<PAGE>
THOMAS S. SMITH SMITH MCCULLOUGH, P.C. MARK A. MEYER
Kim I. McULLOUGH DONNA J. BLOOMER
DOUGLAS R. FERGUSO DANIEL J. BLOCK*
JEFFREY J. COWMAN *Admitted in Oregon Only
HAROLD R. BRUNO III
STEVEN M. FEDER
THERESA M. MEHRINGER
LYNNE M. HANSON
GARRETT M. TUTTLE
________________________________________________________________________________
REGENCY PLAZA ONE O 4643 SOUTH ULSTER STREET O SUITE 900 O
DENVER, COLORADO 80237-2866
TELEPHONE (303) 221-6000 O FAX (303) 221-6001 O [email protected]
March 20, 2000
VIA EDGAR
United States Securities
and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Silverthorne Production Company
File No. 000-11730
Preliminary Proxy Materials for Annual Meeting of Shareholders
Ladies and Gentlemen:
Enclosed for filing are copies of the preliminary Notice of Annual Meeting
of Shareholders, Proxy Statement and Proxy to be used in connection with the
Annual Meeting of Shareholders of Silverthorne Production Company ("Company") to
be held in April 2000. It is planned that the proxy materials will be mailed to
the Company's shareholders in early April 2000.
Please contact the undersigned with any comments the Staff may have on the
preliminary proxy materials.
Sincerely yours,
/s/ Thomas S. Smith
Thomas S. Smith
TSS:js
Enclosure
cc: Silverthorne Production Company
Attn: Jimmy L. Boswell
Darrell H. Hughes
David L. Jackson
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange
Act of 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement
|_| Confidential for use of the Commission Only (as permitted by Rule
14a-6(e)(2))
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
SILVERTHORNE PRODUCTION COMPANY
(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which the transaction applies:
- --------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
- --------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------
|_| Fee paid previously with preliminary materials.
- --------------------------------------------------------------------
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
7001 Seaview Avenue NW
Suite 210
Seattle, Washington 98117
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be held on April __, 2000
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the
"Meeting") of Silverthorne Production Company, a Colorado corporation (the
"Company"), will be held in the Special Events Room on the Second Floor, 7001
Seaview Avenue, NW, Seattle, Washington 98117, on _________, April __, 2000, at
10:00 a.m., Pacific Time, for the purpose of considering and voting upon
proposals to:
(1) elect five directors to serve until the next annual meeting of
shareholders or until their successors are elected and qualify;
(2) adopt an amendment to Article FIRST of the Articles of Incorporation
of the Company to change the name of the Company from "Silverthorne
Production Company" to "Cognigen
Networks, Inc.";
(3) adopt an amendment to Article THIRD of the Articles of Incorporation
of the Company to delete any reference contained in the current
Article THIRD to an area of business in which the Company no longer
engages and to change the wording of the provision in the current
Article THIRD that confers upon the Company all of the rights, powers
and privileges conferred on Colorado corporations;
(4) adopt an amendment to Section (d)(ii) of Article EIGHTH of the
Articles of Incorporation of the Company to change the vote required
to amend the Articles of Incorporation to a majority of a quorum;
(5) adopt a new Article NINTH of the Articles of Incorporation of the
Company which limits the liability of the directors of the Company
under certain circumstances;
(6) approve a one-for-four reverse split of the Company's outstanding
common stock;
(7) approve the Company's 2000 Incentive and Nonstatutory Stock Option
Plan; and
(8) transact such other business as may lawfully come before the Meeting
or any adjournment(s) thereof.
Only shareholders of record at the close of business on February 25, 2000,
are entitled to notice of and to vote at the Meeting and at any adjournment(s)
thereof.
The enclosed Proxy is solicited by and on behalf of the Board of Directors
of the Company. All shareholders are cordially invited to attend the Meeting in
person. Whether you plan to attend or not, please date, sign and return the
accompanying proxy in the enclosed return envelope, to which no postage need be
affixed if mailed in the United States. The giving of a proxy will not affect
your right to vote in person if you attend the Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
DAVID L. JACKSON, SECRETARY
Seattle, Washington
April __, 2000
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
7001 Seaview Avenue NW
Suite 210
Seattle, Washington 98117
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL __ 2000
This proxy statement ("Proxy Statement") is being furnished in connection
with the solicitation of proxies by the Board of Directors of Silverthorne
Production Company (the "Company") to be used at the Annual Meeting of
Shareholders (the "Meeting") to be held in the Special Events Room on the
Second Floor, 7001 Seaview Avenue, N.W., Seattle, Washington 98117, on April __,
2000, at 10:00 a.m. Pacific Time, and at any adjournment(s) thereof.
This Proxy Statement and the accompanying Proxy will be mailed to the
Company's shareholders on or about April __, 2000.
Any person signing and mailing the enclosed Proxy may revoke it at any
time before it is voted by: (i) giving written notice of the revocation to the
Company's corporate secretary; (ii) voting in person at the Meeting; or (iii)
voting again by submitting a new proxy card. Only the latest dated proxy card,
including one which a person may vote in person at the Meeting, will count. If
not revoked, the Proxy will be voted at the Meeting in accordance with the
instructions indicated on the Proxy by the shareholder, or, if no instructions
are indicated, will be voted FOR the nominees for director described therein;
FOR the proposed amendments to the Company's Articles of Incorporation; FOR
approval of a proposal to effectuate a one-for-four reverse split of the
Company's outstanding common stock; and FOR approval of the Company's 2000
Incentive and Nonstatutory Stock Option Plan.
VOTING SECURITIES
Voting rights are vested exclusively in the holders of the Company's
$0.001 par value common stock with each share entitled to one vote. Cumulative
voting in the election of directors is not permitted. Only shareholders of
record at the close of business on February 25, 2000, are entitled to notice of
and to vote at the Meeting or any adjournments thereof. On February 25, 2000,
the Company had 44,825,522 shares of common stock outstanding.
<PAGE>
PRINCIPAL SHAREHOLDERS AND
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of February 25, 2000, the number of
shares of the Company's outstanding common stock beneficially owned by each of
the Company's current directors and by each nominee for director, sets forth the
number of shares of the Company's common stock beneficially owned by all of the
Company's current executive officers and directors as a group, and sets forth
the number of shares of the Company's common stock owned by each person who
owned of record, or was known to own beneficially, more than 5% of the
outstanding shares of the Company's common stock:
Amount and Nature of
Name and Address Beneficial Ownership(1) Percent of Class
- ------------------------- ------------------------ -------------------
Jimmy L. Boswell
Suite 304
3220 South Higuera Street
San Luis Obispo, CA 93401 1,600,000(2) 3.4%
David L. Jackson
16053 Via Viajera
Rancho Santa Fe, CA 92067 1,620,000(3) 3.5%
Wilhelm J. Giertsen
Starefossveien
5019 Burgen
Norway 559,213(4) 1.2%
Darrell H. Hughes
Suite 210
7001 Seaview Avenue N.W.
Seattle, WA 98117 1,602,000(5) 3.4%
Mohammed I. Marafi
P. O. Box 104
13002 Safat
Kuwait 1,257,894(6) 2.8%
All current officers and
directors as a group (3
persons) 6,422,000(7) 12.5%
Inter-American
Telecommunications
Holding Corporation
2608 Second Avenue,
Suite 108
Seattle, Washington 98121 24,195,384 54.0%
Combined
Telecommunications
Consultancy, Ltd.
2608 Second Avenue,
Suite 108
Seattle, Washington 98121 4,445,569(8) 9.1%
Cognigen Corporation
8711 15th Avenue N.W.
Seattle, WA 98117 24,195,384(9) 54.0%
Kevin Anderson
2608 Second Avenue,
Suite 108
Seattle, Washington 98120 36,195,384(9)(10) 63.7%
Anderson Family Trust #1
2608 Second Avenue,
Suite 108
Seattle, Washington 98120 36,195,384(10)(11) 63.7%
Peter Tilyou
2608 Second Avenue,
Suite 108
Seattle, Washington 98120 36,195,384(12) 63.7%
--------------------
(1) Except as indicated below, each person has sole and voting and/or
investment power over the shares listed.
(2) Represents 1,600,000 shares underlying an option. Mr. Boswell
currently owns approximately 2.6% of the outstanding common stock of
Inter-American Telecommunications Holding Corporation ("ITHC") which currently
owns 24,195,384 shares of the Company's outstanding common stock. If the
proposal to effectuate a one-for-four reverse split of the Company's outstanding
common stock is adopted, ITHC will be entitled to receive an additional
37,298,444 pre-split shares of the Company's common stock. Mr. Boswell does not
have sole or shared voting and/or investment power over the shares of the
Company's common stock owned by ITHC. Therefore, Mr. Boswell disclaims
beneficial ownership of the aggregate approximate 1,598,840 pre-split shares of
the Company's common stock that are and will be represented by Mr. Boswell's
ownership of approximately 2.6% of the outstanding common stock of ITHC and the
1,598,840 shares are not included in the above table.
(3) Includes 1,600,000 shares underlying an option. Mr. Jackson currently
owns approximately 3.5% of the outstanding common stock of ITHC which currently
owns 24,195,384 shares of the Company's outstanding common stock. If the
proposal to effectuate a one-for-four reverse split of the Company's outstanding
common stock is adopted, ITHC will be entitled to receive an additional
37,298,444 pre-split shares of the Company's common stock. Mr. Jackson does not
have sole or shared voting and/or investment power over the shares of the
Company's common stock owned by ITHC. Therefore, Mr. Jackson disclaims
beneficial ownership of the aggregate approximate 2,152,284 pre-split shares of
the Company's common stock that are and will be represented by Mr. Jackson's
ownership of approximately 3.5% of the outstanding common stock of ITHC and the
2,152,284 shares are not included in the above table.
(4) Includes 25,000 shares owned by Mr. Giertsen's wife.
(5) Includes 1,600,000 shares underlying an option. Mr. Hughes currently
owns approximately 10.5% of the outstanding common stock of ITHC which currently
owns 24,195,384 shares of the Company's outstanding common stock. If the
proposal to effectuate a one-for-four reverse split of the Company's outstanding
common stock is adopted, ITHC will be entitled to receive an additional
37,298,444 pre-split shares of the Company's common stock. Mr. Hughes does not
have sole or shared voting and/or investment power over the shares of the
Company's common stock owned by ITHC. Therefore, Mr. Hughes disclaims beneficial
ownership of the aggregate approximate 6,456,852 pre-split shares of the
Company's common stock that are and will be represented by Mr. Hughes' ownership
of approximately 10.5% of the outstanding common stock of ITHC and the 6,456,852
shares are not included in the above table.
(6) Includes 100,000 shares underlying a warrant. Does not include
1,241,472 shares owned by companies in which Mr. Marafi has a minority interest.
(7) Includes the shares specified in footnotes (2), (3) and (5) above.
Also, includes 1,600,000 shares underlying an option held by David G. Lucas, the
Chief Financial Officer of the Company. Mr. Lucas currently owns approximately
2.6% of the outstanding common stock of ITHC which currently owns 24,195,384
shares of the Company's outstanding common stock. If the proposal to effectuate
a one-for-four reverse split of the Company's outstanding common stock is
adopted, ITHC will be entitled to receive an additional 37,298,444 pre-split
shares of the Company's common stock. Mr. Lucas does not have sole or shared
voting and/or investment power over the shares of the Company's common stock
owned by ITHC. Therefore, Mr. Lucas disclaims beneficial ownership of the
aggregate approximate 1,598,840 pre-split shares of the Company's common stock
that are and will be represented by Mr. Lucas' ownership of approximately 2.6%
of the outstanding common stock of ITHC and the 1,598,840 shares are not
included in the above table.
(8) Includes 4,000,000 shares underlying an option. Combined
Telecommunications Consultancy, Ltd. ("CTC") currently owns approximately 7.1%
of the outstanding common stock of ITHC which currently owns 24,195,384 shares
of the Company's outstanding common stock. If the proposal to effectuate a
one-for-four reverse split of the Company's outstanding common stock is adopted,
ITHC will be entitled to receive an additional 37,298,444 pre-split shares of
the Company's common stock. CTC does not have sole or shared voting and/or
investment power over the shares of the Company's common stock owned by ITHC.
Therefore, CTC disclaims beneficial ownership of the aggregate approximate
4,366,062 pre-split shares of the Company's common stock that are and will be
represented by CTC's ownership of approximately 7.1% of the outstanding common
stock of ITHC and the 4,366,062 shares are not included in the above table.
(9) Includes the 24,195,384 shares of the Company's common stock owned by
ITHC. Cognigen Corporation currently owns approximately 57.9% of the outstanding
common stock of ITHC. The 24,195,384 shares of the Company's outstanding common
stock owned by ITHC may be deemed to be beneficially owned by Cognigen
Corporation. If the proposal to effectuate a one-for-four reverse split of the
Company's outstanding common stock is adopted, ITHC will be entitled to receive
an additional 37,298,444 pre-split shares of the Company's common stock. The
37,298,444 shares will be deemed to be beneficially owned by Cognigen
Corporation. The 37,298,444 shares are not included in the above table.
(10) Includes the 24,195,384 shares of the Company's common stock owned by
ITHC and that may be deemed to be beneficially owned by Cognigen Corporation and
12,000,000 shares of the Company's common stock underlying an option owned by
the Anderson Family Trust #1. Kevin Anderson has the sole voting and investment
power over the shares of the Company's common stock owned by ITHC. Kevin
Anderson and members of his family are the beneficiaries of the Anderson Family
Trust #1 which owns approximately 98.9% of the outstanding common stock of
Cognigen Corporation. Therefore, Mr. Anderson may be deemed to beneficially own
the 24,195,384 shares of the Company's common stock that Cognigen Corporation
may be deemed to beneficially own.
(11) Represents the 36,195,384 shares that Kevin Anderson may be deemed to
beneficially own.
(12) Represents the 36,195,384 shares of the Company's common stock owned
by the Anderson Family Trust #1 of which Peter Tilyou is the sole trustee but
not a beneficiary.
CHANGE IN CONTROL OF THE COMPANY
On August 20, 1999, the Company completed the first closing of the
acquisition of all of the assets of ITHC in exchange for 29,242,953 shares of
the Company's common stock. On December 27, 1999, the Company and ITHC agreed
that the total number of shares of the Company's common stock that were to be
issued at the first closing was 11,742,953 shares rather than 29,242,953 shares
and that the total number of shares to be issued by the Company to ITHC at the
second closing is 37,298,444 shares. Further, the Company and ITHC made it clear
that the Company was acquiring all of the assets and assuming all of the
liabilities of ITHC as of August 20, 1999.
As a result of ITHC's right to receive the 11,742,953 shares of the
Company's common stock and a previous purchase of 12,452,431 shares of the
Company's common stock by ITHC, ITHC now owns 24,195,384 shares, or
approximately 54.0% of the Company's outstanding shares of common stock.
Kevin Anderson and his family are beneficiaries of the Anderson Family
Trust #1 which owns approximately 98.9% of the outstanding common stock of
Cognigen Corporation. Cognigen Corporation currently owns approximately 57.9% of
the outstanding common stock of ITHC. Kevin Anderson has the sole voting and
investment power over the shares of the Company's common stock owned by ITHC.
Therefore, Kevin Anderson may be deemed to control ITHC and, thus, may be deemed
to control the Company.
The assets of ITHC consisted of electronically archived customer data
bases consisting of approximately 95,000 individual residential and business
long-distance telephone service subscriber accounts; agency, reseller and other
agreements and contracts ITHC had with carriers, switched resellers, unswitched
resellers, consolidators or other providers of long-distance and local telephone
service; ITHC's accounts receivable, commissions receivable, future commissions
that may be payable from any of the carriers, switched resellers, unswitched
resellers, consolidators or other providers of long-distance and local telephone
service; ITHC's computer software, proprietary programs and applications,
computers, monitors, peripherals, printers, copiers, telephone PABX systems,
office furniture and fixtures, office leases; customer data bases, customer
lists and print and electronic records relating to customers; ITHC's inventories
and orders for prepaid telephone cards; ITHC's new accounts; ITHC's websites,
pages, links and agreements as well as ITHC's Internet domains and email
addresses; agreements with ITHC's agents and subagents; exclusive use and
control of the name "Cognigen" and its attendant copyright, trade name and
trademark and service mark registrations; ITHC's intellectual property; ITHC's
lines of credit with carriers, prepaid card providers, swtiched resellers,
switchless resellers and other providers of local and long-distance phone
service, ITHC's cash and a majority of the outstanding stock of Inter-American
Telecommunications Corporation, a non-operating subsidiary of ITHC. The audited
balance sheets of ITHC as of June 30, 1999, and the audited statements of
operations, cash flows and changes in stockholders' equity of ITHC for the
period July 24, 1998 (inception) through July 30, 1999, the audited balance
sheets of Cognigen as of June 30, 1999 and 1998 and the audited statements of
income and retained earnings and cash flows of Cognigen and unaudited pro forma
financial information as of June 30, 1999 for the Company, ITHC and Cognigen and
the unaudited consolidated balance sheets of the Company as of December 31, 1999
and the unaudited consolidated statements of operations and unaudited
consolidated statements of cash flows of the Company for the six months ended
December 31, 1999 are attached hereto as Exhibit A.
CERTAIN INFORMATION PERTAINING TO THE COMPANY AND ITHC
As indicated under the caption "Change in Control," on August 20, 1999,
the Company acquired all of the assets of ITHC in exchange for 11,742,953 shares
of the Company's common stock that have been issued to ITHC and 37,298,444
pre-split shares of the Company's common stock that will be issued to ITHC only
if the proposal to effectuate a one-for-four reverse split of the Company's
outstanding common stock is adopted at the Meeting. Prior to the acquisition of
the assets of ITHC, the Company had no operations, no assets and minimal
liabilities. The audited balance sheets of ITHC as of June 30, 1999, and the
audited statements of operations, cash flows and changes in stockholders' equity
of ITHC for the period July 24, 1998 (inception) through July 30, 1999, the
audited balance sheets of Cognigen as of June 30, 1999 and 1998 and the audited
statements of income and retained earnings and cash flows of Cognigen and
unaudited pro forma financial information as of June 30, 1999 for the Company,
ITHC and Cognigen and the unaudited consolidated balance sheets of the Company
as of December 31, 1999 and the unaudited consolidated statements of operations
and unaudited consolidated statements of cash flows of the Company for the six
months ended December 31, 1999 are attached hereto as Exhibit A.
ITHC, which was incorporated in July 1998, acquired the assets it
transferred to the Company for a total of $1,600,000 in promissory notes, which
were assigned by the Company, and 7,500 shares of ITHC's common stock. ITHC
originally acquired the assets in 1998 and 1999 from Inter-American
Telecommunications Corporation, Telkiosk, Inc., Combined Telecommunications
Consultancy, Ltd. and Cognigen Corporation, all of which were incorporated in
1998.
ITHC, through Cognigen, its e-commerce division, was a major marketer of
long-distance telecommunications services. Operating on the Internet via
thousands of Web sites, Cognigen marketed both domestic and international
long-distance telephone service as well as prepaid calling cards through a
network of approximately 40,000 independent agents to approximately 157,000
subscribers worldwide.
Since 1997, the Cognigen division has experienced growth in the retail
revenue it has generated, in the size of its agent force, and in the number of
subscribers it has acquired and maintained. Cognigen's Internet presence
operates through proprietary programs that provide for a very high volume of
visits with user friendly procedures that allow on-line fulfillment of service
applications. Typically, a Cognigen subscriber is able to apply for, and obtain
discount long-distance service within a matter of hours rather than days.
The Company currently leases approximately 3,457 square feet of office
space at 7001 Seaview Avenue, NW, Suite 210, Seattle, Washington 98117, pursuant
to a lease that will terminate in December 2001 and that currently requires
monthly rental payments of approximately $3,025. The Company also currently
leases approximately 1,007 square feet of office space at 6751 Academy Road, NE,
Suite B, Albuquerque, New Mexico 87109, pursuant to a lease that will terminate
in March 2003 and that currently requires monthly rental payments of $1,390.49.
ITHC had 9 employees at the time the ITHC assets were acquired by the
Company. The employees became employees of the Company. As of February 25, 2000,
the Company had a total of 14 employees.
The Company's common stock is quoted on the OTC Bulletin Board ("OTC").
Even though maintaining a current listing on the OTC, no known significant
trading occurred during the Company's last two fiscal years. The following table
sets forth, for the periods indicated, the high and low closing bid price
quotations for the common stock as reported by the OTC. Such quotations reflect
inter-dealer prices, but do not include retail mark-ups, mark-downs or
commissions and may not necessarily represent actual transactions.
High Bid Low Bid
---------- ---------
Quarter ended December 31, 1999: $ 3.625 $ 0.8125
Quarter ended September 30, 1999: 1.00 0.1875
Quarter ended June 30, 1999: $ 0.30 $ 0.125
Quarter ended March 31, 1999: 0.2815 0.03125
Quarter ended December 31, 1998: 0.10 0.08
Quarter ended September 30, 1998: 0.125 0.0625
Quarter ended June 30, 1998: $ 0.1875 $ 0.125
Quarter ended March 31, 1998: 0.1875 0.125
Quarter ended December 31, 1997 0.15625 0.125
Quarter ended September 30, 1997: 0.3125 0.15625
As of February 25, 2000, there were approximately 1,348 holders of record
of the Company's common stock. The number of record holders does not include
holders whose securities are held in street name. The closing price of the
common stock on August 20, 1999, the date of the closing of the agreement with
ITHC, was $0.7187 per share. The closing price of the common stock on February
25, 2000, was $2.25. As of February 25, 2000, the Company had 44,825,522 shares
of common stock outstanding.
The Company has never paid and does not anticipate paying any cash
dividends on its common stock in the foreseeable future. The Company intends to
retain all earnings for use in the Company's business operations and in the
expansion of its business.
ACTIONS TO BE TAKEN AT MEETING
The Meeting has been called by the directors of the Company to consider
and act upon proposals to:
(1) elect five directors to serve until the next annual meeting of
shareholders or until their successors are elected and qualify;
(2) adopt an amendment to Article FIRST of the Articles of Incorporation
of the Company to change the name of the Company from "Silverthorne
Production Company" to "Cognigen Networks, Inc.";
(3) adopt an amendment to Article THIRD of the Articles of Incorporation
of the Company to delete any reference contained in the current Article
THIRD to an area of business in which the Company no longer engages and to
change the wording of the provision in the current Article THIRD that
confers upon the Company all of the rights, powers and privileges
conferred on Colorado corporations;
(4) adopt an amendment to Section (d)(ii) of Article EIGHTH of the Articles of
Incorporation of the Company to change the vote required to amend the
Articles of Incorporation to a majority of a quorum;
(5) adopt a new Article NINTH of the Articles of Incorporation of the Company
which limits the liability of the directors of the Company under certain
circumstances;
(6) adopt a proposal to effectuate a one-for-four reverse split of the
Company's outstanding common stock;
(7) approve the Company's 2000 Incentive and Nonstatutory Stock Option Plan;
and
(8) transact such other business as may lawfully come before the Meeting
or any adjournment(s) thereof.
The holders of one-third of the outstanding shares of common stock of the
Company present at the Meeting in person or represented by proxy constitutes a
quorum. If a quorum is present, directors are elected by a plurality of the
vote, i.e., the candidates receiving the highest number of votes cast in favor
of their election will be elected to the Board of Directors. To be approved, the
proposals specified in items (2) through (5) must receive the affirmative vote
of a majority of the outstanding shares. If a quorum is present, the proposals
specified in items (6) and (7) must receive the affirmative vote of a majority
of the shares represented in person or by proxy at the Meeting and entitled to
vote thereon. Where brokers have not received any instruction from their clients
on how to vote on a particular proposal, brokers are permitted to vote on
routine proposals but not on nonroutine matters. The absence of votes on
nonroutine matters are "broker nonvotes." Abstentions and broker nonvotes will
be counted as present for purposes of establishing a quorum, but will have no
effect in the election of directors. Abstentions and broker nonvotes on
proposals other than the election of directors will be counted as present for
purposes of the other proposals and will count as votes against all other
proposals.
<PAGE>
PROPOSAL NUMBER ONE
ELECTION OF DIRECTORS
The number of directors on the Company's Board of Directors has been
established by resolution of the Board of Directors as five directors effective
at the Meeting. The terms of the two current directors expire at the Meeting.
The persons named in the enclosed form of Proxy will vote the shares
represented by such Proxy for the election of the five nominees for director
named below. If, at the time of the Meeting, any of these nominees shall become
unavailable for any reason, which event is not expected to occur, the persons
entitled to vote the Proxy will vote for such substitute nominee or nominees, if
any, as they determine in their sole discretion. If elected, Jimmy L. Boswell,
Wilhelm J. Giertsen, Darrell H. Hughes, David L. Jackson and Mohammed I. Marafi
will hold office until the next annual meeting of shareholders, until their
successors are duly elected or appointed or until their earlier death,
resignation or removal. The nominees for director, each of whom has consented to
serve if elected, are as follows:
Director
Name of Nominee Since Age Principal Occupation for Last Five Years
- ---------------- --------- --- ------------------------------------------
Jimmy L. Boswell Not 57 Mr. Boswell has been the President and
currently Chief Operating Officer of the Company
a since August 1999 and was a director of
director the Company from August 1999 to
January 2000. From July 1999 to the
present, Mr. Boswell has also been the
President, Chief Operating Officer and a
director of ITHC, a predecessor to the
Company. From January 1998 to the
present, Mr. Boswell has also been the
President, Chief Executive Officer and a
director of Aquila International
Telecommunications, Inc., a long distance
national and international telephone
carrier. From November 1993 to
September 1997, Mr. Boswell was the Vice
President of Engineering and Chief
Technical Officer of Gateway U.S.A., Inc.,
an international telecommunications
company. Mr. Boswell graduated with a
degree in management from the University
of Redlands.
David L. Jackson 1990 61 Mr. Jackson has been the Secretary and
Treasurer of the Company since August 1999
and was the President and Chairman of the
Board of the Company from 1996 to
August 1999, the Vice President of the
Company from 1995 to 1996 and the President
and the Chairman of the Board of the
Company from 1990 to 1992. From
August 1999 to the present, Mr. Jackson has
also been a director and the Secretary of
ITHC, a predecessor to the Company. Mr.
Jackson has been a licensed real estate
broker in California since 1991. Mr.
Jackson graduated with a bachelor of arts
degree from Northwest Nazarene University
and with a Juris Doctor degree from the
University of Denver, College of Law.
Mr. Jackson was admitted to practice law in
the United States Federal Courts and
various state courts. He practiced in
Colorado until 1997 when his name was
removed from the list of attorneys
authorized to practice law in the
Colorado Courts. Mr. Jackson is an
arbitrator in dispute resolution of
commercial and labor law. He has been on
the roster of arbitrators of the Federal
Mediation and Conciliation Service of the
United States Government since March 1994.
Wilhelm J. Not 48 Mr. Giertsen has been the Chief Executive
Giertsen currently Officer and owner of W. Giertsen AS, a
a company that conducts worldwide sales of
director fish and seafood to the international
cruise fleet, since 1994. From 1991 to
1993, Mr. Giertsen was the owner of
Giertsen Services AS, a company that
conducted worldwide sales of fish and
seafood, including its own brand, to the
international cruise fleet. Mr. Giertsen
graduated from the Bergen College of
Commerce and received a Bachelor of
Business Administration from England.
Darrell H. 2000 54 Mr. Hughes has been a director of the
Hughes Company since January 2000 and the Chief
Executive Officer of the Company since
October 1999. From October 1999 to the
present, Mr. Hughes has also been the Chief
Executive Officer of ITHC, a predecessor to
the Company. From April 1997 through
October 1999, Mr. Hughes was Vice President
of Sales and Service with AAA Washington,
an automobile association. From
October 1996 through March 1997, Mr. Hughes
was the Vice President of Engineering
with ITL, a long distance telecom company.
From June 1996 through October 1996, Mr.
Hughes was a Manager of Program Development
for Siemens Communications, Inc., a
worldwide technology and communications
systems provider. From 1995 until 1996,
Mr. Hughes was the Director of Sales in the
Northwest for Ascom Timeplex, a provider of
voice, video and data communications. In
September 1993, Mr. Hughes retired as an
executive with GTE, a local exchange
carrier. Mr. Hughes graduated with a
bachelors degree in liberal arts and a
masters degree in management from the
University of Redlands.
Mohammed I. Not 43 Mr. Marafi has been the Chairman and
Marafi currently Managing Director of Al-Noor International
a Holding Company, a private investment,
director since 1999, the Deputy Chairman of Bryan
Investment Company, a company, since 1997,
Chairman or Deputy Chairman of United Bank
of Kuwait, a bank, since 1993, and the
Deputy Chairman of The Gulf Bank, K.S.C., a
bank, since 1992. Mr. Marafi has also
managed his family's general trading and
investment company since 1973.
The Company's Board of Directors held three meetings during the Company's
fiscal year ended June 30, 1999. Such meetings consisted of consent directors
minutes signed by all of the then directors, including David L. Jackson. The
Company has no standing audit, nominating or compensation committees or other
similar committees of the Board of Directors.
During the Company's fiscal year ended June 30, 1999, directors of the
Company received no compensation for their services as directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
ELECTION OF THE NOMINEES FOR DIRECTOR LISTED ABOVE.
<PAGE>
EXECUTIVE OFFICERS
The executive officers of the Company are Jimmy L. Boswell, Darrell H.
Hughes and David L. Jackson, information pertaining to whom is set forth under
"Election of Directors" above, and David G. Lucas. Mr. Lucas has been the Chief
Financial Officer of the Company since December 1999, has been the Chief
Financial Officer and a director of ITHC, a predecessor to the Company, since
July 1999, and has been the Vice President of Finance of Aquila International
Telecommunications, Inc., a long distance national and international telephone
carrier, since April 1998. From July 1997 through March 1998, Mr. Lucas was the
Controller for U.S. Filter Corp., a water treatment company. From 1994 to July
1997, Mr. Lucas was the Controller for Gateway U.S.A., a long distance national
and international telephone carrier. Mr. Lucas graduated with a bachelors degree
in business administration from Wayne State University and is a certified public
accountant.
The executive officers of the Company are elected annually at the first
meeting of the Company's Board of Directors held after each annual meeting of
shareholders. Each executive officer will hold office until his or her successor
duly is elected and qualified, until his or her death or resignation or until he
or she shall be removed in the manner provided by the Company's bylaws.
There is no arrangement or understanding between any executive officer and
any other person pursuant to which any person was selected as an executive
officer.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors and persons who beneficially own more than 10%
of the Company's outstanding common stock to file reports of beneficial
ownership with the Securities and Exchange Commission and to furnish the Company
with copies of these reports.
Based solely on a review of Forms 3, 4 and 5 and amendments thereto
furnished to the Company during its fiscal year ended June 30, 1999, no persons
who were either a director, officer or beneficial owner of more than 10% of the
Company's common stock failed to file on a timely basis reports required by
Section 16(a) of the Securities Exchange Act of 1934 during the most recent
fiscal year, except that Eric Sundsvold, who then was a more than 10% beneficial
shareholder, was late in filing two Forms 4 which reported purchase
transactions. During March 1999, management discovered that the Company's
securities had been registered under the Securities Exchange Act of 1934 since
1984 and the then officers, directors and more than 10% beneficial shareholders
filed Forms 3 and 4 for all of their historical transactions.
<PAGE>
EXECUTIVE COMPENSATION
The following table provides certain information pertaining to the
compensation paid by the Company and its subsidiaries during the Company's last
three fiscal years for services rendered by David L. Jackson, the former
President of the Company at June 30, 1999
SUMMARY COMPENSATION TABLE
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ON AWARDS
------------------------------------------ ----------
OTHER
FISCAL ANNUAL SECURITIES
NAME AND YEAR ENDED COMPEN- UNDERLYING ALL OTHER
PRINCIPAL POSITION JUNE 30 SALARY($) BONUS($) SATION($) OPTIONS(#) COMPENSATION($)
- ------------------ ---------- --------------- --------- -------- ---------- ---------------
David L ................. 1999 -0- -0- -0- -0- -0-
Jackson ................. 1998 -0- -0- -0- -0- -0-
President ............... 1997 -0- -0- -0- -0- -0-
</TABLE>
No compensation was paid by the Company to any of its executive officers
during the fiscal year ended June 30, 1999.
There were no options granted to or exercised by David L. Jackson during
the fiscal year ended 1999, and David L. Jackson owned no options to purchase
the Company's common stock at June 30, 1999. On August 25, 1999, David L.
Jackson was granted a five year option to purchase 1,600,000 shares of the
Company's common stock at $0.46 per share.
TRANSACTIONS WITH MANAGEMENT AND OTHERS AND
CERTAIN BUSINESS RELATIONS
On August 20, 1999, the Company completed the first closing of the
acquisition of all of the assets of ITHC in exchange for 29,242,953 shares of
the Company's common stock. On December 27, 1999, the Company and ITHC agreed
that the total number of shares of the Company's common stock that were to be
issued at the first closing was 11,742,953 shares rather than 29,242,953 shares
and the total number of shares to be issued at the second closing is 37,298,444
shares. Further, the Company and ITHC made it clear that the Company was
acquiring all of the assets and assuming all of the liabilities of ITHC as of
August 20, 1999.
As a result of ITHC's right to receive the 11,742,953 shares of the
Company's common stock and the previous sale of 12,452,431 shares of the
Company's common stock to ITHC, ITHC now owns 24,195,384 shares, or
approximately 54.0% of the Company's outstanding shares of common stock. The
Company loaned ITHC $190,000 to purchase 12,602,431 shares. Subsequently,
150,000 shares were later transferred by ITHC to two persons. The loan has not
yet been repaid.
On August 20, 1999, and on December 27, 1999, Jimmy L. Boswell and David
G. Lucas were directors, officers and owners of less than 5% of the outstanding
common stock of ITHC. Further, on August 20, 1999, David L. Jackson and his wife
were the sole directors and officers of the Company. On December 27, 1999, David
L. Jackson was a director of ITHC and owned less than 5% of the outstanding
common stock of ITHC. As of December 27, 1999, Darrell H. Hughes was an officer
of ITHC and owned approximately 10.5% of the outstanding common stock of ITHC.
As of August 20, 1999, and as of December 27, 1999, Cognigen Corporation owned
approximately 64.7% and 57.9%, respectively, of the outstanding common stock of
ITHC, Inter-American Telecommunications Corp. and Telkiosk, Inc. each owned
approximately 5.9% and 5.3%, respectively, of the outstanding common stock of
ITHC, and Combined Telecommunications Consultancy, Ltd. owned approximately 7.9%
and 7.1%, respectively, of the outstanding common stock of ITHC. As of August
20, 1999, and as of December 27, 1999, Kevin Anderson, through the Anderson
Family Trust #1 which owns approximately 98.9% of the outstanding common stock
of Cognigen Corporation, controlled Cognigen Corporation and ITHC. Peter Tilyou
is the sole trustee of the Anderson Family Trust #1 but is not a beneficiary of
the trust.
On August 25, 1999, the Company granted five-year options to purchase
approximately 31,600,000 shares of its common stock at $0.46 per share to
various persons including the Anderson Family Trust #1 (12,000,000 shares) which
is affiliated with Cognigen Corporation and of which Kevin Anderson and his
family are the sole beneficiaries, Jimmy L. Boswell (1,600,000 shares), Combined
Telecommunications Consultancy, Ltd. (4,000,000 shares), Darrell H. Hughes
(1,600,000 shares), Inter-American Telecommunications Corp. (800,000 shares),
David L. Jackson (1,600,000 shares) and David G. Lucas (1,600,000 shares). The
Company also issued another option to purchase 800,000 shares of the Company's
common stock to a nonaffiliated party. It is the position of the Company that
this option is void because of a misrepresentation made by a representative of
the person to whom the option was issued.
On July 22, 1999, ITHC and Aquila International Telecommunications, Inc.
("Aquila") entered into a Carrier Service Agreement that was assumed by the
Company in connection with the acquisition by the Company of all of the assets
of ITHC. Under the terms of the three-year agreement, ITHC agreed to migrate to
Aquila domestic and international dial-around and call-back long distance
subscribers pursuant to a telemarketing campaign to be conducted with ITHC's
personnel. Aquila agreed to provide office space, long distance telephone
service, PABX and telephone hand sets, at its cost, to support up to 12
telemarketing personnel and work stations. ITHC agreed to provide the computer
terminals and peripherals, furniture and fixtures required for the telemarketing
personnel. Aquila also agreed to provide customer service personnel. Aquila
agreed to charge ITHC a rate to each destination equal to Aquila's cost plus
15%. The rate charged by Aquila includes all switching services. Aquila also
agreed to provide all accounting services in connection with the agreement. All
accounts sent to Aquila by ITHC remain the property of ITHC. ITHC provided
Aquila with an advance payment of approximately $435,000 to help cover Aquila's
cost in providing long distance services for telemarketing, customer service and
carrier transport for the accounts of ITHC that migrate to Aquila. Jimmy L.
Boswell and David G. Lucas are officers and directors of Aquila and each own
approximately 19% of the outstanding common stock of Aquila.
The Company has employment agreements with Jimmy L. Boswell, Darrell H.
Hughes and David G. Lucas pursuant to which they are paid annual salaries of
$120,000, $125,000 and $90,000, respectively. In addition, commencing with the
month of December 1999, the Company began paying David L. Jackson a fee of
$6,000 per month for providing services to the Company. The Company also has
agreements with Kevin Anderson and Peter Tilyou pursuant to which they are paid
$14,583 and $10,000 per month, respectively.
Wilhelm J. Giertsen and Mohammed I. Marafi (and members of Mr. Marafi's
immediate family) purchased shares of the Company's common stock at $0.38 per
share in an offering by the Company of its common stock in September through
November 1999. In addition, Mohammed I. Marafi received two year warrants to
purchase 100,000 shares of the Company's common stock at $0.38 per share in
connection with the offering. Shares of the Company's common stock were sold in
the offering at $0.38 per share to other persons who were not affiliated with
the Company.
PROPOSAL NUMBER TWO
APPROVAL OF THE ADOPTION OF AN AMENDMENT TO ARTICLE FIRST
OF THE ARTICLES OF INCORPORATION OF THE COMPANY
The Board of Directors of the Company is recommending that Article FIRST
of the Company's Articles of Incorporation be amended to change the name of the
Company from Silverthorne Production Company to Cognigen Networks, Inc. The
directors of the Company recommend such change because the directors believe
that the current name has very little good will associated with it and the new
name will be more representative of the Company's current business activities
which consist primarily of the business activities conducted by the Cognigen
Division of the Company. The directors believe the "Cognigen" name has a
significant amount of good will associated with it because of its use for a
number of years by the Cognigen Corporation, the assets of which were acquired
by ITHC and then by the Company from ITHC.
If this proposal is approved, the officers of the Company will file an
amendment to the Articles of Incorporation of the Company with the Colorado
Secretary of State to amend Article FIRST so that as amended Article FIRST will
read as follows:
"FIRST: The name of the corporation is Cognigen Networks, Inc."
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
ADOPTION OF THE AMENDMENT TO ARTICLE FIRST OF THE ARTICLES OF INCORPORATION OF
THE COMPANY AS SET FORTH ABOVE.
PROPOSAL NUMBER THREE
APPROVAL OF THE ADOPTION OF AN AMENDMENT TO ARTICLE THIRD
OF THE ARTICLES OF INCORPORATION OF THE COMPANY
Article THIRD of the Company's Articles of Incorporation currently reads
as follows:
"THIRD: (a) Purposes. The nature, objects and purposes for which the
corporation is organized are to engage in the manufacture, assembly, licensing
and sale of cellular radio and communications equipment and accessories, to
engage generally in the cellular communications business, to invest in real and
personal property, and to engage in any other lawful activity permitted under
the laws of the State of Colorado, whether or not connected with any of the
foregoing objects and purposes, which is calculated, directly or indirectly, to
promote the interests of the corporation or to enhance the value of its
property.
(b) Powers. In furtherance of the foregoing purposes the corporation shall
have and may exercise all of the rights, powers, and privileges now or hereafter
conferred upon corporations organized under the laws of Colorado. In addition,
it may do everything necessary, suitable or proper for the accomplishment of any
of its corporate purposes."
The Board of Directors of the Company is recommending Article THIRD be
revised to read as follows:
"THIRD: The corporation shall have and may exercise all of the rights,
powers and privileges now or hereafter conferred upon corporations organized
under the laws of Colorado. In addition, the corporation may do everything
necessary, suitable or proper for the accomplishment of any of its corporate
purposes. The corporation may conduct part or all of its business in any part
of Colorado, the United States or the world and may hold, purchase, mortgage,
lease and convey real and personal property in any of such places."
The Board of Directors is recommending the change in Article THIRD because
the Company is no longer engaged in the business as set forth in paragraph (a)
of the current Article THIRD. Under the Colorado Business Corporation Act, the
Company is not required to set forth any specific business purpose in its
Articles of Incorporation and the proposed Article THIRD provides a statement
similar to the statement contained in paragraph (b) of the current Article THIRD
of the Company's Articles of Incorporation in that it confers upon the Company
all of the rights, powers and privileges conferred on corporations organized
under the laws of Colorado.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
ADOPTION OF THE AMENDMENT TO ARTICLE THIRD OF THE ARTICLES OF INCORPORATION OF
THE COMPANY AS SET FORTH ABOVE.
PROPOSAL NUMBER FOUR
APPROVAL OF THE ADOPTION OF AN AMENDMENT TO SECTION (d)(ii)
OF ARTICLE EIGHTH OF THE ARTICLES OF INCORPORATION
Section (d)(ii) of Article EIGHTH of the Company's Articles of
Incorporation currently reads as follows:
"(ii)When, with respect to any action to be taken by shareholders of this
Corporation, the laws of Colorado require the vote or concurrence of the holders
of two-thirds of the outstanding shares, of the shares entitled to vote thereon,
or of any class or series, such action may be taken by the vote or concurrence
of a majority of such shares or class or series thereof."
The Board of Directors of the Company is recommending that Section (d)(ii)
of Article EIGHTH be revised to read as follows:
"(ii)Except as bylaws adopted by the shareholders may provide for a greater
voting requirement and except as is otherwise provided by the Colorado Business
Corporation Act with respect to action on a plan of merger or share exchange,
on the disposition of substantially all of the property of the corporation, on
the granting of consent to the disposition of property by an entity controlled
by the corporation and on the dissolution of the corporation, action on a matter
other than the election of directors is approved if a quorum exists and if the
votes cast favoring the action exceed the votes cast opposing the action. Any
bylaw adding, changing or deleting a greater quorum or voting requirement for
shareholders shall meet the same quorum requirement and be adopted by the
same vote required to take action under the quorum and voting requirements
then in effect or proposed to be adopted, whichever are greater."
If the amendment to Section (d)(ii) of Article EIGHTH is adopted, the only
change will be that amendments to the Company's Articles of Incorporation will
be able to be adopted by a majority of a quorum, which is currently one-third of
the outstanding shares, rather than having to be adopted by a majority of the
outstanding shares. If adopted, the amendment to Section (d)(ii) will make it
easier for the holders of a controlling block of the common stock of the
Company, such as ITHC, to adopt amendments to the Articles of Incorporation of
the Company that could be detrimental to the other shareholders. The amendment
to Section (d)(ii) of Article EIGHTH of the Articles of Incorporation will
enable the Company, as a public company, to more easily obtain the vote
necessary to adopt an amendment to the Company's Articles of Incorporation in
the future. Except for amending the Company's Articles of Incorporation, the
amendment to Section (d)(ii) of Article EIGHTH does not change the number of
shares that must be voted in favor of a proposal for the proposal to be adopted.
Under the Colorado Business Corporation Act, amendments to articles of
incorporation require the approval of the holders of a majority of a quorum
unless the articles of incorporation, bylaws adopted by the shareholders or the
persons proposing the amendment require a greater vote. The Company's Articles
of Incorporation currently require the vote of a majority of the outstanding
shares of common stock of the Company to amend, repeal or adopt provisions to
the Articles of Incorporation. The requirement set forth in the Company's
Articles of Incorporation was in accordance with the Colorado Corporation Code
which was replaced by the Colorado Business Corporation Act in 1994.
It is proposed to amend the Company's Articles of Incorporation to permit
the stockholders from time to time to amend the Articles of Incorporation by the
affirmative vote of the holders of a majority of a quorum present at a meeting
rather than a majority of the outstanding shares of common stock. Assuming
adoption of the proposed amendment, future amendments would generally require
the affirmative vote of 16.7% of the outstanding shares of common stock instead
of the currently required 50.1% vote, thus reducing by 33.4% the stockholder
vote required for amendments.
The Board of Directors believes that the proposed reduction in the
stockholder vote requirement for amending the Articles of Incorporation would
offer the Company greater flexibility and ease in taking advantage of corporate
developments which may be in the best interests of the Company and its
stockholders. The reduced voting requirement could also enable the Company to
effect future amendments to the Articles of Incorporation at a lower cost to the
Company by reducing proxy solicitation expenses and management time
requirements.
Although the Board of Directors does not consider the amendment an
anti-takeover measure, the proposed amendment could be viewed as having the
effects of such a measure because the adoption of the reduced voting requirement
may increase the likelihood that the Board of Directors could obtain stockholder
approval for anti-takeover amendments to the Articles of Incorporation. Such
amendments, if proposed and adopted, could have the effect of enabling the
Company to discourage or make more difficult an attempt by another person to
remove incumbent management or to acquire control of the Company in a
transaction which a majority of stockholders might deem in their best interests.
However, the Company's Board of Directors believes that such possibilities at
this time are remote and that the advantages in making it easier and less costly
in soliciting stockholder approval of actions which might be proposed by the
Board of Directors outweighs any possible anti-takeover impact.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE IN FAVOR OF THE
ADOPTION OF THE AMENDMENT TO SECTION (d)(ii) OF ARTICLE EIGHTH OF THE ARTICLES
OF INCORPORATION OF THE COMPANY.
<PAGE>
PROPOSAL NUMBER FIVE
APPROVAL OF THE ADOPTION OF A NEW ARTICLE NINTH TO THE
ARTICLES OF INCORPORATION
The Board of Directors of the Company is recommending that the Articles of
Incorporation of the Company be amended to add the following Article NINTH:
"NINTH: A director of the corporation shall not be personally liable to the
corporation or to its shareholders for monetary damages for breach of fiduciary
duty as a director. However, this provision shall not eliminate or limit the
liability of a director to the corporation or to its shareholders for monetary
damages otherwise existing for (i) any breach of the director's duty of loyalty
to the corporation or to its shareholders; (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law;
(iii) acts specified in Section 7-108-403 of the Colorado Business Corporation
Act, as it may be amended from time to time; or (iv) any transaction from which
the director directly or indirectly derived any improper personal benefit. If
the Colorado Business Corporation Act is hereafter amended to eliminate or limit
further the liability of a director, then, in addition to the elimination and
limitation of liability provided by the preceding sentence, the liability of
each director shall be eliminated or limited to the fullest extent permitted by
the Colorado Business Corporation Act as so amended. Any repeal or modification
of this Article NINTH shall not adversely affect any right or protection of a
director of the corporation under this Article NINTH, as in effect immediately
prior to such repeal or modification, with respect to any liability that would
have accrued, but for this Article NINTH, prior to such repeal or modification.
Nothing contained herein will be construed to deprive any director of the
director's right to all defenses ordinarily available to a director nor will
anything herein be construed to deprive any director of any right the director
may have for contribution from any other director or other person."
Section 7-108-402 of the Colorado Business Corporation Act permits Colorado
corporations to include in their articles of incorporation a provision
eliminating or limiting the personal liability of directors to the corporation
or its shareholders for monetary damages for certain breaches of the fiduciary
duty of directors. This section is intended, among other things, to encourage
qualified individuals to serve as directors of Colorado corporations. Article
NINTH is designed to take advantage of this section of the Colorado Business
Corporation Act.
In performing their duties, directors of a Colorado corporation owe
fiduciary obligations to the corporation they serve and its shareholders. These
fiduciary obligations include the duty of care and the duty of loyalty. In
simple terms, the duty of care requires that directors exercise the care that an
ordinary prudent person would exercise under similar circumstances and the duty
of loyalty prohibits faithlessness and self-dealing. The so-called business
judgment rule is a specific application of this directorial standard of conduct
to a situation where, after reasonable investigation, disinterested directors
adopt a course of action which, in good faith, they honestly and reasonably
believe will benefit the corporation.
The business judgment rule was and is designed to protect directors of a
corporation from personal liability to the corporation or its shareholders if
their business decisions are subsequently challenged. This rule shields
corporate decision makers and their decisions where the five elements of the
rule--a business decision, disinterestedness, due care, good faith and no abuse
of discretion are present. However, as a practical matter, due to the expense of
defending lawsuits and the frequency in which unwarranted litigation is brought
against directors and officers of corporations, and due to the inevitable
uncertainties with respect to the application of the business judgment rule to a
particular set of facts and circumstances, directors of a corporation must
either rely upon indemnity from or insurance procured by the corporation to
defend such lawsuits. Therefore, although the business judgment rule protects
directors from personal liability to the corporation and its shareholders,
unless such indemnity provisions and/or insurance are available, directors could
find themselves faced with the extraordinary expense of defending themselves in
litigation brought by a shareholder who questions a decision of a director based
upon an objective after-the-fact examination of the facts and circumstances.
The Colorado legislature has recognized that insurance and indemnity
provisions are often a condition of an individual's willingness to serve as a
director of a Colorado corporation. The Colorado Business Corporation Act has,
for some time, specifically permitted corporations to provide indemnity and
procure insurance for its directors. An existing Article of the Company's
Articles of Incorporation presently provides for the indemnification of the
directors of the Company. However, changes in the market for directors'
liability insurance have resulted in the unavailability for directors of many
corporations from obtaining any meaningful liability insurance coverage.
Additionally, insurance carriers have, in many cases, increased premiums to such
an extent that the cost of obtaining such insurance becomes extremely
prohibitive. Moreover, current policies often exclude coverage for areas where
service of qualified directors is most needed. The high cost and sometimes
unavailability of meaningful directors' liability insurance is attributable to
some degree to a number of factors which include, among other things, the
granting of significant damage awards.
The Company to date has not obtained insurance coverage for the Company's
directors due primarily to the prohibitive cost of the insurance premiums and
the limitations on the scope of coverage. The proposed addition of Article NINTH
to the Articles of Incorporation is designed to assure that the Company's
current directors and its future directors are protected to at least the same
extent they would be if such insurance coverage were made available. Due to the
fact that the Company is acting as a self-insuror with respect to director
liability coverage, the Company's assets and equity are at risk if there should
ever be a large damage award for which the directors of the Company would be
entitled to indemnification from the Company.
Proposed Article NINTH would protect the Company's directors against
personal liability for breach of their fiduciary obligations to the Company,
including their duty of care. Under Colorado law, absent the adoption of the
proposed Article NINTH, directors of the Company would continue to be liable for
negligent violations of their fiduciary duties. If adopted by the shareholders,
proposed Article NINTH would absolve the directors of liability for negligence
in the performance of their duties, including gross negligence. One of the
principal effects of the adoption of the proposed Article NINTH would be that
the Company's shareholders would be giving up a cause of action against a
director of the Company for breach of fiduciary duty, including but not limited
to a breach resulting from making grossly negligent business decisions involving
takeover proposals for the Company. In effect, directors would not be required
to prove that their decisions are protected by the business judgment rule.
However, directors would remain liable for breaches of their duty of loyalty,
for any act of omission not in good faith or which involves intentional
misconduct or a knowing violation of law and for any transaction from which the
directors derived an improper personal benefit or for the payment of a dividend
in violation of the Colorado Business Corporation Act. Furthermore, the proposed
Article NINTH would not eliminate or limit liability of directors arising in
connection with causes of action brought under the federal securities laws.
While the proposed Article NINTH provides directors of the Company with
protection from damages for breaches of their duty of care, it does not
eliminate the directors' duty of care. Accordingly, the proposed Article NINTH
would have no effect on the availability of equitable remedies such as an
injunction or rescission based upon a director's breach of the duty of care. As
a practical matter, however, such equitable remedies may be inadequate. Finally,
the proposed Article NINTH would apply only to claims against a director arising
out of his or her role as a director of the Company and would not apply, if he
or she is also an officer, to his or her role as an officer or in any other
capacity other than that of a director of the Company.
There has never been any litigation involving the Company's Board of
Directors or its individual members in their capacities as directors of the
Company nor are such persons aware that any such litigation is threatened.
The Board of Directors of the Company believes that the inability of the
Company to provide meaningful directors' liability insurance at a reasonable
cost may in the future have a damaging effect on the Company's ability to
recruit and obtain highly qualified independent directors. Therefore, the
Company's Board of Directors believes that the Company should take every step
available, such as the adoption of Article NINTH, to assure that the Company
will be able to attract the best possible directors in the future. The proposed
Article NINTH is consistent with the Colorado Business Corporation Act. The
primary purpose of Article NINTH and the reason it is being recommended for
adoption by the shareholders is to ensure that the Company will continue to be
able to attract individuals of the highest quality and ability to serve as its
directors and officers. In addition, each member of the Board of Directors of
the Company has a personal interest in seeing the limited liability provisions
contained in the proposed Article NINTH adopted even though, as explained
previously, there is a potential detriment to the Company's shareholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
ADOPTION OF A NEW ARTICLE NINTH OF THE ARTICLES OF INCORPORATION OF THE COMPANY
AS SET FORTH ABOVE.
PROPOSAL NUMBER SIX
APPROVAL OF A REVERSE STOCK SPLIT
The Company has 50,000,000 shares of $0.001 par value common stock
authorized. As of February 25, 2000, the Company had 44,825,522 shares of common
stock issued and outstanding. In addition, as described under "Change in Control
of the Company" and under "Transactions with Management and Others and Certain
Business Relations," the Company has agreed to issue ITHC an additional
37,298,444 shares of the Company's common stock at such time as the Company has
a sufficient number of shares of common stock authorized to be able to
consummate the issuance. Further, the Company currently has outstanding options
to purchase 31,600,000 shares of the Company's common stock and warrants to
purchase 1,500,000 shares of the Company's common stock that cannot be exercised
until the Company has a sufficient number of shares of common stock authorized
to enable the Company to issue shares upon the exercise of the options and
warrants. The Company is also disputing the validity of another option for
800,000 shares of the Company's common stock.
The Board of Directors is recommending that the shareholders approve a
one-for-four reverse split of the Company's outstanding common stock. If
approved, the Company would then have approximately 11,206,380 shares of common
stock outstanding and options and warrants outstanding to purchase approximately
an additional 8,775,000 shares of common stock. After the reverse split, the
Company would still have 50,000,000 shares of $0.001 par value common stock
authorized.
The proposed one-for-four reverse split of the Company's outstanding
common stock has been recommended by the Board of Directors to assure that an
adequate supply of authorized unissued shares is available for the above needs
and for such things as future stock dividends or issuances upon the exercise of
options granted under the Company's proposed 2000 Incentive and Nonstatutory
Stock Option Plan ("2000 Plan"). The additional authorized shares of common
stock could also be used for such purposes as raising additional capital for the
operations of the Company or acquiring other businesses. Except as stated
herein, there are currently no plans or arrangements relating to the issuance of
any of the additional shares of common stock. Such shares would be available for
issuance without further action by the shareholders.
The Company's common stock trades on the Over-The-Counter Bulletin Board.
The Company's Board of Directors believes that it would be beneficial for the
Company and its shareholders if the Company's common stock is listed on the
Nasdaq SmallCap Market in the future.
In order to be listed on the Nasdaq SmallCap Market, the Company will have
to meet several requirements. One of these requirements is that the common stock
have a minimum bid price of $4.00 per share. As of February 25, 2000, the
closing price of the common stock was $2.25 per share. As a result, the Company,
based on the recent bid price of the Company's common stock, would not be able
to have its common stock eligible to be listed on the Nasdaq SmallCap Market
without the Company effectuating a reverse split in a sufficient amount to
attempt to assure that the Company's common stock would have a minimum bid price
of at least $4.00 per share. The Board of Directors believes that it is in the
best interest of the Company's shareholders that the Company's common stock be
included on the Nasdaq SmallCap Market or another securities trading market at a
strategic time in the future. Accordingly, in anticipation of the Company
applying to have its common stock included on the Nasdaq SmallCap Market in the
future, the Board of Directors has requested that the shareholders of the
Company approve the one-for-four reverse split of the Company's outstanding
common stock. Any fractional shares resulting from any reverse stock split will
be rounded up to the next whole share.
The Board of Directors further believes that the relatively low per-share
market price of the common stock may impair the acceptability of the common
stock to certain institutional investors and other members of the investing
public. Theoretically, the number of shares outstanding should not, by itself,
affect the marketability of the stock, the type of investor who acquires it, or
the Company's reputation in the financial community. In practice this is not
necessarily the case, as certain investors view low-priced stock as unattractive
or, as a matter of policy, are precluded from purchasing low-priced shares. In
addition, certain brokerage houses, as a matter of policy, will not extend
margin credit on stocks trading at low prices. On the other hand, certain other
investors may be attracted to low-priced sock because of the greater trading
volatility associated with such securities.
The reverse stock split will result in each shareholder of record, as of
the specific record date to be determined by the Board of Directors, owning a
proportionately smaller number of shares with the end result being that each
shareholder maintains the proportionate number of shares of the Company's common
stock that each shareholder owned prior to such reverse stock split. For
example, if a shareholder owned 1,000,000 shares of the 44,825,522 shares
outstanding on a record date determined by the Board of Directors, then
subsequent to the reverse stock split, such shareholder would own 250,000 shares
of the 11,206,380 shares outstanding. The shareholder would maintain the same
percentage ownership interest in the outstanding common stock both prior to and
subsequent to the reverse stock split. The reverse stock split would not, by
itself, result in any taxable distributions or any dilution to the shareholders.
As mentioned above, the closing price of the Company's common stock on
February 25, 2000, was $2.25 per share. Assuming the reverse split had occurred
as of February 25, 2000, theoretically the closing price that day would have
been $9.00 per share. The aforementioned is for illustration purposes only.
There are no assurances that the Company's common stock would trade after a
reverse split at a price directly proportional to the price that the common
stock traded at prior to the reverse split. In most cases, the public trading
price of a security after a reverse split will be less than a price that is
proportional to the price before the reverse split.
The Board of Directors believes that the reverse stock split is advisable
and in the best interests of the Company and its stockholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE IN FAVOR OF THE
ONE-FOR-FOUR REVERSE SPLIT.
<PAGE>
PROPOSAL NUMBER SEVEN
APPROVAL OF 2000 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
Summary
The Company's Board of Directors is recommending the adoption of the 2000
Incentive and Nonstatutory Stock Option Plan (the "2000 Plan"). A copy of the
2000 Plan is attached to this Proxy Statement as Exhibit B. The following is a
brief summary of the 2000 Plan, which is qualified in its entirety by reference
to Exhibit B.
Options granted under the 2000 Plan may be either nonstatutory stock
options ("Nonstatutory Options") or incentive stock options ("Incentive
Options"). The purpose of the 2000 Plan is to advance the interests of the
Company, its shareholders and its subsidiaries by encouraging and enabling
selected officers, directors, employees and consultants of the Company, upon
whose judgment, initiative and effort the Company is largely dependent for the
successful conduct of its business, to acquire and retain a proprietary interest
in the Company by ownership of its stock through the exercise of stock options.
Amount of Common Stock Subject to Options Under the 2000 Plan
The 2000 Plan provides for the grant of stock options covering an
aggregate of 1,250,000 post-split shares of common stock. The aggregate
1,250,000 shares of common stock is subject to equitable adjustments for any
stock dividends, stock splits, reverse stock splits, combinations,
recapitalizations, reclassifications or any other similar changes which may be
required in order to prevent dilution. Any option which is not exercised prior
to expiration or which otherwise terminates will thereafter be available for
further grant under the 2000 Plan.
Administration of the 2000 Plan
The 2000 Plan may be administered by the Board of Directors or by a
committee appointed by the Board of Directors consisting of not fewer than two
non-employee members of the Board of Directors (the "Committee"). Subject to the
conditions set forth in the 2000 Plan, the Board of Directors or the Committee
has full and final authority to determine the number of shares represented by
each option, the individuals to whom and the time or times at which options will
be granted and be exercisable, their exercise prices and the terms and
provisions of the respective agreements to be entered into at the time of grant,
which may vary. The 2000 Plan is intended to be flexible and a significant
amount of discretion is vested in the Board of Directors or the Committee with
respect to all aspects of the options to be granted under the 2000 Plan.
<PAGE>
Participants
Nonstatutory Options may be granted under the 2000 Plan to any person who
is or who agrees to become an officer, director, employee or consultant of the
Company or any of its subsidiaries. Incentive Options may be granted only to
persons who are employees of the Company or any of its subsidiaries. As of
February 25, 2000, the Company and its subsidiaries had approximately 14
employees. The participants will not be required to pay any sums for the
granting of options, but may be required to pay the Company for extending the
options. No Options have been granted under the 2000 Plan.
Exercise Price
The exercise price of each Nonstatutory Option granted under the 2000 Plan
will be determined by the Board of Directors or the Committee. The exercise
price of each Incentive Option granted under the 2000 Plan will be determined by
the Board of Directors or the Committee and will in no event be less than 100%
(110% in the case of a person who owns directly or indirectly more than 10% of
the common stock) of the fair market value of the shares of common stock on the
date of grant. The payment of the exercise price of an option may be made in
cash or shares of common stock, as more fully described under "Exercise of
Options". Fair market value will be determined by the Board of Directors or the
Committee in accordance with the 2000 Plan and such determination will be
binding upon the Company and upon the holder. The closing price of the common
stock on February 25, 2000 was $2.25 per share.
Terms of Options
Options may be granted for a term of up to 10 years (five years in the
case of Incentive Options granted to a person who owns directly or indirectly
more than 10% of the Company's outstanding common stock), which may extend
beyond the term of the 2000 Plan.
Exercise of Options
The terms governing the exercise of options granted under the 2000 Plan
will be determined by the Board of Directors or the Committee, which may limit
the number of options exercisable in any period. Payment of the exercise price
upon exercise of an option may be made in any combination of cash and shares of
common stock, including the automatic application of shares of common stock
received upon exercise of an option to satisfy the exercise price of additional
options (unless the Board of Directors or the Committee provides otherwise).
Where payment is made in common stock, such common stock will be valued for such
purpose at the fair market value of such shares on the date of exercise.
Nontransferability
Incentive Options granted under the 2000 Plan are not transferable or
assignable, other than by will or the laws of descent and distribution and,
during the lifetime of the holder, options are exercisable only by the holder.
Nonstatutory Options do not have to contain restrictions on transferability.
Termination of Relationship
Except as the Board of Directors or the Committee may expressly determine
otherwise, if the holder of an Incentive Option ceases to be employed by or to
have another qualifying relationship (such as that of director) with the Company
or any of its subsidiaries other than by reason of the holder's death or
permanent disability, all Incentive Options granted to such holder under the
2000 Plan will terminate immediately, except for Incentive Options which were
exercisable on the date of such termination of relationship which Incentive
Options will terminate three months after the date of such termination of
relationship, unless such Incentive Options specify by their terms an earlier
expiration or termination date. In the event of the death or permanent
disability of the holder of an Incentive Option, options may be exercised to the
extent that the holder might have exercised the options on the date of death or
permanent disability for a period of up to 12 months following the date of death
or permanent disability, unless by their terms the options expire before the end
of such 12 month period.
Amendment and Termination of the 2000 Plan
The Board of Directors may at any time and from time to time amend or
terminate the 2000 Plan, but may not, without the approval of the shareholders
of the Company representing a majority of the voting power present at a
shareholder's meeting or represented and entitled to vote thereon, or by
unanimous written consent of the shareholders, (i) increase the maximum number
of shares of common stock subject to options which may be granted under the 2000
Plan, other than in connection with an equitable adjustment, (ii) change the
class of employees eligible for Incentive Options, or (iii) make any material
amendment under the 2000 Plan that must be approved by the Company's
shareholders for the Board of Directors to be able to grant Incentive Options
under the 2000 Plan. No amendment or termination of the 2000 Plan by the Board
may alter or impair any of the rights under any option granted under the 2000
Plan without the holder's written consent.
Effective Date and Term of the 2000 Plan
Options may be granted under the 2000 Plan during its 10 year term, which
will commence on April __, 2000.
Certain Federal Income Tax Consequences
Incentive Options. The Company believes that with respect to Incentive
Options granted under the 2000 Plan, no income generally will be recognized by
an optionee for federal income tax purposes at the time such an option is
granted or at the time it is exercised. If the optionee makes no disposition of
the shares so received within two years from the date the Incentive Options was
granted and one year from the receipt of the shares pursuant to the exercise of
the Incentive Option, the optionee will generally recognize long term capital
gain or loss upon the disposition of the shares of common stock issued upon
exercise of the Incentive Option.
If the optionee disposes of shares of common stock acquired by exercise of
an Incentive Option before the expiration of the applicable holding period, any
amount realized from such a disqualifying disposition will be taxable as
ordinary income in the year of disposition generally to the extent that the
lesser of the fair market value of the shares of common stock on the date the
option was exercised or the fair market value at the time of such disposition
exceeds the exercise price. Any amount realized upon such a disposition in
excess of the fair market value of the shares of common stock on the date of
exercise generally will be treated as long term or short term capital gain,
depending on the holding period of the shares. A disqualifying disposition will
include the use of shares of common stock acquired upon exercise of an Incentive
Option in satisfaction of the exercise price of another option prior to the
satisfaction of the applicable holding period.
The Company will not be allowed a deduction for federal income tax
purposes at the time of the grant or exercise of an Incentive Option. At the
time of a disqualifying disposition by an optionee, the Company will be entitled
to a deduction for federal income tax purposes equal to the amount taxable to
the optionee as ordinary income in connection with such disqualifying
disposition (assuming that such amount constitutes reasonable compensation).
Nonstatutory Options. The Company believes that the grant of a
Nonstatutory Option under the 2000 Plan will not be subject to federal income
tax. Upon exercise, the optionee generally will recognize ordinary income, and
the Company will be entitled to a corresponding deduction for federal income tax
purposes (assuming that such compensation is reasonable), in an amount equal to
the excess of the fair market value of the shares of common stock on the date of
exercise over the exercise price. Gain or loss on the subsequent sale of shares
of common stock received on exercise of a Nonstatutory Option generally will be
long term or short term capital gain or loss, depending on the holding period of
the shares.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE APPROVAL
OF THE 2000 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN.
INDEPENDENT PUBLIC ACCOUNTANTS
On March 17, 2000, the Company engaged Ehrhardt Keefe Steiner & Hottman
PC as the Company's principal independent accountants in place of Daniel
Jankowski. On March 17, 2000, the Company dismissed Daniel Jankowski. The
reports of Daniel Jankowski on the Company's financial statements for the two
fiscal years ended June 30, 1999, contain no adverse opinion or disclaimer of
opinion, nor were such reports modified as to uncertainty, audit scope or
accounting principles. There were no disagreements during the Company's two
fiscal years ended June 30, 1999, or any interim period subsequent thereto
between the Company and Daniel Jankowski on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure
which, if not resolved to the satisfaction of Daniel Jankowski, would have
caused Daniel Jankowski to make reference in its reports to the subject matter
of such disagreements. The decision to change accountants was approved by the
Company's Board of Directors.
Representatives of Ehrhardt Keefe Steiner & Hottman PC are expected to
be present at the Meeting, have an opportunity to make a statement if they
desire to do so and to be available to respond to appropriate questions. Daniel
Jankowski is not expected to be present at the Meeting.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the next Annual
Meeting of Shareholders must be received by the Company within a reasonable time
prior to the mailing of the proxy statement for such Meeting but no later than
December __, 2000.
Proxies that confer discretionary authority will not be able to be voted
on shareholder proposals which shareholders do not request be included in the
Company's proxy statement to be used in connection with the Company's next
Annual Meeting of Shareholders if by February __, 2001, the shareholder provides
the Company with advance written notice of such proposal. Therefore, if a
shareholder fails to so notify the Company of such a shareholder proposal by
February __, 2001, proxies that confer discretionary authority will be able to
be voted when the proposal is presented at the next Annual Meeting of
Shareholders.
1999 ANNUAL REPORT ON FORM 10-K
The Company will provide, without charge, a copy of the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1999, that was filed with
the Securities and Exchange Commission pursuant to the Securities Exchange Act
of 1934, as amended, upon written request to Darrell H. Hughes, 7001 Seaview
Avenue N.W., Suite 210, Seattle, Washington 98117. Each such request must set
forth a good faith representation that, as of February 25, 2000, the person
making the request was a beneficial owner of the Company's common stock. The
exhibits to the Annual Report on Form 10-K may be obtained by any shareholder
upon written request to Mr. Hughes. Each person making any such request will be
required to pay a fee of $0.25 per page to cover the Company's expenses in
furnishing such exhibits.
SOLICITATION OF PROXIES
The cost of soliciting proxies, including the cost of preparing, assembling
and mailing this proxy material to shareholders, will be borne by the Company.
Solicitations will be made only by use of the mails, except that, if necessary
to obtain a quorum, officers and regular employees of the Company may make
solicitations of proxies by telephone or electronic facsimile or by personal
calls. Brokerage houses, custodians, nominees and fiduciaries will be requested
to forward the proxy soliciting material to the beneficial owners of the
Company's shares held of record by such persons and the Company will reimburse
them for their charges and expenses in this connection.
OTHER BUSINESS
The Company's Board of Directors does not know of any matters to be
presented at the Meeting other than the matters set forth herein. If any other
business should come before the Meeting, the persons named in the enclosed form
of Proxy will vote such Proxy according to their judgment on such matters.
BY ORDER OF THE BOARD OF DIRECTORS
DAVID L. JACKSON, SECRETARY
Seattle, Washington
April __, 2000
<PAGE>
EXHIBIT A
INDEX TO SILVERTHORNE PRODUCTION COMPANY AUDITED FINANCIAL STATEMENTS
PAGE
Independent Auditor's Report ...................................... F-1
Financial Statements
Balance Sheet ................................................... F-2
Statement of Operations ......................................... F-3
Statement of Cash Flow .......................................... F-4
Statement of Stockholders' Equity ............................... F-5
Notes to Financial Statements ................................... F-6
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors,
SILVERTHORNE PRODUCTION COMPANY
I have audited the accompanying balance sheet of SILVERTHORNE PRODUCTION COMPANY
( a Colorado Corporation) as of June 30, 1999 and 1998 and the related
statements of operations, stockholders, equity and cash flows for each of the
two years in the period ended June 30, 1999. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial presentation. I believe
that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of SILVERTHORNE PRODUCTION COMPANY as
of June 30, 1999 and 1998, and the results of its operations and its cash flows
for each of the two years in the period ended June 30, 1999, in conformity with
generally accepted accounting principles.
/s/ Daniel Jankowski
Daniel Jankowski, CPA, CNA, MCSE
August 17, 1999
F-1
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
(A Developmental Stage Company)
COMPARATIVE BALANCE SHEET
For fiscal years ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Year ended Year ended
June 30, June 30,
Notes 1999 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ................................. $ 0 $ 0
--------- ---------
TOTAL ASSETS: ..................... $ 0 $ 0
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable ..................... 2 2,234 7,018
--------- ---------
TOTAL CURRENT LIABILITIES: ........ 2,234 7,018
--------- ---------
SHAREHOLDERS' EQUITY
Common Stock, par value $.001 per
share; authorized 50,000,000
shares; of which 15,757,047
shares are issued and outstanding ... 15,757 15,757
Capital paid in excess of par ........ 748,230 748,230
RETAINED EARNINGS DEFICIT:
From regular operations .............. (617,286) (617,286)
Accumulated during developmental
stage ............................... 5 (148,935) (153,719)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) ... $ (2,234) $ (7,018)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ........................... $ 0 $ 0
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
(A Developmental Stage Company)
STATEMENT OF OPERATIONS
For fiscal years ended June 30, 1999 and 1998
Notes Year ended Year ended
June 30, June 30,
1999 1998
----------- ------------
MISCELLANEOUS REVENUE:
Reversal of accounts payable $ 3,212 $ 0
Net earnest money deposit .. 12,807 0
----------- ------------
$ 16,019 $ 0
----------- ------------
EXPENSES:
Administrative expenses: ... 3,929 7,236
Interest ................... 0 6,906
Legal Fees ................. 3 6,806 69,800
Auditing Fees .............. 500 1,560
Consulting ................. 0 8,500
----------- ------------
Total Expenses .......... $ 11,235 $ 94,002
----------- ------------
NET INCOME (LOSS) ............ $ 4,784 $ (94,002)
=========== ============
EARNINGS PER SHARE:
Net income from operations . 4 0.0004 0.0098
Weighted average common
shares outstanding .......... 15,757,047 9,631,047
=========== ============
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
(A Developmental Stage Company)
STATEMENT OF CASH FLOW
For fiscal years ended June 30, 1999 and 1998
Year Year
Ended Ended
June 30, June 30,
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .......................... $ 4,784 $(94,002)
Increase (decrease) in accounts payable .... (4,784) 0
-------- --------
Net cash flows from operation ................ $ 0 $(94,002)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt converted to common stock .............. 0 93,976
-------- --------
CASH FLOWS FOR INVESTMENT ACTIVITIES:
0 0
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENT .............................. 0 (26)
Cash or bank overdraft at beginning of period 0 26
-------- --------
$ 0 $ 0
======== ========
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
(A Developmental Stage Company) STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) For
fiscal years ended June 30, 1999 and 1998
<TABLE>
Total
Common Stock Additional Shareholders'
----------------------- Paid-in Accumulated Equity
Shares Amount Capital Deficit (Deficit)
----------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE
June 30, 1998 .. #15,757,047 $ 15,757 $ 748,230 $(771,005) $ (7,018)
NET INCOME (LOSS)
from fiscal year
ended June 30,
1999 4,784 4,784
----------- --------- --------- --------- ---------
BALANCE
June 30, 1999 .. #15,757,047 $ 15,757 $ 748,230 $(766,221) $ (2,234)
=========== ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
(A Developmental Stage Company)
NOTES TO FINANCIAL STATEMENTS For fiscal years ended June 30, 1999 and 1998
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION: Company was incorporated in May 1983 in the State of
Colorado, to engage in the cellular radio and communications business; and to
"engage in any other lawful activity permitted." In June 1988, Company changed
its name to Silverthorne Production Company and commenced operations in the oil
an gas industry. During 1993-96, Company attempted to locate acquisition
prospects and negotiate acquisition or exchange of assets, including activity in
the fuel industry. Company's pursuit of business opportunities through
acquisition by stock exchange or merger did not materialized during year ended
June 30, 1999.
BASIS OF FINANCIAL STATEMENT PRESENTATION: Company is a development stage
company. Company has no operations and is critically short of cash. Its ability
to continue development stage activities is in question, except for the efforts
of the current officers/directors.
NOTE 2 -ACCOUNTS PAYABLE:
Company's accounts payable include obligations to Company's legal counsel
on Securities and Exchange (SEC) matters, the registered agent and depository
trust company.
NOTE 3 - RELATED PARTY TRANSACTIONS:
Company officers from time to time obtained funds from shareholders to pay
for expenses, including this audit, as well as pursuit of Company business
opportunities.
NOTE 4 - EARNINGS PER SHARE:
Earnings per share is calculated by dividing the net income (loss) from
operations, by total weighted shares outstanding at June 30, 1999.
NOTE 5 - INCOME TAXES:
In the cellular radio communications business, Company accumulated a loss
carry forward of about $243,000. Company's loss carry forward from the oil and
gas industry increased by approximately $376,000. From 1989 through June 30,
1997, development stage activities in pursuit of acquisition and merger
opportunities, Company accumulated an additional loss carry forward of
approximately $148,000. Therefore the total loss carry forward is approximately
$762,000 through June 30, 1999. Company may not be able to utilize part of these
loss carry forwards, depending on the nature of future operations. Company has
prepared and is filing its federal income tax returns for the year ended June
30, 1999, contemporaneously with publication of this audited report.
NOTE 6 - CHANGE IN CONTROL OF THE COMPANY:
A proposed merger/acquisition by Company with certain third-parties was
negotiated subject to final approval, but was terminated before closing,
therefore, the proposed change in control did not formally occur and returned to
status quo following termination of the proposed transaction.
<PAGE> F-6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF SILVERTHORNE PRODUCTION COMPANY FINANCIAL STATEMENTS.
During the fiscal year ended June 30, 1999 and since 1989, the Company has
engaged in no significant operations other than the search for, and
identification and evaluation of, possible acquisition candidates. No revenues
were received by the Company during the fiscal year, except for a deposit on the
Pricenet.com transaction which was terminated. The Company experienced a net
income of $4,784 during the fiscal year ended June 30, 1999, since the deposit
received from the Pricenet.com transaction exceeded the expenses for that
transaction in addition to the remaining legal and administrative fees for the
year.
The Company anticipates that until a business combination is completed with
an acquisition candidate, it will not generate revenues, and may continue to
operate at a loss after completing a business combination, depending upon the
performance of the acquired business.
As of June 30, 1999, the Company had no material commitments for capital
expenditures.
<PAGE>
INDEX TO SILVERTHORNE PRODUCTION COMPANY UNAUDITED FINANCIAL STATEMENTS
Unaudited Consolidated Statements of Operations..................Page 1
Unaudited Consolidated Balance Sheets............................Page 3
Unaudited Consolidated Statements of Cash Flows..................Page 4
Notes to Unaudited Consolidated Financial Statements.............Page 5
Management's Discussion and Analysis or Plan of Operation........Page 8
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
Unaudited Consolidated Statements of Operations
Three Months Ended
December 31,
------------------------------
1998 1999
------------ ------------
Revenue
Prepaid cards and pins ................ $ -- $ 318,705
Commissions ........................... -- 490,074
Other ................................. -- 2,370
Allowances ............................ -- (12,402)
------------ ------------
Total revenue ........................ -- 798,747
------------ ------------
Operating expenses
Prepaid cards and pins ................ -- 236,954
Commissions ........................... -- 396,570
Sales, general and administrative ..... -- 561,108
------------ ------------
Total operating expenses ............. -- 1,194,632
------------ ------------
Loss from operations .................... -- (395,885)
Other income (expense)
Other income .......................... -- 16,727
Interest expense ...................... (16,953) (32,700)
------------ ------------
Loss before income taxes ................ (16,953) (411,858)
Income taxes ............................ 4,132 --
------------ ------------
Net loss ................................ $ (12,821) $ (411,858)
============ ============
Loss per common share - basic and diluted $ -- $ (.01)
============ ============
Weighted average number of common shares
outstanding - basic and diluted ........ 2,000 32,500,000
============ ============
See notes to unaudited consolidated financial statements.
- 1 -
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
Unaudited Consolidated Statements of Operations
Six Months Ended
December 31,
------------------------------
1998 1999
------------ ------------
Revenue
Prepaid cards and pins .................. $ -- $ 763,795
Commissions ............................. -- 935,207
Other ................................... -- 2,370
Allowances .............................. -- (17,781)
------------ ------------
Total revenue .......................... -- 1,683,591
------------ ------------
Operating expenses
Prepaid cards and pins .................. -- 539,591
Commissions ............................. -- 741,613
Stock options granted for services to non -- 5,836,724
employees
Sales, general and administrative ....... -- 1,063,656
------------ ------------
Total operating expenses ............... -- 8,181,584
------------ ------------
Loss from operations ...................... -- (6,497,993)
Other income (expense)
Other income ............................ -- 16,727
16,727
Interest expense ........................ (33,906) (68,250)
------------ ------------
Loss before income taxes .................. (33,906) (6,549,516)
Income taxes .............................. 8,264 --
------------ ------------
Net loss .................................. $ (25,642) $ (6,549,516)
============ ============
Loss per common share - basic and diluted . $ -- $ (.23)
============ ============
Weighted average number of common shares
outstanding - basic and diluted .......... 2,000 28,314,262
============ ============
See notes to unaudited consolidated financial statements.
- 2 -
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
Unaudited Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1999 1999
------------ ------------
Assets
<S> <C> <C>
Current assets
Cash ........................................................ $ -- $ 2,765,570
Accounts receivable ......................................... -- 539,316
Inventory ................................................... -- 35,665
Other current assets ........................................ -- 153,348
------------ ------------
Total current assets ....................................... -- 3,493,899
------------ ------------
Property and equipment ........................................ -- 225,500
------------ ------------
Other assets
Intangibles and other assets ................................ 1,316,551 1,535,627
------------ ------------
Total other assets ......................................... 1,316,551 1,535,627
------------ ------------
Total assets .................................................. $ 1,316,551 $ 5,255,026
============ ============
Liabilities and Stockholders' (Deficit) Equity
Current liabilities
Interest payable ............................................ $ 67,814 $ 136,064
Current portion of long-term debt ........................... 700,000 395,000
Accounts payable ............................................ -- 94,095
Deferred revenue ............................................ -- 95,486
Commissions payable ......................................... -- 242,968
Payroll taxes payable ....................................... -- 76,657
Income taxes payable ........................................ -- 13,770
------------ ------------
Total current liabilities .................................. 767,814 1,054,040
Long-term debt ................................................ 600,000 --
------------ ------------
Total liabilities .......................................... 1,367,814 1,054,040
Stockholders' (deficit) equity Common stock,
$.01 (June) and $.001 (December) par value,
10,000 shares authorized; 2,000 shares issued
and outstanding at June 30, 1999 and 50,000,000
shares authorized; 32,500,000 issued and
outstanding and 49,808,966 to be issued at
December 31, 1999 ............................................ 20 82,308
Additional paid in capital .................................. -- 10,909,477
Accumulated deficit ......................................... (51,283) (6,790,799)
------------ ------------
Total stockholders' (deficit) equity ....................... (51,263) 4,200,986
------------ ------------
Total liabilities and stockholders' (deficit)
equity ....................................................... $ 1,316,551 $ 5,255,026
============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
- 3 -
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
Unaudited Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
December 31,
----------------------------
1998 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss .................................... $ (25,642) $(6,549,516)
----------- -----------
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization .............. -- 17,563
Stock options granted for services to non
employees ................................. -- 5,836,724
Changes in assets and liabilities
Receivables ............................... -- (259,809)
Inventory ................................. -- (10,589)
Other current assets ...................... -- (152,596)
Intangible assets ......................... (8,264) (9,076)
Interest payable .......................... 33,906 68,250
Accounts payable .......................... -- 90,837
Deferred revenue .......................... -- 23,723
Commissions payable ....................... -- 58,700
Payroll taxes payable ..................... -- 26,254
----------- -----------
25,642 5,689,981
Net cash used in operations ............. -- (859,535)
----------- -----------
Cash flows from investing activities
Capital expenditures ........................ -- (158,363)
Cash acquired in acquisition ................ -- 21,248
----------- -----------
Net cash used in investing activities ... -- (137,115)
----------- -----------
Cash flows from financing activities
Payment for stock ........................... -- (190,000)
Proceeds from subscriptions received ........ -- 5,157,220
Payments on notes payable ................... -- (1,205,000)
----------- -----------
Net cash provided by financing activities -- 3,762,220
----------- -----------
Net increase in cash .......................... -- 2,765,570
Cash and cash equivalents-beginning of period . -- --
----------- -----------
Cash and cash equivalent-end of period ........ $ -- $ 2,765,570
=========== ===========
</TABLE>
Non-cash investing and financing activities:
There were certain non-cash transactions associated with the acquisition of
Cognigen Corporation and the reverse acquisition of Silverthorne Production
Company by Inter-American Telecommunications Holdings Corporation (ITHC).
See notes to unaudited consolidated financial statements.
- 4 -
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
Notes to Unaudited Consolidated Financial Statements
1) In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, have been made to (a) the results of consolidated
operations for the three and six month periods ended December 31, 1999 and
1998, respectively, (b) the consolidated balance sheet at December 31, 1999
and 1998 and (c) the consolidated statements of cash flows for the six month
periods ended December 31, 1999 and 1998, respectively, in order to make the
financial statements not misleading.
2) The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting
principles for financial statements. For further information, refer to the
audited consolidated financial statements and notes thereto for the year
ended June 30, 1999, included in Silverthorne Production Company's
("Company") Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission and the audited financial statements of Inter-American
Telecommunications Holding Corporation (ITHC) and Cognigen Corporation
(Cognigen) for the year ended June 30, 1999 included in the Company's Form
8-K/A filed with the Securities and Exchange Commission on March 8, 2000.
3) These unaudited consolidated financial statements include the accounts of
Inter-American Telecommunications Corporation, ITHC, Cognigen and the
Company. All significant intercompany balances and transactions have been
eliminated in consolidation.
4) The Company was incorporated in May 1983 in the State of Colorado to engage
in the cellular radio and communications business and to engage in any other
lawful activity permitted under Colorado law. In June 1988, the Company
changed its name to Silverthorne Production Company and commenced operations
in the oil and gas industry. These operations were discontinued in 1989.
Since 1989, the Company has attempted to locate acquisition prospects and
negotiate an acquisition. The Company's pursuit of an acquisition did not
materialize until August 20, 1999.
5) 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 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 its articles
of incorporation. The first closing resulted in the issuance of 11,742,953
shares while the remaining 37,298,444 shares will be issued after a
shareholder vote to increase the authorized number of shares or after a
reverse stock split is effected. The Company issued 5,000,000 shares of the
Company's common stock as finders' fees in connection with the transaction.
- 5 -
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
Notes to Unaudited Consolidated Financial Statements
The Company will be the legal survivor and plans to change its name to
Cognigen Networks, Inc.
Additionally, 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 equity in the amount of $190,000.
6) Company officers from time to time obtained funds from shareholders to pay
for expenses and to pursue Company business opportunities.
7) During the three months ended December 31, 1999, the Company advanced
$435,000 to a company it had entered into a letter-of-intent to acquire. The
letter-of-intent expired on February 29, 2000.
8) On July 1, 1999, ITHC entered into an agreement with Cognigen Corporation
(Cognigen) to purchase all of Cognigen's net assets. The purchase price
included 5,500 shares of ITHC common stock ($.01 par value), a $300,000 note
payable due October 1, 1999, a four year employment contract for the founder
of Cognigen with an annual base salary of $175,000, and a commitment to
provide future working capital of $600,000 over a three year period to cover
business expansion. The transaction was accounted for as a purchase. ITHC
acquired net assets of $86,230 and recorded goodwill of $213,770. The
goodwill will be amortized over a life of 20 years.
ITHC had various working capital funding commitments in the amount of
$850,000 with related parties entered into in connection with acquisitions of
various customer lists.
9) During the six months ended December 31, 1999, the Company received
subscriptions for 12,510,522 shares of the Company's common stock at prices
of $0.38 per share (11,583,722 shares) and $1.60 per share (926,800 shares)
from various persons. The subscriptions and cash were received prior to
December 31, 1999, however, the stock was not issued until after December 31,
1999. 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. As of December
31, 1999, the Company had paid $727,474 towards the total fee due and other
expenses associated with the offering.
- 6 -
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
Notes to Unaudited Consolidated Financial Statements
10) In August 1999, the Company issued 31,600,000 options entitling the holders
to purchase the Company's common stock at $0.46 per share. 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. $5,836,724 of compensation expense was recorded in
connection with the options granted to non employees.
- 7 -
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
Certain of the information discussed in this quarterly report, and in particular
in this section entitled "Management's Discussion and Analysis or Plan of
Operation," contains forward-looking statements that involve risks and
uncertainties that might adversely affect the operating results of Silverthorne
Production Company ("Company") in the future in a material way. Such risks and
uncertainties include, without limitation, rate changes, fee policy or
application changes and competition. Many of these risks are beyond the control
of the Company.
Overview
Inter-American Telecommunications Holding Corporation (ITHC) was incorporated on
July 24, 1998 in Delaware. Since its inception, ITHC has directed its efforts
toward the acquisition of assets that would allow it to be engaged in direct and
multilevel agency marketing and sale of long distance service and products as
well as the switching and transport of voice, fax and data telephone and
internet traffic and related services. On July 1, 1999, ITHC acquired the net
assets of Cognigen Corporation (Cognigen) in exchange for 5,500 shares of its
common stock and a note payable of $300,000. Cognigen was actively marketing
long distance telephone services over the internet.
The Company was incorporated on May 6, 1983, in Colorado. On August 20, 1999,
the Company completed the acquisition of all of the net assets of ITHC in
exchange for up to 49,041,397 shares of the Company's common stock. For
financial statement purposes, this business combination was accounted for as an
additional capitalization of ITHC (a reverse acquisition in which ITHC was the
accounting acquirer). For accounting purposes, ITHC is considered the surviving
entity and the historical financial statements prior to the acquisition are
those of ITHC. The Company's net book value prior to the transaction was $0.
- 8 -
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
ITHC was a developmental stage company since its inception on July 24, 1998
through June 30, 1999. During this stage, ITHC generated no revenues and
incurred only minimal operational costs. ITHC focused its efforts on the pursuit
of the acquisition of business opportunities. On July 1, 1999, ITHC completed
the acquisition of all the net assets of Cognigen in a transaction accounted for
as a purchase. Additionally, in a transaction accounted for as a reverse
acquisition, ITHC acquired control of the Company, a non-operating public shell
corporation. Therefore, the results of operations for the three and six months
ended December 31, 1999 are comprised entirely of the operations generated from
the net assets purchased from Cognigen on July 1, 1999. As no operations existed
for ITHC for the three and six month periods ended December 31, 1998, no
meaningful comparisons can be made.
For purposes of this Management's Discussion and Analysis or Plan of Operation,
the Company believes that the unaudited results of operations for Cognigen for
the three and six months ended December 31, 1998 shown below provide a more
meaningful basis for analysis. Therefore, all comparisons and analysis included
in this Management's Discussion and Analysis or Plan of Operation will be based
upon these unaudited results of operations for Cognigen for the three and six
months ended December 31, 1998.
Unaudited Results of Operations for Cognigen
Three Six
Months Ended Months Ended
December 31, December 31,
1998 1998
--------- ---------
Revenue
Prepaid cards and pins .................... $ 207,625 $ 430,387
Commissions ............................... 82,751 157,111
--------- ---------
Total revenue .......................... 290,376 587,498
Operating expenses
Prepaid cards and pins .................... 132,225 256,124
Commissions ............................... 52,434 116,033
Sales, general and administrative ......... 75,812 220,789
--------- ---------
Total operating expenses ............... 260,471 592,946
--------- ---------
Income (loss) from operations and before taxes 29,905 (5,448)
Income taxes ................................. -- --
--------- ---------
Net income (loss) ............................ $ 29,905 $ (5,448)
========= =========
- 9 -
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Three Months Ended December 31, 1999 Compared to Three Months Ended December 31,
1998
Total revenue for the three months ended December 31, 1999 was $798,747 compared
to $290,376 for the three months ended December 31, 1998. Total revenue for the
1999 period consisted of $318,705 related to prepaid cards and pins and $490,074
related to commissions. Total revenue for the comparable period in 1998
consisted of $207,625 related to prepaid cards and pins and $82,751 related to
commissions. The $111,080, or 54%, increase in prepaid cards and pins is due to
a larger internet presence and more agents making sales. The $407,323, or 492%,
increase in commissions is due to a larger number of agents making sales.
Operating costs related to prepaid cards and pins for the three months ended
December 31, 1999 increased $104,729, or 79%, to $236,954 from $132,225 during
the three months ended December 31, 1998. Operating costs related to commissions
for the three months ended December 31, 1999 increased $344,136, or 656%, to
$396,570 from $52,434 during the three months ended December 31, 1998. The cost
increases are directly related to the increased revenue.
General and administrative operating expenses increased $485,296, or 640%, to
$561,108 during the three months ended December 31, 1999 from $75,812 during the
three months ended December 31, 1998. This increase is primarily due to the
addition of staff and associated costs.
The Company incurred a loss from operations of $395,885 for the three months
ended December 31, 1999 compared with operating income of $29,905 for the three
months ended December 31, 1998. The primary decrease in operating income during
the current period is mostly related to the increased staff costs.
Net interest expense for the three months ended December 31, 1999 of $32,700
compares to net interest expense during the same three months ended December 31,
1998 of $0. The reason for this increase is due to increased borrowings during
the three months ended December 31, 1999. After interest expense, the net loss
for the three months ended December 31, 1999 was $411,858, or $(.01) per share,
compared to net income of $29,905 for the three months ended December 31, 1998.
Six Months Ended December 31, 1999 Compared to Six Months Ended December 31,
1998
Total revenue for the six months ended December 31, 1999 was $1,683,591 compared
to $587,498 for the six months ended December 31, 1998. Total revenue for the
1999 period consisted of $763,795 related to prepaid cards and pins and $935,207
related to commissions. Total revenue for the comparable period in 1998
consisted of $430,387 related to prepaid cards and pins and $157,111 related to
commissions. The $333,408, or 77%, increase in prepaid cards and pins is due to
a larger internet presence and more agents making sales. The $778,096, or 495%,
increase in commissions is due to a larger number of agents making sales.
- 10 -
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Operating costs related to prepaid cards and pins for the six months ended
December 31, 1999 increased $283,467, or 111%, to $539,591 from $256,124 during
the six months ended December 31, 1998. Operating costs related to commissions
for the six months ended December 31, 1999 increased $625,580, or 539%, to
$741,613 from $116,033 during the six months ended December 31, 1998. The cost
increases are directly related to the increased revenue.
General and administrative operating expenses increased $842,867, or 382%, to
$1,063,656 during the six months ended December 31, 1999 from $220,789 during
the six months ended December 31, 1998. This increase is primarily due to the
addition of staff and associated costs.
The Company incurred a loss from operations of $6,497,993 for the six months
ended December 31, 1999 compared with an operating loss of $5,448 for the six
months ended December 31, 1998. The primary increase in operating loss during
the current period is mostly related to the increased staff costs and the charge
for stock options granted to non employees.
Net interest expense for the six months ended December 31, 1999 of $68,250
compares to net interest expense during the six months ended December 31, 1998
of $0. The reason for this increase is due to increased borrowings during the
six months ended December 31, 1999. After interest expense, the net loss for the
six months ended December 31, 1999 was $6,549,516, or $(.23) per share, compared
to net loss of $5,448 for the six months ended December 31, 1998.
Liquidity and Capital Resources:
The Company has funded its operations to date primarily from shareholder
advances and stock subscriptions received. At December 31, 1999, the Company had
cash and cash equivalents of approximately $2,765,570 and working capital of
$2,439,859.
Cash used by the Company for operating activities during the six months ended
December 31, 1999 was approximately $859,535. A primary component of the use of
cash during the six months was the Company's net loss of $6,549,516 adjusted for
non-cash adjustments of depreciation and amortization of approximately $17,563
and stock option expense of $5,836,724. Additional uses of operating cash for
the six months included increases in the Company's accounts receivable of
$259,809, inventory of $10,589, other current assets of $152,596 and intangibles
and other assets of $9,076. Sources of operating cash were the increase in
payables and deferred revenue of $244,041 and $23,723, respectively. Additional
sources of cash include $21,248 from the acquisition of Cognigen. Additional
sources and uses of cash during the six months ended December 31, 1999 included
net proceeds from the receipt of stock subscriptions of $5,157,220, capital
expenditures of $158,363, payments on notes payable of $1,395,000 and a payment
for stock of $190,000.
- 11 -
<PAGE>
SILVERTHORNE PRODUCTION COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company believes its current liquidity requirement primarily will be to meet
working capital requirements. Cash generated from operations was not sufficient
to meet working capital requirements for the six months ended December 31, 1999,
and may not be sufficient to meet working capital requirements for the
foreseeable future. Therefore, additional debt or equity financing may be
required for the Company to satisfy its short term capital needs. There can be
no assurances that the Company will be able to generate additional debt or
equity financing if needed.
- 12 -
<PAGE>
INTER-AMERICAN TELECOMMUNICATIONS HOLDING CORPORATION
Financial Statements
June 30, 1999
F - 1
<PAGE>
CONTENTS
Page
INDEPENDENT AUDITORS' REPORT F-3
BALANCE SHEET F-4
STATEMENT OF OPERATIONS F-5
STATEMENT OF CASH FLOWS F-6
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY F-7
NOTES TO FINANCIAL STATEMENTS F-8-13
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Inter-American Telecommunications Holding Corporation
Seattle, Washington
We have audited the accompanying balance sheet of Inter-American
Telecommunications Holding Corporation (a development stage company) as of June
30, 1999, and the related 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 financial position of Inter-American
Telecommunications Holding Corporation as of June 30, 1999, and the 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 8 which
is dated February 10, 2000)
COMISKEY & COMPANY
PROFESSIONAL CORPORATION
F - 3
<PAGE>
Inter-American Telecommunications Holding Corporation
(A Development Stage Company)
BALANCE SHEET
June 30, 1999
ASSETS 1999
-----------
OTHER ASSETS
Goodwill ....................................... $ 5
Deferred
tax ............................................ 16,531
Customer lists
1,300,015
-----------
TOTAL ASSETS ................................. $ 1,316,551
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Interest payable ............................... $ 67,814
Notes payable - related parties
700,000
Total current liabilities
767,814
Notes payable - related parties, due in more
than one year .................................. 600,000
STOCKHOLDERS' EQUITY
Common stock; $0.01 par value, 10,000 shares
Authorized; 2,000 shares issued and
outstanding .................................. 20
Deficit accumulated during the development stage
(51,283)
-----------
(51,263)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ... $ 1,316,551
===========
The accompanying notes are an integral part of the
financial statements.
F - 4
<PAGE>
Inter-American Telecommunications Holding Corporation
(A Development Stage Company)
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 $ (25.64)
========
Weighted average shares outstanding 2,000
========
The accompanying notes are an integral part of the
financial statements.
F - 5
<PAGE>
Inter-American Telecommunications Holding Corporation
(A Development Stage Company)
STATEMENT OF CASH FLOWS For the period July 24, 1998
(inception) through June 30, 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net ........................................... $(51,283)
loss
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
-------
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 .......... $ --
========
The accompanying notes are an integral part of the
financial statements.
F - 6
<PAGE>
Inter-American Telecommunications Holding Corporation
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY For the period July 24,
1998 (inception) through June 30, 1999
<TABLE>
<CAPTION>
Deficit
Stock accumulated
Number during the Total
of Development Stockholders'
Shares Amount Stage Equity
------ -------- -------- -------
<S> <C> <C> <C> <C>
Common stock issued for
intangible assets,
November 4, 1998 at
$0.01 per share 2,000 $ 20 $ -- $ 20
Net loss for the period
July 24, 1998 to June 30,
1999 -- -- (51,283) (51,283)
------ -------- -------- -------
Balance, June 30, 1999..... 2,000 $ 20 $(51,283) $(51,263)
===== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F - 7
<PAGE>
Inter-American Telecommunications Holding Corporation
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
1. 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. The Company also issued shares to acquire
Inter-American Telecommunications Corporation ("ITC"), which 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 8.
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.
2. Summary of Significant Accounting Policies
------------------------------------------
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.
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.
F - 8
<PAGE>
Inter-American Telecommunications Holding Corporation
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
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.
3. 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)
4. 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
F - 9
<PAGE>
Inter-American Telecommunications Holding Corporation
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
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
======== ========
5. 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 $ 10,172
State taxes 6,359
Valuation allowance -
--------
Income tax benefit $ 16,531
========
6. Commitments and Contingencies
Working capital commitments
A portion of the consideration paid to acquire the customer lists is a
commitment to provide a total of $700,000 over a 3 year period to cover
the costs of migrating the customer bases to a chosen carrier network and
the costs of business expansion related to the customer bases.
F - 10
<PAGE>
Inter-American Telecommunications Holding Corporation
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
ITHC owns 100% of the common shares of ITC, a company that will provide
backroom support services for companies engaged in providing long distance
telephone services. A separate agreement to provide $150,000 in working
capital to this related party was executed concurrently with the customer
list purchases.
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.
7. 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 500 shares of ITHC
common stock, plus a cash payment of $500,000 in the form of a promissory
note payable November 4, 1998 (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.
Also on November 4, 1998, ITHC acquired a customer database of 41,415
individual subscribers from CTC in exchange for 1,000 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 $300,000 of the remaining balance due). CTC is partially owned
by Peter Tilyou, a former officer and director of ITHC.
8. Subsequent Event
Acquisition of Cognigen Corporation
On July 1, 1999, the Company entered into an agreement with Cognigen
Corporation ("Cognigen") to purchase all of Cognigen's assets. The
purchase price included 5,500 shares of ITHC common stock ($.01 par
value), a $300,000 note payable due October 1, 1999, a four-year
employment contract for the founder of Cognigen with an annual base salary
of $175,000, and a commitment to provide future working capital of
$600,000 over a three year period to cover business expansion. The
transaction will be accounted for as a purchase.
F - 11
<PAGE>
Inter-American Telecommunications Holding Corporation
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
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 share $ (18.52)
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
common stock of Silverthorne in exchange for all of ITHC's assets and
liabilities. In a second closing which is to occur after the annual
meeting of the shareholders of Silverthorne, ITHC will receive an
additional 37,298,444 Silverthorne common shares. Silverthorne is a
publicly-traded shell company with no assets or liabilities prior to the
transaction with ITHC as described herein.
Of the shares acquired in August, 11,742,953 were acquired directly from
Silverthorne and 12,602,431 shares were acquired from certain shareholders
of Silverthorne in exchange for $190,000 in cash and 300 shares of ITHC
common stock.
Shares issued for employment agreements
On July 22, 1999 ITHC executed a one-year employment agreement for the
positions of Chief Operating Officer ("COO") and Chief Financial Officer
("CFO"). Included in this agreement was a jointly held option to purchase
1,000 shares of ITHC common stock at any time during the one-year period
commencing July 22, 1999. The shares were issued in consideration of
services rendered in August of 1999.
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.
F - 12
<PAGE>
Inter-American Telecommunications Holding Corporation
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
In January 2000, Silverthorne entered into a letter of intent to acquire
Aquila, subject to the execution of a definitive agreement and other
conditions.
F - 13
<PAGE>
COGNIGEN CORPORATION
Financial Statements
June 30, 1999 and 1998
F - 14
<PAGE>
CONTENTS
Page
INDEPENDENT AUDITORS' REPORT F-16
BALANCE SHEETS F-17
STATEMENTS OF INCOME AND RETAINED EARNINGS F-18
STATEMENTS OF CASH FLOWS F-19
NOTES TO FINANCIAL STATEMENTS F-20--24
F - 15
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Cognigen Corporation
Seattle, Washington
We have audited the accompanying balance sheets of Cognigen Corporation as of
June 30, 1999 and 1998, and the related statements of income and retained
earnings, and cash flows for each of the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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
COMISKEY & COMPANY
PROFESSIONAL CORPORATION
F - 16
<PAGE>
Cognigen Corporation
BALANCE SHEETS
June 30, 1999 and 1998
ASSETS 1999 1998
--------- ---------
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)
--------- ---------
86,285 67,267
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY .............................. $ 407,513 $ 164,014
========= =========
The accompanying notes are an integral part of the
financial statements.
F - 17
<PAGE>
Cognigen Corporation
STATEMENTS OF INCOME AND RETAINED EARNINGS
For the years ended June 30, 1999 and 1998
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 .............. $ 0.21 $ (0.52)
=========== ===========
Diluted earnings per share ............ $ 0.21 $ (0.52)
=========== ===========
The accompanying notes are an integral part of the
financial statements.
F - 18
<PAGE>
Cognigen Corporation
STATEMENTS OF CASH FLOWS
For the years ended June 30, 1999 and 1998
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
--------- ---------
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
========= =========
The accompanying notes are an integral part of the
financial statements.
F - 19
<PAGE>
Cognigen Corporation
NOTES TO FINANCIAL STATEMENTS
June 30, 1999 and 1998
1. Organization and Presentation
Description of Business and Operations
Cognigen Corporation, previously Cognigen Communications, was incorporated
in the state of Nevada in February 1998. Cognigen's predecessor, Cognigen
Communications, was incorporated in the state of California in February
1997. All references to the "Company" or "Cognigen" refer to Cognigen
Corporation and include its predecessor. Cognigen is an on-line marketer
of a variety of telecommunication services.
Telecommunication services that are offered for sale include both domestic
and international long distance, international callback service, high
bandwidth web hosting service, IP telephony service and prepaid calling
cards. Services other than prepaid calling cards are provided by
telecommunication companies with which Cognigen has on-going
relationships. Commissions are paid to Cognigen based on the sale and
usage of these telecommunication services. The commission rates vary among
the providers. Calling cards are purchased from various vendors at a
discount from the face value. Revenue is generated upon the sale of the
calling cards.
Cognigen services are marketed via a network of over thirty thousand
agents worldwide. Each agent has a personalized Web page that is accessed
by customers and potential customers looking for lower cost
telecommunication services. Commissions are paid on a sliding scale to
agents on both direct and downline sales.
2. Summary of Significant Accounting Policies
Revenue Recognition
The Company records commission income when the underlying
telecommunication service is rendered.
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.
General and administrative expenses are charged as incurred to periodic
income.
Statement of Cash Flows
For the purpose of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents.
F - 20
<PAGE>
Cognigen Corporation
NOTES TO FINANCIAL STATEMENTS
June 30, 1999 and 1998
Commissions Receivable
Commissions receivable represent amounts due from providers for
telecommunication services used by subscribers. Typically providers pay
commissions due to Cognigen forty-five days after the usage month end to
allow for billing and collection.
No allowance for doubtful accounts has been established by the Company and
no bad debt expense has been recorded in either 1998 or 1999.
Inventory
Inventory consists of prepaid calling cards held for resale and is valued
at the lower of cost or market. Calling cards are purchased from a variety
of vendors at a discount from the face value. Excise tax of 3% of the face
value is paid at the time of purchase. When the calling card is sold, the
excise tax is collected and offset against the prepaid excise tax.
Property and Equipment
Property and equipment is stated at cost and depreciated using the
straight-line method over the following estimated useful lives:
Telephone system 5 years
Computers 3 years
Furniture 5 years
Capitalized software 5 years
Software developed to support the self-replicating Web pages used to
market telecommunication services and administer agents' sales and related
commissions has been capitalized according to the provisions of AICPA
Statement of Position 98-1 "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use". Such software was contributed in
exchange for stock in the Company in February 1997.
Commissions Payable
Commissions payable represent amounts due to agents as commission related
to the usage for which the Company is due commission income from its
providers. It is the Company's policy to pay commission to its agents only
after receiving commission due from its providers. This policy results in
approximately two months commission payable as of each year end.
F - 21
<PAGE>
Cognigen Corporation
NOTES TO FINANCIAL STATEMENTS
June 30, 1999 and 1998
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.
3. Statements of Cash Flows
------------------------
There were no cash payments made for interest or income taxes in either
1999 or 1998.
F - 22
<PAGE>
Cognigen Corporation
NOTES TO FINANCIAL STATEMENTS
June 30, 1999 and 1998
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 components of income tax expense (benefit) are:
1999 1998
-------- --------
Taxes currently payable .... $ 11,738 $ 800
Change in deferred tax asset 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:
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 asset ........ $ 74 $2,718
====== ======
The provision for income taxes was different than the amount computed
using the statutory income tax rate for the reasons following:
1999 1998
------- -------
Tax computed at statutory rate.. $ 5,010 $(7,441)
State taxes .................... 5,744 --
Other, non-deductible expenses . 3,628 5,523
------- -------
Provision for income taxes $14,382 $(1,918)
======= =======
F - 23
<PAGE>
Cognigen Corporation
NOTES TO FINANCIAL STATEMENTS
June 30, 1999 and 1998
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 $0, respectively.
The Company is not involved in any lawsuits or litigation.
6. Related Parties
---------------
Prior to October 1, 1998, the corporate offices of the Company were in the
personal residence of the two of the Company's directors. No rent was
charged for the use of the space.
7. Subsequent Event
----------------
On July 1, 1999, the Company entered into an agreement with Inter-American
Telecommunications Corporation ("ITHC") to sell all of its assets to ITHC.
The purchase price included 5,500 shares of ITHC common stock ($.01 par
value), a $300,000 note payable due October 1, 1999, a four-year
employment contract for Cognigen's founder, and provisions for future
working capital of $600,000 over a three year period to cover business
expansion.
ITHC was incorporated on July 24, 1998 and had no operations during the
year ended June 30, 1999. Proforma financial results would include only
the results of operations of Cognigen.
F - 24
<PAGE>
Inter-American Telecommunications Holding Corporation
Silverthorne Production Company
Cognigen Corporation
UNAUDITED PRO FORMA FINANCIAL DATA
The accompanying unaudited Pro Forma financial information gives effect to
the July 1, 1999 acquisition of the operating assets of Cognigen
Corporation ("Cognigen") and the August 20, 1999 acquisition of a majority
interest in Silverthorne Production Company ("Silverthorne") by
Inter-American Telecommunications
Holding Corporation ("ITHC").
On July 1, 1999, ITHC entered into an agreement with Cognigen Corporation
("Cognigen") to purchase all of Cognigen's assets. The purchase price
included 5,500 shares of ITHC common stock ($.01 par value), a $300,000
note payable due October 1, 1999, a four-year employment contract for the
founder of Cognigen, and a commitment to provide future working capital of
$600,000 over a three year period to cover business expansion. The
transaction will be accounted for as a purchase.
On August 20, 1999, pursuant to a Stock Purchase and Asset Acquisition
Agreement by and among ITHC, Silverthorne, and certain shareholders of
Silverthorne, ITHC acquired a total of 24,345,384 shares, or approximately
58%, of the outstanding common stock of Silverthorne in exchange for all
of ITHC's assets and liabilities. In a second closing which is to occur
after the annual meeting of the shareholders of Silverthorne, ITHC will
receive an additional 37,298,444 Silverthorne common shares.
The following unaudited pro forma financial statements are based on the
historical presentation of the financial statements of ITHC, Cognigen, and
Silverthorne as of June 30, 1999 and for the year then ended.
The unaudited pro forma financial statements should be read in conjunction
with the historical financial statements, including notes thereto, of
ITHC, Cognigen, and Silverthorne previously filed or included herein.
F - 25
<PAGE>
Silverthorne Production Company
Pro-Forma Financial Statements
June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Silverthorne ITHC Cognigen
June 30, 1999 June 30, 1999 June 30, 1999 Pro Forma Pro Forma
Historical Historical Historical Adjustments Combined
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Current Assets ........................ $ -- $ -- $ 326,583 $ 326,583
Equipment ............................. -- -- 79,356 79,356
213,770a
Other Assets .......................... -- 1,316,551 1,574 (14,251)b 1,517,644
----------- ----------- ----------- -----------
Total Assets .......................... $ -- $ 1,316,551 $ 407,513 $ 1,923,583
=========== =========== =========== ===========
$190,000e
Current 300,000a
liabilities .......................... $ 2,234 $ 1,367,814 $ 321,228 (6,128)c $ 2,175,148
Stockholders' (8,123)b,c
equity ............................... (2,234) (51,263) 86,285 (86,230)a (251,565)
----------- ----------- ----------- (190,000)e -----------
Total
liabilities and
equity ............................... $ -- $ 1,316,551 $ 407,513 $ 1,923,583
=========== =========== =========== ===========
Revenues .............................. $ -- $ -- $ 1,807,401 $ 1,807,401
Cost of revenues ...................... -- -- 1,232,950 1,232,950
----------- ----------- ----------- -----------
Gross profit .......................... -- -- 574,451 574,451
SG&A .................................. -- -- 541,051 14,251b 555,302
Interest .............................. -- 67,814 -- 67,814
Other income/
expense .............................. 4,784 -- -- 4,784
----------- ----------- ----------- -----------
Net before tax ........................ 4,784 (67,814) 33,400 (53,449)
Tax ................................... -- 16,531 (14,382) 6,128c 8,277
----------- ----------- ----------- -----------
Net income ............................ $ 4,784 $ (51,283) $ 19,018 $ (32,265)
=========== =========== =========== ===========
Income (loss)
per share:
Basic ................................. $ 0.00 $ (25.64) $ 0.21 $ (0.00)
=========== =========== =========== ===========
Diluted ............................... $ 0.00 $ (25.64) $ 0.21 $ (0.00)
=========== =========== =========== ===========
Weighted average
shares outstanding.................... 15,757,047 2,000 91,000 11,742,953d 27,500,000
=========== =========== =========== ===========
F - 26
</TABLE>
Pro Forma Adjustments
a - to record acquisition of Cognigen for $300,000 debt plus $55 stock
b - to amortize goodwill ratably over a 15 year recovery period
c - tax effect of goodwill amortization
d - newly issued Silverthorne shares acquired by ITHC
e - to record charge to equity for 12,602,431 Silverthorne shares acquired by
ITHC from Silverthorne shareholders for $190,000.
F - 27
<PAGE>
EXHIBIT B
COGNIGEN NETWORKS, INC.
2000 INCENTIVE AND NONSTATUTORY
STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this 2000 Incentive and
Nonstatutory Stock Option Plan are to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional
incentive to the Employees and Consultants of the Company and to promote the
success of the Company's business. Options granted hereunder may be either
"incentive stock options," as defined in Section 422 of the Internal Revenue
Code of 1986, as amended, or "nonstatutory stock options," at the discretion of
the Board and as reflected in the terms of the written stock option agreement.
2. Definitions. As used herein, the following definitions shall apply:
a. "Board" shall mean the Committee, if one has been
appointed, or the Board of Directors of the Company if no
Committee is appointed.
b. "Code" shall mean the Internal Revenue Code of 1986,
as amended.
c. "Common Stock" shall mean the $0.001 par value common
stock of the Company.
d. "Company" shall mean Cognigen Networks, Inc., a
Colorado corporation.
e. "Committee" shall mean the Committee appointed by the Board in
accordance with paragraph (a) of Section 4 of the Plan, if one is
appointed, or the Board if no committee is appointed.
f. "Consultant" shall mean any person who is engaged by the Company
or any Subsidiary to render consulting services and is compensated for
such consulting services, but does not include a director of the Company
who is compensated for services as a director only with the payment of a
director's fee by the Company.
g. "Continuous Status as an Employee" shall mean the absence of any
interruption or termination of service as an Employee. Continuous Status
as an Employee shall not be considered interrupted in the case of sick
leave, military leave, or any other leave of absence approved by the
Board; provided that such leave is for a period of not more than 90 days
or reemployment upon the expiration of such leave is guaranteed by
contract or statute.
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 1,250,000 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock. If an Option should expire
or become unexercisable for any reason without having been exercised in full,
the unpurchased Shares which were subject thereto shall, unless the Plan shall
have been terminated, become available for future grant under the Plan.
4. Administration of the Plan.
a. Procedure. The Plan shall be administered by the Board or a
Committee appointed by the Board consisting of two or more Non-Employee
Directors to administer the Plan on behalf of the Board, subject to such
terms and conditions as the Board may prescribe.
(i) Once appointed, the Committee shall continue to serve until
otherwise directed by the Board (which for purposes of this paragraph
(a)(i) of this Section 4 shall be the Board of Directors of the
Company). From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members
(with or without cause) and appoint new members in substitution
therefor, fill vacancies however caused, or remove all members of the
Committee and thereafter directly administer the Plan.
(ii) Members of the Board who are granted, or have been granted,
Options may vote on any matters affecting the administration of the
Plan or the grant of any Options pursuant to the Plan.
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 April __, 2000. It shall
continue in effect until April __, 2010, 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. Nontransferability of Options. Unless permitted by the Code, in the
case of an Incentive Stock Option, the Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent and distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
11. Adjustments Upon Changes in Capitalization or Merger. Subject to any
required action by the shareholders of the Company, the number of Shares covered
by each outstanding Option, and the number of Shares which have been authorized
for issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of any
Option, as well as the price per Share covered by each such outstanding Option,
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of Shares subject to an Option.
In the event of the proposed dissolution or liquidation of the Company,
the Option will terminate immediately prior to the consummation of such proposed
action, unless otherwise provided by the Board. The Board may, in the exercise
of its sole discretion in such instances, declare that any Option shall
terminate as of a date fixed by the Board and give each Optionee the right to
exercise his Option as to all or any part of the Optioned Stock, including
Shares as to which the Option would not otherwise be exercisable. In the event
of the proposed sale of all or substantially all of the assets of the Company,
or the merger of the Company with or into another corporation in a transaction
in which the Company is not the survivor, the Option shall be assumed or an
equivalent option shall be substituted by such successor corporation or a parent
or subsidiary of such successor corporation, unless the Board determines, in the
exercise of its sole discretion and in lieu of such assumption or substitution,
that the Optionee shall have the right to exercise the Option as to all of the
Optioned Stock, including Shares as to which the Option would not otherwise be
exercisable. If the Board makes an Option fully exercisable in lieu of
assumption or substitution in the event of such a merger or sale of assets, the
Board shall notify the Optionee that the Option shall be fully exercisable for a
period of 30 days from the date of such notice, and the Option will terminate
upon the expiration of such period.
12. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date on which the Board makes the determination granting
such Option. Notice of the determination shall be given to each Employee or
other person to whom an Option is so granted within a reasonable time after the
date of such grant. Within a reasonable time after the date of the grant of an
Option, the Company shall enter into and deliver to each Employee or other
person granted such Option a written Stock Option Agreement as provided in
Sections 2(r) and 16 hereof, setting forth the terms and conditions of such
Option.
13. Amendment and Termination of the Plan.
a. Amendment and Termination. The Board may amend or terminate the
Plan from time to time in such respects as the Board may deem advisable;
provided that, the following revisions or amendments shall require
approval of the shareholders of the Company in the manner described in
Section 17 of the Plan:
(i) An increase in the number of Shares subject to the Plan
above the number of Shares set forth in Section 3 of the Plan, other
than in connection with an adjustment under Section 11 of the Plan;
(ii) Any change in the designation of the class of Employees
eligible to be granted Incentive Stock Options; or
(iii)Any material amendment under the Plan that would have to be
approved by the shareholders of the Company for the Board to continue
to be able to grant Incentive Stock Options under the Plan.
b. Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if the Plan had not been
amended or terminated, unless mutually agreed otherwise between the
Optionee and the Board, which agreement must be in writing and signed by
the Optionee and the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and
regulations promulgated thereunder, applicable state securities laws, and the
requirements of any stock exchange upon which the Shares may then be listed, and
shall be further subject to the approval of legal counsel for the Company with
respect to such compliance.
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.
<PAGE>
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:
Jimmy L. Boswell, President
<PAGE>
PROXY
SILVERTHORNE PRODUCTION COMPANY
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL __, 2000
The undersigned hereby constitutes and appoints Jimmy L. Boswell and
Darrell H. Hughes, and each of them, the true and lawful attorneys and proxies
of the undersigned with full power of substitution and appointment, for and in
the name, place and stead of the undersigned, to act for and to vote all of the
undersigned's shares of $0.001 par value common stock ("common stock") of
Silverthorne Production Company (the "Company") at the Annual Meeting of
Shareholders (the "Meeting") to be held in the Special Events Room on the Second
Floor, 7001 Seaview Avenue, NW, Seattle, Washington 98117, on _________, April
__, 2000, at 10:00 a.m., Pacific Time, and at all adjournment(s) thereof for the
following purposes:
(1) Elect five directors;
[ ] FOR THE DIRECTOR [ ] WITHHOLD AUTHORITY TO VOTE
NOMINEES LISTED BELOW FOR ALL NOMINEES LISTED BELOW
(EXCEPT AS MARKED TO
THE CONTRARY BELOW)
INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL
NOMINEE, STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST
BELOW.
Jimmy L. Boswell Darrell Hughes
David L. Jackson Mohammed I. Marafi
Wilhelm J. Giertsen
(2) adoption of an amendment to Article FIRST of the Articles of
Incorporation of the Company to change the name of the Company from
"Silverthorne Production Company" to "Cognigen Networks, Inc.";
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
<PAGE>
(3) adoption of an amendment to Article THIRD of the Articles of
Incorporation of the Company to delete any reference contained in the current
Article THIRD to an area of business in which the Company no longer engages and
to change the wording of the provision in the current Article THIRD that confers
upon the Company all of the rights, powers and privileges conferred on Colorado
corporations;
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
(4) adoption of an amendment to Section (d)(ii) of Article EIGHTH of the
Articles of Incorporation of the Company to change the vote required to amend
the Articles of Incorporation to a majority of a quorum;
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
(5) adoption of a new Article NINTH of the Articles of Incorporation of
the Company which limits the liability of the directors of the Company under
certain circumstances;
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
(6) adoption of a proposal to effectuate a one-for-four reverse split of
the Company's outstanding common stock;
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
(7) approval of the 2000 Incentive and Nonstatutory Stock Option Plan; and
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
(8) transact such other business as may lawfully come before the Meeting
or any adjournment(s) thereof.
The undersigned hereby revokes any proxies as to said shares heretofore
given by the undersigned and ratifies and confirms all that said attorneys and
proxies lawfully may do by virtue hereof.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED. IF NO
SPECIFICATION IS MADE, THEN THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED
AT THE MEETING FOR THE ELECTION OF THE NOMINEES FOR DIRECTOR AND FOR THE OTHER
ITEMS LISTED ABOVE.
It is understood that this proxy confers discretionary authority in
respect to matters not known or determined at the time of the mailing of the
Notice of Annual Meeting of Shareholders to the undersigned. The proxies and
attorneys intend to vote the shares represented by this proxy on such matters,
if any, as determined by the Board of Directors.
The undersigned hereby acknowledges receipt of the Notice of Annual
Meeting of Shareholders and the Proxy Statement and Annual Report to
Shareholders furnished therewith.
Dated and Signed: ______________, 2000
Signature(s) should agree with the name(s) stenciled
hereon. Executors, administrators, trustee, guardians
and attorneys should so indicate when signing.
Attorneys should submit powers of attorney.
