UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
SCHEDULE
14A
Proxy
Statement Pursuant to Section 14(a) of
the
Securities Exchange Act of 1934
Filed by
the Registrant x
Filed by
a Party other than the Registrant ¨
Check the
appropriate box:
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¨
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Preliminary
Proxy Statement
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Confidential,
for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
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x
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Definitive
Proxy Statement
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Definitive
Additional Materials
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Soliciting
Material Pursuant to Rule 14a-12
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SMART
ONLINE, INC.
(Name
of Registrant as Specified In Its Charter)
Not
Applicable
(Name
of Person(s) Filing Proxy Statement if other than the Registrant)
Payment
of Filing Fee (Check the appropriate box):
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x
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No
fee required.
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¨
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Fee
computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
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(1)
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Title
of each class of securities to which transaction
applies:
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(2)
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Aggregate
number of securities to which transaction
applies:
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(3)
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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):
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(4)
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Proposed
maximum aggregate value of
transaction:
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(5)
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Total
fee paid:
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Fee
paid previously with preliminary
materials.
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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.
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(1)
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Amount
Previously Paid:
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(2)
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Form,
Schedule or Registration Statement
No.:
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Party:
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(4)
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Date
Filed:
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SMART
ONLINE, INC.
2530
Meridian Parkway
2nd
Floor
Durham,
North Carolina 27713
NOTICE
OF ANNUAL MEETING OF STOCKHOLDERS
TO
BE HELD JUNE 19, 2008
You are
cordially invited to attend the Annual Meeting of Stockholders of Smart Online,
Inc., which will be held on Thursday, June 19, 2008, at 9:00 a.m. local time, in
the Asheville Room, at 2530 Meridian Parkway, 3rd Floor, Durham, North Carolina
27713, to consider and vote upon the following matters and to transact such
other business as may be properly brought before the meeting:
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Proposal
No. 1 — Election of six directors
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Proposal
No. 2 — Ratification of the appointment of Sherb & Co., LLP as
independent auditors for the fiscal year ending December 31,
2008
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Stockholders
of record at the close of business on April 21, 2008 are entitled to notice of
and to vote at the annual meeting and any and all adjournments or postponements
thereof.
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By
Order of the Board of Directors
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| /s/ Thomas Furr | |
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Thomas
Furr
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Secretary
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Durham,
North Carolina
April 23,
2008
IMPORTANT: Whether
or not you plan to attend the meeting in person, please submit voting
instructions for your shares promptly using the directions on your proxy card to
vote by one of the following methods: (1) over the Internet, by
accessing the website address printed on your proxy card; or (2) by marking,
dating, and signing your proxy card and returning it in the accompanying
postage-paid envelope.
SMART
ONLINE, INC.
The Board
of Directors of Smart Online, Inc. (the “Company”) is asking for your proxy for
use at the 2008 Annual Meeting of Stockholders and any adjournments of the
meeting. The meeting will be held in the Asheville Room at 2530 Meridian
Parkway, 3rd Floor, Durham, North Carolina 27713 on Thursday, June 19,
2008, at 9:00 a.m. local time, to conduct the following business and such other
business as may be properly brought before the meeting: (1) election of six
directors; and (2) ratification of the appointment of Sherb & Co., LLP
as the Company’s independent auditors for the fiscal year ending December 31,
2008.
The
Board of Directors recommends that you vote FOR the election of the director
nominees listed in this proxy statement and FOR ratification of the appointment
of Sherb & Co., LLP as the Company’s independent auditors for the fiscal
year ending December 31, 2008.
The
Company intends to mail its 2007 Annual Report, this proxy statement and the
accompanying proxy card to stockholders beginning on or about April 28, 2008.
The Annual Report and proxy statement will also be available on the Internet at
www.smartonline.com/annualreport.html.
The Annual Report is not part of the Company’s proxy soliciting
materials.
Only
stockholders of record at the close of business on April 21, 2008 are entitled
to vote at the meeting and any adjournments of the meeting. At that time, there
were 18,234,627 shares of the Company’s common stock outstanding, each of which
is entitled to one vote on each matter submitted to a vote at the meeting. The
common stock is the only class of securities of the Company that has the right
to vote at the meeting.
You may
vote shares by proxy or in person using one of the following
methods:
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Voting by Internet. You
can vote over the Internet using the directions on your proxy card by
accessing the website address printed on the card. The deadline for voting
over the Internet is Wednesday, June 18, 2008 at 7:00 p.m. Eastern
time. If you vote over the Internet you need not return your
proxy card.
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Voting by Proxy Card.
You can vote by completing and returning your signed proxy card. To vote
using your proxy card, please mark, date, and sign the card and return it
by mail in the accompanying postage-paid envelope. You should mail your
signed proxy card sufficiently in advance for it to be received by
Wednesday, June 18, 2008.
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Voting in Person. You
can vote in person at the meeting if you are the record owner of the
shares to be voted. You also can vote in person at the meeting if you
present a properly signed proxy that authorizes you to vote shares on
behalf of the record owner. If your shares are held by a broker, bank,
custodian, or other nominee, to vote in person at the meeting you must
present a letter or other proxy appointment, signed on behalf of the
broker or nominee, granting you authority to vote the
shares.
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How
You Can Revoke Your Proxy and Change Your Vote
You can
revoke your proxy and change your vote by (1) attending the meeting and
voting in person, (2) delivering written notice of revocation of your proxy
to the Secretary of the Company at any time before voting is closed,
(3) timely submitting another signed proxy card bearing a later date, or
(4) timely submitting new voting instructions over the Internet as
described above.
If you
timely submit your proxy over the Internet or by proxy card as described above
and have not revoked it, your shares will be voted or withheld from voting in
accordance with the voting instructions you gave. If you timely submit your
proxy without giving contrary voting instructions, your shares will be voted
“FOR” election of the director nominees listed in this proxy statement and “FOR”
ratification of the appointment of Sherb & Co., LLP as the Company’s
independent auditors for the fiscal year ending December 31, 2008.
If your
shares are held by a broker, bank, custodian, or other nominee, you may have
received a voting instruction form with this proxy statement instead of a proxy
card. The voting instruction form is provided on behalf of the broker or other
nominee to permit you to give directions to the broker or nominee on how to vote
your shares. Please refer to the voting instruction form or contact the broker
or nominee to determine the voting methods available to you.
A quorum
must be present at the meeting before business can be conducted. A quorum will
be present if a majority of the shares entitled to vote are represented in
person or by proxy at the meeting. Shares represented by a proxy with
instructions to withhold authority to vote or to abstain from voting on any
matter will be considered present for purposes of determining the existence of a
quorum. Shares represented by a proxy as to which a broker, bank, custodian, or
other nominee has indicated that it does not have discretionary authority to
vote on any matter (sometimes referred to as a “broker non-vote”) will also be
considered present for purposes of determining the existence of a
quorum.
Directors
will be elected by a plurality of the votes cast. Thus the six nominees who
receive the most votes will be elected to fill the available positions.
Stockholders do not have the right to vote cumulatively in electing directors.
Withholding authority in your proxy to vote for a nominee will result in the
nominee receiving fewer votes.
The
proposed ratification of the appointment of Sherb & Co., LLP as
independent auditors for fiscal 2008 will be approved if the votes cast for
approval exceed the votes cast against approval.
Abstentions
and broker non-votes will not be counted for purposes of determining whether
these proposals have received sufficient votes for approval.
PROPOSAL
NO. 1 — ELECTION OF DIRECTORS
All six
of the persons nominated for election to the Board of Directors at the annual
meeting are currently serving as directors of the Company. The Company is not
aware of any nominee who will be unable or will decline to serve as a director.
If a nominee becomes unable or declines to serve, the accompanying proxy may be
voted for a substitute nominee, if any, designated by the Board of Directors.
The term of office of each person elected as a director will continue until the
later of the next annual meeting of stockholders or until such time as his
successor has been duly elected and qualified.
The
following table lists the nominees for election and information about
each.
2
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Name
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Age
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Principal Occupation and
Background
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Doron
Roethler
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51
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Chairman
of the Board. Mr. Roethler was appointed as Chairman of the
Company’s Board of Directors on November 27, 2007. He has been
the managing director and indirect majority owner of TMF Airmarine BV, an
independent aviation spare parts company, since 1988. He is also the
indirect owner of Smart IL, Ltd., a software development company that had
been a development partner and customer of the Company. He received a B.A.
in behavioral science from Ben Gurion University, Beer Sheva,
Israel.
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David
E. Colburn
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61
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President,
Chief Executive Officer, and Director. Mr. Colburn was appointed to the
Company’s Board of Directors on May 31, 2007, as Interim President and
Chief Executive Officer on September 11, 2007, and as Chairman of the
Board on October 19, 2007. He completed his service as Chairman
on November 27, 2007 and was appointed as the Company’s President and
Chief Executive Officer effective December 12, 2007. He
served as President, Global Manufacturing Industry Practice, of Electronic
Data Systems (“EDS”), a provider of business and technology solutions,
from 2004 to 2006. Mr. Colburn was responsible for developing EDS’s global
manufacturing industry business and sales strategy for its automotive,
industrial manufacturing, high tech, and aerospace & defense segments.
Mr. Colburn previously served as EDS’s Area Director, Manufacturing -
Automotive (2003 - 2004); Vice President of the Global Industry Group
(2002 - 2003); and Vice President of Global Industrial Manufacturing
within the Global Industry Group (2001 - 2002). In addition, Mr. Colburn
has served as president of four different corporations in the
manufacturing and industrial segments. He has served as chairman and on
the boards of directors of several automotive industry associations, and
he is a member of the National Association of Corporate Directors
(“NACD”). Mr. Colburn received a B.A. in Liberal Arts from
Robert Wesleyan College and previously served on that
institution’s Board of Trustees. He has enrolled in continuing education
programs at, among others, the University of Michigan and the University
of Pennsylvania.
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Thomas
P. Furr
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41
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Chief
Strategy Officer, Secretary, and Director. Mr. Furr became Vice
President, Sales of Smart Online in 2001, Chief Operating Officer in
November 2005, Chief Strategy Officer in August 2007, and Secretary in
March 2008. In 2002, he also became a Director. He was a co-founder and
president of Kinetics, Inc. (“Kinetics”), one of the first online commerce
providers for the small business industry, from 1994 until 1995. The
Company purchased Kinetics in 1995. After founding Kinetics, Mr. Furr was
with the Plurimus Corporation from 1999 until 2001, where he managed its
southeast direct sales efforts. Previously, from 1996 until 1999 he
managed East Coast direct sales and channel efforts in Canada and South
Africa for Information Retrieval Corporation, a leading multi-national
back-end CRM/help desk company. Mr. Furr holds a bachelor’s degree in
finance from East Carolina University.
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Shlomo
Elia
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65
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Director.
Mr. Elia has
served on the Company’s Board of Directors since November 2006 and was
originally recommended for appointment to the Board by Atlas Capital SA,
one of the Company’s stockholders. Mr. Elia is a Director of
3Pen Ltd. (“3Pen”), a private holding company focusing on business
opportunities in Internet infrastructure and
telecommunications. Prior to founding 3Pen in 1999, Mr. Elia
held several senior positions in the Israeli Defense Forces (“I.D.F.”),
including the post of the Military Governor of the West-Bank (1982-1984)
and Commander of the Liaison Unit for South Lebanon (1984-1985). During
his service, among other activities, General Elia was engaged for a year
as a Research Fellow in the Institute of International Strategic Affairs
at U.C.L.A. Since his retirement from the I.D.F., he is
involved in communication projects in Nigeria and West Africa, and
construction projects in Romania. Among his civilian activities, Mr. Elia
was Chairman of the National Tourist Board and currently is Chairman of
3Pen Technologies Ltd. and co-chairman of the Israeli Soldiers Welfare
Association. Mr. Elia holds a B.A. degree in Modern History of the
Middle-East from Tel Aviv University.
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3
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C.
James Meese, Jr.
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66
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Director. Mr.
Meese has served on the Company’s Board of Directors since November
2006. Mr. Meese is President and founder of Business
Development Associates, Inc. (“BDA”), a strategic advisory
firm. Since 1989, BDA has provided advice and assistance to
both middle market and emerging companies on issues of company valuations,
acquisitions and divestitures, market development, corporate governance,
capital acquisition, strategic planning, exit strategies, and
organizational structuring. Prior to 1989, Mr. Meese spent approximately
20 years in various senior corporate marketing, business development, and
finance positions. Sixteen of those years were spent with West
Pharmaceutical Services Inc. (“West”). He was a member of the company’s
Top Management Committee during his last four years with West. Mr. Meese
is also a director of DRI Corporation (NASDAQ:TBUS) (“DRI”), The
Altoona Railroaders Memorial Museum, and The Raleigh Rescue Mission and
its Foundation. He is a former Chair and current member of the DRI Audit
Committee, Secretary of the Railroaders Museum Board, President of the
Raleigh Rescue Mission Board, and serves on a variety of committees in his
directorships. He is a member of the NACD and is designated as the
Company’s audit committee financial expert. Mr. Meese received
a B.A. degree in Economics from the University of Pennsylvania and an
M.B.A. from Temple University.
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Dror
Zoreff
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62
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Director. Mr. Zoreff
has served on the Company’s Board of Directors since April 1,
2008. He is the President and CEO of Donor Management Services,
Inc., a New York-based company incorporated in March 2008, which provides
major donors, corporations, and foundations a unique set of tools and
services to ensure their charitable gifts are properly used and achieve
the desired impact. From 1999 to 2008, Mr. Zoreff served as Consultant to
the President and CEO of United Retail Group Inc., a specialty retailer of
large size women’s fashions. From 1997 to 1999, he was Vice President of
International Operations at Russ Berrie, Inc., a designer, importer,
marketer, and distributor of gift and infant and juvenile consumer
products. Prior to 1997, Mr. Zoreff held positions with The College of
Judea & Samaria, Glenoit Industries Ltd, and the Jewish Agency for
Israel. Mr. Zoreff holds a B.A. degree in Business Administration from
Manchester University and an M.A. degree in Business Administration from
Tel Aviv University.
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4
The
Board of Directors recommends stockholders
vote
FOR election of the nominees named above.
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Philippe
Pouponnot
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38
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Director. Mr.
Pouponnot has served on the Company’s Board of Directors since November
2006 and was originally recommended for appointment to the Board by The
Blueline Fund, one of the Company’s stockholders. Mr. Pouponnot
is a Director of Azur Management SAL (“Azur”), a business engaged in the
study and management of assets and companies. Mr. Pouponnot has
been a Director of Azur since its founding in 1999. In his
position with Azur, he has gained international experience working with
banks and brokers in all phases of investment management, including
administrative, investment, and commercial transactions. He
also serves as an asset and investment manager for companies and high net
worth individuals. Mr. Pouponnot has also worked closely with
companies in a variety of sectors in matters ranging from formation to
reorganization to liquidation. Mr. Pouponnot informed the
Company’s Board of Directors in March 2008 that he would be unable to
stand for re-election due to increased business
commitments.
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Executive
Officers
The names
of the Company’s current executive officers are listed below. The Company’s
executive officers are appointed by its Board of Directors to hold office
until their successors are appointed.
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Name
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Age
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Position
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David
E. Colburn
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61
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President,
Chief Executive Officer, and Director
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Neile
King
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37
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Chief
Operating Officer
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Thomas
P. Furr
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41
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Chief
Strategy Officer, Secretary, and Director
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George
Cahill
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60
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Interim
Chief Financial Officer
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Neile
King, Chief Operating Officer. Mr. King was appointed as the
Company’s Chief Operating Officer on February 18, 2008 after serving as the
Company’s Director of Operations and Vice President of Business Services since
September 2007. Prior to joining the Company, from March 2006 to September 2007,
Mr. King was the Director of Operations at DataFlux Corporation, a SAS company
and data quality vendor. From April 1999 to July 2005, Mr. King held several
management positions within the IT Solutions group in the Operations, Marketing,
Contracts Management, and Sales Operations organizations with Hill-Rom Company,
Inc., a healthcare information technology services provider.
George Cahill,
Interim Chief Financial Officer. Mr. Cahill was appointed as
the Company’s Interim Chief Financial Officer on April 22,
2008. Since 1992, Mr. Cahill has been the principal of Cahill
Financial Consulting, a North Carolina registered certified public accounting
firm providing business and non-profit management consulting with services
including full and part-time chief financial officer roles. Mr.
Cahill has served with various companies in senior finance roles, including as
(1) Vice President Finance, Controller, and Assistant Secretary of Carolina Door
Controls, a national distributor of automatic doors for commercial applications,
from 1999 to 2005; (2) Chief Financial Officer and Controller of Customer Access
Resources, Inc., an outsourcing company that specialized in e-support activities
for financial institutions, from 1998 to 1999; and (3) Chief Financial Officer
and Controller of HMY Star, Inc., a 20-location retail sales and financial
services organization, from 1995 to 1997.
Prior to
founding Cahill Financial Consulting, Mr. Cahill worked from 1978 until 1991
with Carolina Power and Light Company, now Progress Energy, Inc., in
various roles, including Program Director-Employee Benefits, Manager-Financial
Administration, Manager-Investor Relations & Financial Analysis, and
Director-Financial Analysis. Prior to joining Carolina Power and
Light Company, Mr. Cahill was a Senior Accountant with Deloitte Haskins and
Sells, now Deloitte & Touche LLP. Mr. Cahill is a certified
public accountant in North Carolina with an MBA majoring in finance and
accounting from The Fuqua School of Business at Duke University and holds a BSME
in mechanical engineering also from Duke University.
5
Code
of Ethics
The
Company has adopted a Code of Ethics applicable to its executives, including the
principal executive officer, principal financial officer, and principal
accounting officer, as defined by applicable rules of the Securities and
Exchange Commission (“SEC”). It is publicly available on the Company’s website
at www.smartonline.com.
If the Company makes any amendments to the Code of Ethics other than technical,
administrative, or other non-substantive amendments, or grants any waivers,
including implicit waivers, from a provision of the Code of Ethics to the
Company’s Chief Executive Officer, Chief Financial Officer, or certain other
finance executives, the Company will disclose the nature of the amendment or
waiver, its effective date, and to whom it applies on the Company’s website at
www.smartonline.com or
in a report on Form 8-K filed with the SEC.
The size
of the Board of Directors is currently fixed at seven members, but that number
is set to decrease to six members immediately prior to the 2008 annual
meeting. Six persons have been nominated for election at the annual
meeting. Under the rules of the SEC, the accompanying proxy cannot be voted for
more than six nominees.
The
Company is not required to comply with the listing requirements of The Nasdaq
Stock Market (“Nasdaq”) since its securities are not listed on
Nasdaq. Nasdaq listing requirements mandate that a majority of the
members of a listed company’s board of directors be “independent” directors as
defined under Nasdaq Marketplace Rules. Although not currently
required, the Board has determined that four of the present directors — Messrs.
Elia, Meese, Pouponnot, and Zoreff — are each an “independent” director within
the meaning of Nasdaq Marketplace Rules. All except Mr. Pouponnot are
standing for re-election. Therefore, assuming all six nominees are
elected at the annual meeting, the Board will no longer have a majority of
“independent” directors after the annual meeting.
In 2007,
two directors resigned from the Company’s Board of Directors. On
September 11, 2007, Dennis Michael Nouri resigned, and on October 19, 2007,
Jeffrey W. LeRose resigned. The Board of Directors had determined
that Mr. LeRose was an “independent” director within the meaning of Nasdaq
Marketplace Rules. Mr. Nouri was not considered “independent” as he
also served as the Company’s President and Chief Executive Officer.
The Board
of Directors held 11 meetings during the fiscal year ended December 31,
2007. Each incumbent director attended or participated in at least 75% of the
aggregate of (1) the number of meetings of the Board of Directors held in fiscal
2007 during the period he served as a director and (2) the number of meetings of
committees on which he served that were held during the period of his
service.
The
Company expects all directors to attend each annual meeting of stockholders,
absent good reason. Six of the seven then serving directors attended
the annual meeting of stockholders in 2007.
Standing Committees
The
Company’s Board of Directors has three standing committees: the Audit
Committee, the Compensation Committee, and the Corporate Governance and
Nominating Committee. Copies of the charters of these committees, as they may be
amended from time to time, are available on the Company’s website at www.smartonline.com.
Audit
Committee. The Audit Committee is composed of Mr. Meese and
Mr. Elia. Mr. Meese serves as chairman of the Committee. The
Company’s Board of Directors, in its business judgment, has made an affirmative
determination that Mr. Meese and Mr. Elia meet the definition of “independent”
director, as that term is defined by Nasdaq Marketplace Rules and SEC rules, and
they each meet the special independence requirements applicable to audit
committee members. Both members have past financial experience resulting in
their financial sophistication as would be required by Nasdaq Marketplace
Rules. The Board of Directors has determined that Mr. Meese meets the
definition of “audit committee financial expert” as that term is defined in
Regulation S-K. Mr. Colburn served on the Audit Committee until March
31, 2008 and was replaced by Mr. Elia because he was no longer an “independent”
director. The Company’s securities are quoted on the OTC Bulletin
Board and are not listed on a national securities exchange. Therefore, neither
the SEC nor the Nasdaq Marketplace Rules regarding audit committees are
applicable to the Company’s Board of Directors.
6
The Audit
Committee was established by the Board of Directors for the purpose of assisting
it in fulfilling its responsibilities with respect to its oversight of (1) the
quality and integrity of the Company’s financial statements, (2) compliance with
legal and regulatory requirements, (3) independent auditor’s qualifications and
independence, and (4) the performance of its internal audit function and
independent auditors. The Audit Committee is also responsible for the
preparation of reports required to be included in the Company’s annual proxy
statement or other documents from time to time required with respect to the
Audit Committee’s functions. The Audit Committee met four times
during 2007.
Compensation
Committee. The Compensation Committee is composed of Mr. Elia
and Mr. Meese. Mr. Elia serves as chairman of the
Committee.
The
Compensation Committee was established by the Company’s Board of Directors for
the purpose of assisting it in discharging its duties with respect to (1) the
formulation, implementation, review and modification of the compensation of the
Company’s officers and directors and (2) the preparation of the annual report on
executive compensation for inclusion in the Company’s annual proxy statement, if
required. The Compensation Committee’s duties include, among other
things, setting the compensation for officers and directors, making
recommendations to the Board of Directors with respect to incentive compensation
plans and equity-based compensation plans, approving grants of stock options and
other awards under the Company’s 2004 Equity Compensation Plan, and
administering the Company’s defined benefit and defined contribution plans, if
any.
In fulfilling its responsibilities, the
Compensation Committee is entitled to delegate any or all of its
responsibilities to a subcommittee of the Compensation Committee, to the extent
consistent with applicable law, the Company’s certificate of incorporation,
bylaws, corporate governance guidelines, and rules of any exchange or market on
which the securities of the Company are then traded if compliance with such
rules are required to begin or continue trading.
As part of its review and establishment
of the performance criteria and compensation of officers and directors of the
Company, the Compensation Committee must separately meet at least annually with
the Company’s Chief Executive Officer, the principal human resources executive
and compliance officer, and with any other corporate officers as the
Compensation Committee deems appropriate. However, the Compensation Committee
must also meet regularly without such officers present, and in all cases such
officers must not be present at the meetings at which their performance and
compensation is being discussed and determined. The Compensation
Committee must consult with the Chief Executive Officer regarding compensation
of the other officers of the Company. The Compensation Committee has not engaged
any compensation consultant to determine or recommend the amount or form of
executive and director compensation. The Compensation Committee met
five times during 2007.
Corporate
Governance and Nominating Committee. The Corporate Governance
and Nominating Committee is composed of Mr. Meese and Mr. Zoreff. Mr.
Zoreff serves as chairman of the Committee.
The
Corporate Governance and Nominating Committee was established by the Board of
Directors for the purpose of assisting it in discharging its duties with respect
to (1) the identification of individuals qualified to become directors and the
selection or recommendation of candidates for directorships to be filled by the
Board of Directors or the stockholders, and (2) the development, maintenance and
recommendation of a set of corporate governance principles applicable to the
Company, and the periodic review of such principles. The Corporate Governance
and Nominating Committee met four times during 2007.
Section 16(a)
Beneficial Ownership Reporting Compliance
The
members of the Company’s Board of Directors, its executive officers, and persons
who hold more than 10% of its outstanding common stock are subject to the
reporting requirements of Section 16(a) of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), which requires them to file reports with
respect to their ownership of the Company’s common stock and their transactions
in such common stock. Based upon the Company’s review of the Section 16(a)
reports in its records for fiscal 2007 transactions in the Company’s common
stock and their common stock holdings, the Company believes that, except as
noted below, all reporting requirements under Section 16(a) for such fiscal year
were met in a timely manner by its directors, executive officers, and greater
than 10% beneficial owners.
7
The following reports were filed late
on behalf of Atlas Capital SA due to administrative error by the
Company:
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A
Form 4 filed on June 15, 2007 reporting a purchase of the Company’s common
stock on June 7, 2007 and a Form 4/A filed on June 15, 2007 reporting a
purchase of the Company’s common stock on June 8,
2007.
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A
Form 4 filed on July 3, 2007 reporting a purchase of the Company’s common
stock on June 27, 2007 and a purchase of the Company’s common stock on
June 28, 2007.
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A
Form 4 filed on September 17, 2007 reporting a purchase of the Company’s
common stock on September 12, 2007.
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A
Form 4 filed on December 6, 2007 reporting four purchases of the Company’s
common stock on November 21, 2007 and two purchases of the Company’s
common stock on November 29, 2007.
|
The
following reports were filed late on behalf of Doron Roethler due to
administrative error by the Company:
|
|
•
|
A
Form 4 filed on January 24, 2007 reporting a purchase of the Company’s
common stock on October 10, 2006.
|
|
|
•
|
A
Form 4 filed on September 17, 2007 reporting two purchases by Crystal
Management, Ltd., which is wholly-owned by Mr. Roethler, on September 12,
2007.
|
|
|
•
|
A
Form 4 filed on December 4, 2007 reporting a restricted stock award
granted to Mr. Roethler on November 28,
2007.
|
The
following reports were filed late on behalf of C. James Meese, Jr. due to
administrative error by the Company:
|
|
•
|
A
Form 3 filed on January 18, 2007 reporting Mr. Meese’s ownership of the
Company’s common stock as of the date of his appointment to the Board of
Directors on November 17, 2006.
|
|
|
•
|
A
Form 4 filed on April 18, 2007 reporting an option award granted to Mr.
Meese on April 11, 2007.
|
The
following reports were filed late on behalf of Philippe Pouponnot due to
administrative error by the Company:
|
|
•
|
A
Form 3 filed on January 24, 2007 reporting Mr. Pouponnot’s ownership of
the Company’s common stock as of the date of his appointment to the Board
of Directors on November 17, 2006.
|
|
|
•
|
A
Form 4 filed on June 22, 2007 reporting the acquisition of shares of the
Company’s common stock on January 19, 2007 as payment of a penalty for
late registration of other shares purchased from the
Company.
|
The
following reports were filed late on behalf of Brian Patrick Donaghy due to
administrative error by the Company:
|
|
•
|
A
Form 3 filed on February 14, 2007 reporting Mr. Donaghy’s ownership of the
Company’s common stock as of the date he was determined to be an executive
officer on January 30, 2007.
|
|
|
•
|
A
Form 4 filed on September 10, 2007 reporting a sale of the Company’s
common stock on each of August 21, 2007, August 22, 2007, and August 24,
2007, and a gift of common stock on September 5,
2007.
|
8
The
following additional Form 3 reports were filed late on behalf of the following
individuals due to administrative error by the Company:
|
|
•
|
A
Form 3 filed on January 29, 2007 reporting Shlomo Elia’s ownership of the
Company’s common stock as of the date of his appointment to the Board of
Directors on November 17, 2006.
|
|
|
•
|
A
Form 3 filed on February 14, 2007 reporting Mike N. Stuart’s ownership of
the Company’s common stock as of the date he was determined to be an
executive officer on January 30,
2007.
|
|
|
•
|
A
Form 3 filed on June 14, 2007 reporting David E. Colburn’s ownership of
the Company’s common stock as of the date of his appointment to the Board
of Directors on May 31, 2007.
|
The
following additional Form 4 reports were filed late on behalf of the following
individuals due to administrative error by the Company:
|
|
•
|
A
Form 4 filed on January 23, 2007 reporting two sales of the Company’s
common stock by Dennis Michael Nouri on October 10,
2006.
|
|
|
•
|
A
Form 4 filed on April 23, 2007 reporting a restricted stock award granted
to Nicholas A. Sinigaglia on April 18,
2007.
|
|
|
•
|
A
Form 4 filed on August 21, 2007 reporting a restricted stock award granted
to Joseph Francis Trepanier on August 15,
2007.
|
Certain
Relationships and Related Transactions
Non-Compete
Payments Made to Former
Chief Operating
Officer of Smart Commerce. In October 2005, the Company
purchased all of the stock of iMart Incorporated (“iMart”). One of the Company’s
former executive officers, Gary Mahieu, was a founder and shareholder of iMart,
and was its principal executive officer. Following the purchase of
iMart’s stock, Mr. Mahieu entered into an employment agreement with Smart
Commerce, Inc. (“Smart Commerce”), the Company’s wholly-owned subsidiary. Under
the terms of that agreement, the Company agreed to make non-competition payments
to Mr. Mahieu of an aggregate of $510,000 to be made in eight equal quarterly
installments of $63,750 through October 1, 2007. In connection with obtaining a
loan from Fifth Third Bank, the payment schedule was modified to require all
outstanding non-compete payments to be made by February 2007. This amount was
paid in full on February 7, 2007, and no additional non-compete payments are
owed to Mr. Mahieu.
Loans Made by
Certain Parties to the Former
Chief Executive
Officer. During 2005, the following loans were made by certain
investors, consultants, and/or stockholders to Michael Nouri, the Company’s then
serving Chief Executive Officer: (i) $809,736.49 was borrowed from Leon Sokolic,
one of the Company’s stockholders, (ii) $77,971.20 was borrowed from Atlas
Capital SA, one of the Company’s stockholders, (iii) $80,000 was borrowed from
Pete Coker, a principal of Tryon Capital, which provided financial consulting
services to the Company and received a warrant and cash fees, and (iv) $296,589
was borrowed from Berkley Financial Services, Ltd. (“Berkley”), which received
compensation for services rendered to the Company for investment banking and
investor relations services, including during the period in which Berkley was
making loans to Mr. Nouri (collectively, the “Lenders”). Under Section 402 of
the Sarbanes-Oxley Act of 2002, the Company is prohibited from making personal
loans to its directors and executive officers, directly and indirectly. The
Company believes that the loans to Mr. Nouri described above are not personal
loans made directly or indirectly by it to the Chief Executive
Officer.
On
January 19, 2007, Mr. Nouri entered into note cancellation agreements with each
of the Lenders. Under the terms of these note cancellation agreements, Mr. Nouri
transferred his personally held shares of the Company’s common stock to the
Lenders as consideration for the cancellation of promissory notes held by the
Lenders. Under these agreements, Mr. Nouri transferred a total of 521,699 shares
of common stock for the cancellation of principal and interest totaling
$1,306,178.66 as of December 31, 2006. The agreed upon per share value ranged
from $1.50 to $4.22 per share.
In
connection with the note cancellation agreements, the Company entered into
registration rights agreements with each of the Lenders described in the
preceding paragraphs. Under the terms of these registration rights agreements,
each Lender was required to be given notice when the Company filed a
registration statement under the Securities Act of 1933, as amended (the
“Securities Act”). Each Lender was then permitted to include its shares received
in such registration statement. Under the registration rights agreements,
parties electing to include such shares in the registration were to bear their
proportionate share of the registration expenses. The Company has
satisfied its obligations under these registration rights
agreements.
9
Private Placement
of Common Stock to a Certain Director. In a transaction that
closed on August 21, 2006, Mr. Pouponnot purchased 50,000 shares of the
Company’s common stock in a private placement transaction. The private placement
shares were sold at $2.50 per share pursuant to subscription agreements between
Mr. Pouponnot and the Company. The Company entered into a subscriber rights
agreement with Mr. Pouponnot whereby it was obligated to register these shares
for resale by the purchaser by filing a registration statement on or before
September 30, 2006. If a registration statement was not filed by that date, the
Company was obligated to pay a penalty obtained by multiplying the total
purchase price for the shares by 0.5% by the number of prorated 30-day periods
after the target registration date. At the Company’s sole discretion, this
penalty could be paid in the number of shares obtained by dividing the total
penalty amount by the per share purchase price. The Company filed a registration
statement for these shares on April 3, 2007. In January 2007, the Company
entered into an amendment to the registration rights agreement with Mr.
Pouponnot. Under this amendment, the penalty for late registration was set at a
fixed amount. The Company subsequently issued Mr. Pouponnot 750 shares of
its common stock as payment for this late registration penalty with an aggregate
value of $2,100 based upon a closing price per share of $2.80 on the OTC
Bulletin Board on the date of issuance. The Company has satisfied its
obligations under the subscriber rights agreement.
Mr.
Pouponnot also entered into a dribble out agreement with the Company pursuant to
which he was permitted to sell up to 25% of these shares during any rolling
30-day period following the effective date of the registration
statement. This agreement has expired. At the time of the
sale to Mr. Pouponnot, he had not been appointed a member of the Company’s Board
of Directors.
Private Placement
of Common Stock to a Certain Affiliate by Former Chief Executive
Officer. On October 10, 2006, Michael Nouri, the Company’s
then serving Chief Executive Officer, entered into a stock purchase agreement
with Doron Roethler, a stockholder who subsequently became the Company’s
Chairman of the Board in November 2007. Pursuant to this agreement, Mr. Nouri
sold 247,043 shares of the Company’s common stock from his personal holdings at
a price of $1.5176 per share. The Company entered into a registration rights
agreement with Mr. Roethler in connection with this transaction under which it
had an obligation to register the shares sold by Mr. Nouri to Mr. Roethler on
the first registration statement filed by the Company following the sale, with
Mr. Roethler bearing his proportionate share of the registration expenses. Under
the terms of this agreement, the shares were delivered following the Company’s
execution of such registration rights agreement, which occurred on January 19,
2007. The Company filed a registration statement for these shares on
April 3, 2007 and has satisfied its obligations under the registration rights
agreement.
Sale of Convertible Notes to Certain Affiliates. On November
14, 2007, in an initial closing, the Company sold $3.3 million aggregate
principal amount of secured subordinated convertible notes due November 14, 2010
to certain existing stockholders. These stockholders (referred to in
this discussion as the “noteholders”) and the amount of notes they purchased in
the initial closing are as follows: (i) The Blueline Fund, which originally
recommended Philippe Pouponnot, one of the Company’s directors, for appointment
to the Company’s Board of Directors - $500,000; (ii) Atlas Capital SA, which
originally recommended Shlomo Elia, another one of the Company’s directors, for
appointment to the Board of Directors - $2,050,000; (iii) Crystal Management
Ltd., which is owned by Doron Roethler, a stockholder who subsequently became
Chairman of the Company’s Board of Directors - $500,000; and (iv) William Furr,
who is the father of Thomas Furr, one of the Company’s directors and executive
officers - $250,000. The noteholders also have committed to purchase on a pro
rata basis up to $5.2 million aggregate principal of secured subordinated notes
upon approval and call by the Company’s Board of Directors in future closings.
The Company is obligated to pay interest on the notes at an annualized rate of
8% payable in quarterly installments commencing on February 14, 2008. As of
April 21, 2008, the Company has paid $65,267 in interest on the
notes. The Company does not have the ability to prepay the notes
without approval of at least a majority of the principal amount of the notes
then outstanding.
10
On the
earlier of the maturity date of November 14, 2010 or a merger, acquisition, sale
of all or substantially all of the Company’s assets or capital stock, or similar
transaction, each noteholder in its sole discretion shall have the option to (i)
convert the principal then outstanding on its note into shares of the Company’s
common stock, or (ii) demand immediate repayment in cash of the note, including
any accrued and unpaid interest. If a noteholder elects to convert its note
under these circumstances, the conversion price for notes issued in the initial
closing on November 14, 2007 shall be $3.05 and the conversion price for notes
issued in any additional closings shall be the lesser of a 20% premium above the
average of the closing bid and asked prices of shares of the Company’s common
stock quoted in the Over-The-Counter Market Summary (or, if the Company’s shares
are traded on the Nasdaq Stock Market or another exchange, the closing price of
shares of the Company’s common stock quoted on such exchange) averaged over five
trading days prior to the respective additional closing date.
Upon
certain events of default and at any time during the continuance of such an
event of default, the noteholders have the right, with the consent of the agent
appointed for such noteholders, to accelerate payment on their notes. Payment of
the notes will be automatically accelerated if the Company enters voluntary or
involuntary bankruptcy or insolvency proceedings.
If notes
are converted into the Company’s common stock and a demand for registration of
the shares of common stock is made by a holder of a majority of the converted
common stock, the Company has agreed, subject to certain limitations, to use its
best efforts to file a registration statement with the SEC within a prescribed
time period. In addition, if the Company proposes to file a registration
statement to register any of its common stock under the Securities Act in
connection with the public offering of such securities solely for cash, subject
to certain limitations, the Company shall give each noteholder who has converted
its notes into common stock the opportunity to include such shares of converted
common stock in the registration. The Company has agreed to bear the expenses
for any of these registrations, exclusive of any stock transfer taxes,
underwriting discounts, and commissions.
The noteholders have designated Doron
Roethler as bond representative to act as their agent. So long as the notes are
outstanding, the Company has agreed that it will not take certain actions
without approval of the bond representative.
Settlement
Agreement with Former Executive Officer. On January 23, 2008,
the Company and Henry Nouri entered a settlement agreement and release to settle
a legal action brought by Mr. Nouri against the Company relating to Mr. Nouri’s
termination from his position as Executive Vice President of the Company in
September 2007. The agreement provided for a release of claims by
both parties, a payment to Mr. Nouri of $100,000 (less applicable withholding
taxes) and Mr. Nouri’s former Company vehicle valued at $12,500, the
acceleration of the expiration date of certain of Mr. Nouri’s options to
purchase the Company’s common stock, and the dismissal with prejudice of Mr.
Nouri’s action against the Company. Mr. Nouri remains subject to the
non-competition, non-disclosure, and non-solicitation obligations in his
employment agreement, dated April 1, 2004, with the Company.
EXECUTIVE
COMPENSATION
Summary
of Cash and Certain Other Compensation
The
following table shows the annual and long-term compensation for the fiscal years
indicated, of the two individuals who served as the Company’s Chief Executive
Officer during 2007 and the next two most highly compensated executive officers
serving at the end of fiscal 2007. The persons identified in the table below are
referred to as the Company’s “named executive officers.”
Summary
Compensation Table
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Stock
Awards
($)
(1)
|
Option
awards
($)
(1)
|
Total
($)
|
|||||
|
David
E. Colburn (2)
|
2007
|
$85,962
(3)
|
$70,500
(4)
|
—
|
$156,462
|
|||||
|
President
and
|
||||||||||
|
Chief
Executive Officer
|
||||||||||
|
Dennis Michael Nouri
(5)
|
2007
|
$103,923
|
—
|
$30,977
|
$134,900
|
|||||
|
Former
President and
|
2006
|
$
170,000
|
—
|
$46,461
|
$216,461
|
|||||
|
Chief
Executive Officer
|
11
|
Nicholas A. Sinigaglia
(6)
|
2007
|
$135,275
|
$49,000
|
$22,930
|
$207,205
|
|||||
|
Former
Chief Financial Officer
|
2006
|
$
108,333
|
—
|
$17,197
|
$125,530
|
|||||
|
Anil Kamath
(7)
|
2007
|
$129,317
|
—
|
$23,230
|
$152,547
|
|||||
|
Former
Chief Technology Officer
|
|
(1)
|
Amounts do
not reflect compensation actually received by the named executive officer.
Instead, the amounts represent the amount of compensation cost recognized
in fiscal 2007 in accordance with Statement of Financial Accounting
Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123R”), disregarding any adjustments for forfeiture assumptions. For a
discussion of the assumptions used to value these awards, see Note 2 to
the Company’s consolidated financial statements included in its Annual
Report on Form 10-K for the fiscal year ended December 31,
2007.
|
|
(2)
|
Mr.
Colburn was appointed as an independent member of the Company’s Board of
Directors on May 31, 2007. On September 11, 2007, he was appointed to
serve as the Company’s Interim President and Chief Executive Officer and
was later appointed as the Company’s President and Chief Executive Officer
effective December 12, 2007. Mr. Colburn also served as the
Company’s Chairman of the Board of Directors from October 19, 2007 to
November 27, 2007, but he did not receive any compensation for such
service.
|
|
(3)
|
Includes
$6,000 in cash fees paid to Mr. Colburn for his service as a director
prior to being appointed as the Company’s Interim President and Chief
Executive Officer.
|
|
(4)
|
Represents
a restricted stock award granted to Mr. Colburn as compensation for
service as a director prior to being appointed as the Company’s Interim
President and Chief Executive Officer.
|
|
(5)
|
Mr.
Nouri ceased to be the Company’s President and Chief Executive Officer on
September 11, 2007.
|
|
(6)
|
Mr.
Sinigaglia resigned from the Company, effective March 30,
2008.
|
|
(7)
|
Mr.
Kamath was not a “named executive officer” during fiscal 2006, and thus
his compensation information for fiscal 2006 is not provided. Mr. Kamath
resigned from the Company, effective March 31,
2008.
|
Employment
Agreements
The
Company has the following employment agreements with its named executive
officers. See “Potential Payments upon Termination or Change in Control” below
for additional material terms of these agreements.
David E.
Colburn. Effective
December 12, 2007, covering employment commencing on such date, the Company
entered into an employment agreement with Mr. Colburn which provided for an
initial base salary of $180,000. The term of the agreement is one year
commencing on the effective date, and the term is subject to automatic renewal
for successive one-year terms unless, at least 30 days prior to the renewal
date, either party gives the other written notice of its intent not to continue
the employment relationship. The agreement requires the Company to make a
severance payment to Mr. Colburn if the Company terminates Mr. Colburn’s
employment without “Cause” or if, within 18 months following a “Change in
Control,” the Company terminates Mr. Colburn’s employment without “Cause” or by
notice of non-renewal, or Mr. Colburn terminates his employment for “Good Cause”
(all as described under “Potential Payments upon Termination or Change in
Control”). Mr. Colburn’s agreement contains non-competition and
non-solicitation provisions. The non-competition provision prohibits him from
competing with the Company in the same or similar business in any jurisdiction
where it does business for a period of one year following the termination of
employment for any reason. The non-solicitation provision prohibits the direct
or indirect solicitation (a) of any of the Company’s customers to purchase
similar products or services from others, (b) to take away the customers’
business from the Company, or (c) to induce employees to leave their employment
with the Company, for a period of one year following the termination of
employment for any reason. The agreement was accompanied by an award of
100,000 shares of restricted stock of the Company, restrictions of which lapse
as to 25,000 shares on January 1, 2008, 37,500 shares on January 1, 2010, 18,750
shares on January 1, 2011, and 18,750 shares on January 1, 2012. In
the event that Mr. Colburn’s employment is terminated within 18 months following
a “Change in Control” either by the Company without “Cause” or by notice of
non-renewal, or by Mr. Colburn for “Good Cause,” all of the restrictions on his
shares of restricted stock in the Company will immediately lapse.
12
Dennis Michael
Nouri. Effective April 1, 2004, covering employment commencing as
of June 1, 2004, the Company entered into an employment agreement, which
provided for an initial base salary of $170,000. The agreement replaced an
employment agreement dated July 14, 1999. The agreement had a termination date
of December 31, 2005, but it automatically extended for additional two-year
terms, unless either party provided the other with written notice of intention
not to renew at least 180 days prior to the end of the term or the end of any
renewal period. Since neither party gave written notice of termination, the
agreement was extended for an additional two years and thus had a termination
date of December 31, 2007. Mr. Nouri, however, resigned from his employment with
the Company on September 11, 2007. The agreement required the Company
to make a severance payment to Mr. Nouri if either the Company terminated Mr.
Nouri’ s employment without cause or Mr. Nouri terminated his employment for
“Good Reason,” because of death or disability, or following a change in control.
The Company was not required to make any severance payments to Mr. Nouri in
connection with his resignation. Mr. Nouri’s agreement contains
non-competition and non-solicitation provisions. The non-competition provision
prohibits him from directly or indirectly engaging in the same or similar
business as the Company’s in jurisdictions where it does business for a period
of one year following the termination of employment for any reason. The
non-solicitation provision prohibits the direct or indirect solicitation (a) of
any of the Company’s customers to purchase similar products or services from
others, (b) to take away the customers’ business from the Company, or (c) to
induce employees to leave their employment with the Company, for a period of one
year following the termination of employment for any reason.
In
addition to Mr. Nouri’s employment agreement, the Company also entered into an
indemnification agreement with Mr. Nouri on April 14, 2006. This
indemnification agreement provides that Mr. Nouri will be indemnified, to the
fullest extent permitted under the Company’s bylaws and Delaware law, for his
expenses incurred in connection with the SEC investigation involving the
Company. Mr. Nouri agreed to repay these amounts to the Company should it
ultimately be determined that such indemnification was not
permissible.
Nicholas A.
Sinigaglia.
Effective March 21, 2006, covering employment commencing on such date, the
Company entered into an employment agreement with Mr. Sinigaglia which provided
for an initial annual base salary of $90,000, which was increased according to
the following schedule: to $110,000 effective April 1, 2006, to $120,000
effective June 1, 2006, and to $135,000 effective September 1, 2006. The
agreement had a termination date of March 31, 2007, but it was to automatically
extend for additional one-year terms, unless either party provided the other
with written notice of intention not to renew at least 30 days prior to the end
of the term or of any renewal period. Because Mr. Sinigaglia provided notice of
his desire to resign from the Company on February 1, 2008, Mr. Sinigaglia and
the Company entered into an amendment of his employment agreement. Under the
terms of the amended employment agreement, Mr. Sinigaglia remained with the
Company until March 30, 2008 and received severance payments described below in
“Potential Payments upon Termination or Change in Control.” Mr.
Sinigaglia’s employment agreement contains non-competition and non-solicitation
provisions. The non-competition provision prohibits him from the following in
jurisdictions where the Company does business for a period of one year following
the termination of employment for any reason: (a) being the owner of the
outstanding capital stock of any corporation which conducts a business of a like
or similar nature to the Company (other than stock of a corporation traded on a
national securities exchange or automated quotation service), (b) being an
officer or director of any corporation which conducts a business of a like or
similar nature to the Company, (c) being a member of any partnership which
conducts a business of a like or similar nature to the Company or (d) being a
consultant to, an owner of or an employee of any other business which conducts a
business of a like or similar nature to the Company. The non-solicitation
provision prohibits the direct or indirect solicitation (a) of any of the
Company’s customers to either purchase similar products or services from others,
(b) to take away the customers’ business from the Company, or (c) to induce
employees to leave their employment with the Company, for a period of one year
following the termination of employment for any reason. Mr. Sinigaglia’s
employment agreement was accompanied by a grant of incentive stock options for
50,000 shares of common stock at an exercise price of $2.50 vesting over a
five-year period in five equal installments, commencing one year from the date
of the grant.
13
The
Company and Mr. Sinigaglia were also parties to a restricted stock agreement
dated April 18, 2007 pursuant to which Mr. Sinigaglia was granted 30,000 shares
of restricted stock of the Company. As of the effective date of Mr. Sinigaglia’s
resignation, the restrictions had lapsed as to one-third of the shares as of
April 18, 2007 and the remaining restrictions were scheduled to lapse in equal
installments on April 18, 2008 and April 18, 2009. On February 1, 2008, the
Company and Mr. Sinigaglia entered into an amendment to the restricted stock
agreement to accelerate the restriction lapsing date of April 18, 2008 to March
30, 2008. As he did not continue as an employee of the Company after March 30,
2008, the 10,000 shares of restricted stock with a restriction lapsing date of
April 18, 2009 have been forfeited by Mr. Sinigaglia.
Anil
Kamath. Mr.
Kamath did not have an employment agreement with the Company and resigned as of
March 31, 2008. In connection with his resignation, Mr.
Kamath entered into a Severance Agreement and General Release with the Company,
effective March 31, 2008, under which he was entitled to severance payments
described below in “Potential Payments upon Termination or Change in
Control.”
The
following table provides information about outstanding equity awards held by the
named executive officers as of December 31, 2007.
Outstanding
Equity Awards at 2007 Fiscal Year-End
|
Option
awards
|
Stock
awards
|
|||||||||||
|
Name
|
Number
of
securities
underlying
unexercised
options
(#)
Exercisable
|
Number
of
securities
underlying
unexercised
options
(#)
Unexercisable
|
Option
exercise
price
($/Sh)
|
Option
expiration
date
|
Number
of
shares
or units
of
stock that
have
not vested
(#)
|
Market
value of
shares
or units of
stock
that have
not
vested
($)
(1)
|
||||||
|
David
E. Colburn
|
—
|
—
|
—
|
—
|
5,000
(2)
|
$13,000
|
||||||
|
—
|
—
|
—
|
—
|
100,000
(3)
|
$260,000
|
|||||||
|
Dennis
Michael Nouri
|
250,000
(4)
|
—
|
$1.43
|
12/31/2008
|
||||||||
|
Nicholas
A. Sinigaglia
|
10,000 (5)
|
40,000
|
$2.50
|
03/24/2016
|
20,000
(6)
|
$52,000
|
||||||
|
Anil
Kamath
|
75,000 (7)
|
—
|
$3.50
|
05/01/2014
|
—
|
—
|
||||||
|
20,000
(8)
|
30,000
|
$8.61
|
7/22/2015
|
—
|
—
|
|||||||
|
(1)
|
Market
value of shares that have not vested is based on $2.60 per share (the
closing price of the Company’s common stock as quoted on the OTC Bulletin
Board on December 31, 2007).
|
|
(2)
|
Restrictions
lapse as to 2,500 shares on each of February 29, 2008 and May 31,
2008.
|
|
(3)
|
Restrictions
lapse as to 25,000 shares on January 1, 2008, 37,500 shares on January 1,
2010, 18,750 shares on January 1, 2011, and 18,750 shares on January 1,
2012.
|
|
(4)
|
This
option was fully vested on December 31, 2003, the date of the
grant. On January 10, 2008, the Compensation Committee of the
Company’s Board of Directors cancelled this option.
|
|
(5)
|
Vests
as to 20% of the award on each anniversary of the grant date for five
years following March 24, 2006, the date of the grant. Upon
Mr. Sinigaglia’s resignation on March 30, 2008, this option was
forfeited as to 30,000 unvested shares and remains exercisable as to
20,000 vested shares for 90 days following Mr. Sinigaglia’s
termination of employment.
|
14
|
(6)
|
As
of December 31, 2007, restrictions were scheduled to lapse as to
10,000 shares on each of April 18, 2008 and April 18, 2009. On
February 1, 2008, in connection with Mr. Sinigaglia’s resignation on
March 30, 2008, the vesting schedule was amended to accelerate the
restriction lapsing date of April 18, 2008 to March 30,
2008. The remaining 10,000 shares of restricted stock were
forfeited.
|
|
(7)
|
This
option vested bi-annually over two years following May 1, 2004, the date
of the grant. It will remain exercisable for 90 days following
March 31, 2008, the date of Mr. Kamath’s
resignation.
|
|
(8)
|
Vests
as to 20% of the award on each anniversary of the grant date for five
years following July 22, 2005, the date of the grant. Upon
Mr. Kamath’s resignation on March 31, 2008, this option was
forfeited as to 30,000 unvested shares and remains exercisable as to
20,000 vested shares for 90 days following Mr. Kamath’s
termination of employment on March 31,
2008.
|
Payments
upon Termination or Change in Control
Three of
the Company’s named executive officers are no longer employed by the
Company. The Company was not required to make any severance payments
to Mr. Nouri in connection with his resignation on September 11,
2007. The payments made to Mr. Kamath and Mr. Sinigaglia are
described below.
In
connection with his resignation from the Company, Mr. Kamath entered into a
severance agreement and general release with the Company, effective March 31,
2008. Under the terms of the agreement, the Company agreed to pay Mr.
Kamath an amount equal to three months of his salary and to reimburse Mr. Kamath
for premium payments he makes under the Consolidated Budget Reconciliation Act
(“COBRA”) to continue his heath insurance coverage for three
months. The agreement also includes a release of customary claims and
provides for future payments for any consulting services requested by the
Company. For requests relating to projects or technology existing at
the Company as of March 31, 2008, Mr. Kamath has agreed to provide up to 10
hours of free consulting services per month until October 1, 2008, at which the
Company will pay a rate of $75.00 per hour for such assistance. For
any requests unrelated to projects or technology existing as of March 31, 2008,
Mr. Kamath will be paid $75.00 per hour, provided that if such assistance is
estimated to be beyond five hours per month, the Company and Mr. Kamath will
enter into a written statement of work setting forth the terms and conditions
governing such project.
In
connection with his resignation from the Company, Mr. Sinigaglia and the Company
agreed to an amendment of his employment agreement on February 1, 2008. Under
the terms of the amended employment agreement, the Company agreed to pay Mr.
Sinigaglia an amount equal to three months of his salary and agreed to reimburse
Mr. Sinigaglia for premium payments he makes under COBRA to continue his heath
insurance coverage for three months. In addition, the Company and Mr.
Sinigaglia agreed to an amendment of his restricted stock agreement on February
1, 2008, which accelerated the restriction lapsing date of 10,000 shares of
restricted stock to March 30, 2008, as more fully described above under
“Employment Agreements.”
The
Company currently has an employment agreement with Mr. Colburn that contains
terms that provide for the potential payment of amounts following termination.
If Mr. Colburn’s employment is terminated by the Company for “Cause” (as defined
below), the Company’s obligation to compensate Mr. Colburn will cease on the
effective termination date except for (a) amounts due for services rendered
prior to the termination date and (b) a lump sum representing any unused portion
of Mr. Colburn’s vacation. If Mr. Colburn is terminated by the Company by notice
of non-renewal or without “Cause,” the Company’s obligation to compensate Mr.
Colburn will cease on the effective termination date except for (x) amounts due
for services rendered prior to the termination date, (y) a lump sum representing
any unused portion of Mr. Colburn’s vacation, and (z) an amount equal to Mr.
Colburn’s then current salary for the then remaining term of the employment
agreement, payable in substantially equal installments on the last business day
of each applicable month.
15
For
purposes of the agreement, “Cause” is defined to mean:
|
|
·
|
any
act or omission constituting misconduct or negligence, fraud,
misappropriation, embezzlement, conflict of interest or competitive
business activities, including without limitation any arrest on criminal
charges;
|
|
|
·
|
any
chemical dependence which materially adversely affects the performance of
his duties and responsibilities to the
Company;
|
|
|
·
|
breach
of his fiduciary obligations to the Company in a material
respect;
|
|
|
·
|
his
repeated failure to perform his duties after written notice of the alleged
failure and a reasonable opportunity to
cure;
|
|
|
·
|
his
material breach of the Company’s policies or any material provision of the
agreement;
|
|
|
·
|
his
gross misconduct resulting in substantial loss to the Company or damage to
the reputation of the Company; or
|
|
|
·
|
his
knowing material violation of securities laws, rules, or
regulations.
|
If Mr.
Colburn’s employment is terminated within 18 months following a “Change in
Control” (as defined below) either by the Company without “Cause” or by notice
of non-renewal, or by Mr. Colburn for “Good Cause” (as defined below), he would
receive the benefits to which he would have been entitled upon a termination by
the Company without “Cause” or by notice of non-renewal prior to a “Change in
Control” and, in addition, all of the restrictions on his shares of restricted
stock in the Company shall immediately lapse.
A “Change
of Control” will be deemed to have occurred on the earlier of the following
dates:
|
|
·
|
the
date on which any “person” (as such term is used in Sections 13(d) and
14(d) of the Exchange Act), other than (a) the Company, (b) a trustee or
other fiduciary holding securities under an employee benefit plan of the
Company, (c) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company, or (d) the existing holders of capital
stock of the Company as of the effective date of the agreement, is or
becomes the “beneficial owner” (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company
representing more than 50% of the combined voting power of the Company’s
then outstanding securities; or
|
|
|
·
|
the
date the stockholders of the Company approve a definitive agreement or
plan for (a) a merger, share exchange, consolidation, or reorganization
involving the Company and any other corporation or other entity as a
result of which less than 50% of the combined voting power of the Company
or of the surviving or resulting corporation or entity after such
transaction is held in the aggregate by the holders of the combined voting
power of the outstanding securities of the Company immediately prior to
such transaction; or (b) a complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or
substantially all of the Company’s
assets.
|
“Good
Cause” shall mean Mr. Colburn’s resignation within six months of any of the
following conditions having arisen without his consent and after having given
the Company written notice of the existence of such condition within 60 days of
the initial existence of the condition and providing the Company with 30 days to
remedy the condition:
|
|
·
|
a
material diminution in his authority or
responsibilities;
|
|
|
·
|
a
material diminution in his base
salary;
|
|
|
·
|
relocation
of his office to a location more than 30 miles outside of Research
Triangle Park, North Carolina; or
|
|
|
·
|
any
material breach of the employment agreement by the
Company.
|
16
The
following table summarizes the compensation paid to non-employee directors for
the fiscal year ended December 31, 2007:
2007
Director Compensation
|
Name
|
Fees
Earned or
Paid
in Cash
($)
|
Stock
Awards
($) (1)
(2)
|
Option
Awards
($) (1)
(3)
|
All
Other
Compensation
($)
|
Total
($)
|
|||||
|
Doron
Roethler (4)
|
—
|
$2,875
|
—
|
—
|
$2,875
|
|||||
|
Jeffrey
W. LeRose (5)
|
$40,000
|
$53,250
|
$4,039
|
$17,750
(6)
|
$115,039
|
|||||
|
Shlomo
Elia (7)
|
—
|
$11,400
|
—
|
—
|
$11,400
|
|||||
|
Philippe
Pouponnot (7)
|
—
|
$11,400
|
—
|
—
|
$11,400
|
|||||
|
C.
James Meese, Jr. (8)
|
$39,500
|
$11,400
|
$23,410
|
—
|
$74,310
|
|||||
|
Thomas
P. Furr (9)
|
—
|
—
|
—
|
—
|
—
|
|
(1)
|
Amounts
represent the amount of compensation cost recognized in fiscal 2007 in
accordance with SFAS 123R, disregarding any adjustments for forfeiture
assumptions. For a discussion of the assumptions used to value these
awards, see Note 2 to the Company’s consolidated financial statements
included in its Annual Report on Form 10-K for the fiscal year ended
December 31, 2007.
|
|
(2)
|
At
December 31, 2007, the aggregate number of restricted stock awards held by
each non-employee director was as follows: Mr. Roethler – 15,000; Mr. Elia
– 7,500; Mr. Pouponnot – 7,500; and Mr. Meese – 7,500.
|
|
(3)
|
At
December 31, 2007, the aggregate number of stock option awards held by
each non-employee director was as follows: Mr. LeRose – 10,000; and Mr.
Meese – 20,000.
|
|
(4)
|
Although
Mr. Roethler qualifies for payment of a monthly cash fee under the
Company’s Board Compensation Policy, as of the end of the Company’s last
fiscal year, he has waived receipt of cash compensation for his service on
the Board of Directors.
|
|
(5)
|
On
October 18, 2007, Mr. LeRose resigned as Chairman of the
Board. In recognition of Mr. LeRose’s service to the Company,
the Board of Directors amended Mr. LeRose’s existing restricted stock
agreement to permit restrictions to continue lapsing on his restricted
stock through December 21, 2007 and approved the continued payment of his
monthly board fee through June 2008, which represents the end of his
annual elected term had he served his full term.
|
|
(6)
|
Includes
monthly board fees totaling $8,000 paid to Mr. LeRose between the date of
his resignation and December 31, 2007 and $9,750 of compensation cost
recognized in accordance with SFAS 123R for the portion of Mr. LeRose’s
restricted stock award as to which restrictions lapsed after Mr. LeRose’s
resignation.
|
|
(7)
|
Although
these directors qualify for payment under the Company’s Board Compensation
Policy, as of the end of the Company’s last fiscal year, they have waived
the receipt of any compensation.
|
|
(8)
|
In
February 2007, the Company’s Board of Directors amended the Company’s
Board Compensation Policy. This amendment resulted in a retroactive
increase in cash compensation from $2,000 per month to $2,500 per month
for Mr. Meese. This increase was made to reflect his additional duties as
Chairman of the Company’s Audit Committee. Additional amounts payable as a
result of this retroactive increase were paid in February
2007. In addition, Mr. Meese received payments totaling $8,500
for his service on a special committee of the Board of Directors during
fiscal 2007.
|
|
(9)
|
Mr.
Furr is an executive officer of the Company and, therefore, is not
eligible to receive compensation for his service as a
director.
|
17
During
2007, the Company had in place a written compensation policy covering
compensation to its directors. Under this policy, directors who also served as
employees were not eligible to receive any compensation.
Under the
policy in effect on and after February 2, 2007, a non-management member of the
Company’s Board is entitled to a fee of $1,500 per month, plus $250 per month
for each committee on which the member serves. If the director serves as the
Chairman of the Audit Committee, the $1,500 is increased to $2,000, but the
director does not receive the $250 fee per month for serving on the Audit
Committee. The Chairman of the Board is entitled to a fee of $4,000 per month in
lieu of the fees described above. In addition, each director is
entitled to receive an award of restricted stock.
Upon a
director’s appointment or election to the Board, the director will be awarded
10,000 shares (15,000 shares for the Chairman of the Board) of restricted common
stock of the Company, valued at the fair market value of the Company’s common
stock on the date of the award. In addition, at the time of the annual meeting
of the Company’s stockholders, if the director is re-elected to the Board and
has been serving on the Board for at least six months prior to the date of the
annual meeting, the director will be awarded additional shares of restricted
common stock of the Company, valued at the fair market value of the Company’s
common stock on the date of the award. The contractual restrictions on all
restricted stock awards granted lapse quarterly over a year’s time, provided
that the person is a member of the Board of Directors on the applicable lapse
date.
In June
2007, the Company limited the issuance of shares of its common stock reserved
under its 2004 Equity Compensation Plan to awards of restricted or unrestricted
stock. Prior to that time, upon appointment or election to the Board,
a director could elect to receive a stock option grant representing 20,000
shares (30,000 shares for the Chairman of the Board) of the Company’s common
stock instead of a restricted stock award. The exercise price of the
option grant would be equal to the fair market value of the Company’s common
stock on the date of grant. At the time of the annual meeting of the
Company’s stockholders, a director who is re-elected and has served on the Board
for at least six months prior to the date of the annual meeting would have
received an additional stock option grant with an exercise price equal to the
fair market value of the Company’s common stock on the date of
grant. All options would vest quarterly over a year’s time or on the
one year anniversary of the award, provided that the director was serving on the
Board of Directors on the applicable vesting date.
Each
non-management director is eligible for expense reimbursement for reasonable
travel and lodging expenses incurred in connection with his or her attendance at
Board and committee meetings.
Under the
policy in effect from November 17, 2006 to February 2, 2007, a non-management
member of the Company’s Board was not entitled to receive a monthly fee for
committee membership and all stock options vested quarterly over a year’s
time. All other terms of the policy were identical to those of the
policy that was effective on and subsequent to February 2, 2007.
18
Equity
Compensation Plans
The
following table provides information, as of December 31, 2007, for the Company’s
compensation plans (including individual compensation arrangements) under which
the Company is authorized to issue equity securities:
Equity
Compensation Plan Information
|
Plan
category
|
Number
of securities to be
issued
upon exercise of
outstanding
options,
warrants
and rights (1)
(a)
|
Weighted
average
exercise
price of
outstanding
options,
warrants
and rights
(b)
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation
plans
(excluding securities
reflected
in column
(a))
(1)
(c)
|
|
Equity
compensation plans approved by security holders
|
1,394,300
(2)
|
$5.06
|
3,869,091
(3)
|
|
Equity
compensation plans not approved by security holders
|
250,000
(4)
|
$9.82
|
N/A
|
|
Total
|
1,644,300
|
3,869,091
|
|
(1)
|
Refers
to shares of the Company’s common
stock.
|
|
(2)
|
Includes
shares issuable upon exercise of outstanding options under the following
plans in the amounts indicated: 2004 Equity Compensation Plan –
818,700; 2001 Equity Compensation Plan – 575,000; and 1998 Stock Option
Plan – 600.
|
|
(3)
|
Includes
3,869,091 shares remaining for future issuance under the 2004 Equity
Compensation Plan, all of which are available for issuance as restricted
shares. No shares remain available for grants under either the 2001 Equity
Compensation Plan or the 1998 Stock Option
Plan.
|
|
(4)
|
Includes
250,000 shares issuable pursuant to an option granted to a consultant
pursuant to an individual compensation arrangement not under any equity
compensation plan. The exercise price under this option grant
is $9.815 per share, with the shares vesting in equal installments on
December 13, 2005, March 13, 2006, June 13, 2006, September 13, 2006, and
December 13, 2006. The option has a termination date of March
8, 2008.
|
OWNERSHIP
OF SECURITIES
Principal
Stockholders and Share Ownership by Management
The
following table sets forth information regarding beneficial ownership of the
Company’s common stock as of April 21, 2008 by (i) each person who is known by
the Company to beneficially own more than 5% of its common stock; (ii) each
person named in the Summary Compensation Table in this proxy statement,
(iii) each person serving as a director or nominated for election as a
director, and (iv) all current executive officers and directors as a
group. Except as otherwise indicated by footnote, to the Company’s
knowledge, the persons named in the table below have sole voting and investment
power with respect to all shares of common stock shown as beneficially owned by
them.
19
|
Beneficial
Owner
Name
and Address (1)
|
Amount
and
Nature
of
Beneficial
Ownership
(2)
|
Percent
of Class
|
|||
|
Atlas
Capital SA
118
Rue du Rhone
CH-1204
Geneva,
Switzerland
|
3,865,927
|
21.2
|
%
|
||
|
Doron
Roethler (3)
c/o
Michal Raviv at
Granot,
Strauss, Adar & Co.
28
Bezalel Street
Ramat
Gan 52521, Israel
|
2,187,253
|
12.0
|
%
|
||
|
Magnetar
Financial LLC (4)
Magnetar
Capital Partners LP
Supernova
Management LLC
Alec
N. Litowitz
1603
Orrington Avenue, 13th Floor
Evanston,
IL 60201
|
1,858,030
|
10.2
|
%
|
||
|
Henry
Nouri (5)
106
Zapata Lane
Chapel
Hill, NC 27517
|
1,429,522
|
7.8
|
%
|
||
|
Herald
Investment Trust, PLC
c/o
Hare & Co. (6)
1
Wall Street
New
York, NY 10286
|
1,176,471
|
6.5
|
%
|
||
|
Michael
Nouri (7)
4024
John S. Raboteau Wynd
Raleigh,
NC 27612
|
745,907
|
4.1
|
%
|
||
|
David
E. Colburn (8)
|
110,000
|
*
|
|||
|
Nicholas
A. Sinigaglia (9)
|
40,000
|
*
|
|||
|
Anil
Kamath (10)
|
294,100
|
1.6
|
%
|
||
|
Thomas
Furr (11)
|
429,937
|
2.4
|
%
|
||
|
Shlomo
Elia (12)
|
70,972
|
*
|
|||
|
C.
James Meese, Jr. (13)
|
30,000
|
*
|
|||
|
Dror
Zoreff (14)
|
10,000
|
*
|
|||
|
Philippe
Pouponnot (15)
|
60,750
|
*
|
|||
|
All
officers and directors as a group (9 persons) (16)
|
2,933,712
|
16.1
|
%
|
||
* Less
than 1%.
|
(1)
|
Unless
otherwise noted, all addresses are in care of the Company at 2530 Meridian
Parkway, Durham, North Carolina 27713.
|
|
(2)
|
Based
upon 18,234,627 shares of common stock outstanding on April 21, 2008. The
number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Exchange Act, and the information is not
necessarily indicative of beneficial ownership for any other purpose.
Under such rule, beneficial ownership includes any shares as to which the
person has sole or shared voting power or investment power and also any
shares that the person has the right to acquire within 60 days of
April 21, 2008 through the exercise of any stock options or other
rights. Any shares that a person has the right to acquire within 60 days
are deemed to be outstanding for the purpose of computing the percentage
ownership of such person but are not deemed outstanding for the purpose of
computing the percentage ownership of any other
person.
|
20
|
(3)
|
Includes
(i) 1,323,619 shares
owned by Greenleaf Ventures Ltd., a British Virgin Islands company, (ii)
121,116 shares owned by Crystal Management Ltd., a company registered
in Anguilla, and (iii) 557,043 shares of common stock owned directly by
Doron Roethler, of which 11,250 shares are held pursuant to a restricted
stock award as to which restrictions had not lapsed as of April 21,
2008.
|
|
(4)
|
Based
on a joint Schedule 13G filed with the SEC by Magnetar Financial LLC
(“Magnetar Financial”), Magnetar Capital Partners LP (“Magnetar Capital
Partners”), Supernova Management LLC (“Supernova”), and Alec N. Litowitz
on February 13, 2008 to report securities held for the account of Magnetar
Capital Master Fund, Ltd (“Magnetar Capital Master Fund”) and certain
Managed Accounts (the “Managed Accounts”) as of December 31, 2007.
Magnetar Capital Partners serves as the sole member and parent holding
company of Magnetar Financial and Magnetar Investment Management, LLC
(“Magnetar Investment Management”), both of which are registered
investment advisers under the Investment Advisers Act of 1940, as
amended. Magnetar Financial serves as investment adviser to
Magnetar Capital Master Fund, and Magnetar Investment Management serves as
investment adviser to the Managed Accounts. Supernova is the
general partner of Magnetar Capital Partners, and Mr. Litowitz is the
manager of Supernova. As of December 31, 2007, each of Magnetar Financial,
Magnetar Capital Partners, Supernova, and Mr. Litowitz had shared voting
and dispositive power over (a) 842,747 shares held for the account of
Magnetar Capital Master Fund and (b) 588,903 shares issuable upon the
exercise of warrants held for Magnetar Capital Master Fund. These amounts
exclude additional warrants to purchase 195,411 shares held for the
account of Magnetar Capital Master Fund which are subject to provisions
prohibiting the holder from exercising the warrants to the extent such
exercise would result in the holder being deemed the beneficial owner of
more than 9.99% of the Company’s issued and outstanding common stock. As
of December 31, 2007, Magnetar Capital Partners, Supernova, and Mr.
Litowitz also had shared voting and dispositive power over 426,380 shares
held for the accounts of the Managed Accounts.
|
|
(5)
|
Includes
180,070 shares which can be acquired upon the exercise of options which
can be exercised at any time between April 21, 2008 and June 13,
2008.
|
|
(6)
|
Includes
a warrant to purchase up to 392,157 shares of common stock which can be
exercised within 60 days after April 21, 2008.
|
|
(7)
|
Includes
6,500 shares of common stock owned by Michael Nouri in trust as to which
he shares investment and voting power.
|
|
(8)
|
Includes
77,500 shares held pursuant to a restricted stock award as to which
restrictions had not lapsed as of April 21, 2008.
|
|
(9)
|
Includes
20,000 shares which can be acquired upon the exercise of options which can
be exercised at any time within 60 days after April 21,
2008.
|
|
(10)
|
Includes
95,000 shares which can be acquired upon the exercise of options which can
be exercised at any time within 60 days after April 21,
2008.
|
|
(11)
|
Includes
95,000 shares which can be acquired upon the exercise of options which can
be exercised at any time within 60 days after April 21, 2008 and 200
shares held in trust over which Mr. Furr has sole investment and voting
power.
|
|
(12)
|
Includes
2,500 shares held pursuant to a restricted stock award as to which
restrictions had not lapsed as of April 21, 2008.
|
|
(13)
|
Includes
2,500 shares held pursuant to a restricted stock award as to which
restrictions had not lapsed as of April 21, 2008 and 20,000 shares
which can be acquired upon the exercise of options which can be exercised
at any time within 60 days after April 21,
2008.
|
21
|
(14)
|
Includes
10,000 shares held pursuant to a restricted stock award as to which
restrictions had not lapsed as of April 21, 2008.
|
|
(15)
|
Includes
2,500 shares held pursuant to a restricted stock award as to which
restrictions had not lapsed as of April 21, 2008.
|
|
(16)
|
For
all current executive officers and directors as a group, includes a total
of 115,000 shares subject to options exercisable at any time within 60
days after April 21, 2008 and 140,500 shares held pursuant to restricted
stock awards as to which restrictions had not lapsed as of April 21,
2008.
|
PROPOSAL
NO. 2 — RATIFICATION OF APPOINTMENT OF
INDEPENDENT
AUDITORS
The Audit
Committee has appointed Sherb & Co., LLP (“Sherb”) to audit the consolidated
financial statements of the Company for fiscal 2008. Sherb was first engaged as
the Company’s independent auditors for fiscal 2005 and continues to serve as the
Company’s independent auditors. A representative from Sherb is not expected to
be present at the 2008 Annual Meeting of Stockholders, and thus will not have
the opportunity to make a statement if he or she desires to do so and is not
expected to be available to respond to appropriate questions.
Although
stockholder ratification of the appointment is not required by law or the
Company’s bylaws, the Audit Committee determined that, as a matter of corporate
governance, the selection of independent auditors should be submitted to the
stockholders for approval. If the appointment of Sherb is not ratified by a
majority of the shares cast at the annual meeting, the Audit Committee will
consider the appointment of other independent auditors for subsequent fiscal
years.
The
Board of Directors recommends
stockholders
vote FOR Proposal No. 2.
The role
of the Audit Committee is to assist the Board of Directors in its oversight of
the quality and integrity of the Company’s financial statements, compliance with
legal and regulatory requirements, qualification and independence of the
Company’s independent auditor, and performance of internal controls over
financial reporting. The full responsibilities of the Audit Committee are
described in a written charter adopted by the Board of Directors, a copy of
which is posted on the Company’s website at www.smartonline.com. The
management of the Company is responsible for the preparation, presentation, and
integrity of the Company’s financial statements, the Company’s accounting and
financial reporting principles, internal controls and procedures designed to
assure compliance with accounting standards and applicable laws and regulations.
The independent auditors are responsible for auditing the Company’s financial
statements and expressing an opinion as to their conformity with generally
accepted accounting principles, as well as expressing opinions on management’s
assessment of the effectiveness of the Company’s internal controls and the
auditors’ own assessment of the effectiveness of the Company’s internal
controls.
In the
performance of its oversight function, the Audit Committee has reviewed and
discussed with management and the independent auditors the audited financial
statements, management’s assessment and report on the effectiveness of the
Company’s internal controls, the independent auditors’ attestation report on the
Company’s internal controls and the processes that support certifications of the
Company’s financial statements by the Company’s Chief Executive Officer and
Chief Financial Officer. The Audit Committee has also discussed with the
independent auditors the matters required by Statement on Auditing Standards
No. 61, Communication
with Audit Committees, as currently in effect. In addition, the Audit
Committee has received the written disclosures and the letter from the
independent auditors required by Independence Standards Board Standard
No. 1, Independence
Discussions with Audit Committees, as currently in effect; has considered
whether the provision of non-audit services by the independent auditors to the
Company is compatible with maintaining the auditors’ independence; and has
discussed with the auditors the auditors’ independence.
22
The
members of the Audit Committee in carrying out their duties are not engaged in
the practice of accounting and do not act as auditors. Members of the Committee
rely without independent verification on the information provided to them and on
the representations made by management and the independent auditors.
Accordingly, the Audit Committee’s oversight does not provide an independent
basis to determine that management has maintained appropriate accounting and
financial reporting principles or appropriate internal controls and procedures
designed to assure compliance with accounting standards and applicable laws and
regulations. The Audit Committee’s considerations and discussions referred to
above do not assure that the audit of the Company’s financial statements has
been carried out in accordance with generally accepted auditing standards, that
the financial statements are presented in accordance with generally accepted
accounting principles, or that the Company’s auditors are in fact
independent.
Based
upon the review and discussions described in this report, and subject to the
limitations on the role and responsibilities of the Audit Committee referred to
above and in the Audit Committee Charter, the Audit Committee recommended to the
Board that the audited financial statements be included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2007 for filing with the
Securities and Exchange Commission.
|
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THE
AUDIT COMMITTEE
|
|
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C.
James Meese, Jr., Chairman
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|
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David
E. Colburn
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|
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March
19, 2008
|
The Audit
Committee appointed Goldstein Golub Kessler LLP (“GGK”) to serve as the
Company’s independent registered public accountant effective November 15,
2005. GGK notified the Company on March 17, 2006 that it resigned as
the Company’s independent accountant effective March 16, 2006. Due to the short
duration of GGK’s retention as the Company’s outside
accounting firm, GGK never provided a report on its financial statements. From
the time GGK was engaged to the date of the termination of that relationship on
March 16, 2006, there were no “disagreements” (as that term is defined in Item
304(a)(1)(iv) of Regulation S-K) on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
would have caused GGK to make reference to the subject matter in connection with
its report, and there have been no “reportable events” (as that term is defined
in Item 304(a)(1)(v) of Regulation S-K).
On April
3, 2006, the Audit Committee engaged Sherb as the Company’s new independent
accountant to be the principal accountant to audit its financial
statements. During the fiscal years ended December 31, 2004 and 2005
and through April 3, 2006, neither the Company nor anyone on the Company’s
behalf consulted with Sherb regarding (i) the application of accounting
principles to a specific transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Company’s financial statements;
or (ii) any matter that was either the subject of a “disagreement” (as defined
in Item 304(a)(1)(iv) of Regulation S-K) or a “reportable event” (as defined in
Item 304(a)(1)(v) of Regulation S-K).
Principal
Accounting Fees and Services
In
November 2005, the Company engaged GGK. The Company did incur expenses related
to GGK’s work, although GGK resigned in March 2006 prior to releasing an audit
opinion. In March 2006, the Company engaged Sherb as its principal accountant.
The amounts billed under the categories referenced below may contain a
combination of charges from the different firms that served as the Company’s
independent accountant during its past two fiscal years.
Audit Fees. Aggregate fees
billed for the audit of our 2006 annual consolidated financial statements,
including the reviews of the Company’s Quarterly Reports on Form 10-Q filed
during 2006, were approximately $76,000. Aggregate fees billed for
the audit of our 2007 annual consolidated financial statements, including the
reviews of the Company’s Quarterly Reports on Form 10-Q filed during 2007, were
approximately $110,807.
Audit-Related
Fees. There were no audit-related fees billed by the principal
accountant in fiscal 2007 and 2006.
Tax Fees. The principal
accountant did not provide professional services related to tax compliance, tax
advice, and tax planning during fiscal 2006 and 2007.
All Other
Fees. There were no other fees billed by the principal
accountant in 2006 and 2007.
23
All audit
and permissible non-audit services provided by the Company’s independent
accountant, as well as the fees for such services, must be pre-approved by the
Audit Committee. The Audit Committee may delegate to one or more designated
members of the Audit Committee the authority to pre-approve audit and
permissible non-audit services, provided such pre-approval decisions are
reported to the full Audit Committee at a later time. Any pre-approval is
generally for the current fiscal year, and any pre-approval is detailed as to
the particular service or category of services. All audit and non-audit services
provided by the Company’s independent accountant during fiscal 2006 and 2007
were pre-approved by or on behalf of the Audit Committee.
Other
than the election of directors and ratification of the appointment of
Sherb & Co., LLP as the Company’s independent auditors for the fiscal
year ending December 31, 2008, as described in this proxy statement, the Board
of Directors presently knows of no other business to be conducted at the 2008
Annual Meeting of Stockholders. The Company has not received any notice from a
stockholder desiring to present a proposal for consideration at the meeting,
including any director nomination. Should any other business properly
come before the meeting, the persons named in the accompanying form of proxy may
vote the shares represented by the proxy in their discretion, except that under
the rules of the SEC the accompanying proxy cannot be voted for more than six
nominees.
Pursuant
to the rules of the SEC, stockholder proposals submitted for inclusion in the
Company’s proxy statement and form of proxy for the annual meeting to be held in
2009 must be received by the Company not later than December 25, 2008, and must
comply with the SEC’s rules in other respects.
Other
stockholder proposals to be presented at the annual meeting in 2009, including
director nominations, must comply with the notice requirements of the Company’s
bylaws and be delivered to the Company not later than April 20, 2009, nor
earlier than March 21, 2009. Any such proposals should be sent via
means that afford proof of delivery to the Secretary at the Company’s principal
executive offices.
Under the
charter of the Corporate Governance and Nominating Committee, the Committee is
responsible for identifying and selecting or recommending qualified candidates
for membership on the Board of Directors. In identifying candidates, the
Committee takes into account such factors as it considers appropriate, which may
include (a) knowledge in the technology industry generally, and
Software-as-a-Service specifically, (b) experience in the areas of accounting
and finance, (c) mature business judgment, (d) the candidate’s management,
leadership, and business strategy experience, (e) the candidate’s ability to
manage a crisis, and (f) the candidate’s knowledge of proper corporate
governance.
The
Corporate Governance and Nominating Committee is responsible for evaluating
suggestions concerning possible candidates for election to the Board submitted
to the Company, including those submitted by Board members (including
self-nominations) and stockholders. All candidates, including those submitted by
stockholders, will be evaluated by the Committee on the same basis as other
candidates using the Board membership criteria described above and in accordance
with applicable procedures. The Committee
believes that the minimum qualifications for serving as a Company director are
that a candidate demonstrate, by significant accomplishment in his or her field,
an ability to make a meaningful contribution to the Board’s oversight of the
Company’s business and affairs and have an impeccable record and reputation for
honest and ethical conduct in his or her professional and personal
activities. Qualifications for consideration as a director nominee
may vary according to the particular areas of expertise being sought as a
complement to the existing board composition.
Once
candidates have been identified, the Committee will determine whether such
candidates meet the minimum qualifications for director nominees and will
recommend qualified nominees to the Board of Directors. In accordance
with the Company’s bylaws, proposed nominees must tender, prior to nomination,
an irrevocable, conditional letter of resignation that would be effective upon
such person being charged with a felony or equivalent offense under the laws of
any jurisdiction. The full Board of Directors will then approve
qualified nominees for appointment or election to the Board of
Directors. The Company has engaged the NACD to assist the Committee
in identifying and evaluating potential candidates.
24
Any
stockholder desiring to present a nomination for consideration by the Corporate
Governance and Nominating Committee prior to the 2009 Annual Meeting must do so
in accordance with the Company’s bylaws. See “2009 Annual Meeting of
Stockholders,” above.
The Board
of Directors, as a matter of policy, desires to facilitate communications
between stockholders and directors to assist the Board in fulfilling its
responsibilities to all stockholders. To that end, the Board has established a
process for use by stockholders who desire to bring matters to the Board’s
attention. The process is intended to provide stockholders one means of
communicating with directors and is not intended to be exclusive.
Any
stockholder who desires to send a communication to members of the Board may
submit it either by e-mail addressed to Corporate.Secretary@smartonline.com or
by mail addressed to the attention of the Corporate Secretary at Smart Online,
Inc., P.O. Box 12794, Research Triangle Park, North Carolina
27709. All such communications should include the mailing address,
telephone number, and e-mail address, if any, of the person submitting the
communication. All communications properly submitted under these procedures,
except those deemed inappropriate as noted below, will be delivered to all
members of the Board periodically, generally in advance of each regularly
scheduled Board meeting. The Board has directed that the Secretary not forward
communications that (a) are not reasonably related to the business of the
Company, (b) concern individual grievances or other interests that are
personal to the stockholder submitting the communication and that cannot
reasonably be construed to present a matter of concern to stockholders
generally, or (c) under community standards, contain offensive, scurrilous,
or abusive content or advocate engaging in illegal activities. If the Secretary,
in his or her judgment, deems a communication inappropriate under the foregoing
criteria, it will be returned to the person who submitted it together with a
brief explanation of the reason why it has been deemed inappropriate for
delivery.
The
Company will bear the cost of this solicitation, including the preparation,
printing, and mailing of the proxy statement, proxy card, and any additional
soliciting materials sent by the Company to stockholders. The Company’s
directors, officers, and employees may solicit proxies personally or by
telephone without additional compensation. The Company will also
reimburse brokerage firms and other persons representing beneficial owners of
shares for reasonable expenses incurred in forwarding proxy soliciting materials
to the beneficial owners.
A
copy of the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2007 (without exhibits), including financial statements, will be
furnished without charge to any stockholder whose proxy is solicited hereby upon
written request directed to the attention of Corporate Secretary, Smart Online,
Inc., P.O. Box 12794, Research Triangle Park, North Carolina 27709.
Stockholders
Sharing the Same Last Name and Address
Only one
annual report and proxy statement may be delivered to multiple stockholders
sharing an address unless the Company has received contrary instructions from
one or more of the stockholders. The Company will deliver promptly upon written
or oral request a separate copy of the annual report and proxy statement to
a stockholder
at a shared address to which a single copy of the documents was delivered.
Requests for additional copies
should be directed to the Secretary by e-mail addressed to
Corporate.Secretary@smartonline.com, by mail addressed to the attention of the
Corporate Secretary at Smart Online, Inc., P.O. Box 12794, Research Triangle
Park, North Carolina 27709, or by telephone at (919) 765-5000. Stockholders
sharing an address and currently receiving a single copy may contact the
Secretary as described above to request that multiple copies be delivered in
future years. Stockholders sharing an address and currently receiving multiple
copies may request delivery of a single copy in future years by contacting the
Secretary as described above.
25
The
Company’s principal executive offices are located at 2530 Meridian Parkway, 2nd
Floor, Durham, North Carolina 27713, and the main telephone number at that
location is (919) 765-5000.
Dated: April
23, 2008
26
SMART
ONLINE, INC.
|
VOTE
BY INTERNET OR VOTE BY MAIL
QUICK
***
EASY
***
IMMEDIATE
|
As a
stockholder of Smart Online, Inc., you have the option of voting your shares
electronically through the Internet, eliminating the need to return the proxy
card. Your electronic vote authorizes the named proxies to vote your shares in
the same manner as if you marked, signed, dated and returned the proxy card.
Votes submitted electronically over the Internet must be received by 7:00 p.m.,
Eastern Time, on June 18, 2008.
 |
 |
||||||||
|
Vote
Your Proxy on the Internet:
|
Vote
Your Proxy by mail:
|
||||||||
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Go
to www.continentalstock.com
|
OR
|
Mark,
sign, and date your proxy card,
|
|||||||
|
Have
your proxy card available when
|
then
detach it, and return it in the
|
||||||||
|
you
access the above website. Follow
|
postage-paid
envelope provided.
|
||||||||
|
the
prompts to vote your shares.
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|
PLEASE
DO NOT RETURN THE PROXY CARD IF YOU ARE
VOTING
ELECTRONICALLY
|
|
▼ FOLD AND DETACH HERE AND READ
THE REVERSE SIDE ▼
|
|
PROXY
|
Please
mark
|
x
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|||||||||
|
your
votes
|
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|||||||||
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like
this
|
|||||||||||
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FOR
ALL
|
WITHHOLD
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FOR
ALL EXCEPT
|
|||||||||
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1.
Election of Directors
|
NOMINEES
|
AUTHORITY
|
(See
instructions
|
FOR
|
AGAINST
|
ABSTAIN
|
|||||
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FOR
ALL NOMINEES
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below)
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2. | Ratification of the appointment of Sherb & Co., |
o
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o
|
o
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|||||
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Nominees:
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01 Doron Roethler |
o
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o
|
o
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LLP as independent auditors for the fiscal year | |||||
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02
David E. Colburn
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ending
December 31, 2008
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||||||
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03
Thomas P. Furr
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04
Shlomo Elia
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Any
proxy heretofore given by the undersigned is hereby
revoked.
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|||||||||
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05
C. James Meese, Jr.
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Please
complete, sign and return this proxy whether or not you intend to attend
|
||||||||||
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06
Dror Zoreff
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the
meeting.
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||||||||||
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(Instruction:
To withhold authority to vote for any individual nominee(s),
mark
|
||||
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“FOR
ALL EXCEPT” and strike a line to through that nominee(s) name in
the
|
To
change the address on your account, please check the box at the right
and
|
|||
|
list
above.)
|
indicate
your new address in the address space to the left. Please note that
changes
|
|||
|
|
to
the registered name(s) on the account may not be submitted via this
method.
|
o | ||
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Please
check box if you intend to attend the annual meeting in
person.
|
o | |||
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COMPANY
ID:
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|||||
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PROXY
NUMBER:
|
|||||
|
ACCOUNT
NUMBER:
|
|||||
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Signature
|
Signature
|
Date
|
,
2008.
|
Note:
Please sign exactly as your name or names appear on this Proxy. When shares are
held jointly, each holder should sign. When signing as executor, administrator,
attorney, trustee, or guardian, please give full title as such. If
the signer is a corporation, please sign full corporate name by duly authorized
officer, giving full title as such. If signer is a partnership, please sign in
partnership name by authorized person.
|
▼ FOLD AND DETACH HERE AND READ
THE REVERSE SIDE ▼
|
|
PROXY
|
SMART
ONLINE, INC.
|
PROXY
SOLICITED BY THE BOARD OF DIRECTORS
FOR
THE 2008 ANNUAL MEETING OF STOCKHOLDERS
The
undersigned hereby appoints David E. Colburn and Thomas P. Furr, and each of
them individually, as proxies and attorneys-in-fact of the undersigned, with
full power of substitution, to represent the undersigned and to vote, in
accordance with the directions in this proxy, all of the shares of stock of
Smart Online, Inc. which the undersigned is entitled to vote at the 2008 Annual
Meeting of Stockholders of Smart Online, Inc. to be held in the Asheville Room
at 2530 Meridian Parkway, 3rd Floor, Durham, North Carolina 27713, on Thursday,
June 19, 2008, at 9:00 a.m. local time, and at any and all adjournments
thereof.
Shares
represented by this proxy will be voted as directed on the reverse. Unless a
contrary direction is indicated, the shares will be voted FOR election of the
director nominees listed on the reverse, and FOR the ratification of the
appointment of Sherb & Co., LLP as the independent auditors for the fiscal
year ending December 31, 2008, and, in the discretion of the persons acting
pursuant to this proxy, on any other matters that properly come before the
meeting or any adjournments thereof, all as more specifically set forth in the
Notice of Annual Meeting of Stockholders and Proxy Statement, each dated April
23, 2008, receipt of which is hereby acknowledged.
(Please
sign and date on the reverse side and promptly return in the enclosed
envelope.)