
June 30, 1999
Assets
Other assets
Goodwill $ 5
Deferred tax 16,531
Customer lists 1,300,015
----------
Total assets $1,316,551
==========
Liabilities and Stockholders' Equity
Current liabilities
Interest payable $ 67,814
Notes payable - related parties 700,000
----------
Total current liabilities 767,814
Notes payable - related parties, due in more than one 600,000
year
Stockholders' equity
Common stock; $0.01 par value, 10,000 shares
authorized; 2,000 shares (11,377,137 shares, as
adjusted) issued and outstanding 20
Deficit accumulated during the development stage (51,283)
----------
(51,263)
----------
Total liabilities and stockholders' equity $1,316,551
==========
INTER-AMERICAN TELECOMMUNICATIONS HOLDING CORPORATION
(A Development Stage Company)
(Accounting Acquirer of Silverthorne Production Company)
Consolidated Statement of Operations
For the Period July 24, 1998 (Inception) through June 30, 1999
Revenue $ -
Interest expense 67,814
----------
Loss before income taxes (67,814)
Income tax benefit 16,531
----------
Net loss $ (51,283)
==========
Basic and diluted earnings per share $ (0.01)
==========
Weighted average shares outstanding, as adjusted 11,377,137
==========
INTER-AMERICAN TELECOMMUNICATIONS HOLDING CORPORATION
(A Development Stage Company)
(Accounting Acquirer of Silverthorne Production Company)
Consolidated Statement of Cash Flows
For the Period July 24, 1998 (Inception) through June 30, 1999
Cash flows from operating activities
Net loss $ (51,283)
----------
Adjustments to reconcile net income to net cash flows
from operating activities
Deferred tax benefit (16,531)
Changes in assets and liabilities
Interest payable 67,814
----------
51,283
----------
Net cash flows from operating activities -
----------
Cash flows from investing activities
Net cash flows from investing activities -
----------
Cash flows from financing activities
Net cash flows from financing activities -
----------
Net change in cash -
----------
Cash and cash equivalents, beginning of period -
----------
Cash and cash equivalents, end of period $ -
==========
INTER-AMERICAN TELECOMMUNICATIONS HOLDING CORPORATION
(A Development Stage Company)
(Accounting Acquirer of Silverthorne Production Company)
Consolidated Statement of Changes in Stockholders' Equity
For the Period July 24, 1998 (Inception) through June 30, 1999
Common Stock
Deficit
Accumulated
Number of During the Total
Shares As Development Stockholders'
Adjusted Amount Stage Equity
Common stock issued for intangible
assets, November 4, 1998 $11,377,137 $ 20 $ - $ 20
Net loss for the period July 24,
1998 to June 30, 1999 - - (51,283) (51,283)
Balance, June 30, 1999 11,377,137 $ 20 $ (51,283) $(51,263)
INTER-AMERICAN TELECOMMUNICATIONS HOLDING CORPORATION
(A Development Stage Company)
(Accounting Acquirer of Silverthorne Production Company)
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies and Organization and
Presentation
Description of Business and Operations
Inter-American Telecommunications Holding Corporation ("ITHC" or the
"Company") was incorporated in the state of Delaware on July 24, 1998. ITHC
was organized for the purpose of consolidating the operations of certain
enterprises engaged in the commerce and transmission of domestic and
international long distance telephone and related services.
During the period ended June 30, 1999, ITHC acquired customer lists from
Telkiosk, Inc. ("Telkiosk") and Combined Telecommunications Consultancy, Ltd.
("CTC") that will be utilized to build a customer base for telecommunication
sales. These companies were unrelated to ITHC prior to the transaction. As
a result of these transactions, Telkiosk and CTC became shareholders of the
Company. On November 4, 1998, in a transaction accounted for as a purchase,
the Company issued 2,844,285 common shares (as adjusted) to acquire
Inter-American Telecommunications Corporation ("ITC"), an unrelated, inactive
corporation with no assets or liabilities. The shares were valued at an
aggregate consideration of $5, which was recorded as goodwill. ITC will
provide backroom support services for the Company's operations. On July 1,
1999, ITHC acquired all of the assets and liabilities of Cognigen
Corporation, an on-line marketer of a variety of telecommunications services;
see Note 7.
As of June 30, 1999, the Company is in the development stage as defined in
Statement of Financial Accounting Standards No. 7 - Accounting and Reporting
by Development Stage Enterprises. Since its inception, the Company has
geared its efforts toward the acquisition of assets that will allow it to be
engaged in direct and multilevel agency marketing and sale of long distance
service and products as well as the switching and transport of voice, fax and
data telephone and Internet traffic and related services. At June 30, 1999,
operations had not commenced.
Customer Lists
Customer databases acquired for debt have been recorded at the face amount of
the debt issued in the acquisition. Customer databases will be amortized
into income over a period not to exceed 3 years from the migration date.
Long Lived Assets
The Company assesses its long-lived assets for impairment on a quarterly
basis. Impairment is considered possible when management's projections of
future cash flows to be derived from the long-lived assets are less than the
carrying amount of the asset. Impairment is recorded as the difference
between the carrying amount of the asset and the present value of projected
future cash flows using the Company's incremental borrowing rate.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109
"Accounting for Income Taxes" which requires that deferred income tax
expenses be provided based upon estimated future tax effects of differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes calculated
based upon provisions of enacted tax laws.
Financial Instruments
Unless otherwise indicated, the fair value of all reported assets and
liabilities, which represent financial instruments (none of which are held
for trading purposes) approximate the carrying values of such amounts.
Use of Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in these financial
statements and accompanying notes. Actual results could differ from these
estimates.
Loss Per Share
Loss per common share has been computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period.
Shares issued in the initial capitalization of the Company have been treated
as outstanding since inception.
Principles of Consolidation
The accompanying financial statements include all of the accounts of the
Company and its wholly owned subsidiary, Inter-American Telecommunications
Corporation, an inactive corporation with no assets or liabilities. All
intercompany amounts have been eliminated in consolidation.
Stockholders' Equity
As more fully explained in footnote 8 to the financial statements, the
Company engaged in a reverse acquisition by Silverthorne Production Company
whereby the Company received or will receive at the second closing a total of
54,041,397 newly issued Silverthorne common shares. The effect of the
transaction is presented in the accompanying financial statements as a
pro-rata restatement of ITHC common shares outstanding. Unless otherwise
indicated, all ITHC common share and per- share amounts in these financial
statements have been restated to reflect a 5,688.57 to 1 increase in the
number of common shares outstanding.
Newly Issued Accounting Pronouncements
In June 1998, the FASB issued FAS 133, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, which establishes accounting and
reporting standards for all derivative instruments and for hedging
activities. FAS 133 requires that an entity measure all derivatives at fair
value and recognize those derivatives as either assets or liabilities on the
balance sheet. The change in a derivative's fair value is generally to be
recognized in current period earnings. However, if certain conditions are
met, a derivative may be specifically designated as a hedge of an exposure to
changes in fair value, variability of cash flows, or certain foreign currency
exposures. Based on the hedge designation, special hedge accounting rules
allow the derivative's change in value to be recognized either in current
period earnings, together with the offsetting change in value of the risk
being hedged, or, to the extent the hedge is effective, in comprehensive
income and subsequently reclassified into earnings when the hedged item
affects earnings.
FAS 133, as amended by FAS 137, is effective for all fiscal years beginning
after June 15, 2000 (calendar year 2001), with early adoption permitted. The
Company does not currently use derivatives for trading or speculative
purposes or for hedging and does not anticipate that the adoption of this
standard will have a significant impact on its operating results.
Note 2 - Statements of Cash Flows
There were no cash payments made for interest or income taxes in 1999.
Non-cash investing and financing activities consisted of the following:
Issuance of promissory notes $ 1,300,000
Issuance of common stock 20
Purchase of customer lists (1,300,015)
Goodwill (5)
Note 3 - Long-term Debt
At June 30, 1999, the Company had the following notes payable to related
parties:
Current Long-term
8% unsecured promissory note payable to Telkiosk, with
principal and interest due upon maturity at November
4, 1999, partially refinanced to July 1, 2000 $200,000 $300,000
8% unsecured promissory note payable to CTC, with
principal and interest due upon maturity at November
4, 1999, partially refinanced to July 1, 2000. 500,000 300,000
-------- --------
$700,000 $600,000
======== ========
Note 4 - Income Taxes
The Company computes and records taxes payable based upon determination of
taxable income, which is different from pre-tax financial statement income.
Such differences arise from the reporting of financial statement amounts in
different periods for tax purposes. The timing differences are a result of
different accounting methods being used for financial and tax reporting.
The Company's total deferred tax assets, deferred tax liabilities, and
deferred tax valuation allowance at June 30, 1999 are as follows:
Deferred tax assets
Non-benefited tax losses and credits $ 16,531
Valuation allowance -
------------
Net deferred tax asset $ 16,531
============
The provision for income taxes was different than the amount computed using
the statutory income tax rate for the reasons following:
Tax computed at statutory rate
State taxes $ 10,172
Valuation allowance 6,359
------------
Income tax benefit $ 16,531
============
Note 5 - Commitments and Contingencies
Presentation as a going concern
The Company is in the development stage and at June 30, 1999, had no liquid
assets with which to satisfy its acquisition liabilities and ongoing working
capital commitments. After year-end, as discussed in Note 8, the Company
acquired a controlling interest in Silverthorne Production Company, a
publicly traded shell company. Between September and December of 1999,
Silverthorne Production Company raised a total of $5.85 million through the
sale of its common stock, the proceeds of which will be used to fund ITHC's
operating capital requirements, as well as to make additional planned
acquisitions.
Note 6 - Related Party Transactions
Acquisition of customer databases
On November 4, 1998, ITHC acquired a customer database of 54,034 individual
subscribers from Telkiosk in exchange for 2,844,285, as adjusted shares of
ITHC common stock, plus a cash payment of $500,000 in the form of a
promissory note payable November 4, 1999 (and subsequently extended until
July 1, 2000 as to the remaining $300,000 balance due). Telkiosk is
partially owned by Peter Tilyou, a former officer and director of ITHC. This
is an electronically archived database containing 54,034 individual,
comma-delimited records of residential and business accounts of long distance
telephone subscribers using the callback or call-reorigination system. The
domiciles of these accounts are located primarily outside the United States,
including Japan, Italy, France, Argentina, Brazil, Spain, Israel, Russia and
CIS countries, Guatemala, Venezuela and Singapore. The customers in the
database use primarily U.S. origination - foreign termination callback long
distance services.
Also on November 4, 1998, ITHC acquired a customer database of 41,415
individual subscribers from CTC in exchange for 5,688,570, as adjusted shares
of ITHC common stock plus a cash payment of $800,000 in the form of a
promissory note payable November 4, 1999 (and subsequently extended until
July 1, 2000 as to $300,000 of the remaining balance due). CTC is partially
owned by Peter Tilyou, a former officer and director of ITHC. This is an
electronically archived database containing 41,415 individual,
comma-delimited records of residential and business accounts of long distance
telephone subscribers. The domiciles of these accounts are all located
within the United States. Approximately 90% of these accounts have an
affinity to a foreign country, and the accounts are held by persons of
Russian, Romanian, Czech, Slovakian, Slovenian, Polish, Bulgarian, German,
Japanese and Filipino national origin.
Migration of customers will commence when the solicitation process is
complete. The lists were originally purchased by CTC and Telkiosk in an
arm's length transaction from an independent international long distance
reseller and customer base consolidator. The purchase price to ITHC was
determined with respect to amounts paid or payable to the original seller of
the lists.
Note 7 - Subsequent Event
Acquisition of Cognigen Corporation
On July 1, 1999, the Company entered into an agreement with Cognigen
Corporation ("Cognigen") to purchase all of Cognigen's assets. The purchase
price included 31,286,894, as adjusted shares of ITHC common stock, and a
$300,000 note payable due October 1, 1999. The agreement also calls for a
four-year employment contract between the Company and Kevin Anderson, the
founder of Cognigen with an annual base salary of $175,000. Mr. Anderson was
not previously affiliated with ITHC prior to the acquisitions, and will
continue with the Company and will perform functions equivalent to that of a
chief operating officer. The agreement also calls for the Company to expend
a total of $600,000 over a three-year period on business expansion. The
transaction will be accounted for as a purchase.
The following Pro Forma combined condensed financial information reflects the
acquisition of Cognigen as if it occurred as of July 24, 1998 (the beginning
of the period).
Total assets $ 1,923,583
Total liabilities 1,982,914
Stockholders' equity (59,331)
Revenues 1,807,401
Net loss (37,049)
Loss per adjusted share (0.003)
Acquisition of controlling interest in Silverthorne Production Company
On August 20, 1999, pursuant to a Stock Purchase and Asset Acquisition
Agreement by and among Silverthorne Production Company ("Silverthorne"),
certain shareholders of Silverthorne, and the Company, ITHC acquired a total
of 24,345,384 shares, or approximately 58%, of the outstanding and to be
issued shares of common stock of Silverthorne in exchange for all of ITHC's
assets and liabilities. In a second closing which is to occur after a meeting
of the shareholders of Silverthorne, ITHC will receive an additional
37,298,444 Silverthorne common shares. Silverthorne is a publicly traded shell
company with no assets or liabilities prior to the transaction with ITHC as
described herein.
Of the shares acquired in August, 11,742,953 were acquired directly from
Silverthorne and 12,602,431 shares were acquired from certain shareholders of
Silverthorne in exchange for $190,000 in cash and 1,706,571, as adjusted
shares of ITHC common stock.
The transaction will be accounted for as a reverse acquisition, with ITHC
being the accounting acquirer of Silverthorne. Unless otherwise indicated,
all share and per share amounts in the accompanying financial statements have
been restated to reflect the issuance by Silverthorne of a total of
54,041,397 common shares to ITHC in the transaction, which equates to a total
of 5,688.57 shares of Silverthorne for each outstanding common share of ITHC.
Shares issued for employment agreements
On July 22, 1999 ITHC executed one-year employment agreements for the
positions of Chief Operating Officer ("COO") and Chief Financial Officer
("CFO"). Included in these agreements were the rights to receive 11,377,366,
as adjusted shares of ITHC common stock in consideration of past services.
On July 22, 1999, shares were issued and have been valued at $30,000 or .003
per share (as adjusted), which approximated market value at the date of issue.
Aquila Agreement
On July 22, 1999, ITHC entered into a three-year carrier service agreement
with Aquila International Telecommunications, Inc. ("Aquila"), a company
partially owned by Jimmy Boswell and David G. Lucas who are officers and
directors of the Company. ITHC provided an advance payment of $400,000 in
connection with this agreement.
In January 2000, Silverthorne entered into a letter of intent to acquire
Aquila, subject to the execution of a definitive agreement and other
conditions.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Cognigen Corporation
Seattle, Washington
We have audited the accompanying balance sheets of Cognigen Corporation as of
June 30, 1999 and 1998, and the related statements of income and retained
earnings, and cash flows for each of the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cognigen Corporation as of
June 30, 1999 and 1998, and the results of its operations and its cash flows
for each of the years then ended in conformity with generally accepted
accounting principles.
Denver, Colorado
January 20, 2000
/s/Comiskey & Company
Comiskey & Company
PROFESSIONAL CORPORATION
COGNIGEN CORPORATION
(A Business Acquired by Inter-American Telecommunications Holding Corporation)
Balance Sheets
June 30,
------------------------
1999 1998
--------- ---------
Assets
Current assets
Cash and cash equivalents $ 21,248 $ 14,390
Commissions receivable 279,507 19,956
Inventory 25,076 38,301
Prepaid excise taxes 752 1,149
--------- ---------
Total current assets 326,583 73,796
--------- ---------
Equipment - at cost
Telephone system 3,035 -
Computers 17,804 -
Furniture 790 -
Capitalized software 125,000 125,000
--------- ---------
146,629 125,000
Less accumulated depreciation (67,273) (37,500)
--------- ---------
79,356 87,500
--------- ---------
Other assets
Deferred income tax asset 74 2,718
Deposits 1,500 -
--------- ---------
1,574 2,718
--------- ---------
Total assets $ 407,513 $ 164,014
========= =========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 1,024 $ -
Commissions payable 184,268 40,346
Deferred revenue 71,763 31,451
Income taxes payable 13,770 2,032
Payroll taxes payable 50,403 22,918
--------- ---------
Total current liabilities 321,228 96,747
--------- ---------
Stockholders' equity
Common stock; $0.01 par value, 100,000 shares
authorized; 91,000 shares issued and outstanding 910 910
Additional paid-in capital 124,100 124,100
Retained deficit (38,725) (57,743)
--------- ---------
Total stockholders' equity 86,285 67,267
--------- ---------
Total liabilities and stockholders' equity $ 407,513 $ 164,014
========= =========
See notes to financial statements.
COGNIGEN CORPORATION
(A Business Acquired by Inter-American Telecommunications Holding Corporation)
Statements of Income and Retained Earnings
For the Years Ended
June 30,
--------------------------
1999 1998
---------- ----------
Revenues
Commission income $ 765,416 $ 615,090
Calling card sales 1,041,985 237,113
--------- ----------
1,807,401 852,203
--------- ----------
Cost of revenues
Commissions 553,086 409,657
Calling card cost of revenue 679,864 110,268
--------- ----------
1,232,950 519,925
--------- ----------
Gross profit 574,451 332,278
Selling, general and administrative expenses 541,051 381,885
--------- ----------
Income (loss) before income taxes 33,400 (49,607)
Provision for income taxes 14,382 (1,918)
--------- ----------
Net income (loss) 19,018 (47,689)
Retained deficit
Balance, beginning of the year (57,743) (10,054)
--------- ----------
Balance, end of year $ (38,725) $ (57,743)
========= ==========
Basic earnings per share $ .21 $ (.52)
========= ==========
See notes to financial statements.
COGNIGEN CORPORATION
(A Business Acquired by Inter-American Telecommunications Holding Corporation)
Statements of Cash Flows
For the Years Ended
June 30,
-------------------------
1999 1998
--------- ----------
Cash flows from operating activities
Net income (loss) $ 19,018 $ (47,689)
--------- ----------
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 29,773 25,000
Deferred income taxes 2,644 (2,718)
Changes in assets and liabilities
Commissions receivable (259,551) 58,824
Inventory 13,225 (38,301)
Prepaid excise taxes 397 (1,149)
Deposits (1,500) -
Accounts payable 1,024 (579)
Commissions payable 143,922 (20,783)
Deferred revenue 40,312 31,451
Income taxes payable 11,738 800
Payroll taxes payable 27,485 22,918
--------- ----------
9,469 75,463
--------- ----------
Net cash provided by operating activities 28,487 27,774
--------- ----------
Cash flows from investing activities
Acquisition of equipment (21,629) -
--------- ----------
Net cash used by investing activities (21,629) -
--------- ----------
Cash flows from financing activities
Net cash provided by financing activities - -
--------- ----------
Net increase in cash 6,858 27,774
Cash and cash equivalents, beginning of year 14,390 (13,384)
--------- ----------
Cash and cash equivalents, end of year $ 21,248 $ 14,390
========= ==========
See notes to financial statements.
(A Business Acquired by Inter-American Telecommunications Holding Corporation)
Notes to Financial Statements
Note 1 - Summary of Significant Accounting Policies and Organization and
Presentation
Description of Business and Operations
Cognigen Corporation, previously Cognigen Communications, was incorporated in
the state of Nevada in February 1998. Cognigen's predecessor, Cognigen
Communications, was incorporated in the state of California in February 1997.
All references to the "Company" or "Cognigen" refer to Cognigen
Corporation and include its predecessor. Cognigen is an on-line marketer of a
variety of telecommunication services.
Telecommunication services that are offered for sale include both domestic
and international long distance, international callback service, high
bandwidth web hosting service, IP telephony service and prepaid calling
cards. Services other than prepaid calling cards are provided by
telecommunication companies with which Cognigen has on-going relationships.
Commissions are paid to Cognigen based on the sale and usage of these
telecommunication services. The commission rates vary among the providers.
Calling cards are purchased from various vendors at a discount from the face
value. Revenue is generated upon the sale of the calling cards.
Cognigen services are marketed via a network of over thirty thousand agents
worldwide. Each agent has a personalized Web page that is accessed by
customers and potential customers looking for lower cost telecommunication
services. Commissions are paid on a sliding scale to agents on both direct
and downlink sales.
Revenue Recognition
The Company records commission income when the underlying telecommunication
service is rendered. Commission income does not include amounts paid
separately to carriers for telecommunication services provided.
Calling card revenue is recorded when the calling cards are shipped. The
Company's policy is to delay shipment of calling cards for a two-week period
after receipt of cash to allow for processing. This delay results in deferred
revenue, which is recorded as liability until the calling cards are shipped.
Calling card revenues include amounts paid for the cost of the
telecommunication services provided by third-party carriers.
General and administrative expenses are charged as incurred to periodic
income.
Statement of Cash Flows
For the purpose of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Commissions Receivable
Commissions receivable represent amounts due from providers for
telecommunication services used by subscribers. Typically providers pay
commissions due to Cognigen forty-five days after the usage month end to
allow for billing and collection.
No allowance for doubtful accounts has been established by the Company and no
bad debt expense has been recorded in either 1998 or 1999.
Inventory
Inventory consists of prepaid calling cards held for resale and is valued at
the lower of cost or market. Calling cards are purchased from a variety of
vendors at a discount from the face value. Excise tax of 3% of the face
value is paid at the time of purchase. When the calling card is sold, the
excise tax is collected and offset against the prepaid excise tax.
Property and Equipment
Property and equipment is stated at cost and depreciated using the
straight-line method over the following estimated useful lives:
Telephone system 5 years
Computers 3 years
Furniture 5 years
Capitalized software 5 years
Software developed to support the self-replicating Web pages used to market
telecommunication services and administer agents' sales and related
commissions has been capitalized according to the provisions of AICPA
Statement of Position 98-1 "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use". Such software was contributed in
exchange for stock in the Company in February 1997.
Commissions Payable
Commissions payable represent amounts due to agents as commission related to
the usage for which the Company is due commission income from its providers.
It is the Company's policy to pay commission to its agents only after
receiving commission due from its providers. This policy results in
approximately two months commission payable as of each year-end.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109
"Accounting for Income Taxes" which requires that deferred income tax
expenses be provided based upon estimated future tax effects of differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes calculated
based upon provisions of enacted tax laws.
Concentration of Credit Risk
The Company sells the telecommunication services of various providers. Based
on the sales efforts of the Company's agents, a concentration of revenue
and/or receivables can arise at various times. As of June 30, 1999 and 1998,
commissions receivable from two providers comprised 64% and 95%,
respectively, of the total commissions receivable. For the year ended June
30, 1998, 97% of commission income was generated from one provider. For the
year ended June 30, 1999, this provider's proportionate share of revenue had
decreased to 21%, while a new provider contributed 42% of the total revenue.
Financial Instruments
Unless otherwise indicated, the fair value of all reported assets and
liabilities, which represent financial instruments (none of which are held
for trading purposes) approximate the carrying values of such amounts.
Use of Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in these financial
statements and accompanying notes. Actual results could differ from these
estimates.
Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards No. 128
Earnings per Share" (SFAS No. 128) that requires the calculation of basic
earnings per common share, which is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
period, and diluted earnings per common share, which is computed using the
weighted average number of shares of common stock and common stock
equivalents.
Note 2 - Statements of Cash Flows
There were no cash payments made for interest or income taxes in either 1999
or 1998.
Note 3 - Income Taxes
The Company computes and records taxes payable based upon determination of
taxable income, which is different from pre-tax financial statement income.
Such differences arise from the reporting of financial statement amounts in
different periods for tax purposes. The timing differences are a result of
different accounting methods being used for financial and tax reporting.
The components of income tax expense (benefit) are:
June 30,
--------------------------
1999 1998
---------- ----------
Taxes currently payable $ 11,738 $ 800
Change in deferred tax assets 2,644 (2,718)
---------- ----------
$ 14,382 $ (1,918)
========== ==========
The Company's total deferred tax assets, deferred tax liabilities, and
deferred tax valuation allowance at June 30, 1999 and 1998 are as
follows:
June 30,
--------------------------
1999 1998
---------- ----------
Deferred tax assets
Deductible temporary differences $ 74 $ -
Non-benefited tax losses and credits - 2,718
---------- ----------
Total deferred tax assets 74 2,718
---------- ----------
Net deferred tax assets $ 74 $ 2,718
========== ==========
The provision for income taxes was different than the amount computed using
the statutory income tax rate for the reasons following:
June 30,
--------------------------
1999 1998
---------- ----------
Tax computed at statutory rate $ 5,010 $ (7,441)
State taxes 5,744 -
Other, non-deductible expenses 3,628 5,523
---------- ----------
Provision for income taxes $ 14,382 $ (1,918)
========== ==========
Note 5 - Commitments and Contingencies
The Company leases certain office space under an operating lease expiring
September 30, 1999 with monthly payments of $900 and an option to renew on a
month-to-month basis at $945 per month. Total expense for the years ended
June 30, 1999 and 1998 was $7,815 and $0, respectively.
The Company is not involved in any lawsuits or litigation.
Note 6 - Related Parties
Prior to October 1, 1998, the corporate offices of the Company were in the
personal residence of the two of the Company's directors. No rent was
charged for the use of the space.
Note 7 - Subsequent Event
On July 1, 1999, the Company entered into an agreement with Inter-American
Telecommunications Corporation ("ITHC") to sell all of its assets to ITHC.
The purchase price included 31,286,894 shares of ITHC common stock (as
adjusted for ITHC's reverse acquisition of Silverthorne Production Company,
see notes to the ITHC financial statements at June 30, 1999), and a $300,000
note payable due October 1, 1999. The agreement also calls for a four-year
employment contract between ITHC and Kevin Anderson, Cognigen's founder, who
was not related to ITHC prior to the acquisition.
ITHC was incorporated on July 24, 1998 and had no operations during the year
ended June 30, 1999. Proforma financial results would include only the
results of operations of Cognigen.
EXHIBIT B
COGNIGEN NETWORKS, INC.
2000 INCENTIVE AND NONSTATUTORY
STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this 2000 Incentive and
Nonstatutory Stock Option Plan are to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional
incentive to the Employees and Consultants of the Company and to promote the
success of the Company's business. Options granted hereunder may be either
"incentive stock options," as defined in Section 422 of the Internal Revenue
Code of 1986, as amended, or "non-statutory stock options," at the discretion of
the Board and as reflected in the terms of the written stock option agreement.
2. Definitions. As used herein, the following definitions shall apply:
a. "Board" shall mean the Committee, if one has been appointed, or the
Board of Directors of the Company if no Committee is appointed.
b. "Code" shall mean the Internal Revenue Code of 1986, as amended.
c. "Common Stock" shall mean the $0.001 par value common stock of the
Company.
d. "Company" shall mean Cognigen Networks, Inc., a Colorado
corporation.
e. "Committee" shall mean the Committee appointed by the Board in
accordance with paragraph (a) of Section 4 of the Plan, if one is
appointed, or the Board if no committee is appointed.
f. "Consultant" shall mean any person who is engaged by the Company or
any Subsidiary to render consulting services and is compensated for such
consulting services, but does not include a director of the Company who is
compensated for services as a director only with the payment of a
director's fee by the Company.
g. "Continuous Status as an Employee" shall mean the absence of any
interruption or termination of service as an Employee. Continuous Status as
an Employee shall not be considered interrupted in the case of sick leave,
military leave, or any other leave of absence approved by the Board;
provided that such leave is for a period of not more than 90 days or
reemployment upon the expiration of such leave is guaranteed by contract or
statute.
h. "Employee" shall mean any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company. The
payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
i. "Incentive Stock Option" shall mean an Option, which is intended to
qualify as an incentive stock option within the meaning of Section 422 of
the Code.
j. "Non-Employee Director" shall mean a director who:
(i) Is not currently an officer (as defined in Section 16a-1(f)
of the Securities Exchange Act of 1934, as amended) of the Company or
a Parent or Subsidiary of the Company, or otherwise currently employed
by the Company or a Parent or Subsidiary of the Company.
(ii) Does not receive compensation, either directly or
indirectly, from the Company or a Parent or Subsidiary of the Company,
for services rendered as a Consultant or in any capacity other than as
a director, except for an amount that does not exceed the dollar
amount for which disclosure would be required pursuant to Item 404(a)
of Regulation S-K adopted by the United States Securities and Exchange
Commission.
(iii) Does not possess an interest in any other transaction for
which disclosure would be required pursuant to Item 404(a) of
Regulation S-K adopted by the United States Securities and Exchange
Commission.
k. "Nonstatutory Stock Option" shall mean an Option granted under this
Plan, which does not qualify as an Incentive Stock Option. To the extent
that the aggregate fair market value of Optioned Stock to which Incentive
Stock Options granted under Options to an Employee are exercisable for the
first time during any calendar year (under the Plan and all plans of the
Company or any Parent or Subsidiary) exceeds $100,000, such Options shall
be treated as Nonstatutory Stock Options under the Plan. The aggregate fair
market value of the Optioned Stock shall be determined as of the date of
grant of each Option and the determination of which Incentive Stock Options
shall be treated as qualified incentive stock options under Section 422 of
the Code and which Incentive Stock Options exercisable for the first time
in a particular year in excess of the $100,000 limitation shall be treated
as Nonstatutory Stock Options shall be determined based on the order in
which such Options were granted in accordance with Section 422(d) of the
Code.
l. "Option" shall mean an Incentive Stock Option, a Nonstatutory Stock
Option or both.
m. "Optioned Stock" shall mean the Common Stock subject to an Option.
n. "Optionee" shall mean an Employee or other person who is granted an
Option.
o. "Parent" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
p. "Plan" shall mean this 2000 Incentive and Nonstatutory Stock Option
Plan.
q. "Share" shall mean a share of the Common Stock of the Company, as
adjusted in accordance with Section 11 of the Plan.
r. "Stock Option Agreement" shall mean the agreement to be entered
into between the Company and each Optionee which shall set forth the terms
and conditions of each Option granted to each Optionee, including the
number of Shares underlying such Option and the exercise price of each
Option granted to such Optionee under such agreement.
s. "Subsidiary" shall mean a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of Shares, which may be optioned and sold
under the Plan, is 5,000,000 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock. If an Option should expire
or become unexercisable for any reason without having been exercised in full,
the unpurchased Shares which were subject thereto shall, unless the Plan shall
have been terminated, become available for future grant under the Plan.
4. Administration of the Plan.
a. Procedure. The Plan shall be administered by the Board or a
Committee appointed by the Board consisting of two or more Non-Employee
Directors to administer the Plan on behalf of the Board, subject to such
terms and conditions as the Board may prescribe.
(i) Once appointed, the Committee shall continue to serve until
otherwise directed by the Board (which for purposes of this paragraph
(a)(i) of this Section 4 shall be the Board of Directors of the
Company). From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with
or without cause) and appoint new members in substitution therefore,
fill vacancies however caused, or remove all members of the Committee
and thereafter directly administer the Plan.
(ii) Members of the Board who are granted, or have been granted,
Options may vote on any matters affecting the administration of the
Plan or the grant of any Options pursuant to the Plan.
b. Powers of the Board. Subject to the provisions of the Plan, the
Board shall have the authority, in its discretion:
(i) To grant Incentive Stock Options and Nonstatutory Stock
Options or both as provided and identified in a separate written Stock
Option Agreement to each Optionee granted such Option or Options under
the Plan; provided however, that in no event shall an Incentive Stock
Option and a Nonstatutory Stock Option granted to any Optionee under a
single Stock Option Agreement be subject to a "tandem" exercise
arrangement such that the exercise of one such Option affects the
Optionee's right to exercise the other Option granted under such Stock
Option Agreement;
(ii) To determine, upon review of relevant information and in
accordance with Section 8(b) of the Plan, the fair market value of the
Common Stock;
(iii) To determine the exercise price per Share of Options to be
granted, which exercise price shall be determined in accordance with
Section 8(a) of the Plan;
(iv) To determine the Employees or other persons to whom, and the
time or times at which, Options shall be granted and the number of
Shares to be represented by each Option;
(v) To interpret the Plan;
(vi) To prescribe, amend and rescind rules and regulations
relating to the Plan;
(vii) To determine the terms and provisions of each Option
granted (which need not be identical) and, with the consent of the
holder thereof, modify or amend each Option;
(viii) To accelerate or defer (with the consent of the Optionee)
the exercise date of any Option, consistent with the provisions of
Section 7 of the Plan;
(ix) To authorize any person to execute on behalf of the Company
any instrument required to effectuate the grant of an Option
previously granted by the Board; and
(x) To make all other determinations deemed necessary or
advisable for the administration of the Plan.
c. Effect of Board's Decision. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees
and any other permissible holders of any Options granted under the Plan.
5. Eligibility.
a. Persons Eligible. Options may be granted to any person selected by
the Board. Incentive Stock Options may be granted only to Employees. An
Employee, who is also a director of the Company, its Parent or a
Subsidiary, shall be treated as an Employee for purposes of this Section 5.
An Employee or other person who has been granted an Option may, if he is
otherwise eligible, be granted an additional Option or Options.
b. No Effect on Relationship. The Plan shall not confer upon any
Optionee any right with respect to continuation of employment or other
relationship with the Company nor shall it interfere in any way with his
right or the Company's right to terminate his employment or other
relationship at any time.
6. Term of Plan. The Plan became effective on the date the Plan is approved
by the shareholders of the Company in accordance with Section 422 of the Code.
It shall continue in effect until a date that is 10 years after such approval,
unless sooner terminated under Section 13 of the Plan.
7. Term of Option. The term of each Option shall be 10 years from the date
of grant thereof or such shorter term as may be provided in the Stock Option
Agreement. However, in the case of an Option granted to an Optionee who, at the
time the Option is granted, owns stock representing more than 10% of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, if the Option is an Incentive Stock Option, the term of the Option
shall be five years from the date of grant thereof or such shorter time as may
be provided in the Stock Option Agreement.
8. Exercise Price and Consideration.
a. Exercise Price. The per Share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be such price as is
determined by the Board, but the per Share exercise price under an
Incentive Stock Option shall be subject to the following:
(i) If granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than 10% of
the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall not be less than
110% of the fair market value per Share on the date of grant.
(ii) If granted to any other Employee, the per Share exercise
price shall not be less than 100% of the fair market value per Share
on the date of grant.
b. Determination of Fair Market Value. The fair market value per Share
on the date of grant shall be determined as follows:
(i) If the Common Stock is listed on the New York Stock Exchange,
the American Stock Exchange or such other securities exchange
designated by the Board, or admitted to unlisted trading privileges on
any such exchange, or if the Common Stock is quoted on a National
Association of Securities Dealers, Inc. system that reports closing
prices, the fair market value shall be the closing price of the Common
Stock as reported by such exchange or system on the day the fair
market value is to be determined, or if no such price is reported for
such day, then the determination of such closing price shall be as of
the last immediately preceding day on which the closing price is so
reported;
(ii) If the Common Stock is not so listed or admitted to unlisted
trading privileges or so quoted, the fair market value shall be the
average of the last reported highest bid and the lowest asked prices
quoted on the National Association of Securities Dealers, Inc.
Automated Quotations System or, if not so quoted, then by the National
Quotation Bureau, Inc. on the day the fair market value is determined;
or
(iii) If the Common Stock is not so listed or admitted to
unlisted trading privileges or so quoted, and bid and asked prices are
not reported, the fair market value shall be determined in such
reasonable manner as may be prescribed by the Board.
c. Consideration and Method of Payment. The consideration to be paid
for the Shares to be issued upon exercise of an Option, including the
method of payment, shall be determined by the Board and may consist
entirely of cash, check, other shares of Common Stock having a fair market
value on the date of exercise equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, or any combination of
such methods of payment, or such other consideration and method of payment
for the issuance of Shares to the extent permitted under the Colorado
Business Corporation Act.
9. Exercise of Option.
a. Procedure for Exercise: Rights as a Shareholder. Any Option granted
hereunder shall be exercisable at such times and under such conditions as
determined by the Board, including performance criteria with respect to the
Company and/or the Optionee, and as shall be permissible under the terms of
the Plan.
In the sole discretion of the Board, at the time of the grant of an
Option or subsequent thereto but prior to the exercise of an Option, an
Optionee may be provided with the right to exchange, in a cashless
transaction, all or part of the Option for Common Stock of the Company on
terms and conditions determined by the Board.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for
the Shares with respect to which the Option is exercised has been received
by the Company. Full payment, as authorized by the Board, may consist of a
consideration and method of payment allowable under Section 8(c) and this
Section 9(a) of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of the duly authorized
transfer agent of the Company) of the stock certificate evidencing such
Shares, no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, notwithstanding
the exercise of the Option. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the stock
certificate is issued, except as provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares, which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which
the Option is exercised.
b. Termination of Status as an Employee. In the case of an Incentive
Stock Option, if any Employee ceases to serve as an Employee, he may, but
only within such period of time not exceeding three months as is determined
by the Board at the time of grant of the Option after the date he ceases to
be an Employee, exercise his Option to the extent that he was entitled to
exercise it at the date of such termination. To the extent that he was not
entitled to exercise the Option at the date of such termination, or if he
does not exercise such Option (which he was entitled to exercise) within
the time specified herein, the Option shall terminate.
c. Disability of Optionee. In the case of an Incentive Stock Option,
notwithstanding the provisions of Section 9(b) above, in the event an
Employee is unable to continue as an Employee as a result of his total and
permanent disability (as defined in Section 22(e)(3) of the Code), he may,
but only within such period of time not exceeding 12 months as is
determined by the Board at the time of grant of the Option from the date of
termination, exercise his Option to the extent he was entitled to exercise
it at the date of such termination. To the extent that he was not entitled
to exercise the Option at the date of termination, or if he does not
exercise such Option (which he was entitled to exercise) within the time
specified herein, the Option shall terminate.
d. Death of Optionee. In the case of an Incentive Stock Option, in the
event of the death of the Optionee:
(i) During the term of the Option if the Optionee was at the time
of his death an Employee and had been in Continuous Status as an
Employee or Consultant since the date of grant of the Option, the
Option may be exercised, at any time within 12 months following the
date of death, by the Optionee's estate or by a person who acquired
the right to exercise the Option by bequest or inheritance, but only
to the extent of the right to exercise that would have accrued had the
Optionee continued living and remained in Continuous Status as an
Employee 12 months after the date of death; or
(ii) Within such period of time not exceeding three months as is
determined by the Board at the time of grant of the Option after the
termination of Continuous Status as an Employee, the Option may be
exercised, at any time within 12 months following the date of death,
by the Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued at the date of termination.
10. Non-transferability of Options. Unless permitted by the Code, in the
case of an Incentive Stock Option, the Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent and distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
11. Adjustments Upon Changes in Capitalization or Merger. Subject to any
required action by the shareholders of the Company, the number of Shares covered
by each outstanding Option, and the number of Shares which have been authorized
for issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of any
Option, as well as the price per Share covered by each such outstanding Option,
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of Shares subject to an Option.
In the event of the proposed dissolution or liquidation of the Company, the
Option will terminate immediately prior to the consummation of such proposed
action, unless otherwise provided by the Board. The Board may, in the exercise
of its sole discretion in such instances, declare that any Option shall
terminate as of a date fixed by the Board and give each Optionee the right to
exercise his Option as to all or any part of the Optioned Stock, including
Shares as to which the Option would not otherwise be exercisable. In the event
of the proposed sale of all or substantially all of the assets of the Company,
or the merger of the Company with or into another corporation in a transaction
in which the Company is not the survivor, the Option shall be assumed or an
equivalent option shall be substituted by such successor corporation or a parent
or subsidiary of such successor corporation, unless the Board determines, in the
exercise of its sole discretion and in lieu of such assumption or substitution,
that the Optionee shall have the right to exercise the Option as to all of the
Optioned Stock, including Shares as to which the Option would not otherwise be
exercisable. If the Board makes an Option fully exercisable in lieu of
assumption or substitution in the event of such a merger or sale of assets, the
Board shall notify the Optionee that the Option shall be fully exercisable for a
period of 30 days from the date of such notice, and the Option will terminate
upon the expiration of such period.
12. Time of Granting Options. The date of grant of an Option shall, for all
purposes, be the date on which the Board makes the determination granting such
Option. Notice of the determination shall be given to each Employee or other
person to whom an Option is so granted within a reasonable time after the date
of such grant. Within a reasonable time after the date of the grant of an
Option, the Company shall enter into and deliver to each Employee or other
person granted such Option a written Stock Option Agreement as provided in
Sections 2(r) and 16 hereof, setting forth the terms and conditions of such
Option.
13. Amendment and Termination of the Plan.
a. Amendment and Termination. The Board may amend or terminate the
Plan from time to time in such respects as the Board may deem advisable;
provided that, the following revisions or amendments shall require approval
of the shareholders of the Company holding a majority of the outstanding
voting stock of the Company, who are present or represented and entitled to
vote thereon, or by unanimous written consent of the shareholders:
(i) An increase in the number of Shares subject to the Plan above
the number of Shares set forth in Section 3 of the Plan, other than in
connection with an adjustment under Section 11 of the Plan;
(ii) Any change in the designation of the class of Employees
eligible to be granted Incentive Stock Options; or
(iii) Any material amendment under the Plan that would have to be
approved by the shareholders of the Company for the Board to continue
to be able to grant Incentive Stock Options under the Plan.
b. Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if the Plan had not been
amended or terminated, unless mutually agreed otherwise between the
Optionee and the Board, which agreement must be in writing and signed by
the Optionee and the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant
to the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Securities Exchange Act of 1934, as amended, the rules and
regulations promulgated thereunder, applicable state securities laws, and the
requirements of any stock exchange upon which the Shares may then be listed, and
shall be further subject to the approval of legal counsel for the Company with
respect to such compliance.
As a condition to the existence of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares and such other
representations and warranties which in the opinion of legal counsel for the
Company, are necessary or appropriate to establish an exemption from the
registration requirements under applicable federal and state securities laws
with respect to the acquisition of such Shares.
15. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. Inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's legal counsel to be necessary for the lawful issuance
and sale of any Share hereunder, shall relieve the Company of any liability
relating to the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
16. Option Agreement. Each Option granted to an Employee or other persons
shall be evidenced by a written Stock Option Agreement in such form as the Board
shall approve.
17. Information to Optionees. The Company shall provide to each Optionee,
during the period for which such Optionee has one or more Options outstanding,
copies of all annual reports and other information, which are provided to all
shareholders of the Company. The Company shall not be required to provide such
information if the issuance of Options under the Plan is limited to key
employees whose duties in connection with the Company assure their access to
equivalent information.
18. Gender. As used herein, the masculine, feminine and neuter genders
shall be deemed to include the others in all cases where they would so apply.
19. CHOICE OF LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND
INTERPRETATION OF THIS PLAN AND THE INSTRUMENTS EVIDENCING OPTIONS WILL BE
GOVERNED BY THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF
DELAWARE.
IN WITNESS WHEREOF, the Company has caused its duly authorized officer to
execute this Plan effective as of _______________, 2000.
COGNIGEN NETWORKS, INC.,
a Colorado corporation
By:
------------------------------
Darrell H. Hughes, President
