<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
(Amendment no. __)
Filed by the Registrant [X]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
[X] Definitive Proxy Statement Commission Only (as permitted by
[ ] Definitive Additional Materials Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
SMARTSOURCES.COM, INC.
------------------------------------------------
(Name of Registrant as Specified in Its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transactions applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transactions applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(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> 2
[LOGO]
[SMARTSOURCES.COM LOGO]
To Our Shareholders:
We are pleased to report that since going public in
December 1998, SmartSources.com has experienced a
new level of growth and potential. By concluding
many of our research and development projects
during 1998, the company is shifting its focus to
the development of its markets and becoming a
dynamic Internet business enterprise.
The Internet is changing everything
The Internet is creating an exciting field of
commercial and business opportunities for our
software technologies to build better and more
efficient business to business solutions and
services for our partners around the world.
We positioned the company to compete in the years
ahead by forming three divisions, International
Trade, Knowledge Management and Smart communities.
These divisions will expand the Company's
management team, resources, products and services
and utilize our core proprietary software
technologies to create and procure new
Internet-based business opportunities.
Employees and Offices
Today the board of directors, the management team
and staff in Seattle, Toronto, Silicon Valley and
Vancouver are working diligently to transform
SmartSources.com into a world-class global Internet
company.
Growth Strategy for 1999 and beyond
Our plan is to expand our current business and
market share while strategically pursuing
partnerships and acquisitions to consolidate new
market channels for our products and services on
the Internet.
Sincerely,
/s/ NATHAN NIFCO
Nathan Nifco
Chairman & CEO
<PAGE> 3
SMARTSOURCES.COM, INC.
2030 MARINE DRIVE, SUITE 100
NORTH VANCOUVER, BRITISH COLUMBIA
CANADA V7P 1V7
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 21, 1999
To the Shareholders of SmartSources.com, Inc.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of
SMARTSOURCES.COM, INC., a Colorado corporation (the "Company"), will be held on
Friday, May 21, 1999, at 10:00 a.m., local time, at the offices of the Company,
located at 2030 Marine Drive, Suite 100, North Vancouver, British Columbia,
Canada V7P 1V7 for the following purposes:
1. To elect four directors to serve until the next annual meeting of
shareholders and until their successors are elected and qualified.
2. To approve the Company's 1999 Stock Incentive Compensation Plan.
3. To ratify the selection of Moss Adams LLP, independent certified
public accountants, to serve as auditors of the Company for its fiscal year
ending December 31, 1999.
4. To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on March 31, 1999,
as the record date for the determination of shareholders entitled to notice of
and to vote at this Annual Meeting and at any adjournment or postponement
thereof.
By Order of the Board of Directors
/s/ NATHAN NIFCO
NATHAN NIFCO
Chairman
North Vancouver, British Columbia, Canada
May 3, 1999
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER
OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN
THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR
REPRESENTATION AT THE MEETING. A RETURN ENVELOPE IS ENCLOSED FOR THAT PURPOSE.
EVEN IF YOU HAVE GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND
THE MEETING. PLEASE NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A
BROKER, BANK OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST
OBTAIN FROM THE RECORD HOLDER A PROXY ISSUED IN YOUR NAME.
<PAGE> 4
SMARTSOURCES.COM, INC.
2030 MARINE DRIVE, SUITE 100
NORTH VANCOUVER, BRITISH COLUMBIA
CANADA V7P 1V7
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
May 21, 1999
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
THE ENCLOSED PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
SMARTSOURCES.COM, INC., a Colorado corporation (the "Company"), for use at the
Annual Meeting of Shareholders to be held on May 21, 1999, at 10:00 a.m., local
time (the "Annual Meeting"), or at any adjournment or postponement thereof, for
the purposes set forth herein and in the accompanying Notice of Annual Meeting.
The Annual Meeting will be held at the offices of the Company located at 2030
Marine Drive, Suite 100, North Vancouver, British Columbia, Canada V7P 1V7. The
Company intends to mail this proxy statement and accompanying proxy card on or
about May 10, 1999, to all shareholders entitled to vote at the Annual Meeting.
On December 11, 1998, Innovest Capital Sources Corporation (now
SmartSources.com, Inc.) acquired all of the capital stock of Nifco Investments
Ltd. ("Nifco") in exchange for 6,000,000 shares of Common Stock (the "Common
Stock") issued to former shareholders of Nifco (the "Exchange Transaction").
As a result of the Exchange Transaction, the Company acquired all of the
outstanding capital stock of Nifco. Nifco was founded in 1991 and has developed
software to assist companies in acquiring and processing international trade
information for trade compliance purposes. Intelli Trade, Inc., a wholly-owned
subsidiary of Nifco, provides compliance strategies for companies, from
classifying the products they purchase and manufacture and building audit trails
to preparing and distributing relevant NAFTA certificates to their customers.
Origin(R) Professional is the comprehensive software used by NAFTA trade experts
at Intelli Trade, Inc. to construct audit trails. The software is also used
in-house by a number of Fortune 500 companies to meet trade compliance standards
enforced under NAFTA. Analysis by Intelli Trade, Inc. and Origin(R) software
allows companies to maximize tariff reductions under NAFTA and find alternative
sourcing scenarios for cost-saving measures.
SOLICITATION
The Company will bear the entire cost of solicitation of proxies, including
preparation, assembly, printing and mailing of this proxy statement, the proxy
and any additional information furnished to shareholders. Copies of solicitation
materials will be furnished to banks, brokerage houses, fiduciaries and
custodians holding in their names shares of Common Stock beneficially owned by
others to forward to such beneficial owners. The Company may reimburse persons
representing beneficial owners of Common Stock for their costs of forwarding
solicitation materials to such beneficial owners. Original solicitation of
proxies by mail may be supplemented by telephone, telegram or personal
solicitation by directors, officers or other employees of the Company. No
additional compensation will be paid to directors, officers or other employees
for such services.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Common Stock at the close of business on March
31, 1999, will be entitled to notice of and to vote at the Annual Meeting. At
the close of business on March 31, 1999, the Company had outstanding and
entitled to vote 10,918,305 shares of Common Stock.
Each holder of record of Common Stock on such date will be entitled to one
vote for each share held on all matters to be voted upon at the Annual Meeting.
With respect to the election of directors, shareholders
<PAGE> 5
shall have the right to vote their shares for as many persons as there are
directors to be elected. Cumulative voting shall not be permitted in the
election of directors or otherwise.
All votes will be tabulated by the inspector of election appointed for the
meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions and broker non-votes are counted
towards a quorum but are not counted for any purpose in determining whether a
matter is approved.
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
Vice President, Corporate Development of the Company at the Company's principal
executive office, 2030 Marine Drive, Suite 100, North Vancouver, British
Columbia, Canada V7P 1V7, a written notice of revocation or a duly executed
proxy bearing a later date, or it may be revoked by attending the meeting and
voting in person. Attendance at the meeting will not, by itself, revoke a proxy.
PROPOSAL 1
ELECTION OF DIRECTORS
There are four nominees for four of the five Board positions presently
existing in accordance with the Company's Bylaws. The fifth Board position is
currently vacant, and it may be filled by the Board of Directors at a later date
without shareholder approval. Each director to be elected will hold office until
the next annual meeting of shareholders and until his or her successor is
elected and has qualified, or until such director's earlier death, resignation
or removal. Each nominee listed below is currently a director of the Company.
Shares represented by executed proxies will be voted, if authority to do so
is not withheld, for the election of the four nominees named below. In the event
that any nominee should be unavailable for election as a result of an unexpected
occurrence, such shares will be voted for the election of such substitute
nominee as management may propose. Each person nominated for election has agreed
to serve if elected and management has no reason to believe that any nominee
will be unable to serve. The four candidates receiving the highest number of
affirmative votes cast at the meeting will be elected directors of the Company.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF EACH NAMED NOMINEE.
2
<PAGE> 6
NOMINEES
The names of the nominees and certain information about them are set forth
below:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION/ DIRECTOR
AGE POSITION HELD WITH THE COMPANY SINCE
--- ------------------------------ --------
<S> <C> <C> <C>
Nathan Nifco...................... 35 Chairman, President, Chief 1991
Executive Officer and Director
Joel S. Dumaresq.................. 34 Investment banker, Pashleth 1998
Investment Ltd.; Vice President,
Chief Financial Officer (October
1998 - March 1999) and Director
Gerald J. Wittenberg.............. 46 Surgeon; Director 1998
Charles K. Kelly.................. 50 Chairman of Canadian Public 1999
Affairs Consulting Group, Vista
Strategic Management, Inc., North
American Institute -- Canada and
The Cascadia Institute; Director
</TABLE>
Nathan Nifco
Nathan Nifco founded Nifco Synergy Ltd. in 1991. Mr. Nifco holds a B.Sc.
from the Monterrey Institute of Technology in Mexico City, a M.Sc. from the
Rosenbleuth Foundation, also in Mexico City, an MBA from Asia Pacific
International University and diplomas in executive leadership and management
from the Massachusetts Institute of Technology and the Kennedy School of
Management at Harvard University.
Joel Dumaresq
Joel Dumaresq has been an investment banker with Pashleth Investment Ltd.,
located in Richmond, British Columbia, Canada, since 1995. From 1994 until the
present, Mr. Dumaresq has been the President of Dumaresq Enterprises Ltd., a
diversified holding company with forestry, aviation and hospitality interests in
Canada and the United States. Mr. Dumaresq has served as a member of the board
of directors of two public companies, Solar Energy Ltd. and Wattage Monitor,
Inc., since 1998 and 1999, respectively. Mr. Dumaresq earned his B.A. degree in
Economics from the University of British Columbia in 1986.
Dr. Gerald Wittenberg
Dr. Gerald Wittenberg is an oral and maxillofacial surgeon and received his
degree from the University of British Columbia in 1977. In 1981, Dr. Wittenberg
obtained a Masters of Science degree with emphasis on Anatomy and Physiology
from the University of Minnesota. He has a private practice in Vancouver and
Richmond, British Columbia, teaches at the University of British Columbia, and
is on staff at several hospitals.
Charles Kelly
Charles Kelly has been the Chairman of The Cascadia Institute
(1991-Present), North American Institute -- Canada (1994-Present), Vista
Strategic Management, Inc. (1990-Present) and the Canadian Public Affairs
Consulting Group (1978-Present). He has served as a member of the board of
directors of The Cascadia Institute and North American Institute -- Canada since
1991 and 1994, respectively. Mr. Kelly received his B.A. degree from Queen's
University in 1971.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended December 31, 1998, the Board of Directors had
three meetings. The Board intends to form an Audit Committee and a Compensation
Committee.
3
<PAGE> 7
The Audit Committee will meet with the Company's auditors at least annually
to review the results of the annual audit and discuss the financial statements,
will recommend to the Board the auditors to be retained, and will receive and
consider the accountants' comments as to controls, adequacy of staff and
management performance and procedures in connection with audit and financial
controls. The Audit Committee will be composed of two non-employee directors.
Joel Dumaresq and Charles Kelly have agreed to serve on the Audit Committee.
The Compensation Committee will make recommendations concerning salaries
and incentive compensation awards, stock options to employees and consultants
under the Company's stock option plans, and will otherwise determine
compensation levels and perform such other functions regarding compensation as
the Board may delegate. The Compensation Committee will be composed of two
non-employee directors. Joel Dumaresq and Charles Kelly have agreed to serve on
the Audit Committee.
During the fiscal year ended December 31, 1998, each Board member attended
75% or more of the aggregate of the meetings of the Board held during the period
for which he was a Director.
COMPENSATION OF DIRECTORS
The members of the Board of Directors of the Company do not receive cash
compensation for their services as directors but are reimbursed for their
reasonable expenses incurred in connection with attendance at meetings of the
Board, in accordance with Company policy.
PROPOSAL 2
APPROVAL OF 1999 STOCK INCENTIVE COMPENSATION PLAN
The Company's 1999 Stock Incentive Compensation Plan (the "Plan") was
adopted by the Board of Directors in April 1999.
Shareholders are requested in this Proposal 2 to approve the Plan. The
affirmative vote of the holders of a majority of the shares present in person or
represented by proxy and voting at the meeting will be required to approve the
Plan. For purposes of this vote abstentions and broker non-votes will not be
counted for any purpose in determining whether this matter has been approved.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 2.
The following is a description of the material features of the Plan and is
qualified in its entirety by the complete text of the Plan. Capitalized terms
not defined herein shall have the meanings given them in the Plan.
ADMINISTRATION OF THE PLAN
The Plan is administered by the Board or a committee of the Board (the
"Compensation Committee") appointed by and consisting of two or more members of
the Board. In making its selection, the Board shall consider the provisions
regarding "outside director" as defined by section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"), and "non-employee" director as
defined in Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Board may delegate the responsibility for administering the
Plan with respect to designated classes of eligible persons to different
committees of the Board, subject to such limitations as the Board deems
appropriate. Committee members shall serve for such term as the Board may
determine, subject to removal by the Board at any time. To the extent consistent
with applicable law, the Board may authorize a senior executive officer of the
Company to grant Awards, within limits specifically prescribed by the Board.
Except for the terms and conditions set forth in the Plan, the Compensation
Committee shall have exclusive authority, in its discretion, to determine all
matters relating to Awards under the Plan, including the selection of
individuals to be granted Awards, the type of Awards (as defined below), the
number of shares of Common Stock subject to an Award, all terms,
4
<PAGE> 8
conditions, restrictions and limitations, if any, of an Award and the terms of
any instrument that evidences the Award. The Compensation Committee shall also
have exclusive authority to interpret the Plan and may from time to time adopt
and change rules and regulations of general application for the Plain's
administration. The Compensation Committee's interpretation of the Plan and its
rules and regulations, and all actions taken and determinations made by the
Compensation Committee pursuant to the Plan, shall be conclusive and binding on
all parties involved or affected. The Compensation Committee may delegate
administrative duties to such of the Company's officers as it so determines.
STOCK SUBJECT TO THE PLAN
Subject to adjustment in certain circumstances, as discussed below, and to
shareholder approval of the Plan, the maximum number of shares of Common stock
which shall be available for issuance under the Plan shall not exceed in the
aggregate 10% of the issued shares of Common Stock as of the Plan's effective
date; provided that, if the number of issued shares of Common Stock is increased
after the Plan's effective date, the maximum number of shares of Common Stock
which shall be available for issuance under the Plan shall be increased by 10%
of such increase. In no event, however, shall more than 550,000 shares of Common
Stock be cumulatively available for issuance pursuant to the exercise of
Incentive Stock Options under the Plan. The Company will file a registration
statement on Form S-8 to register the shares of Common Stock issuable under the
Plan.
AWARDS
Awards under the Plan may consist of (i) Incentive Stock Options designed
to qualify as "incentive stock options" under Section 422 of the Code, (ii)
Nonqualified Stock Options, or (iii) grants of stock ("Stock Awards";
collectively referred to as "Awards"). Options may be granted singly or in
combination. Notwithstanding anything in the Plan to the contrary, the
Compensation Committee may grant Awards under the Plan, in substitution for
awards issued under other plans, or assume under the Plan awards issued under
other plans, if the other plans are or were plans of other acquired entities
("Acquired Entities") (or the parent of an Acquired Entity) and the new Award is
substituted, or the old award is assumed, by reason of merger, consolidation,
acquisition of property or of stock, reorganization or liquidation (the
"Acquisition Transaction"). In the event that a written agreement pursuant to
which the Acquisition Transaction is completed is approved by the Board and said
agreement sets forth the terms and conditions of the substitution for or
assumption of outstanding awards of the Acquired Entity, said terms and
conditions shall be deemed to be the action of the Compensation Committee
without any further action by the Compensation Committee, except as may be
required for compliance with Rule 16b-3 under the Exchange Act, and the persons
holding such Awards shall be deemed to be Holders.
ELIGIBILITY FOR PARTICIPATION
Awards may be granted to any officers, directors, employees, advisors,
agents or consultants to the Company or its subsidiaries.
OPTIONS
The exercise price for shares purchased under an Option shall be as
determined by the Compensation Committee, but shall not be less than 100% of the
Fair Market Value of the Common Stock on the Grant Date with respect to
Incentive Stock Options and not less than 100% of the Fair Market Value of the
Common Stock on the Grant Date with respect to Nonqualified Stock Options. The
term of each Option shall be as established by the Compensation Committee or, if
not so established, shall be 10 years from the Grant Date. The Compensation
Committee shall establish and set forth in each instrument that evidences an
Option the time at which or the installments in which the Option shall vest and
become exercisable, which provisions may be waived or modified by the
Compensation Committee at any time. If not so established in the
5
<PAGE> 9
instrument evidencing the Option, the Option will vest and become exercisable
according to the following schedule, which may be waived or modified by the
Compensation Committee at any time.
<TABLE>
<CAPTION>
PERIOD OF HOLDER'S CONTINUOUS PERCENT OF
EMPLOYMENT OR SERVICE WITH TOTAL OPTION
THE COMPANY OR ITS SUBSIDIARIES THAT IS VESTED
FROM THE OPTION GRANT DATE AND EXERCISABLE
- ------------------------------------------------------------ ---------------
<S> <C>
After 1 year.......................................... 25%
After 2 years......................................... 50%
After 3 years......................................... 75%
After 4 years......................................... 100%
</TABLE>
To the extent that the right to purchase shares has accrued thereunder, an
Option may be exercised from time to time by written notice to the Company, in
accordance with procedures established by the Compensation Committee, setting
forth the number of shares with respect to which the Option is being exercised
and accompanied by payment in full as described below. The Compensation
Committee may determine at any time that an Option may not be exercised as to
less than 100 shares at any one time (or the lesser number of remaining shares
covered by the Option).
The exercise price for shares purchased under an Option shall be paid in
full to the Company by delivery of consideration equal to the product of the
Option exercise price and the number of shares purchased. Such consideration
must be paid in cash or by check or, unless the Compensation Committee in its
sole discretion determines otherwise, either at the time the Option is granted
or at any time before it is exercised, a combination of cash and/or check (if
any) and/or one or both of the following alternative forms: (a) tendering Common
Stock already owned by the Holder for at least six months (or any shorter period
necessary to avoid a charge to the Company's earnings for financial reporting
purposes) having a Fair Market Value on the day prior to the exercise date equal
to the aggregate Option exercise price or (b) if and so long as the Common Stock
is registered under Section 12(b) or 12(g) of the Exchange Act, delivery of a
properly executed exercise notice, together with irrevocable instructions, to
(i) a brokerage firm designated by the Company to deliver promptly to the
Company the aggregate amount of sale or loan proceeds to pay the Option exercise
price and any withholding tax obligations that may arise in connection with the
exercise and (ii) the Company to deliver the certificates for such purchased
shares directly to such brokerage firm, all in accordance with the regulations
of the Federal Reserve Board. In addition, the exercise price for shares
purchased under an Option may be paid, either singly or in combination with one
or more of the authorized forms of payment by such other consideration as the
Compensation Committee may permit.
The Compensation Committee shall establish and set forth in each instrument
that evidences an Option whether the Option will continue to be exercisable, and
the terms and conditions of such exercise, if a Holder ceases to be employed by,
or to provide services to, the Company or its Subsidiaries, which provisions may
be waived or modified by the Compensation Committee at any time. If not so
established in the instrument evidencing the Option, the Option will be
exercisable according to the following terms and conditions, which may be waived
or modified by the Compensation Committee at any time.
TERMINATION OF EMPLOYMENT
In case of termination of the Holder's employment or services other than by
reason of death or Cause, the Option shall be exercisable, to the extent of the
number of shares purchasable by the Holder at the date of such termination, only
(a) within one year if the termination of the Holder's employment or services is
coincident with Retirement, Early Retirement at the Company's request or
Disability or (b) within three months after the date the Holder ceases to be an
employee, director, officer, consultant, agent, advisor or independent
contractor of the Company or a Subsidiary if termination of the Holder's
employment or services is for any Disability, but in no event later than the
remaining term of the Option. Any Option exercisable at the time of the Holder's
death may be exercised, to the extent of the number of shares purchasable by the
Holder at the date of the Holder's death, by the personal representative of the
Holder's estate, the person(s) to whom the Holder's rights under the Option have
passed by will or the applicable laws of descent and
6
<PAGE> 10
distribution or the Holder's designated beneficiary at any time or from time to
time within one year after the date of death, but in no event later than the
remaining term of the Option. Any portion of an Option that is not exercisable
on the date of termination of the Holder's employment or services shall
terminate on such date, unless the Compensation Committee determines otherwise.
In case of termination of the Holder's employment or services for Cause, the
Option shall automatically terminate upon first notification to the Holder of
such termination, unless the Compensation Committee determines otherwise. If a
Holder's employment or services with the Company are suspended pending an
investigation of whether the Holder shall be terminated for Cause, all the
Holder's rights under any Option likewise shall be suspended during the period
of investigation.
A transfer of employment of services between or among the Company and its
Subsidiaries shall not be considered a termination of employment or services.
The effect of a Company-approved leave of absence on the terms and conditions of
an Option shall be determined by the Compensation Committee, in its sole
discretion.
LIMITATIONS ON INCENTIVE STOCK OPTIONS
To the extent required by Section 422 of the Code, Incentive Stock Options
shall be subject to the following additional terms and conditions:
1. To the extent the aggregate Fair Market Value (determined as of the
Grant Date) of Common Stock with respect to which Incentive Stock Options
are exercisable for the first time during any calendar year (under the Plan
and all other stock option plans of the Company) exceeds $100,000 such
portion in excess of $100,000 shall be treated as a Nonqualified Stock
Option. In the event the Holder holds two or more such Options that become
exercisable for the first time in the same calendar year, such limitation
shall be applied on the basis of the order in which such Options are
granted.
2. If an individual owns more than 10% of the total voting power of
all classes of the Company's stock, then the exercise price per share of an
Incentive Stock Option shall not be less than 110% of the Fair Market Value
of the Common Stock on the Grant Date and the Option term shall not exceed
five years. The determination of 10% ownership shall be made in accordance
with Section 422 of the Code.
3. Individuals who are not employees of the Company or one of its
parent corporations or subsidiary corporations may not be granted Incentive
Stock Options. For purposes of this determination, "parent corporation" and
"subsidiary corporation" shall have the meanings attributed to those terms
for purposes of Section 422 of the Code.
4. The term of an Incentive Stock Option shall not exceed 10 years.
5. To qualify for Incentive Stock Option tax treatment, an Option
designated as an Incentive Stock Option must be exercised within three
months after termination of employment for reasons other than death, except
that, in the case of termination of employment due to total disability,
such Option must be exercised within one year after such termination.
Employment shall not be deemed to continue beyond the first 90 days of a
leave of absence unless the Holder's reemployment rights are guaranteed by
statute or contract. For purposes of this determination, "total disability"
shall mean a mental or physical impairment of the Holder that is expected
to result in death or that has lasted or is expected to last for a
continuous period of 12 months or more and that causes the Holder to be
unable, in the opinion of the Company and two independent physicians, to
perform his or her duties for the Company and to be engaged in any
substantial gainful activity. Total disability shall be deemed to have
occurred on the first day after the Company and the two independent
physicians have furnished their opinion of total disability to the
Compensation Committee.
In order to obtain certain tax benefits afford to Incentive Stock Options
under Section 422 of the Code, the Holder must hold the shares issued upon the
exercise of an Incentive Stock Option for two years after the Grant Date of the
Incentive Stock Option and one year from the date of exercise. A Holder may be
subject to the alternative minimum tax at the time of exercise of an Incentive
Stock Option. The Compensation
7
<PAGE> 11
Committee may require a Holder to give the Company prompt notice of any
disposition of shares acquired by the exercise of an Incentive Stock Option
prior to the expiration of such holding periods.
STOCK AWARDS
The Compensation Committee is authorized to make Awards of Common Stock on
such terms and conditions and subject to such restrictions, if any (which may be
based on continuous service with the Company or the achievement of performance
goals related to profits, profit growth, profit-related return ratios, cash flow
or total shareholder return, where such goals may be stated in absolute terms or
relative to comparison companies), as the Compensation Committee shall
determine, in its sole discretion, which terms, conditions and restrictions
shall be set forth in the instrument evidencing the Award. The terms, conditions
and restrictions that the Compensation Committee shall have the power to
determine shall include, without limitation, the manner in which shares subject
to Stock Awards are held during the periods they are subject to restrictions and
the circumstances under which forfeiture of Restricted Stock shall occur by
reason of termination of the Holder's services.
Upon the satisfaction of any terms, conditions and restrictions prescribed
in respect of a Stock Award, or upon the Holder's release from any terms,
conditions and restrictions of a Stock Award, as determined by the Compensation
Committee, the Company shall release, as soon as practicable, to the Holder or,
in the case of the Holder's death, to the personal representative of the
Holder's estate or as the appropriate court directs, the appropriate number of
shares of Common Stock.
Notwithstanding any other provision of the Plan, the Compensation Committee
may, in its sole discretion, waive the forfeiture period and any other terms,
conditions or restrictions on any Restricted Stock under such circumstances and
subject to such terms and conditions and the Compensation Committee shall deem
appropriate.
ASSIGNABILITY
Awards are generally not transferable by the participant, except in the
event of death and, during Holder's lifetime, such Awards may be exercised only
by the Holder or a permitted assignee or transferee of the Holder (as provided
below). Notwithstanding the foregoing, and to the extent permitted by Section
422 of the Code, the Compensation Committee, in its sole discretion, may permit
such assignment, transfer and exercisability and may permit a Holder to
designate a beneficiary who may exercise the Award after the Holder's death;
provided, however, that any Award so assigned or transferred shall be subject to
all the same terms and conditions contained in the instrument evidencing the
Award.
ADJUSTMENT OF SHARES
In the event that, at any time or from time to time, a stock dividend,
stock split, spin-off, combination or exchange of shares, recapitalization,
merger, consolidation, distribution to shareholders other than a normal cash
dividend, or other change in the Company's corporate or capital structure
results in (a) the outstanding shares, or any securities exchanged therefor or
received in their place, being exchanged for a different number or class of
securities of the Company or of any other corporation being received by the
holders of shares of Common Stock of the Company, then the Compensation
Committee shall make proportional adjustments in (i) the maximum number and kind
of securities subject to the Plan as set forth above, (ii) the maximum number
and kind of securities that may be made subject to Awards to any individual as
set forth above, and (iii) the number and kind of securities that are subject to
any outstanding Award and the per share price of such securities, without any
change in the aggregate price to be paid therefor. The determination by the
Compensation Committee as to the terms of any of the foregoing adjustment shall
be conclusive and binding.
Except as otherwise provided in the instrument that evidences the Award, in
the event of any Corporate Transaction (a term that includes, among other
things, certain mergers or consolidations involving the Company or a sale of all
or substantially all the assets of the Company), each Award that is at the time
outstanding shall automatically accelerate so that each such Award shall,
immediately prior to the specified effective date for the Corporate Transaction,
become 100% vested and exercisable.
8
<PAGE> 12
Such Award shall not so accelerate, however, if and to the extent that such
Award is, in connection with the Corporate Transaction, either to be assumed by
the successor corporation or parent thereof (the "Successor Corporation") or to
be replaced with a comparable award for the purchase of shares of the capital
stock of the Successor Corporation. The determination of Award comparability
shall be made by the Compensation Committee, and its determination shall be
conclusive and binding. Any such Awards that are assumed or replaced in the
Corporate Transaction and do not otherwise accelerate at that time shall be
accelerated in the event that the Holder's employment or services should
subsequently terminate within two years following such Corporate Transaction,
unless such employment or services are terminated by the Successor Corporation
for Cause or by the Holder voluntarily without Good Reason.
All such Awards shall terminate and cease to remain outstanding immediately
following the consummation of the Corporate Transaction, except to the extent
assumed by the Successor Corporation. The acceleration will not occur if, in the
opinion of the Company's outside accountants, it would render unavailable
"pooling of interest" accounting for a Corporate Transaction that would
otherwise qualify for such accounting treatment.
FURTHER ADJUSTMENT OF OPTIONS
Subject to the above-noted Corporate Transaction adjustment, the
Compensation Committee shall have the discretion, exercisable at any time before
a sale, merger, consolidation, reorganization, liquidation or change in control
of the Company, as defined by the Compensation Committee, to take such further
action as it determines to be necessary or advisable, and fair and equitable to
Holders, with respect to Awards. Such authorized action may include (but shall
not be limited to) establishing, amending or waiving the type, terms, conditions
or duration of, or restrictions on, Awards so as to provide for earlier, later,
extended or additional time for exercise and other modifications, and the
Compensation Committee may take such actions with respect to all Holders, to
certain categories of Holders or only to individual Holders. The Compensation
Committee may take such action before or after granting Awards to which the
action relates and before or after any public announcement with respect to such
sale, merger, consolidation, reorganization, liquidation or change in control
that is the reason for such action.
ADJUSTMENT LIMITATIONS
The grant of Awards will in no way affect the Company's right to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
TAX WITHHOLDING
The Company may require the Holder to pay to the Company the amount of any
withholding taxes that the Company is required to withhold with respect to the
grant, vesting or exercise of any Award. Subject to the Plan and applicable law,
the Compensation Committee may, in its sole discretion, permit the Holder to
satisfy withholding obligations, in whole or in part, by paying cash, by
electing to have the Company withhold shares of Common Stock or by transferring
shares of Common Stock to the Company, in such amounts as are equivalent to the
Fair Market Value of the withholding obligation. The Company shall have the
right to withhold from any Award or any shares of Common Stock issuable pursuant
to an Award or from any cash amount otherwise due or to become due from the
Company to the Holder an amount equal to such taxes. The Company may also deduct
from any Award any other amounts due from the Holder to the Company or a
Subsidiary.
AMENDMENT AND TERMINATION OF PLAN
The Plan may be amended only by the Board in such respects as it shall deem
advisable; however, to the extent required for compliance with Section 422 of
the Code or any applicable law or regulation, shareholder approval will be
required for any amendment that will (a) increase the total number of shares as
to which Options may be granted under the Plan or that may be issued as Stock
Awards, (b) modify the class of
9
<PAGE> 13
persons eligible to receive Options, or (c) otherwise require shareholder
approval under any applicable law or regulation.
The Board may suspend or terminate the Plan at any time. The Plan will have
no fixed expiration date; provided, however, that no Incentive Stock Options may
be granted more than 10 years after the earlier of the Plan's adoption by the
Board and approval by the shareholders. The amendment or termination of the Plan
shall not, without the consent of the Holder of any Award under the Plan, impair
or diminish any rights or obligations under any Award theretofore granted under
the Plan. Any change or adjustment to an outstanding Incentive Stock Option
shall not, without the consent of the Holder, be made in a manner so as to
constitute a "modification" that would cause such Incentive Stock Option to fail
to continue to qualify as an Incentive Stock Option.
PROPOSAL 3
RATIFICATION OF SELECTION OF AUDITORS
The Board of Directors has selected Moss Adams LLP, independent certified
public accountants, as the Company's auditors for the fiscal year ending
September 30, 1999, and has further directed that management submit the
selection of auditors for ratification by the shareholders at the Annual
Meeting. Representatives of Moss Adams LLP are expected to be present at the
Annual Meeting, will have an opportunity to make a statement if they so desire
and will be available to respond to appropriate questions.
Shareholder ratification of the selection of Moss Adams LLP as the
Company's auditors is not required by the Company's Bylaws. However, the Board
is submitting the selection of Moss Adams LLP to the shareholders for
ratification as a matter of good corporate practice. If the shareholders fail to
ratify the selection, the Board will reconsider whether or not to retain that
firm. Even if the selection is ratified, the Board in its discretion may direct
the appointment of different auditors at any time during the year if they
determine that such a change would be in the best interests of the Company and
its shareholders.
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and voting at the Annual Meeting will be required
to ratify the selection of Moss Adams LLP. For purposes of this vote abstentions
and broker non- votes will not be counted for any purpose in determining whether
this matter has been approved.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 3.
10
<PAGE> 14
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of March 31, 1999, by: (i) each nominee for
director; (ii) each of the executive officers named in the Summary Compensation
Table; (iii) all executive officers and directors of the Company as a group; and
(iv) all those known by the Company to be beneficial owners of more than five
percent of its Common Stock.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
-----------------------------------
BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF TOTAL
- ---------------- ---------------- ----------------
<S> <C> <C>
Nathan Nifco................................................ 3,003,070(2) 27.5%
2220 Mathers Avenue
West Vancouver, British Columbia
V7V 2H5 Canada
Joel S. Dumaresq............................................ 0 *
Gerald J. Wittenberg........................................ 0 *
Charles K. Kelly............................................ 0 *
Sokhie S. Puar.............................................. 0 *
Carol Beaul................................................. 0 *
Lionel Prins................................................ 0 *
Dina Nifco.................................................. 2,991,355(2) 27.4%
2220 Mathers Avenue
West Vancouver, British Columbia
V7V 2H5 Canada
All executive officers and directors as a group (7
persons).................................................. 5,994,425 54.9%
</TABLE>
- ---------------
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal shareholders and Schedules 13D and 13G filed with the Securities
and Exchange Commission ("SEC"). Unless otherwise indicated in the footnotes
to this table and subject to community property laws where applicable, the
Company believes that each of the shareholders named in this table has sole
voting and investment power with respect to the shares indicated as
beneficially owned. Applicable percentages are based on 10,918,305 shares of
Common Stock outstanding on March 31, 1999, adjusted as required by rules
promulgated by the SEC.
(2) This does not include 5,575 shares of Common Stock beneficially owned by the
Nifco Family Trust, of which Nathan Nifco is the Trustee and Dina Nifco is a
beneficiary.
11
<PAGE> 15
ADDITIONAL INFORMATION
MANAGEMENT
Executive officers are elected by the Board and serve at the discretion of
the Board. Set forth below is information regarding executive officers of the
Company who are not directors.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION/POSITION HELD WITH THE COMPANY
- ---- --- ---------------------------------------------------
<S> <C> <C>
Sokhie S. Puar.......... 35 Vice President, Corporate Development
Lionel Prins............ 41 Vice President, Sales and Marketing
Carol Beaul............. 46 President, Intelli Trade, Inc., a wholly-owned subsidiary
</TABLE>
Sokhie Puar, Vice President, Corporate Development
Sokhie Puar has been Vice President of Corporate Development for the
Company since February 1999. From 1987 to January 1999, Mr. Puar was a
Registered Representative at Canaccord Capital Corporation (Canada) and Noram
Investments (United States of America). A licensed securities professional in
both the United States and Canada, Mr. Puar received his training at the British
Columbia Institute of Technology obtaining both an advanced Diploma in
Mechanical Engineering (1985) and Business Administration (1986).
Lionel Prins, Vice President, Sales and Marketing
Lionel Prins has been Vice President of Sales and Marketing since January
1999. From 1990 to 1998, Mr. Prins served as the President of Imagelynx Digital
Imaging, a prepress and digital print company servicing design firms and
advertising agencies throughout North America. Mr. Prins earned his B.F.A.
degree in design from the Emily Carr College of Art and Design in 1975.
Carol Beaul, President, Intelli Trade, Inc.
Carol Beaul has served as the President of Intelli Trade, Inc. since 1994.
She has been a member of the board of directors of the Canadian Industrial
Transportation League since 1995. She obtained her B.A. degree from Windsor
University in 1975.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act")
requires the Company's directors and executive officers, and persons who own
more than ten percent of a registered class of the Company's equity securities,
to file with the SEC initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Officers,
directors and greater than ten percent (10%) shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1999, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with.
12
<PAGE> 16
EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows for the fiscal year ended December 31, 1998,
compensation awarded or paid to, or earned by, the Company's Chief Executive
Officer. The Company had no other executive officers whose compensation exceeded
$100,000 for such year (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
NAME AND PRINCIPAL POSITION SALARY BONUS
- --------------------------- -------- -------
<S> <C> <C>
Nathan Nifco, Chief Executive Officer, President, Chairman
and Director.............................................. $150,000(1) $34,161
</TABLE>
- ---------------
(1) This includes $150,000 in management fees accrued in 1997 (prior to the
merger of Nifco Synergy Ltd. into SmartSources.com, Inc.) but paid during
the fiscal year 1998.
STOCK OPTION GRANTS AND EXERCISES
For the fiscal year ended December 31, 1998, there were no options granted
to, exercised by, or held at year end by, the Named Executive Officers.
CERTAIN TRANSACTIONS
On November 1, 1996, the Company (then Nifco Synergy Ltd.) entered into an
agreement with Nathan Nifco. The agreement has a term of ten years and provides
for an annual royalty payment equal to 10% of any sales by the Company derived
from the commercial exploitation of all computer programs, methodologies,
products, formulas, concepts, techniques, algorithms, user and technical notes
and documents, derivatives and related technical material related to the INFER
technology developed by Nathan Nifco. In exchange for the royalty, Nathan Nifco
transferred all intellectual and commercial property rights relating to INFER to
the Company. In addition, Nathan Nifco agreed not to compete with the Company's
exploitation and commercialization of the INFER technology without the Company's
prior written consent. At this time, no royalties have been accrued or paid to
Nathan Nifco under the agreement.
SHAREHOLDER PROPOSALS
Proposals of shareholders that are intended to be presented at the
Company's 2000 Annual Meeting of Shareholders must be received by the Company
not later than December 22, 1999, in order to be included in the proxy statement
and proxy relating to that Annual Meeting. In addition, pursuant to recent
changes to the proxy rules, unless a shareholder who wishes to bring a matter
before the shareholders at the Company's 2000 Annual Meeting of Shareholders
notifies the Company of such matter prior to March 6, 2000, management will have
discretionary authority to vote all shares for which it has proxies in
opposition to such matter.
13
<PAGE> 17
OTHER MATTERS
The Board of Directors knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters are properly brought
before the meeting, it is the intention of the persons named in the accompanying
proxy to vote on such matters in accordance with their best judgment.
By Order of the Board of Directors
/s/ NATHAN NIFCO
NATHAN NIFCO
Chairman
May 3, 1999
14
<PAGE> 18
APPENDIX A
SMARTSOURCES.COM, INC.
1999 STOCK INCENTIVE COMPENSATION PLAN
SECTION 1. PURPOSE
The purpose of the SmartSources.com, Inc. 1999 Stock Incentive Compensation
Plan (the "Plan") is to enhance the long-term shareholder value of
SmartSources.com, Inc., a Colorado corporation (the "Company"), by offering
opportunities to employees, directors, officers and consultants of the Company
and its Subsidiaries (as defined in Section 2) to participate in the Company's
growth and success, and to encourage them to remain in the service of the
Company and its Subsidiaries and to acquire and maintain stock ownership in the
Company.
SECTION 2. DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set forth
below:
2.1 AWARD
"Award" means an award or grant made pursuant to the Plan, including,
without limitation, awards or grants of Options and Stock Awards, or any
combination of the foregoing.
2.2 BOARD
"Board" means the Board of Directors of the Company.
2.3 CAUSE
"Cause" means dishonesty, fraud, misconduct, unauthorized use or disclosure
of confidential information or trade secrets, or conviction or confession of a
crime punishable by law (except minor violations), in each case as determined by
the Compensation Committee, and its determination shall be conclusive and
binding.
2.4 CODE
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
2.5 COMMON STOCK
"Common Stock" means the common stock, no par value, of the Company.
2.6 COMPENSATION COMMITTEE
"Compensation Committee" means the Board or any committee of the Board
designated to administer the Plan under Section 3.1.
2.7 CORPORATE TRANSACTION
"Corporate Transaction" means any of the following events:
(a) Consummation of any merger or consolidation of the Company in
which the Company is not the continuing or surviving corporation, or
pursuant to which shares of the Common Stock are converted into cash,
securities or other property, if following such merger or consolidation the
holders of the Company's outstanding voting securities immediately prior to
such merger or consolidation own less than a majority of the outstanding
voting securities of the surviving corporation;
15
<PAGE> 19
(b) Consummation of any sale, lease, exchange or other transfer in one
transaction or a series of related transactions of all or substantially all
of the Company's assets other than a transfer of the Company's assets to a
majority-owned subsidiary corporation (as the term "subsidiary corporation"
is defined in Section 8.3) of the Company;
(c) Approval by the holders of the Common Stock of any plan or
proposal for the liquidation or dissolution of the Company.
Ownership of voting securities shall take into account and shall include
ownership as determined by applying Rule 13d-3(d)(1)(i) (as in effect on the
date of adoption of the Plan) under the Exchange Act.
2.8 DISABILITY
"Disability" means "disability" as that term is defined for purposes of
Section 22(e)(3) of the Code.
2.9 EARLY RETIREMENT
"Early Retirement" means early retirement as that term is defined by the
Compensation Committee from time to time for purposes of the Plan.
2.10 EXCHANGE ACT
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.11 FAIR MARKET VALUE
"Fair Market Value" shall be as established in good faith by the
Compensation Committee or (a) if the Common Stock is listed on the American
Stock Exchange or the New York Stock Exchange, the average of the high and low
per share sales prices for the Common Stock as such price is officially quoted
in the composite tape of transactions on such exchange for a single trading day
or (b) if the Common Stock is listed on the Nasdaq National Market, the Nasdaq
Small Cap Market or the Electronic Bulletin Board, the average of the high and
low per share sales prices for the Common Stock as reported for a single trading
day. If there is no such reported price for the Common Stock for the date in
question, then such price on the last preceding date for which such price exists
shall be determinative of Fair Market Value.
2.12 GOOD REASON
"Good Reason" means the occurrence of any of the following events or
conditions and the failure of the Successor Corporation to cure such event or
condition within 30 days after receipt of written notice by the Holder:
(a) a change in the Holder's status, title, position or
responsibilities (including reporting responsibilities) that, in the
Holder's reasonable judgment, represents a substantial reduction in the
status, title, position or responsibilities as in effect immediately prior
thereto; the assignment to the Holder of any duties or responsibilities
that, in the Holder's reasonable judgment, are materially inconsistent with
such status, title, position or responsibilities; or any removal of the
Holder from or failure to reappoint or reelect the Holder to any of such
positions, except in connection with the termination of the Holder's
employment for Cause, for Disability or as a result of his or her death, or
by the Holder other than for Good Reason as defined in this Section 2.12;
(b) a reduction in the Holder's annual base salary;
(c) the Successor Corporation's requiring the Holder (without the
Holder's consent) to be based at any place outside a 35-mile radius of his
or her place of employment prior to a Corporate Transaction, except for
reasonably required travel on the Successor Corporation's business that is
not materially greater than such travel requirements prior to the Corporate
Transaction;
16
<PAGE> 20
(d) the Successor Corporation's failure to (i) continue in effect any
material compensation or benefit plan (or the substantial equivalent
thereof) in which the Holder was participating at the time of a Corporate
Transaction, including, but not limited to, the Plan, or (ii) provide the
Holder with compensation and benefits substantially equivalent (in terms of
benefit levels and/or reward opportunities) to those provided for under
each material employee benefit plan, program and practice as in effect
immediately prior to the Corporate Transaction;
(e) any material breach by the Successor Corporation of its
obligations to the Holder under the Plan or any substantially equivalent
plan of the Successor Corporation; or
(f) any purported termination of the Holder's employment or services
for Cause by the Successor Corporation that does not comply with the terms
of the Plan or any substantially equivalent plan of the Successor
Corporation.
2.13 GRANT DATE
"Grant Date" means the date the Compensation Committee adopted the granting
resolution or a later date designated in a resolution of the Compensation
Committee as the date an Award is to be granted.
2.14 HOLDER
"Holder" means (a) the person to whom an Award is granted; (b) for a Holder
who has died, the personal representative of the Holder's estate, the person(s)
to whom the Holder's rights under the Award have passed by will or by the
applicable laws of descent and distribution, or the beneficiary designated in
accordance with Section 10; or (c) person(s) to whom an Award has been
transferred in accordance with Section 10.
2.15 INCENTIVE STOCK OPTION
"Incentive Stock Option" means an Option to purchase Common Stock granted
under Section 7 with the intention that it qualify as an "incentive stock
option" as that term is defined in Section 422 of the Code.
2.16 NONQUALIFIED STOCK OPTION
"Nonqualified Stock Option" means an Option to purchase Common Stock
granted under Section 7 other than an Incentive Stock Option.
2.17 OPTION
"Option" means the right to purchase Common Stock granted under Section 7.
2.18 RESTRICTED STOCK
"Restricted Stock" means shares of Common Stock granted under Section 9,
the rights of ownership of which are subject to restrictions prescribed by the
Compensation Committee.
2.19 RETIREMENT
"Retirement" means retirement as of the individual's normal retirement date
as that term is defined by the Compensation Committee from time to time for
purposes of the Plan.
2.20 SECURITIES ACT
"Securities Act" means the Securities Act of 1933, as amended.
2.21 STOCK AWARD
"Stock Award" means an Award granted under Section 9.
17
<PAGE> 21
2.22 SUBSIDIARY
"Subsidiary," except as provided in Section 8.3 in connection with
Incentive Stock Options, means any entity that is directly or indirectly
controlled by the Company or in which the Company has a significant ownership
interest, as determined by the Compensation Committee, and any entity that may
become a direct or indirect parent of the Company.
2.23 SUCCESSOR CORPORATION
"Successor Corporation" has the meaning set forth in Section 11.2.
SECTION 3. ADMINISTRATION
3.1 COMPENSATION COMMITTEE
The Plan shall be administered by the Board or a committee or committees
(which term includes subcommittees) appointed by, and consisting of two or more
members of, the Board. If and so long as the Common Stock is registered under
Section 12(b) or 12(g) of the Exchange Act, the Board shall consider in
selecting the Compensation Committee and the membership of any committee acting
as Compensation Committee, with respect to any persons subject or likely to
become subject to Section 16 of the Exchange Act, the provisions regarding (a)
"outside directors" as contemplated by Section 162(m) of the Code and (b)
"nonemployee directors" as contemplated by Rule 16b-3 under the Exchange Act.
The Board may delegate the responsibility for administering the Plan with
respect to designated classes of eligible persons to different committees
consisting of two or more members of the Board, subject to such limitations as
the Board deems appropriate. Committee members shall serve for such term as the
Board may determine, subject to removal by the Board at any time. To the extent
consistent with applicable law, the Board may authorize a senior executive
officer of the Company to grant Awards, within limits specifically prescribed by
the Board.
3.2 ADMINISTRATION AND INTERPRETATION BY THE COMPENSATION COMMITTEE
Except for the terms and conditions explicitly set forth in the Plan, the
Compensation Committee shall have exclusive authority, in its discretion, to
determine all matters relating to Awards under the Plan, including the selection
of individuals to be granted Awards, the type of Awards, the number of shares of
Common Stock subject to an Award, all terms, conditions, restrictions and
limitations, if any, of an Award and the terms of any instrument that evidences
the Award. The Compensation Committee shall also have exclusive authority to
interpret the Plan and may from time to time adopt, and change, rules and
regulations of general application for the Plan's administration. The
Compensation Committee's interpretation of the Plan and its rules and
regulations, and all actions taken and determinations made by the Compensation
Committee pursuant to the Plan, shall be conclusive and binding on all parties
involved or affected. The Compensation Committee may delegate administrative
duties to such of the Company's officers as it so determines.
SECTION 4. STOCK SUBJECT TO THE PLAN
4.1 AUTHORIZED NUMBER OF SHARES
Subject to adjustment from time to time as provided in Section 11.1, the
maximum number of shares of Common Stock which shall be available for issuance
under the Plan shall not exceed in the aggregate 10% of the issued shares of
Common Stock as of the Plan's effective date; provided that, if the number of
issued shares of Common Stock is increased after the Plan's effective date, the
maximum number of shares of Common Stock which shall be available for issuance
under the Plan shall be increased by 10% of such increase. The Plan's effective
date shall be as provided in Section 15. Subject to adjustment from time to time
as provided in Section 11.1, in no event, however, shall more than 550,000
shares of Common Stock be cumulatively available for issuance pursuant to the
exercise of Incentive Stock Options under the Plan.
18
<PAGE> 22
4.2 LIMITATIONS
Subject to adjustment from time to time as provided in Section 11.1, any
grant made under the Plan shall be applied in a manner consistent with the
requirements of, and only to the extent required for compliance with, the
exclusion from the limitation on deductibility of compensation under Section
162(m) of the Code.
4.3 REUSE OF SHARES
Any shares of Common Stock that have been made subject to an Award that
cease to be subject to the Award (other than by reason of exercise or payment of
the Award to the extent it is exercised for or settled in shares) shall again be
available for issuance in connection with future grants of Awards under the
Plan; provided, however, that for purposes of Section 4.2, any such shares shall
be counted in accordance with the requirements of Section 162(m) of the Code.
SECTION 5. ELIGIBILITY
Awards may be granted under the Plan to those officers, directors and
employees of the Company and its Subsidiaries as the Compensation Committee from
time to time selects. Awards may also be made to consultants, agents, advisors
and independent contractors who provide services to the Company and its
Subsidiaries.
SECTION 6. AWARDS
6.1 FORM AND GRANT OF OPTIONS
The Compensation Committee shall have the authority, in its sole
discretion, to determine the type or types of Awards to be made under the Plan.
Such Awards may consist of Incentive Stock Options, Nonqualified Stock Options
and Stock Awards. Options may be granted singly or in combination.
6.2 ACQUIRED COMPANY AWARDS
Notwithstanding anything in the Plan to the contrary, the Compensation
Committee may grant Awards under the Plan in substitution for awards issued
under other plans, or assume under the Plan awards issued under other plans, if
the other plans are or were plans of other acquired entities ("Acquired
Entities") (or the parent of the Acquired Entity) and the new Award is
substituted, or the old award is assumed, by reason of a merger, consolidation,
acquisition of property or of stock, reorganization or liquidation (the
"Acquisition Transaction"). In the event that a written agreement pursuant to
which the Acquisition Transaction is completed is approved by the Board and said
agreement sets forth the terms and conditions of the substitution for or
assumption of outstanding awards of the Acquired Entity, said terms and
conditions shall be deemed to be the action of the Compensation Committee
without any further action by the Compensation Committee, except as may be
required for compliance with Rule 16b-3 under the Exchange Act, and the persons
holding such Awards shall be deemed to be Holders.
SECTION 7. AWARDS OF OPTIONS
7.1 GRANT OF OPTIONS
The Compensation Committee is authorized under the Plan, in its sole
discretion, to issue Options as Incentive Stock Options or as Nonqualified Stock
Options, which shall be appropriately designated.
7.2 OPTION EXERCISE PRICE
The exercise price for shares purchased under an Option shall be as
determined by the Compensation Committee, but shall not be less than 100% of the
Fair Market Value of the Common Stock on the Grant
19
<PAGE> 23
Date with respect to Incentive Stock Options and not less than 100% of the Fair
Market Value of the Common Stock on the Grant Date with respect to Nonqualified
Stock Options.
7.3 TERM OF OPTIONS
The term of each Option shall be as established by the Compensation
Committee or, if not so established, shall be 10 years from the Grant Date.
7.4 EXERCISE OF OPTIONS
The Compensation Committee shall establish and set forth in each instrument
that evidences an Option the time at which or the installments in which the
Option shall vest and become exercisable, which provisions may be waived or
modified by the Compensation Committee at any time. If not so established in the
instrument evidencing the Option, the Option will vest and become exercisable
according to the following schedule, which may be waived or modified by the
Compensation Committee at any time:
<TABLE>
<CAPTION>
PERIOD OF HOLDER'S CONTINUOUS EMPLOYMENT OR SERVICE
WITH THE COMPANY OR ITS SUBSIDIARIES PERCENT OF TOTAL OPTION
FROM THE OPTION GRANT DATE THAT IS VESTED AND EXERCISABLE
- ----------------------------------------------------------- ------------------------------
<S> <C>
After 1 year........................................ 25%
After 2 years....................................... 50%
After 3 years....................................... 75%
After 4 years....................................... 100%
</TABLE>
To the extent that the right to purchase shares has accrued thereunder, an
Option may be exercised from time to time by written notice to the Company, in
accordance with procedures established by the Compensation Committee, setting
forth the number of shares with respect to which the Option is being exercised
and accompanied by payment in full as described in Section 7.5. The Compensation
Committee may determine at any time that an Option may not be exercised as to
less than 100 shares at any one time (or the lesser number of remaining shares
covered by the Option).
7.5 PAYMENT OF EXERCISE PRICE
The exercise price for shares purchased under an Option shall be paid in
full to the Company by delivery of consideration equal to the product of the
Option exercise price and the number of shares purchased. Such consideration
must be paid in cash or by check or, unless the Compensation Committee in its
sole discretion determines otherwise, either at the time the Option is granted
or at any time before it is exercised, a combination of cash and/or check (if
any) and/or one or both of the following alternative forms: (a) tendering
(either actually or, if and so long as the Common Stock is registered under
Section 12(b) or 12(g) of the Exchange Act, by attestation) Common Stock already
owned by the Holder for at least six months (or any shorter period necessary to
avoid a charge to the Company's earnings for financial reporting purposes)
having a Fair Market Value on the day prior to the exercise date equal to the
aggregate Option exercise price or (b) if and so long as the Common Stock is
registered under Section 12(b) or 12(g) of the Exchange Act, delivery of a
properly executed exercise notice, together with irrevocable instructions, to
(i) a brokerage firm designated by the Company to deliver promptly to the
Company the aggregate amount of sale or loan proceeds to pay the Option exercise
price and any withholding tax obligations that may arise in connection with the
exercise and (ii) the Company to deliver the certificates for such purchased
shares directly to such brokerage firm, all in accordance with the regulations
of the Federal Reserve Board. In addition, the exercise price for shares
purchased under an Option may be paid, either singly or in combination with one
or more of the alternative forms of payment authorized by this Section 7.5, by
such other consideration as the Compensation Committee may permit.
7.6 POST-TERMINATION EXERCISES
The Compensation Committee shall establish and set forth in each instrument
that evidences an Option whether the Option will continue to be exercisable, and
the terms and conditions of such exercise, if a Holder
20
<PAGE> 24
ceases to be employed by, or to provide services to, the Company or its
Subsidiaries, which provisions may be waived or modified by the Compensation
Committee at any time. If not so established in the instrument evidencing the
Option, the Option will be exercisable according to the following terms and
conditions, which may be waived or modified by the Compensation Committee at any
time.
In case of termination of the Holder's employment or services other than by
reason of death or Cause, the Option shall be exercisable, to the extent of the
number of shares purchasable by the Holder at the date of such termination, only
(a) within one year if the termination of the Holder's employment or services is
coincident with Retirement, Early Retirement at the Company's request or
Disability or (b) within three months after the date the Holder ceases to be an
employee, director, officer, consultant, agent, advisor or independent
contractor of the Company or a Subsidiary if termination of the Holder's
employment or services is for any reason other than Retirement, Early Retirement
at the Company's request or Disability, but in no event later than the remaining
term of the Option. Any Option exercisable at the time of the Holder's death may
be exercised, to the extent of the number of shares purchasable by the Holder at
the date of the Holder's death, by the personal representative of the Holder's
estate, the person(s) to whom the Holder's rights under the Option have passed
by will or the applicable laws of descent and distribution or the beneficiary
designated pursuant to Section 10 at any time or from time to time within one
year after the date of death, but in no event later than the remaining term of
the Option. Any portion of an Option that is not exercisable on the date of
termination of the Holder's employment or services shall terminate on such date,
unless the Compensation Committee determines otherwise. In case of termination
of the Holder's employment or services for Cause, the Option shall automatically
terminate upon first notification to the Holder of such termination, unless the
Compensation Committee determines otherwise. If a Holder's employment or
services with the Company are suspended pending an investigation of whether the
Holder shall be terminated for Cause, all the Holder's rights under any Option
likewise shall be suspended during the period of investigation.
A transfer of employment or services between or among the Company and its
Subsidiaries shall not be considered a termination of employment or services.
The effect of a Company-approved leave of absence on the terms and conditions of
an Option shall be determined by the Compensation Committee, in its sole
discretion.
SECTION 8. INCENTIVE STOCK OPTION LIMITATIONS
To the extent required by Section 422 of the Code, Incentive Stock Options
shall be subject to the following additional terms and conditions:
8.1 DOLLAR LIMITATION
To the extent the aggregate Fair Market Value (determined as of the Grant
Date) of Common Stock with respect to which Incentive Stock Options are
exercisable for the first time during any calendar year (under the Plan and all
other stock option plans of the Company) exceeds $100,000, such portion in
excess of $100,000 shall be treated as a Nonqualified Stock Option. In the event
the Holder holds two or more such Options that become exercisable for the first
time in the same calendar year, such limitation shall be applied on the basis of
the order in which such Options are granted.
8.2 10% SHAREHOLDERS
If an individual owns more than 10% of the total voting power of all
classes of the Company's stock, then the exercise price per share of an
Incentive Stock Option shall not be less than 110% of the Fair Market Value of
the Common Stock on the Grant Date and the Option term shall not exceed five
years. The determination of 10% ownership shall be made in accordance with
Section 422 of the Code.
8.3 ELIGIBLE EMPLOYEES
Individuals who are not employees of the Company or one of its parent
corporations or subsidiary corporations may not be granted Incentive Stock
Options. For purposes of this Section 8.3, "parent
21
<PAGE> 25
corporation" and "subsidiary corporation" shall have the meanings attributed to
those terms for purposes of Section 422 of the Code.
8.4 TERM
The term of an Incentive Stock Option shall not exceed 10 years.
8.5 EXERCISABILITY
To qualify for Incentive Stock Option tax treatment, an Option designated
as an Incentive Stock Option must be exercised within three months after
termination of employment for reasons other than death, except that, in the case
of termination of employment due to total disability, such Option must be
exercised within one year after such termination. Employment shall not be deemed
to continue beyond the first 90 days of a leave of absence unless the Holder's
reemployment rights are guaranteed by statute or contract. For purposes of this
Section 8.5, "total disability" shall mean a mental or physical impairment of
the Holder that is expected to result in death or that has lasted or is expected
to last for a continuous period of 12 months or more and that causes the Holder
to be unable, in the opinion of the Company and two independent physicians, to
perform his or her duties for the Company and to be engaged in any substantial
gainful activity. Total disability shall be deemed to have occurred on the first
day after the Company and the two independent physicians have furnished their
opinion of total disability to the Compensation Committee.
8.6 TAXATION OF INCENTIVE STOCK OPTIONS
In order to obtain certain tax benefits afforded to Incentive Stock Options
under Section 422 of the Code, the Holder must hold the shares issued upon the
exercise of an Incentive Stock Option for two years after the Grant Date of the
Incentive Stock Option and one year from the date of exercise. A Holder may be
subject to the alternative minimum tax at the time of exercise of an Incentive
Stock Option. The Compensation Committee may require a Holder to give the
Company prompt notice of any disposition of shares acquired by the exercise of
an Incentive Stock Option prior to the expiration of such holding periods.
SECTION 9. STOCK AWARDS
9.1 GRANT OF STOCK AWARDS
The Compensation Committee is authorized to make Awards of Common Stock on
such terms and conditions and subject to such restrictions, if any (which may be
based on continuous service with the Company or the achievement of performance
goals related to profits, profit growth, profit-related return ratios, cash flow
or total shareholder return, where such goals may be stated in absolute terms or
relative to comparison companies), as the Compensation Committee shall
determine, in its sole discretion, which terms, conditions and restrictions
shall be set forth in the instrument evidencing the Award. The terms, conditions
and restrictions that the Compensation Committee shall have the power to
determine shall include, without limitation, the manner in which shares subject
to Stock Awards are held during the periods they are subject to restrictions and
the circumstances under which forfeiture of Restricted Stock shall occur by
reason of termination of the Holder's services.
9.2 ISSUANCE OF SHARES
Upon the satisfaction of any terms, conditions and restrictions prescribed
in respect to a Stock Award, or upon the Holder's release from any terms,
conditions and restrictions of a Stock Award, as determined by the Compensation
Committee, the Company shall release, as soon as practicable, to the Holder or,
in the case of the Holder's death, to the personal representative of the
Holder's estate or as the appropriate court directs, the appropriate number of
shares of Common Stock.
22
<PAGE> 26
9.3 WAIVER OF RESTRICTIONS
Notwithstanding any other provisions of the Plan, the Compensation
Committee may, in its sole discretion, waive the forfeiture period and any other
terms, conditions or restrictions on any Restricted Stock under such
circumstances and subject to such terms and conditions as the Compensation
Committee shall deem appropriate.
SECTION 10. ASSIGNABILITY
No Option or Stock Award granted under the Plan may be assigned, pledged or
transferred by the Holder other than by will or by the applicable laws of
descent and distribution, and, during the Holder's lifetime, such Awards may be
exercised only by the Holder or a permitted assignee or transferee of the Holder
(as provided below). Notwithstanding the foregoing, and to the extent permitted
by Section 422 of the Code, the Compensation Committee, in its sole discretion,
may permit such assignment, transfer and exercisability and may permit an Holder
to designate a beneficiary who may exercise the Award after the Holder's death;
provided, however, that any Award so assigned or transferred shall be subject to
all the same terms and conditions contained in the instrument evidencing the
Award.
SECTION 11. ADJUSTMENTS
11.1 ADJUSTMENT OF SHARES
In the event that, at any time or from time to time, a stock dividend,
stock split, spin-off, combination or exchange of shares, recapitalization,
merger, consolidation, distribution to shareholders other than a normal cash
dividend, or other change in the Company's corporate or capital structure
results in (a) the outstanding shares, or any securities exchanged therefor or
received in their place, being exchanged for a different number or class of
securities of the Company or of any other corporation or (b) new, different or
additional securities of the Company or of any other corporation being received
by the holders of shares of Common Stock of the Company, then the Compensation
Committee shall make proportional adjustments in (i) the maximum number and kind
of securities subject to the Plan as set forth in Section 4.1, (ii) the maximum
number and kind of securities that may be made subject to Awards to any
individual as set forth in Section 4.2, and (iii) the number and kind of
securities that are subject to any outstanding Award and the per share price of
such securities, without any change in the aggregate price to be paid therefor.
The determination by the Compensation Committee as to the terms of any of the
foregoing adjustments shall be conclusive and binding. Notwithstanding the
foregoing, a Corporate Transaction shall not be governed by this Section 11.1
but shall be governed by Section 11.2.
11.2 CORPORATE TRANSACTION
(a) Except as otherwise provided in the instrument that evidences the
Award, in the event of any Corporate Transaction, each Award that is at the time
outstanding shall automatically accelerate so that each such Award shall,
immediately prior to the specified effective date for the Corporate Transaction,
become 100% vested and exercisable.
(b) Such Award shall not so accelerate, however, if and to the extent that
such Award is, in connection with the Corporate Transaction, either to be
assumed by the successor corporation or parent thereof (the "Successor
Corporation") or to be replaced with a comparable award for the purchase of
shares of the capital stock of the Successor Corporation. The determination of
Award comparability shall be made by the Compensation Committee, and its
determination shall be conclusive and binding. Any such Awards that are assumed
or replaced in the Corporate Transaction and do not otherwise accelerate at that
time shall be accelerated in the event that the Holder's employment or services
should subsequently terminate within two years following such Corporate
Transaction, unless such employment or services are terminated by the Successor
Corporation for Cause or by the Holder's voluntarily without Good Reason.
23
<PAGE> 27
(c) All such Awards shall terminate and cease to remain outstanding
immediately following the consummation of the Corporate Transaction, except to
the extent assumed by the Successor Corporation.
(d) The acceleration will not occur if, in the opinion of the Company's
outside accountants, it would render unavailable "pooling of interest"
accounting for a Corporate Transaction that would otherwise qualify for such
accounting treatment.
11.3 FURTHER ADJUSTMENT OF OPTIONS
Subject to Section 11.2, the Compensation Committee shall have the
discretion, exercisable at any time before a sale, merger, consolidation,
reorganization, liquidation or change in control of the Company, as defined by
the Compensation Committee, to take such further action as it determines to be
necessary or advisable, and fair and equitable to Holders, with respect to
Awards. Such authorized action may include (but shall not be limited to)
establishing, amending or waiving the type, terms, conditions or duration of, or
restrictions on, Awards so as to provide for earlier, later, extended or
additional time for exercise and other modifications, and the Compensation
Committee may take such actions with respect to all Holders, to certain
categories of Holders or only to individual Holders. The Compensation Committee
may take such action before or after granting
Awards to which the action relates and before or after any public
announcement with respect to such sale, merger, consolidation, reorganization,
liquidation or change in control that is the reason for such action.
11.4 LIMITATIONS
The grant of Awards will in no way affect the Company's right to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
SECTION 12. WITHHOLDING
The Company may require the Holder to pay to the Company the amount of any
withholding taxes that the Company is required to withhold with respect to the
grant, vesting or exercise of any Award. Subject to the Plan and applicable law,
the Compensation Committee may, in its sole discretion, permit the Holder to
satisfy withholding obligations, in whole or in part, by paying cash, by
electing to have the Company withhold shares of Common Stock or by transferring
shares of Common Stock to the Company, in such amounts as are equivalent to the
Fair Market Value of the withholding obligation. The Company shall have the
right to withhold from any Award or any shares of Common Stock issuable pursuant
to an Award or from any cash amounts otherwise due or to become due from the
Company to the Holder an amount equal to such taxes. The Company may also deduct
from any Award any other amounts due from the Holder to the Company or a
Subsidiary.
SECTION 13. AMENDMENT AND TERMINATION OF PLAN
13.1 AMENDMENT OF PLAN
The Plan may be amended only by the Board in such respects as it shall deem
advisable; however, to the extent required for compliance with Section 422 of
the Code or any applicable law or regulation, shareholder approval will be
required for any amendment that will (a) increase the total number of shares as
to which Options may be granted under the Plan or that may be issued as Stock
Awards, (b) modify the class of persons eligible to receive Options, or (c)
otherwise require shareholder approval under any applicable law or regulation.
24
<PAGE> 28
13.2 TERMINATION OF PLAN
The Board may suspend or terminate the Plan at any time. The Plan will have
no fixed expiration date; provided, however, that no Incentive Stock Options may
be granted more than 10 years after the earlier of the Plan's adoption by the
Board and approval by the shareholders.
13.3 CONSENT OF HOLDER
The amendment or termination of the Plan shall not, without the consent of
the Holder of any Award under the Plan, impair or diminish any rights or
obligations under any Award theretofore granted under the Plan.
Any change or adjustment to an outstanding Incentive Stock Option shall
not, without the consent of the Holder, be made in a manner so as to constitute
a "modification" that would cause such Incentive Stock Option to fail to
continue to qualify as an Incentive Stock Option.
SECTION 14. GENERAL
14.1 AWARD AGREEMENTS
Awards granted under the Plan shall be evidenced by a written agreement
that shall contain such terms, conditions, limitations and restrictions as the
Compensation Committee shall deem advisable and that are not inconsistent with
the Plan.
14.2 CONTINUED EMPLOYMENT OR SERVICES; RIGHTS IN AWARDS
None of the Plan, participation in the Plan or any action of the
Compensation Committee taken under the Plan shall be construed as giving any
person any right to be retained in the employ of the Company or limit the
Company's right to terminate the employment or services of any person.
14.3 REGISTRATION
The Company shall be under no obligation to any Holder to register for
offering or resale or to qualify for exemption under the Securities Act, or to
register or qualify under state securities laws, any shares of Common Stock,
security or interest in a security paid or issued under, or created by, the
Plan, or to continue in effect any such registrations or qualifications if made.
The Company may issue certificates for shares with such legends and subject to
such restrictions on transfer and stop-transfer instructions as counsel for the
Company deems necessary or desirable for compliance by the Company with federal
and state securities laws.
Inability of the Company to obtain, from any regulatory body having
jurisdiction, the authority deemed by the Company's counsel to be necessary for
the lawful issuance and sale of any shares hereunder or the unavailability of an
exemption from registration for the issuance and sale of any shares hereunder
shall relieve the Company of any liability in respect of the nonissuance or sale
of such shares as to which such requisite authority shall not have been
obtained.
14.4 NO RIGHTS AS A SHAREHOLDER
No Option shall entitle the Holder to any dividend, voting or other right
of a shareholder unless and until the date of issuance under the Plan of the
shares that are the subject of such Option, free of all applicable restrictions.
14.5 COMPLIANCE WITH LAWS AND REGULATIONS
Notwithstanding anything in the Plan to the contrary, the Board, in its
sole discretion, may bifurcate the Plan so as to restrict, limit or condition
the use of any provision of the Plan to Holders who are officers or directors
subject to Section 16 of the Exchange Act without so restricting, limiting or
conditioning the Plan with respect to other Holders. Additionally, in
interpreting and applying the provisions of the Plan, any Option
25
<PAGE> 29
granted as an Incentive Stock Option pursuant to the Plan shall, to the extent
permitted by law, be construed as an "incentive stock option" within the meaning
of Section 422 of the Code.
14.6 NO TRUST OR FUND
The Plan is intended to constitute an "unfunded" plan. Nothing contained
herein shall require the Company to segregate any monies or other property, or
shares of Common Stock, or to create any trusts, or to make any special deposits
for any immediate or deferred amounts payable to any Holder, and no Holder shall
have any rights that are greater than those of a general unsecured creditor of
the Company.
14.7 SEVERABILITY
If any provision of the Plan or any Award is determined to be invalid,
illegal or unenforceable in any jurisdiction, or as to any person, or would
disqualify the Plan or any Award under any law deemed applicable by the
Compensation Committee, such provision shall be construed or deemed amended to
conform to applicable laws, or, if it cannot be so construed or deemed amended
without, in the Compensation Committee's determination, materially altering the
intent of the Plan or the Award, such provision shall be stricken as to such
jurisdiction, person or Award, and the remainder of the Plan and any such Award
shall remain in full force and effect.
SECTION 15. EFFECTIVE DATE
The Plan's effective date is the date on which it is adopted by the Board,
so long as it is approved by the Company's shareholders at any time within 12
months of such adoption.
Adopted by the Board on April 27, 1999 and approved by the Company's
shareholders on , 199 .
PLAN ADOPTION AND AMENDMENTS/ADJUSTMENTS
<TABLE>
<CAPTION>
Date of
Adoption/
Amendment/ Effect of Date of Shareholder
Adjustment Section Amendment Approval
<S> <C> <C> <C>
</TABLE>
26
<PAGE> 30
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
<PAGE> 31
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report................................ F-2
Consolidated Financial Statements
Balance Sheet............................................. F-3
Statement of Operations................................... F-4
Statement of Stockholders' Deficit........................ F-5
Statement of Cash Flows................................... F-6
Notes to Consolidated Financial Statements................ F-7 -- F-17
</TABLE>
F-1
<PAGE> 32
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
SmartSources.com, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of
SmartSources.com, Inc. and Subsidiaries as of September 30, 1998, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for each of the two years in the period ended September 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
SmartSources.com, Inc. and Subsidiaries as of September 30, 1998, and the
results of its operations and its cash flows for each of the two years in the
period ended September 30, 1998 in conformity with generally accepted accounting
principles.
/s/ MOSS ADAMS LLP
------------------------------------
Moss Adams LLP
Bellingham, Washington
February 5, 1999
F-2
<PAGE> 33
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash and cash equivalents................................... $ 1,700
Investments, available for sale, at fair value.............. 10,100
Trade accounts receivable, net of allowance of doubtful
accounts of $11,100....................................... 405,700
-----------
Total current assets.............................. 417,500
CAPITALIZED SOFTWARE COSTS, net............................. 111,400
PROPERTY AND EQUIPMENT, net................................. 727,200
INVESTMENT IN JOINT VENTURE................................. 163,800
OTHER ASSETS................................................ 6,800
-----------
TOTAL ASSETS...................................... $ 1,426,700
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities.................... $ 58,500
Administrative fees payable................................. 116,500
Sale deposit................................................ 98,300
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... 23,900
Income taxes payable........................................ 10,500
Note payable................................................ 53,100
Current portion of long-term debt........................... 71,600
-----------
Total current liabilities......................... 432,400
LONG-TERM LIABILITIES
Long-term debt, net of current portion...................... 448,400
Due to stockholder.......................................... 167,100
Deferred gain............................................... 2,432,000
Deferred tax liability...................................... 172,500
-----------
Total liabilities................................. 3,652,400
-----------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' DEFICIT
Common stock................................................ 100
Accumulated other comprehensive income...................... 169,700
Accumulated deficit......................................... (2,395,500)
-----------
Total stockholders' deficit....................... (2,225,700)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT................. $ 1,426,700
===========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-3
<PAGE> 34
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
REVENUES EARNED............................................. $1,571,100 $1,054,800
OPERATING EXPENSES.......................................... 995,900 1,020,500
---------- ----------
OPERATING INCOME............................................ 575,200 34,300
---------- ----------
OTHER INCOME (EXPENSE)
Administrative fees......................................... (168,900) (430,700)
Write-down of investment in joint venture................... (103,400) (109,300)
Interest expense............................................ (63,300) (49,800)
Other income................................................ 16,000 10,500
---------- ----------
(319,600) (579,300)
---------- ----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES............. 255,600 (545,000)
PROVISION FOR INCOME TAXES.................................. (102,700) 214,800
---------- ----------
NET INCOME (LOSS)........................................... $ 152,900 $ (330,200)
========== ==========
BASIC EARNINGS (LOSS) PER SHARE............................. $ 0.02 $ (0.05)
========== ==========
DILUTED EARNINGS (LOSS) PER SHARE........................... $ 0.02 $ (0.05)
========== ==========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-4
<PAGE> 35
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
------------------ ACCUMULATED COMPREHENSIVE ACCUMULATED
SHARES AMOUNT DEFICIT INCOME INCOME TOTAL
--------- ------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, September 30, 1996........... 6,883,400 $100 $(2,119,200) $ 15,000 $(2,104,100)
Net loss.............................. (330,200) $(330,200) (330,200)
Foreign currency translation
adjustment........................ 33,500 33,500 33,500
Income tax effect................... (13,400) (13,400) (13,400)
-------- ---------
Total comprehensive income.... $(310,100) --
=========
Dividends........................... -- -- (34,200) -- (34,200)
--------- ---- ----------- -------- -----------
BALANCE, September 30, 1997........... 6,883,400 100 (2,483,600) 35,100 (2,448,400)
Net income.......................... 152,900 $ 152,900 152,900
Foreign currency translation
adjustment........................ 224,300 224,300 224,300
Income tax effect................... (89,700) (89,700) (89,700)
---------
Total comprehensive income.... $ 287,500 --
=========
Dividends........................... -- -- (64,800) -- (64,800)
--------- ---- ----------- -------- -----------
BALANCE, September 30, 1998........... 6,883,400 $100 $(2,395,500) $169,700 $(2,225,700)
========= ==== =========== ======== ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-5
<PAGE> 36
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
CASH FROM OPERATING ACTIVITIES
Net income (loss)........................................... $ 152,900 $(330,200)
Adjustments to reconcile net income to net cash from
operating activities
Depreciation and amortization............................. 150,100 111,300
Write-down of investment in joint venture................. 103,400 109,300
Deferred income taxes..................................... 78,700 (214,800)
Realized losses on sale of investments.................... 7,100 2,500
Loss on disposal of assets................................ 1,700 23,800
Changes in operating assets and liabilities
Trade accounts receivable................................. (302,900) 185,200
Other assets.............................................. (7,200) --
Accounts payable and other current liabilities............ (37,300) (443,700)
Administrative fees payable............................... 122,700 --
Sale deposit.............................................. 103,400 --
Income taxes payable/refundable........................... (58,200) 65,600
--------- ---------
Total cash from operating activities.............. 314,400 (491,000)
--------- ---------
CASH FROM INVESTING ACTIVITIES
Software costs capitalized.................................. (94,300) (172,500)
Purchase of property and equipment.......................... (46,600) (483,900)
Proceeds from sale of investments........................... 180,400 32,300
Purchase of investments..................................... (16,600) (204,000)
--------- ---------
Total cash from investing activities.............. 22,900 (828,100)
--------- ---------
CASH FROM FINANCING ACTIVITIES
Borrowing on (repayment of) note payable, net............... (59,100) 92,400
Proceeds from long-term debt................................ -- 361,000
Principal repayments on long-term debt...................... (66,100) (18,300)
Advances from (repayments to) stockholder, net.............. (156,500) 351,300
Dividends................................................... (64,800) (34,300)
--------- ---------
Total cash from financing activities.............. (346,500) 752,100
--------- ---------
EFFECT OF CHANGES IN EXCHANGE RATES......................... (600) (4,300)
--------- ---------
NET CHANGE IN CASH.......................................... (9,800) (571,300)
CASH AND CASH EQUIVALENTS, beginning of year................ 11,500 582,800
--------- ---------
CASH AND CASH EQUIVALENTS, end of year...................... $ 1,700 $ 11,500
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................... $ 63,300 $ 49,800
========= =========
Income taxes paid (refunded)................................ $ 82,300 $ (65,600)
========= =========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-6
<PAGE> 37
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
NOTE 1 -- ORGANIZATION, REVERSE ACQUISITION, AND OPERATIONS
Organization
SmartSources.com, Inc. (the Company) was incorporated in 1987 in the State
of Colorado as Cody Capital Corporation. The Company completed a public offering
in 1988. In 1989, it acquired Telco of Baton Rouge, Inc., which was merged into
the Company, and the Company changed its name to Telco Communications, Inc. In
1994, the Company filed for Chapter 11 bankruptcy protection. The Bankruptcy
Court (the Court) subsequently converted the status of the filing to Chapter 7
and appointed a Trustee to manage the affairs of the Company.
In 1996, under direction of the Court, all authorized but unissued shares
were sold to an individual, and the Company emerged from bankruptcy with no
assets, liabilities, and subject to no claims or litigation. In 1997, the
Company name was changed to Innovest Capital Sources Corporation, and control of
the Company was obtained by Intrepid International, S.A., a Panamanian
corporation, through purchase of approximately 85% of the Company's outstanding
shares.
From the date of its emergence from bankruptcy on April 12, 1996 until
December 11, 1998, the date of the acquisition discussed below, the Company
operated as a development stage company. Prior to the acquisition, the Company
had no assets. All liabilities were due to stockholders and were forgiven in
connection with the acquisition.
Reverse Acquisition
Effective December 11, 1998, the Company completed the acquisition of Nifco
Investments Ltd. (Nifco Investments) and Subsidiaries. The acquisition was
effected by exchanging six million shares of common stock for all outstanding
shares of Nifco Investments. In connection with the transaction, the
stockholders of Nifco Investment obtained control of the Company; and,
accordingly, the transaction is characterized as a reverse acquisition. However,
because the Company had no assets or liabilities, the transaction was not
accounted for as a business combination but as a recapitalization of Nifco
Investments. The capital structure presented in the accompanying financial
statements reflects the capital structure of the Company subsequent to a one for
75 reverse stock split authorized on October 15, 1998 and the six million shares
issued in connection with the merger.
Concurrent with the acquisition, the Company name was changed to
SmartSources.com, Inc., and it adopted the September 30 fiscal year-end of Nifco
Investments.
Operations
Nifco Investments was incorporated in the province of British Columbia,
Canada in September 1998 for the purpose of holding all outstanding shares of
Nifco Synergy Ltd. (Nifco Synergy), Intelli Trade Corporation (Intelli Trade),
and Origin Software Corporation (Origin Software).
Nifco Synergy is a British Columbia corporation organized in 1990.
Operations are located in Vancouver, British Columbia where it is engaged in
developing and marketing computer and internet-based knowledge management
software. Over the past five years, efforts have focused primarily on trade
compliance applications, which help businesses qualify for preferential tariff
treatment under the North American Free Trade Agreement (NAFTA).
Intelli Trade is a British Columbia corporation organized in 1994.
Operations are located in Toronto, Ontario where it provides international trade
consulting services.
F-7
<PAGE> 38
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Origin Software is a British Columbia corporation organized in September
1998 to hold the rights to certain software products.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The accompanying financial statements are
presented in accordance with U.S. generally accepted accounting principles.
Nifco Synergy and Intelli Trade have previously issued unaudited and
unconsolidated financial statements prepared in accordance with accounting
principles generally acceptable in Canada. Dividends paid in fiscal 1998 and
1997 were based on equity as reported under these Canadian principles.
Principles of Consolidation -- The consolidated financial statements of
SmartSources.com, Inc. and Subsidiaries include the accounts of its direct and
indirect wholly-owned subsidiaries, Nifco Investments, Nifco Synergy, Intelli
Trade, and Origin Software. All material intercompany accounts and transactions
have been eliminated in consolidation.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Examples of estimates subject to
possible revision based upon the outcome of future events include billings in
excess of costs and estimated earnings on uncompleted contracts, amortization
and valuation of capitalized software costs, depreciation of property and
equipment, and income tax liabilities. Actual results could differ from those
estimates.
Revenue Recognition -- The Company recognizes revenue in accordance with
American Institute of Certified Public Accountants Statement of Position (SOP)
97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2 with
Respect to Certain Transactions. Revenue from packaged software products is
recognized when shipped. Maintenance and subscription revenue is recognized
ratably over the contract period. Revenue attributable to significant support is
based on the price charged for the undelivered elements and is recognized
ratably over the related product's life cycle.
Revenue from fixed-price service contracts and software development
contracts requiring significant production, modification, or customization are
recognized using the percentage-of-completion method. Service contracts based on
time incurred is recognized based on hours worked. Costs and estimated earnings
in excess of billings on uncompleted contracts represents revenues recognized in
excess of amounts billed. Billings in excess of costs and estimated earnings on
uncompleted contracts represents billings in excess of revenues earned.
Cash and Cash Equivalents -- All highly liquid investments, with a maturity
of three months or less at the time of purchase, are considered to be cash
equivalents.
Investments -- Investments in marketable securities are classified as
available-for-sale and are reported at fair value. Net unrealized gains or
losses are reported as a component of comprehensive income. Realized gains and
losses are recorded using the specific identification method.
Accounts Receivable -- The Company extends credit to customers on an
unsecured basis. Management establishes allowances for doubtful accounts based
on evaluation of historical and current payment trends as well as consideration
of specific collection issues that may require additional specific allowances.
Capitalized Software and Research and Development Costs -- Costs incurred
prior to establishing the technological feasibility of software products are
charged to research and development expense. Research and development expense
incurred during fiscal 1998 and 1997 was $38,400 and $73,900, respectively.
Costs incurred once technological feasibility has been established, but prior to
release of product to customers, are capitalized and amortized using the
straight-line method over the estimated economic useful life of the
F-8
<PAGE> 39
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
product, generally three years. Management periodically compares unamortized
costs to net realizable value and writes off any excess.
Property and Equipment -- Property and equipment is recorded at cost.
Depreciation is computed using straight-line and accelerated methods over
estimated useful lives of the assets. Estimated useful lives by major asset
category are as follows: Buildings and improvements -- 20 years, computer
equipment -- four years, computer software -- four years, furniture and
fixtures -- five years.
Investment in Joint Venture -- The Company accounts for its joint venture
investment using the equity method, whereby the investment is increased by
undistributed income and additional cash investments and decreased by losses,
adjustments for impairment and cash distributions.
Valuation of Long-Lived Assets -- The Company periodically reviews
long-lived assets and whenever events or changes in circumstances indicate that
the carrying amount of an asset may be impaired and not recoverable.
Income Taxes -- Income taxes are provided for the tax effect of
transactions reported in the financial statements and consist of taxes currently
due plus deferred taxes. Deferred taxes are recognized for differences between
the basis of assets and liabilities for financial statement and income tax
purposes. Deferred tax assets and liabilities represent the future tax
consequences of those differences, which will either be taxable or deductible
when the assets or liabilities are settled. Amounts are computed using enacted
tax rates.
Foreign Currency Translation -- Assets and liabilities of Canadian
operations, where the functional currency is the local currency, are translated
into U.S. dollars at current exchange rates. Revenues and expenses are
translated using average exchange rates prevailing during the year. Foreign
currency translation adjustments are reported as a component of accumulated
other comprehensive income.
Earnings Per Share -- The Company reports earnings per share in accordance
with Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per
Share.
Segment Information -- The Company reports segment information in
accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information. SFAS No. 131 requires that reportable segments be
designated using a management approach, which relies on the internal
organization used by management for making operating decisions and assessing
performance. SFAS No. 131 also requires certain disclosures about products and
services, geographic areas, and major customers.
New Accounting Standard -- In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. Among other provisions, SFAS No. 133 requires that entities
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those financial instruments at fair value. Accounting for changes in
fair value is dependent on the use of the derivatives and whether such use
qualifies as hedging activity. The new standard becomes effective for the
Company in fiscal 2000 and management is currently assessing the impact, if any,
it may have on financial position and results of operations.
F-9
<PAGE> 40
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- CAPITALIZED SOFTWARE COSTS
<TABLE>
<S> <C>
Information related to capitalized software costs is as
follows:
Balance, beginning of year.................................. $ 114,100
Costs capitalized........................................... 94,300
Amortization expense........................................ (85,800)
Effect of change in foreign currency exchange rates......... (11,200)
---------
Balance, end of year........................................ $ 111,400
=========
Cost........................................................ $ 244,700
Less accumulated amortization............................... (133,300)
---------
$ 111,400
=========
</TABLE>
NOTE 4 -- PROPERTY AND EQUIPMENT
<TABLE>
<S> <C>
Property and equipment consist of the following:
Land........................................................ $ 203,000
Buildings and improvements.................................. 360,700
Computer equipment and software............................. 325,400
Furniture and fixtures...................................... 55,500
---------
944,600
Less accumulated depreciation............................... (217,400)
---------
$ 727,200
=========
</TABLE>
Depreciation expense in fiscal 1998 and 1997 was $64,300 and $61,400,
respectively.
NOTE 5 -- INVESTMENT IN JOINT VENTURE
During fiscal 1996, Nifco Synergy paid $393,100 to acquire a 40% interest
in certain software rights. Payment of additional consideration was contingent
on the level of future revenues derived from the investment. Under terms of a
joint venture agreement between the parties, Nifco Synergy appointed the seller
as its exclusive agent to maintain, develop, distribute, and market the
software. Through September 30, 1998, Nifco Synergy had received essentially no
revenue from the venture. Accordingly, the investment has been written down to
its net realizable value.
Effective January 1, 1999, Nifco Synergy sold its interest in software for
$163,800. Of the total sales price, $98,300 was received prior to September 30,
1998 and is presented as a current liability in the accompanying balance sheet.
F-10
<PAGE> 41
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- UNCOMPLETED CONTRACTS
<TABLE>
<S> <C>
Costs, estimated earnings, and billings on uncompleted
contracts are as follows:
Costs incurred on uncompleted contracts..................... $ 5,900
Estimated earnings.......................................... 2,000
Less billings to date....................................... (31,800)
--------
$(23,900)
========
Presentation in the accompanying balance sheet:
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ --
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (23,900)
--------
$(23,900)
========
</TABLE>
NOTE 7 -- NOTE PAYABLE AND LONG-TERM DEBT
Note Payable
Through Nifco Synergy, the Company has a line of credit facility with a
Canadian bank that allows for borrowing up to $163,800 at the bank's prime rate
plus 1.5%. The line is collateralized by general assets of Nifco Synergy and
guarantees of Intelli Trade and the majority stockholder.
Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<S> <C>
Note payable to a Canadian bank in monthly installments of
$4,300 plus interest at prime plus 1.25%, collateralized
by general assets of Nifco Synergy, due August 2000....... $ 94,100
Mortgage payable to a Canadian bank in monthly installments
of $1,700 including interest at 8.75%, collateralized by
real estate of Nifco Synergy and assignment of rents,
guaranteed by the majority stockholder, due in 2011....... 156,500
Mortgages payable to Canadian finance companies in aggregate
monthly installments of $2,200, including interest at
rates of 7% and 9%, collateralized by real estate of Nifco
Synergy and guaranteed by the majority stockholder, due
January 2001 and June 2002................................ 269,400
--------
Total debt.................................................. 520,000
Less current portion........................................ 71,600
--------
Long-term portion........................................... $448,400
========
</TABLE>
Long-term debt matures as follows:
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30,
-------------
<S> <C>
1999...................................................... $ 71,600
2000...................................................... 63,900
2001...................................................... 99,000
2002...................................................... 159,700
2003...................................................... 9,500
Thereafter................................................ 116,300
--------
$520,000
========
</TABLE>
F-11
<PAGE> 42
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the terms of its loan agreements with the bank, Nifco Synergy is
subject to various covenants, including requirements to maintain certain
financial ratios.
NOTE 8 -- DEFERRED GAIN
During fiscal 1995 and 1996, Nifco Synergy entered into two software sale
agreements with Columbia Diversified Software Fund Limited Partnership
(Columbia), whereby it sold the rights to its principal software product,
ORIGIN. The transactions were structured to take advantage of certain Canadian
tax laws designed to provide tax incentives to investors in software
applications. To facilitate the transactions, Nifco Synergy obtained an
appraisal of the value of ORIGIN from an independent third-party. The valuation
served as a basis for determining the sales price to Columbia. During fiscal
1995 and 1996, Nifco Synergy received cash payments totaling $2,432,000 and took
recourse notes totaling $7,774,400 for the balance of the sales price.
Approximately half the notes are due from Columbia and half are notes assigned
to Nifco Synergy that are payable to Columbia from its limited partners. The
notes are due in 2005 and 2009 and bear interest at rates that have varied over
time based on periodic amendments to the original terms of the notes. The
current rate is 3%.
Pursuant to the agreements, Nifco Synergy was appointed Columbia's agent to
maintain, develop and market ORIGIN for a period of not less than 50 years. Fees
for these services were established at an amount equal to 20% of sales revenues
from ORIGIN. The agreements also specified the allocation of cash flows
generated from sales of ORIGIN, based on the following schedule:
- The first 20% to be paid to Nifco Synergy for maintenance, development
and marketing expenses.
- Next, an amount to be paid to Nifco Synergy equal to the amount of
accrued and unpaid interest owing on the notes receivable.
- Then, 55% of the remaining balance to be paid to limited partners of
Columbia.
- Finally, after allowance for a reasonable reserve for the working capital
needs of Columbia, the remainder to be paid to Nifco Synergy to reduce
the principal balance of the notes receivable.
The allocation of cash flows is scheduled to be modified once the principal
amount of the notes is paid off, after which Nifco Synergy will retain 90% of
sales revenue.
Subsequent to execution of the agreements, Nifco Synergy and Columbia
agreed not to adhere strictly to the allocation of cash flows outlined above,
due to practical business considerations. Generally, Nifco Synergy has paid to
Columbia an amount equal to the interest accruing on the notes, plus a
negotiated annual fee payable to Columbia for a portion of its administrative
expenses. Nifco Synergy, in turn, has retained the remaining balance of ORIGIN
sales revenue and has received payment from Columbia for the interest accruing
on the notes. Neither Nifco Synergy or Columbia have otherwise tracked and
allocated cash flows based on the original schedule outlined above. During the
years ended September 30, 1998 and 1997, Nifco Synergy paid administrative fees
to Columbia in the amount of $168,900 and $430,700, respectively. At September
30, 1998, a total of $116,500 of fees was due to Columbia.
Based on the terms of the agreements, together with subsequent
modifications, Nifco Synergy has concluded that it has a significant continuing
economic interest in ORIGIN and has, in substance, retained the risks and
rewards of ownership. Accordingly, the agreements have been accounted for as a
sale of a tax asset rather than a sale of software rights.
Revenue Canada is currently reviewing the valuation of ORIGIN used to
determine the sales price to Columbia. In the event a lower value is placed on
the software, the possibility exists that Revenue Canada may question the amount
of the tax benefits claimed by Columbia and its investors. Under the agreements,
Nifco Synergy is not required to indemnify the Partnership or its investors in
the event of a denial of the
F-12
<PAGE> 43
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
benefits claimed. However, due to uncertainties surrounding the ultimate outcome
of this matter, gain on the sale equal to the $2,432,000 of cash received has
been deferred.
Nifco Synergy has not recognized the $7,774,400 of notes receivable because
of uncertainties surrounding both the amount and timing of collection. Through
September 30, 1998, approximately $128,000 of principal payments on the notes
had been received. Because Nifco Synergy has concluded that it has retained the
risks and rewards of ownership, all interest and principal payments received on
the notes, resulting from cash generated from sales of ORIGIN, are classified as
revenue in the accompanying statement of operations.
Subsequent to September 30, 1998, Origin Software Corporation was in the
process of negotiating to repurchase the rights to the software product and
obtain release from any contingent liability related to the original sale.
NOTE 9 -- INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Current Canadian federal and provincial expense............. $ 24,000 $ --
Deferred Canadian federal and provincial expense
(benefit)................................................. 78,700 (214,800)
-------- ---------
$102,700.. $(214,800)
======== =========
</TABLE>
The total tax provision differs from the amount computed using the U.S.
federal statutory income tax rate as follows:
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Pretax net income (loss).................................... $255,600 $(545,000)
U.S. statutory rates........................................ 34% 34%
Tax at statutory rates...................................... 86,900 (185,300)
Excess income tax payable (refundable) in Canadian
jurisdictions............................................. 15,800 (29,500)
-------- ---------
$102,700.. $(214,800)
======== =========
</TABLE>
Tax effects of temporary differences that give rise to deferred tax assets
(liabilities), based on a 40% Canadian tax rate, are as follows:
<TABLE>
<S> <C>
Assets
Deferred gain............................................. $ 1,541,000
Research and development costs............................ 110,700
-----------
1,651,700
-----------
Liabilities
Investment in joint venture............................... (778,000)
Depreciation.............................................. (77,000)
Capitalized software costs................................ (44,600)
Foreign currency translation adjustments.................. (113,200)
-----------
(1,012,800)
-----------
Valuation allowance....................................... (811,400)
-----------
Net deferred tax liability............................. $ (172,500)
===========
</TABLE>
F-13
<PAGE> 44
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company believes uncertainty exists surrounding realization of certain
deferred tax assets. Accordingly, it has recorded an $811,400 valuation
allowance to reduce deferred tax assets to an amount that will more likely than
not be realized.
NOTE 10 -- EARNINGS PER SHARE
The numerators and denominators of basic and diluted earnings per share are
as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Numerator -- net income (loss).............................. $ 152,900 $ (330,200)
========== ==========
Denominator -- weighted average number of shares outstanding
(Note 11)................................................. 6,883,400 6,883,400
========== ==========
</TABLE>
At September 30, 1998, the Company had no potential common shares that
would have had a dilutive effect.
NOTE 11 -- STOCKHOLDERS' EQUITY
The Company has a single class of no par value common stock. Authorized
shares total 50 million. The capital structure presented in the accompanying
financial statements reflects the capital structure of the Company subsequent to
a one for 75 stock split authorized on October 15, 1998 and the six million
shares issued in connection with the merger with Nifco Investments Ltd. (Note
1). On October 15, 1998, stockholders also approved issuance of additional
shares of common stock to be placed with investors in the following amounts
pursuant to Regulation D, Rule 504 and Rule 505:
<TABLE>
<S> <C>
4,230,000 shares at......................................... $0.01
500,000 shares at......................................... 1.90
600,000 shares at......................................... 5.00
</TABLE>
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
Operating Leases
In the course of business, the Company obtains the use of certain office
equipment under terms of operating lease agreements. Future minimum lease
payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30,
-------------
<S> <C>
1999...................................................... $21,200
2000...................................................... 20,000
2001...................................................... 7,600
2002...................................................... 2,600
-------
$51,400
=======
</TABLE>
Intelli Trade leases its office under an annual renewable lease currently
requiring monthly payments of $3,200. Total lease payments were $58,300 and
$60,100 in 1998 and 1997, respectively.
Sale of Software Rights
As discussed in Note 8, during fiscal 1995 and 1996, Nifco Synergy sold all
rights to its principal software product, ORIGIN, to Columbia Diversified
Software Limited Partnership ("Columbia"). The sale transactions were structured
to take advantage of certain Canadian tax laws designed to provide tax
incentives to
F-14
<PAGE> 45
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
investors in software applications. In connection with the sale, Nifco Synergy
obtained an appraisal of the value of ORIGIN from an independent third-party to
help determine the sale price to Columbia.
Revenue Canada is currently reviewing the valuation of ORIGIN. In the event
a lower value is placed on the software, the possibility exists that Revenue
Canada may question the amount of the tax benefits claimed by Columbia and its
investors. Under the agreements, Nifco Synergy is not required to indemnify the
Partnership or its investors in the event of a denial of the benefits claimed.
As discussed also in Note 8, certain provisions in the sale agreements
specify the allocation of cash flows from sales of ORIGIN. By mutual agreement,
Nifco Synergy and Columbia agreed not to adhere strictly to these provisions.
Subsequent to September 30, 1998, Origin Software Corporation was in the process
of negotiating to repurchase the rights to the software product and obtain
release from any contingent liabilities related to the original sale.
Cost Sharing and Royalty Agreement
During fiscal 1996, Nifco Synergy entered into a technology and
applications development project agreement (the Project Agreement) with a
not-for-profit organization (the Organization) that serves to disburse funds on
behalf of the Canadian Minister of Industry. Funds are provided as part of a
cost sharing arrangement designed to facilitate development of Canada's
communications infrastructure. Under terms of the Project Agreement, Nifco
Synergy is reimbursed for a portion of costs incurred to develop advanced
network technologies and applications. Funds committed to Nifco Synergy under
this arrangement total $262,000. At September 30, 1998, approximately $189,200
of available funds had been received or committed, including $15,200 due to
Nifco Synergy for holdbacks on qualified claims pending completion of the
development project. This amount is included in accounts receivable in the
accompanying balance sheet.
In turn, Nifco Synergy is obligated to pay a 3% royalty to the Organization
based on sales of any and all products whose development was funded under the
Project Agreement. Total royalties to be paid are limited to the lesser of twice
the amount of funding received or the amount of royalties due during the period
September 1997 through March 2001. At September 30, 1998, the project was not
complete and management is currently unable to assess the probable timing of
completion or estimate a range of the amount of future royalties that might
ultimately be due to the Organization.
Year 2000 Issue
The Company is currently reviewing its computer software programs and
hardware components to identify those areas, if any, that could be affected by
the Year 2000 issue. The Company is also reviewing how the Year 2000 issue may
impact the computer processing systems of its customers, suppliers, banks and
other outside parties. In connection with this process, management is making an
assessment of the potential expense, if any, to be incurred to ensure all
Company computer systems are Year 2000 compliant.
Because of the unprecedented nature of the Year 2000 issue, its effects and
the success of related remediation efforts, if any are required, will not be
fully determinable until the year 2000 and thereafter.
NOTE 13 -- RELATED PARTIES
The Company is affiliated through common ownership with the following
entities:
Tradespace Technologies Corporation (Tradespace)
Tradespace is a Delaware corporation operating in Vancouver, British
Columbia where it develops software applications related to electronic barter
and trade.
F-15
<PAGE> 46
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PMG Project Management Groupware Inc. (PMG)
PMG is a British Columbia corporation operating in Vancouver, British
Columbia where it develops and markets software applications to assist school
districts with centralized purchasing and inventory control.
Synergy Strategy Inc. (Synergy Strategy)
Synergy Strategy is a British Columbia corporation organized to contract
with a U.S. company to market financial information services technology in
Mexico.
Transactions with these entities are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Sales to affiliates......................................... $722,700 $105,500
======== ========
Amounts due from affiliates, included in trade accounts
receivable................................................ $270,200 $ --
======== ========
</TABLE>
NOTE 14 -- CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
investments and accounts receivable. The Company places its temporary cash
investments with major financial institutions. At September 30, 1998,
investments consist of common shares of a single U.S. company in the computer
industry. The Company extends credit to customers based on evaluation of
customers' financial condition and credit history. Collateral is generally not
required. Customers include Canadian and U.S. entities engaged in international
trade and software development in North America. One customer accounted for 64%
of accounts receivable at September 30, 1998.
NOTE 15 -- SEGMENT AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
Segment Information
The Company's primary operations consist of the development and sale of
trade compliance software products to entities subject to the North American
Free Trade Agreement. Other services include international trade consulting and
software engineering contracts. Management assesses the operations of its
software sales and engineering activities and its consulting activities as
separate segments. The following tables and schedules summarize certain
information about these segments.
<TABLE>
<CAPTION>
1998 1997
------------------------------------- -------------------------------------
SOFTWARE SOFTWARE
SALES AND TRADE SALES AND TRADE
DEVELOPMENT CONSULTING TOTAL DEVELOPMENT CONSULTING TOTAL
----------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
External revenues.............. $1,219,200 $351,900 $1,571,100 $ 788,900 $265,900 $1,054,800
Intersegment revenues.......... 9,300 16,200 25,500 10,500 -- 10,500
Interest expense............... 62,200 1,100 63,300 47,900 1,900 49,800
Depreciation and
amortization................. 147,600 2,500 150,100 110,600 700 111,300
Income tax expense (benefit)... 90,700 12,000 102,700 (214,800) -- (214,800)
Segment profit (loss).......... 109,500 68,900 178,400 (312,600) (7,100) (319,700)
Segment assets................. 1,363,600 88,000 1,451,600 1,541,200 71,300 1,612,500
Expenditures for segment
assets....................... 38,500 8,100 46,600 479,500 4,400 483,900
Investment in joint venture.... 163,800 -- 163,800 289,400 -- 289,400
</TABLE>
F-16
<PAGE> 47
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Total revenues for reportable segments...................... $1,596,600 $1,065,300
Less intersegment revenues.................................. (25,500) (10,500)
---------- ----------
Consolidated total................................ $1,571,100 $1,054,800
========== ==========
Total income (loss) before tax for reportable segments...... $ 281,100 $ (534,500)
Elimination of intersegment income.......................... (25,500) (10,500)
---------- ----------
Consolidated total................................ $ 255,600 $ (545,000)
========== ==========
Total assets for reportable segments........................ $1,451,600 $1,612,500
Elimination of intersegment receivables..................... (24,900) (53,700)
---------- ----------
Consolidated total................................ $1,426,700 $1,558,800
========== ==========
</TABLE>
Geographic Information
Following is a summary of revenues and long-lived assets related to the
respective countries in which the Company operates. Revenues are attributed to
countries based on location of customers.
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
LONG-LIVED LONG-LIVED
REVENUES ASSETS REVENUES ASSETS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Canada........................................ $ 636,000 $838,600 $ 754,500 $ 937,400
United States................................. 935,100 -- 300,300 --
---------- -------- ---------- ----------
Total............................... $1,571,100 $838,600 $1,054,800 $ 937,400
========== ======== ========== ==========
</TABLE>
Major Customers
In 1998, revenues from two related parties, Tradespace Technologies
Corporation (Tradespace) and PMG Project Management Groupware, Inc., accounted
for 20% and 26% of the Company's consolidated revenues, respectively. In 1997,
revenues from Tradespace accounted for 10% of consolidated revenues. Revenues
from these customers were earned in the Company's software sales and development
segment.
NOTE 16 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of cash and cash equivalents, accounts receivable and
payable, and other current liabilities approximate their carrying amounts. The
fair value of advances due to stockholder approximates its carrying amount
because of the short-term nature of the financial instrument. The fair value of
other long-term debt approximate their carrying amount because the instruments
bear interest at rates similar to the Company's incremental borrowing rate.
F-17
<PAGE> 48
SMARTSOURCES.COM, INC.
2030 MARINE DRIVE, SUITE 100, NORTH VANCOUVER, BRITISH COLUMBIA CANADA V7P 1V7
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY
FOR THE ANNUAL MEETING OF STOCKHOLDERS MAY 21, 1999
The undersigned hereby constitutes and appoints Nathan Nifco and Joel
S. Dumaresq, and each of them, his true and lawful agents and proxies with full
power of substitution in each, to represent the undersigned at the Annual
Meeting of Shareholders of SmartSources.com, Inc. to be held at the offices of
the Company, located at 2030 Marine Drive, Suite 100, North Vancouver, British
Columbia, Canada, on Friday, May 21, 1999 at 10:00 a.m., local time, and at any
adjournments thereof, on all matters coming before said meeting.
<TABLE>
<S> <C> <C> <C> <C>
1. Election of Directors. Nominees: [ ] FOR all nominees [ ] WITHHOLD vote for [ ] For all nominees
all nominees except vote withheld
for those named below
</TABLE>
Nathan Nifco
Joel S. Dumaresq
Gerald J. Wittenberg
Charles K. Kelly
(To withhold vote for any individual nominee, write the nominee's name below.)
- --------------------------------------------------------------------------------
2. To approve the Company's 1999 Stock Incentive Compensation Plan.
[ ] For [ ] Against [ ] Withheld
3. To ratify the selection of Moss Adams LLP as independent accountants of the
Company for its fiscal year ending September 30, 1999.
[ ] For [ ] Against [ ] Withheld
(Continued and to be signed on the other side.)
<PAGE> 49
(Continued from other side.)
This proxy, when properly executed, will be voted in the manner
directed herein by the undersigned stockholder. If no direction is made, this
proxy will be voted "for" the election of the directors named in this proxy card
and "for" Proposals 2 and 3.
[Name and address of stockholder(s)] Date: 1999
----------------------,
---------------------------
---------------------------
Signature of Stockholder(s)
Please sign your name
exactly as it appears
hereon. Joint owners must
each sign. When signing as
attorney, executor,
administrator, trustee or
guardian, please give your
full title as it appears
thereon.
PLEASE MARK, SIGN, DATE AND RETURN USING THE ENCLOSED ENVELOPE.
