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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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 |
Definitive
Proxy Statement
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Definitive
Additional Materials
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Soliciting
Material Pursuant to Rule 14a-11(c) or 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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No
fee required.
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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) |
Title
of each class of securities to which transaction applies:
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| (2) |
Aggregate
number of securities to which transaction applies:
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| (3) |
Per
unit price or other underlying value of transaction computed pursuant
to
Exchange Act Rule 0-11 (set forth the amount on which the filing
fee is
calculated and state how it was determined):
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| (4) |
Proposed
maximum aggregate value of transaction:
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| (5) |
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) |
Amount
Previously Paid:
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Form,
Schedule or Registration Statement No.:
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Filing
Party:
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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 DECEMBER
11,
2006
You
are
cordially invited to attend the Annual Meeting of Stockholders of Smart Online,
Inc., which will be held on Monday, December 11, 2006, at 9:30 a.m. local time,
at Hilton Hotel - Raleigh-Durham Airport, 4810 Old Page Road, Research Triangle
Park, North Carolina 27709, 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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·
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Proposal
No. 1 — Election of six directors
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·
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Proposal
No. 2 — Ratification of the appointment of Sherb & Co., LLP as the
Company’s independent auditors for the fiscal year ending December 31,
2006
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Stockholders
of record at the close of business on November 28, 2006, 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
/s/
James W. Gayton
James
W. Gayton
Secretary
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Durham,
North Carolina
November
29, 2006
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 2006 Annual Meeting of Stockholders and any adjournments of the
meeting. The meeting will be held at Hilton Hotel - Raleigh-Durham Airport,
4810
Old Page Road, Research Triangle Park, North Carolina 27709, on Monday,
December 11, 2006, at 9:30 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, 2006.
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, 2006.
The
Company intends to mail its 2006 Annual Report, this proxy statement and the
accompanying proxy card to stockholders beginning on or about November 29,
2006.
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 November 28, 2006 are
entitled to vote at the meeting and any adjournments of the meeting. At that
time there were 15,388,149 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 Sunday, December 10, 2006 at 7:00 p.m. Eastern
time.
If you vote over the Internet you need not return your proxy
card.
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•
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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
Sunday,
December 10, 2006.
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•
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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 can also 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 by telephone or over the
Internet as described above.
If
you
timely submit your proxy by telephone, 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, 2006.
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 2006 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.
The
graph
below compares, from the period from April 15, 2005 (the initial date the
Company's Common Stock was actively traded) to April of 2006, the cumulative
total return of our Common Stock at month end with a market index based on
S&P Tech Sector Index and the Russell MicroCap Index. The industry index is
the S&P Tech Sector Index of the Nasdaq Stock Market and the market index is
Russell MicroCap Index. The graph assumes an investment of $100 on February
14,
2005 in shares of our Common Stock and in each index and also assumes the
reinvestment of all dividends during the period shown. The indices are
calculated on a month-end basis.
2
Comparison
of Twelve-Month Total Return
Among
Smart Online, Inc., the S&P Tech Sector Index and the Russell MicroCap
Index
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.
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Name
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Age
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Principal
Occupation and Background
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|
Dennis
Michael Nouri
|
52
|
President,
CEO and Director of Smart Online. Mr. Nouri co-founded Smart Online
in
1993 to develop and market business productivity software to provide
small
businesses with cost-effective tools that address critical business
issues
and enhance their competitive positioning. Prior to founding Smart
Online,
Mr. Nouri was founder and CEO of the Nouri Group of Companies from
1980 to
1991. The Nouri Group of Companies acquired a number of government-owned
manufacturers in Europe and privatized them. The Nouri Group was
a
multi-national conglomerate with diversified activities in real estate
development, investment, construction, motor yacht manufacturing,
high-end
home design and architecture, marketing and publishing, and stock
trading.
More than half of the company’s business was derived from real estate
development and investment and joint ventures. Another third of the
company’s business was derived from construction and motor yacht
manufacturing.
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3
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Thomas
P. Furr
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39
|
Chief
Operating Officer and Director of Smart Online. Mr. Furr is responsible
for developing and implementing strategies to leverage existing direct
and
indirect distribution channels, and our operational and sales areas.
He
joined as our Vice President, Sales and became our Chief Operating
Officer
in November 2005. In 2002, he also became a Director. He was a co-founder
and president of Kinetics, Inc., one of the first online commerce
providers for the small business industry, from 1994 until 1995.
Smart
Online purchased Kinetics in 1995. After founding Kinetics, Mr. Furr
was
with the Plurimus Corporation from 1999 until 2001, where he managed
Plurimus’ 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 (IRC), 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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Jeffrey
W. LeRose
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62
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Independent
Chairman of the Board of Directors of Smart Online. CEO and President
of
Research Triangle Software, an information technology company that
Mr.
LeRose founded in 2001. Mr. LeRose was the Chairman of the Board
of
Directors of the business-to-business online e-commerce firm, Internet
Commerce Corporation (Nasdaq: ICCA) from March 2001 until
September 2001. He became Chairman of ICCA after selling Research
Triangle
Commerce, Inc. (“RTCI”) to ICCA in November 2000. Mr. LeRose was the
founder and President of RTCI from September 1991 until November
2000. He currently sits on the Board of Advisors for the Love School
of
Business at Elon University and is a founding Board Member for the
Research Triangle Chapter of the National Association of Corporate
Directors (“NACD”). Mr. LeRose also is on the Board of Advisors for
Southern Capitol Ventures, where he provides advice on the investments
in
emerging technology companies in the Triangle. Mr. LeRose received
his BA
from New Jersey City University.
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Shlomo
Elia
|
63
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Director,
3Pen Ltd. Prior
to founding 3PEN, 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. General Elia holds a B.A. degree
in
Modern History of the Middle-East from Tel Aviv University.
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Philippe
Pouponnot
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37
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Director,
Azur Management SAL. Mr. Pouponnot has been a director of Azur Management
since its founding in 1999. In his position with Azur Management,
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.
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|
C.
James Meese, Jr.
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65
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President,
Business Development Associates, Inc. Since 1989, Mr. Meese 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 through
Business
Development Associates, Inc., a strategic advisory firm, where he
serves
as the President. Prior to 1989, he 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. Mr. Meese was a member of the company’s Top Management
Committee during his last four years with West. Mr. Meese is a director
of
Digital Recorders, Inc. (NASDAQ:TBUS), Electrical Equipment Company,
The
Railroaders Memorial Museum, and The Raleigh Rescue Mission and its
Foundation. He is a former Chair and current member of the DRI, Inc.
Audit
Committee, chairs the Railroaders Museum Board, and serves on a variety
of
committees in his directorships. He is a member of the NACD. 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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The
Board of Directors recommends stockholders
vote
FOR election of the nominees named above.
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Name
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Age
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Position
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Dennis
Michael Nouri (1)(2)
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52
|
President,
Chief Executive Officer, and Director
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Henry
Nouri (2)
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50
|
Executive
Vice President
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Thomas
Furr
|
39
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Chief
Operating Officer, Director
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Anil
Kamath
|
39
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Chief
Technology Officer
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Nicholas
A. Sinigaglia
|
36
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Chief
Financial Officer and Principal Accounting Officer
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Gary
Mahieu
|
38
|
Chief
Operating Officer and Vice President of Smart Commerce, Inc., a wholly
owned subsidiary
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(1)
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Michael
Nouri’ s full name is Dennis Michael Nouri.
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(2)
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Dennis
Michael Nouri and Henry Nouri are
brothers.
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The
biographical information for Messrs. Michael Nouri and Furr are included in
the
table of nominees for director above.
Henry
Nouri,
Executive Vice President.
Mr.
Nouri co-founded Smart Online in 1993 and has been our Vice President since
that
time. Currently, he manages our research and development teams. He is
responsible for development of the company’s CD-ROM and Internet-hosted
applications, for creating the extensive research and information management
systems required to control the flow of vital validated business data and the
effective delivery of that information to the business user.
4
Anil
Kamath,
Chief Technology Officer.
Mr.
Kamath joined us as Director of Database Implementation in July 1999 and became
Vice President, Technology in 2000 In November 2005, he became our Chief
Technology. Mr. Kamath is responsible for the architecture of our web-native
(SaaS) platform; supervises the development team, and provides architectural
design direction for new software and hardware implementations. Before joining
us he was the senior database architect for A 4 Health Systems from 1998 to
1999
and senior software architect and technical manager of BSG Imonics) from 1991
until 1997. He holds a master’s degree in computer and information sciences from
the University of Florida.
Nicholas
A. Sinigaglia,
Chief Financial Officer and Principal Accounting Officer.
Mr.
Sinigaglia joined us in February 2006. From August 2005 to February 2006, he
acted as an independent business consultant providing accounting and business
consulting services as well as interim-CFO services to New York clients. From
February 2004 to June 2005, Mr. Sinigaglia served as the Center Manager of
MedQuest Associates, a leading provider of diagnostic imaging services. From
1997 to February 2004, Mr. Sinigaglia was the Vice President and Managing
Partner of Ray-X Medical Management Services, Inc., an organization offering
management services to various medical specialties. Mr. Sinigaglia was an Audit
Senior Supervisor with Arthur Andersen LLP from 1991 to 1997 and is a Certified
Public Accountant.
Gary
Mahieu,
Chief
Operating Officer and Vice President of Smart Commerce, Inc., a wholly owned
subsidiary.
Mr.
Mahieu is responsible for the operations of our wholly-owned subsidiary, Smart
Commerce, Inc., serving as its Chief Operating Officer and Vice-President since
we acquired iMart Incorporated in October of 2005. Mr. Mahieu founded and served
as President and Chief Operating Officer of iMart Incorporated from December
1999 until October 2005. Prior to founding iMart, Mr. Mahieu served as a
technical manager for Quixtar, Inc. from April 1998 until December 1999. Mr.
Mahieu received his bachelor’s degree in electrical engineering from Western
Michigan University, and in 2006 he finished the Owners Presidents Management
program at Harvard Business School. Mr. Mahieu is also the co-inventor on two
e-Commerce patents
We
have
adopted a Code of Ethics applicable to our executives, including our principal
executive officer, principal accounting officer and principal financial officer,
as defined by applicable rules of the SEC. It is publicly available on our
web
site at www.smartonline.com.
If we
make any amendments to our Code of Ethics other than technical, administrative,
or other non-substantive amendments, or grant any waivers, including implicit
waivers, from a provision of our Code of Ethics to our chief executive officer,
chief financial officer, or certain other finance executives, we will disclose
the nature of the amendment or waiver, its effective date and to whom it applies
on our web site at www.smartonline.com
or in a
report on Form 8-K filed with the SEC.
Board
Composition
and Independence of Directors
The
size
of the Board of Directors was increased to six members in 2006 by Board action
amending the Company’s Bylaws. Six persons have been nominated for election at
the annual meeting. Under the rules of the Securities and Exchange Commission,
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
Global 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 comprised of “independent” directors as defined
under Nasdaq Marketplace Rules. Although not currently required, the Board
has
determined that three of the present directors — Messrs. LeRose, Meese and
Pouponnot — are each an “independent” director within the meaning of Nasdaq
Marketplace Rules. All three of these directors are standing for
election.
5
The
Board
of Directors held four (4) meetings during the fiscal year ended December 31,
2005. 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
2005 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. The Company did not hold an annual meeting of stockholders
in 2005.
Standing
Committees
Our
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 our website at www.smartonline.com
or free
of charge at 2530 Meridian Parkway, 2nd Floor, Durham, North Carolina 27713.
The
charter of the Audit Committee is also included as Appendix A to this proxy
statement.
Audit
Committee.
The
Audit Committee is composed of Mr. LeRose and Mr. Meese, who serves as chairman
of the Committee. Our Board of Directors, in its business judgment, has made
an
affirmative determination that both meet the definition of “independent”
director as that term is defined by Nasdaq Marketplace Rules and SEC rules,
including the special independence requirements applicable to audit committee
members. In addition, both members have past financial experience resulting
in
their financial sophistication as required by Nasdaq Marketplace Rules. The
Board of Directors has determined that Mr. Meese does meet the definition of
“audit committee financial expert” as that term is defined under the Securities
Exchange Act of 1934, as amended.
As
members of our Audit Committee, Mr. LeRose and Mr. Meese receive directly or
has
access to extensive information from reviews by our independent accountant.
The
Board of Directors believes that both of these persons have sufficient knowledge
and experience in financial matters to effectively perform their
duties.
The
Audit
Committee was established by our Board of Directors for the purpose of
overseeing the quality and integrity of our financial statements, our compliance
with legal and regulatory requirements, our independent auditor’s qualifications
and independence, the performance of our internal audit function and our
independent auditors and the preparation of reports required to be included
in
our annual proxy statement. The Audit Committee met three (3) times during
2005.
Compensation
Committee. The
Compensation Committee is composed of Messrs. Pouponnot, Meese and LeRose,
each
of whom the Board of Directors has determined, in its business judgment, meets
the definition of “independent” director as that term is defined by Nasdaq
Marketplace Rules. Mr. LeRose serves as chairman of the Committee.
The
Compensation Committee was established by our 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 our officers
and
directors and (2) the preparation of the annual report on executive compensation
for inclusion in our annual proxy statement. The Compensation Committee met
two
(2) times during 2005.
Corporate
Governance and Nominating Committee. The
Corporate Governance and Nominating Committee is composed of Messrs. Pouponnot,
Meese and LeRose, each of whom the board has determined, in its business
judgment, meets the definition of “independent” director as that term is defined
by Nasdaq Marketplace Rules. Mr. LeRose serves as chairman of the
Committee.
The
Corporate Governance and Nominating Committee was established by our 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
corporation, and the periodic review of such principles. The Corporate
Governance and Nominating Committee met two (2) times during
2005.
6
Directors
who also are employed by the Company are not separately compensated for their
service on the Board of Directors. Non-management directors are compensated
for
Board service through a combination of a cash retainer and grants of restricted
stock or non-qualified stock options to purchase shares of the Company’s Common
Stock. The Company also reimburses directors for expenses incurred in serving
as
a director.
In
2006,
the Board of Directors adopted a new compensation policy for non-management
directors. The new compensation policy is designed to assist the Board of
Directors in recruiting additional non-management directors to serve on the
Board of Directors. Under the new compensation policy, upon appointment, each
non-management director, including the Chairman of the Audit Committee, has
the
option of either receiving an option for 20,000 shares of the Company’s Common
Stock or 10,000 restricted shares of the Company’s Common Stock. In addition,
the Chairman of the Board of Directors shall be granted either an option for
30,000 shares of the Company’s Common Stock, or 15,000 restricted shares of the
Company’s Common Stock upon appointment as Chairman. These awards are made each
time a non-management director is elected to the Board if such person has been
a
director at least six (6) months prior to their election. The exercise price
of
all option grants is equal to the fair market value on the grant date. Vesting
of the option and the restricted stock award is subject to continued service
to
the Company by such non-management director in equal increments on the last
day
of each calendar quarter following the grant. The maximum term of the option
is
ten years. In accordance with this new compensation policy, in 2006, the Company
granted Mr. LeRose, the sole non-management member of the Board of Directors,
who was appointed as the Board’s Chairman in 2006, 15,000 shares of restricted
stock. In addition, for their service, non-management directors are paid $1,500
per month as a retainer. If a non-management director is acting as Chairman
of
the Board, as is currently the case, this monthly retainer is increased to
$4,000. The Chairman of Audit Committee, which is required to be a
non-management member of the Board, receives a monthly retainer of
$2,000.
Under
the
prior compensation policy in effect during fiscal 2005, non-management
directors
were compensated with a combination of cash and stock options, with the number
of shares and the amount of cash based on estimates of the amount of work
involved in the expected committee assignments for each director. Non-management
directors
received $5,000 upon appointment to the Board of Directors, $1,000 per Board
meeting attended and $250 per committee meeting attended, except that the
Chairman of the Audit Committee was paid $2,000 per meeting of the Board of
Directors and of the Audit Committee. Former Director Frank Coll was granted
10,000 options in April 2005 and an additional 10,000 options in July 2005.
Mr.
Coll resigned from the Board in March 2006. Former Director David Sarna was
granted 24,000 options in April 2005 for agreeing to serve as chairman of the
Audit Committee. Mr. Sarna resigned form our Board of Directors and all
committees thereof in June 2006. Current Director Jeffrey W. LeRose was granted
10,000 options in September 2005. The options vest quarterly over a one-year
period if the grantee remains a director of the Company, with the exercise
price
equal to the value of the stock on the grant date.
User
Advisory Board
The
Company has a User Advisory Board, consisting of up to 10 professionals
representing expertise in a broad range of business areas to assist its
marketing and sales executives with ongoing product development planning,
pricing, partnerships, new product development and other issues, including
customer acquisition and retention. User Advisory Board members provide advice
to the Company’s management, but do not have any power to make decisions. User
Advisory Board members also do not have the same duties and liabilities as
members of Board of Directors have. Each of the Company’s User Advisory Board
members has been granted nonqualified options to purchase 10,000 shares of
Common Stock at an exercise price of $3.50 per share, which options vest in
equal increments of 1,250 per meeting attended, provided the member remains
on
the Advisory Board for at least one year. At present, members of the User
Advisory Board include Mark Self, Rick Bernhardt, Brian Kinahan, and William
Eldridge. The last meeting of our User Advisory Board was held in June of
2006.
7
Certain
Transactions
and Legal Proceedings
Except
as
disclosed below, during the past five years:
|
(a)
|
None
of the directors, officers, affiliates, or holders of five percent
(5%) of
the Company’s outstanding securities, or any associate of any such person,
is a party in a material proceeding where such party is either (i)
adverse
to the Company, or (ii) has a material interest adverse to the
Company;
|
|
(b)
|
None
of the directors, director nominees, or executive officers has had
any
bankruptcy petition filed by or against any business of which such
person
was a general partner or executive officer either at the time of
the
bankruptcy or within two years prior to that
time;
|
|
(c)
|
None
of the directors, director nominees, or executive officers has been
convicted in a criminal proceeding or subject to a pending criminal
proceeding;
|
|
(d)
|
None
of the directors, director nominees, or executive officers has been
subject to any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction or any
federal or state authority, permanently or temporarily enjoining,
barring,
suspending or otherwise limiting his involvement in any type of business,
securities, futures, commodities or banking activities;
and
|
|
(e)
|
None
of the directors, director nominees, or executive officers has been
found
by a court of competent jurisdiction (in a civil action), the Securities
and Exchange Commission or the Commodity Futures Trading Commission
to
have violated a federal or state securities or commodities law, and
the
judgment has not been reversed, suspended, or
vacated.
|
Michael
Nouri and Henry Nouri were officers and directors of two companies in Italy
which were ordered into bankruptcy by Italian courts in 1993. Under Italian
laws, Michael Nouri and Henry Nouri cannot serve as an officer or director
of
any Italian company, because of these bankruptcies.
Section 16(a)
Beneficial Ownership
Reporting Compliance
The
members of our Board of Directors, our Executive Officers and persons who hold
more than 10% of our outstanding Common Stock are subject to the reporting
requirements of Section 16(a) of the Exchange Act which require them to file
reports with respect to their ownership of the Common Stock and their
transactions in such Common Stock. Based upon our review of the Section 16(a)
reports in our records for 2005 fiscal year transactions in the Common Stock
and
their Common Stock holdings, we believe that, except as noted below, all
reporting requirements under Section 16(a) for such fiscal year were met in
a
timely manner by our directors, executive officers and greater than 10%
beneficial owners.
Atlas
Capital, S.A. was delinquent in the filing of a Form 3 relating to the purchase
of shares of our Common Stock from October 17 through 21, 2005. The Form 3
for
those purchases was not filed until October 27, 2005.
Frank
Coll, a former Director, was delinquent in the filing of a Form 3 relating
to
the grant of an option to purchase shares of our Common Stock on April 18,
2005
in connection with his election to our Board of Directors. The Form 3 for this
option grant was not filed until August 1, 2005.
8
David
E.Y. Sarna, a former Director, was delinquent in the filing of a Form 3 relating
to the purchase of shares on August 12 and 15, 2005, and grant of an option
to
purchase shares of our Common Stock on April 18, 2005, and a Form 4 relating
to
the grant of options to purchase shares of our Common Stock on July 22, 2005.
Both of these forms were filed on August 12, 2005.
Gary
Mahieu, the Chief Operating Officer and Vice President of Smart Commerce, Inc.,
our wholly owned subsidiary, was delinquent in filing of a Form 3 relating
to
his appointment to that position and the receipt of shares of our Common Stock
on October 18, 2005 in connection with the Company’s acquisition of iMart
Incorporated. The Form 3 for this issuance of Common Stock was filed on February
14, 2006.
Certain
Relationships and Related Transactions
Except
as disclosed below, none of the following persons has, since January 1, 2002,
had any material interest, direct or indirect, in any transaction with us or
in
any presently proposed transaction that has or will materially affect
us:
|
·
|
Any
of our directors or officers;
|
|
·
|
Any
person proposed as a nominee for election as a
director;
|
|
·
|
Any
person who beneficially owns, directly or indirectly, shares carrying
more
than 10% of the voting rights attached to our outstanding shares
of Common
Stock;
|
|
·
|
Any
of our promoters;
|
|
·
|
Any
relative or spouse of any of the foregoing persons who lives in the
same
house as such person.
|
Loans
Made by Certain Parties to the Chief Executive Officer
During
2005, the following loans were made by certain investors, consultants and/or
stockholders to our Chief Executive Officer: (i) $809,736.49 was borrowed from
Leon Sokolic, one of our stockholders, (ii) $77,971.20 was borrowed from Atlas
Capital, S.A., one of our stockholders, (iii) $80,000 was borrowed from Pete
Coker, a principal of Tryon Capital, which provided financial consulting
services to us and received a warrant and cash fees, and (iv) $296,589 was
borrowed from Berkley Financial Services, Ltd., which received compensation
for
services rendered to us for investment banking and investor relations services,
including during the period in which Berkley was making loans to the Chief
Executive Officer. Our Chief Executive Officer has agreed with the Audit
Committee that he will repay the loans from Berkley by December 31,
2006. Under Section 402 of the Sarbanes-Oxley Act of 2002, issuers subject
to the Act such as Smart Online are prohibited from making personal loans to
their directors and executive officers, directly and indirectly. We believe
that
the loans to our Chief Executive Officer described above are not personal loans
made directly or indirectly by Smart Online to our Chief Executive
Officer.
Loans,
Salary Deferrals and Security Interests of Certain Officers, Employees and
Relatives
Michael
Nouri.
From 1999 until September 2003, we deferred salary payments to Mr. Nouri
totaling $296,667, which were due to him under his employment agreement dated
July 14, 1999, which called for a base salary of $150,000 per year. Loans and
deferrals earned interest at a rate of 15% compounded annually. In October
2003,
Mr. Nouri agreed to continue to defer $9,583 of salary per month for salary
that
accrued after October 1, 2003. On October 13, 2003, we entered into an agreement
with Mr. Nouri whereby the salary deferrals through October 1, 2003 were
evidenced by a promissory note in the principal amount of $358,229 for deferrals
of salary that accrued prior to October 1, 2003. During the fourth quarter
of
2003 and the first quarter of 2004, we deferred an additional $63,437 of Mr.
Nouri’s compensation. On April 30, 2004, the promissory note dated October 13,
2003 was cancelled and replaced by a successor promissory note in the amount
of
$418,750 representing the principal balance of the original note plus the
additional accrued compensation. Subsequently during 2004, we paid $125,000
of
principal to Mr. Nouri. The
9
outstanding
balance due on the successor note bore interest of 15% interest compounded
annually (reduced to 8% effective June 1, 2004 as described above). This note
and all of our other obligations to Mr. Nouri arising out of loans and salary
deferrals were secured by all of our assets, which lien Mr. Nouri shared
with Henry Nouri, Ronna Loprete, Thomas Furr and Eric Nouri to secure the
obligations to them described below. The security interest was originally a
second lien on all of our assets, but with repayment of all amounts owed to
the
holder of the first lien, the security interest became a first lien on all
of our assets . The lien was removed when the notes were paid. The
note was due May 31, 2005, but Mr. Nouri entered into a standstill
agreement not to demand payment on the due date to induce holders of outstanding
shares of Preferred Stock to convert to shares of Common Stock in a
reorganization. The standstill agreement, as amended as of December 22, 2004,
continued through the earlier of June 30, 2006 or the closing after January
1,
2005 of a financing with gross proceeds to us of $2,000,000 or more. After
we
raised $2,500,000 from a sale of securities to a foreign investor in February
2005, we paid in full the $296,667 of deferred compensation and accrued interest
and cancelled the related promissory notes.
Henry
Nouri.
From 1999 until September 2003, we deferred salary payments to Mr. Nouri
totaling $398,383, which were due to him under his employment agreement dated
July 14, 1999, which called for a base salary of $150,000 per year. In October
2003, Mr. Nouri agreed to continue to defer $9,583 of salary per month for
salary that accrued after October 1, 2003. Deferrals earned interest at a rate
of 15% compounded annually. On October 13, 2003, we entered into an agreement
with Mr. Nouri whereby all salary deferrals through October 1, 2003 were
evidenced by a promissory note in the principal amount of $346,812 for deferrals
of salary that accrued prior to October 1, 2003. During the fourth quarter
of
2003 and the first quarter of 2004, we deferred an additional $60,521 of Mr.
Nouri’s compensation and $8,950 of the original principal was repaid. On April
30, 2004, the promissory note dated October 13, 2003 was cancelled and replaced
by a successor promissory note in the amount of $398,383 representing the unpaid
principal balance of the original note plus the additional accrued compensation.
This note and all deferred salary bore 15% interest compounded annually
(reduced to 8% effective June 1, 2004, as described above). The note and all
of
our other obligations to Mr. Nouri arising out of salary deferrals were
secured by all of our assets , which lien Mr. Nouri shared with Michael Nouri,
Ronna Loprete, Thomas Furr and Eric Nouri to secure the obligations to them
described herein. The security interest was originally a second lien on all
of
our assets, but with repayment of all amounts owed to the holder of the first
lien, the security interest became a first lien on all of our assets . The
lien was removed when the notes were paid. The notes were due May 31,
2005, but Mr. Nouri entered into a standstill agreement not to demand
payment on the due date to induce holders of outstanding shares of Preferred
Stock to convert to shares of Common Stock in a reorganization. The standstill
agreement, as amended as of December 22, 2004, continued through the earlier
of
June 30, 2006 or the closing after January 1, 2005 of a financing with gross
proceeds to us of $2,000,000 or more. After we raised $2,500,000 from a sale
of
securities to a foreign investor in February 2005, we paid in full the $398,383
of deferred compensation and accrued interest and cancelled the related
promissory notes.
Thomas
Furr.
From 2001 until September 2003, we deferred salary and commission payments
to
Thomas Furr totaling $117,810, which were due to him under his employment
agreement dated September 15, 2001, which called for a base salary of $70,000
per year, plus 5% sales commissions. Deferrals earned interest at a rate of
15%
compounded annually. In October 2003, Mr. Furr agreed to continue to defer
all
commissions per month for salary or commissions that accrue after October 1,
2003. On October 15, 2003, we entered into an agreement with Mr. Furr whereby
all the loans and salary or commission deferrals through October 1, 2003 were
evidenced by a promissory note in the principal amount of $114,190 for deferrals
of salary that accrued prior to October 1, 2003. During the fourth quarter
of
2003 and the first quarter of 2004, we deferred an additional $2,318 of Mr.
Furr’s compensation. On April 30, 2004, the promissory note dated October 13,
2003 was cancelled and replaced by a successor promissory note in the amount
of
$116,508 representing the unpaid principal balance of the original note plus
the
additional accrued compensation. The note, plus $1,302 of compensation
subsequently deferred during 2004, and all deferred commissions bore 15%
interest compounded annually (reduced to 8% effective June 1, 2004 as described
above). The note and all of our other obligations to Mr. Furr arising out of
salary or commission deferrals were secured by all of our assets , which lien
Mr. Furr shared with Michael Nouri, Henry Nouri, Ronna Loprete and Eric Nouri
to
secure the obligations to them described herein. The security interest was
originally a second lien on all of our assets, but with repayment of all amounts
owed to the holder of the
10
first
lien, the security interest became a first lien on all of our assets. The
lien was removed when the notes were paid. The note was due May 31,
2005, but Mr. Furr has entered into a standstill agreement not to demand payment
on the due date to induce holders of outstanding shares of Preferred Stock
to
convert to shares of Common Stock in a reorganization. The standstill agreement,
as amended as of December 22, 2004, continued through the earlier of June 30,
2006 or the closing after January 1, 2005 by Smart Online of a financing with
gross proceeds to us of $2,000,000 or more. After we raised $2,500,000 from
a
sale of securities to a foreign investor in February 2005, we paid in full
the
$92,500 of deferred compensation and accrued interest and cancelled the related
promissory notes.
Ronna
Loprete.
From 2001 until September 2003, we deferred salary payments to Ms. Loprete
totaling $92,500, which were due to her under her employment agreement dated
June 29, 1999, which called for a base salary of $80,000 per year. In October
2003, Ms. Loprete agreed to continue to defer $2,500 of salary per month for
salary that accrued after October 1, 2003. Deferrals earned interest at a rate
of 15% compounded annually. On October 15, 2003, we entered into an agreement
with Ms. Loprete whereby all salary deferrals through October 1, 2003 were
evidenced by a promissory note in the principal amount of $92,500 for deferrals
of salary that accrued prior to October 1, 2003. During the fourth quarter
of
2003 and the first quarter of 2004, we deferred an additional $625 of Ms.
Loprete’s compensation. On April 30, 2004, the promissory note dated October 15,
2003 was cancelled and replaced by a successor promissory note in the amount
of
$92,500 representing the unpaid principal balance of the original note plus
the
additional accrued compensation. This note and all deferred salary bore 15%
interest compounded annually (reduced to 8% effective June 1, 2004 as described
above). The note and all of our other obligations to Ms. Loprete arising out
of
salary deferrals were secured by all of our assets , which lien Ms. Loprete
shared with Michael Nouri, Henry Nouri, Thomas Furr and Eric Nouri to secure
the
obligations to them described herein. The security interest was originally
a
second lien on all of our assets, but with repayment of all amounts owed to
the
holder of the first lien, the security interest became a first lien on all
of our assets. The lien was removed when the notes were paid. The
note was due May 31, 2005, but Ms. Loprete entered into a standstill
agreement not to demand payment to induce holders of outstanding shares of
Preferred Stock to convert to shares of Common Stock in a reorganization. The
standstill agreement, as amended as of December 22, 2004, continued through
the
earlier of June 30, 2006 or the closing after January 1, 2005 by us of a
financing with gross proceeds to us of $2,000,000 or more. After we raised
$2,500,000 from a sale of securities to a foreign investor in February 2005,
we
paid in full the $117,800 of deferred compensation and accrued interest and
cancelled the related promissory notes.
Eric
Nouri.
From 2002 until September 2003, we deferred salary payments to Eric Nouri
totaling $44,417, which were due to him under his employment agreement dated
April 1, 2002 which called for a base salary of $60,000 per year. Deferrals
earned interest at a rate of 15% compounded annually. Eric Nouri is the brother
of officers and directors of Smart Online, Michael Nouri and Henry Nouri. In
October 2003, Mr. Nouri agreed to continue to defer $2,500 of salary per month
for salary that accrued after October 1, 2003. On October 13, 2003, we entered
into an agreement with Mr. Nouri whereby all salary deferrals through October
1,
2003 were evidenced by a promissory note in the principal amount of $54,925
for
deferrals of salary that accrued prior to October 1, 2003. During the fourth
quarter of 2003 and the first quarter of 2004, we deferred an additional $9,000
of Mr. Nouri’s compensation and $16,185 of principal was paid. On April 30,
2004, the promissory note dated October 13, 2003 was cancelled and replaced
by a
successor promissory note in the amount of $47,740 representing the unpaid
principal balance of the original note plus the additional accrued compensation.
Subsequently during 2004, we deferred an additional $3,323 of Mr. Nouri’s
compensation. This note bore 15% interest compounded annually (reduced to
8% effective June 1, 2004 as described above). The note and all of our other
obligations to Mr. Nouri arising out of salary deferrals were secured by
all of our assets , which lien Mr. Nouri shared with Michael Nouri, Henry Nouri,
Ronna Loprete and Thomas Furr to secure the obligations to them described
herein. The security interest was originally a second lien on all of our assets,
but with repayment of all amounts owed to the holder of the first lien, the
security interest became a first lien on all of our assets. The lien
was removed when the notes were paid. The note was due May 31, 2005,
but Mr. Nouri entered into a standstill agreement not to demand payment on
the due date to induce holders of outstanding shares of Preferred Stock to
convert to shares of Common Stock in a reorganization. The standstill agreement,
as amended as of December 22, 2004, continues through the earlier of June 30,
2006 or the closing after January 1, 2005 by Smart Online of a financing with
gross proceeds to us of $2,000,000 or more. After we raised $2,500,000 from
a
sale of securities to a foreign investor in February 2005, we paid in full
the
$44,417 of deferred compensation and accrued interest and cancelled the related
promissory notes.
11
Tamir
Sagie.
Tamir Sagie was a consultant with and owned Nen, Inc. Nen, Inc. was a consultant
to us and was paid at an annual rate of $70,000 per year in addition to Mr.
Tagie’s salary of $30,000. Nen, Inc. also had an equity interest in Smart IL,
Ltd., from April 2002 to July 2003. Smart IL became an integration partner
with
us in August 2002 through the efforts of Nen, Inc. Mr. Sagie ended his
consulting arrangement with Smart IL in August 2003 when he became an employee
and officer of us. Mr. Sagie’s shares in Smart IL were transferred back to the
Smart IL at this time. In addition, Mr. Sagie owned 29.5% of Greenleaf Ventures,
Ltd., and as such had a financial interest in the 1,448,618 shares of our Common
Stock owned by Greenleaf Ventures. On January 13, 2005, Mr. Sagie entered into
an agreement with Greenleaf Ventures, Ltd. and Doron Roethler, one of our
stockholders and an affiliate of Greenleaf Ventures, Ltd., that provided for
the
withdrawal of Mr. Sagie from Greenleaf. In exchange for Mr. Sagie’s release of
any interest in Greenleaf and Crystal Management Ltd. (another entity owned
by
Mr. Roethler), Mr. Sagie received 125,000 shares of our Common Stock held by
Greenleaf. He was not an officer or director of Greenleaf Ventures. Mr. Sagie
resigned from Smart Online in the first quarter of 2005 and has no further
affiliation with us.
Certain
Investor Relations Service Provider and Company
Stockholder
In
February 2005, the Company entered into an investment banking agreement with
Berkley Financial Services, Ltd. whereby Berkley served as the Company’s
nonexclusive agent in connection with the negotiation and closing of one or
more
transactions with investors outside the United States. Pursuant to this
agreement, the Company paid Berkley approximately $290,000 in cash in 2005.
The
Company sent a notice of termination of this agreement to Berkley on March
22,
2006. In addition, in October 2005, the Company entered into an investor
relations agreement with Berkley, under which Berkley was paid $250,000 and
issued 625,000 shares of our stock. On August 30, 2006, the Company entered
into
a “Settlement Agreement” with Berkley with regard to its consulting agreement.
Pursuant to the Settlement Agreement, Berkley released any and all claims to
the
625,000 shares of the Common Stock that the Company did not deliver, and
released the Company from any obligation to make any additional payments under
the consulting agreement. The Company agreed Berkley can retain all of the
$250,000 cash fee previously paid, and released Berkley from any obligation
to
provide services pursuant to the terms of the consulting agreement. The Company
believes there may be some relationship between Doron Roethler (a stockholder
who beneficially owns more than 10% of the outstanding shares of our Common
Stock) and Berkley, although the Company is unable to determine the nature
of
the relationship.
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 the Company and Mr. Pouponnot. In addition, the Company
entered into a Subscriber Rights Agreements with Mr. Pouponnot whereby the
Company had an obligation to register the shares sold for resale by the
purchaser by filing a registration statement on or before September 30, 2006.
Because a registration statement was not filed by that date, the Company is
obligated to pay a penalty obtained by multiplying the total purchase price
for
the shares by 0.5% by the number of prorated thirty (30) day periods after
the
target registration date. At the Company sole's discretion, this penalty can
be
paid in the number of shares obtained by dividing the total penalty amount
by
the per share purchase price. Mr. Pouponnot also entered into a Dribble Out
Agreement with the Company pursuant to which he may sell up to twenty-five
percent (25%) of these shares during any rolling thirty (30) day period,
following the effective date of the registration statement.
12
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The
table
below summarizes all compensation awarded to, earned by, or paid to our Chief
Executive Officer and those persons other than the Chief Executive Officer,
who,
in fiscal year 2005, were our four highest-paid executive officers, for all
services rendered in all capacities to us for the calendar years listed below:
|
SUMMARY
COMPENSATION TABLE
|
||||||||||
|
NAME
AND PRINCIPAL POSITION
|
YEAR
|
ANNUAL
COMPENSATION
|
LONG-TERM
COMPENSATION
|
|||||||
|
|
AWARDS
|
ALL
OTHER COMPENSATION
|
||||||||
|
SALARY
|
BONUS
|
OTHER
ANNUAL
COMPEN-
SATION
|
SECURITIES
UNDERLYING
OPTIONS
(#)
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Dennis
Michael Nouri (1)
,
President
and CEO
|
2005
|
$
|
170,000
|
$
|
0
|
$
|
0
|
100,000
|
$
|
0
|
|
|
2004
|
$
|
170,000
|
$
|
0
|
$
|
0
|
0
|
$
|
14,616.70
|
|
|
2003
|
$
|
150,000
|
$
|
0
|
$
|
0
|
250,000
|
$
|
14,684.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Henry
Nouri (2)
,
Executive
Vice President
|
2005
|
$
|
150,000
|
$
|
0
|
$
|
0
|
100,000
|
$
|
0
|
|
|
2004
|
$
|
150,000
|
$
|
0
|
$
|
0
|
0
|
$
|
9,303.00
|
|
|
2003
|
$
|
150,000
|
$
|
0
|
$
|
0
|
250,000
|
$
|
9,636.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ronna
Loprete (4),
Secretary
|
2005
|
$
|
120,000
|
$
|
46,152
|
$
|
0
|
0
|
$
|
0
|
|
|
2004
|
$
|
120,000
|
$
|
0
|
$
|
0
|
75,000
|
$
|
0
|
|
|
2003
|
$
|
120,000
|
$
|
0
|
$
|
0
|
0
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anil
Kamath,
Chief
Technology Officer
|
2005
|
$
|
125,000
|
$
|
85,000
|
$
|
0
|
50,000
|
$
|
0
|
|
|
2004
|
$
|
125,000
|
$
|
0
|
$
|
0
|
75,000
|
$
|
0
|
|
|
2003
|
$
|
100,000
|
$
|
0
|
$
|
0
|
None
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tom
Furr (3),
COO
|
2005
|
$
|
136,800
|
$
|
0
|
$
|
0
|
50,000
|
$
|
0
|
|
|
2004
|
$
|
120,000
|
$
|
0
|
$
|
0
|
75,000
|
$
|
0
|
|
|
2003
|
$
|
120,000
|
$
|
0
|
$
|
0
|
0
|
$
|
0
|
|
Scott
Whitaker, CFO
|
2005
|
$
|
72,500
|
$
|
0
|
$
|
0
|
45,000
|
$
|
0
|
|
2004
|
$
|
45,833
|
$
|
0
|
$
|
0
|
25,000
|
$
|
0
|
|
|
2003
|
$
|
40,000
|
$
|
0
|
$
|
0
|
0
|
$
|
0
|
|
___________
13
|
(1)
|
The
amounts of salary in the table above reflect amounts that accrued
under an
employment agreement. Because Dennis Michael Nouri agreed to allow
us to defer part of his accrued compensation he received only the
following amounts of salary: $113,750 in 2004 and $35,000 in 2003.
These
deferred amounts, plus $55,950 interest, were paid in March 2005.
Refer to
“Certain Relationships and Interested Transactions” for a description of
salary deferrals. “Other Compensation” consists of payments for
health insurance for family members of Mr. Nouri. Until December
2005, the
wife of Mr. Nouri was also an employee of the Company. She received
the
following compensation: $120,000 per year in salary for each of 2003,
2004
and 2005 (including amounts of deferred salary that accrued under
an
employment agreement and was paid with $13,936 in interest in 2005);
and
75,000 options in 2004. Ms. Loprete also received a bonus of $46,152
for
her service to the Company upon her departure.
|
|
(2)
|
The
amounts of salary in the table above reflect amounts that accrued
under an
employment agreement. Because Henry Nouri agreed to allow us to
defer part of his accrued compensation he received only the following
amounts of salary: $102,083 in 2004 and $35,000 in 2003. These
deferred amounts, plus $59,582 interest, were paid in March 2005.
Refer to
“Certain Relationships and Interested Transactions” for a description of
salary deferrals. “Other Compensation” consists of payments for health
insurance for family members of Mr. Nouri.
|
|
(3)
|
The
amounts of salary in the table above reflect amounts that accrued
under an
employment agreement. Because Tom Furr agreed to allow us to defer
part of his accrued compensation he received only the following amounts
of
salary: $68,305 in 2004 and $63,998 in 2003. These deferred amounts,
plus $18,073 interest, were paid in March 2005. Refer to “Certain
Relationships and Interested Transactions” for a description of salary
deferrals.
|
|
(4)
|
Ronna
Loprete agreed to allow us to defer part of her accrued compensation
she
received only the following amounts of salary: $107,500 in 2004,
and
$90,000 in 2003. These deferred amounts, plus $13,936 interest, were paid
in March 2005. Refer to “Certain Relationships and Interested
Transactions” for a description of salary deferrals. Ms. Loprete is the
wife of our Chief Executive Officer, Michael Nouri. She resigned
as
Secretary effective July 22, 2005, and as Vice President and Director
effective September 13, 2005, and was no longer an employee of ours
effective December 31, 2005. She received a bonus of $46,152 for
her
service to the Company upon her
departure.
|
14
Option
Grants During the Fiscal Year Ended December 31, 2005
The
following options to purchase shares of our Common Stock were granted to
executive officers during the year ended December 31, 2005:
|
Potential
Realizable Value
At
Assumed Annual Rates of
Stock
Price Appreciation
For
Option Term
|
|||||||||||||||
|
Named
Executive
Officer
|
Number
of
Securities
Underlying
Options
Granted
|
%
of Total
Options
Granted
To
Employees
in
Fiscal Year
|
Exercise
Price
|
Expiration
Date
(1)
|
5%(2)
|
10%(2)
|
|||||||||
|
Michael
Nouri
|
100,000
|
10%
|
$
|
8.61
|
07/22/15
|
$
|
541,478
|
$
|
1,372,212
|
||||||
|
Henry
Nouri
|
100,000
|
10%
|
$
|
8.61
|
07/22/15
|
$
|
541,478
|
$
|
1,372,212
|
||||||
|
Thomas
Furr
|
50,000
|
5%
|
$
|
8.61
|
07/22/15
|
$
|
270,739
|
$
|
686,106
|
||||||
|
Anil
Kamath
|
50,000
|
5%
|
$
|
8.61
|
07/22/15
|
$
|
270,739
|
$
|
686,106
|
||||||
|
Scott
Whitaker
|
20,000
|
2%
|
$
|
8.61
|
07/22/15
|
$
|
108,296
|
$
|
274,442
|
||||||
|
Scott
Whitaker
|
25,000
|
3%
|
$
|
5.00
|
04/15/15
|
$
|
78,612
|
$
|
199,218
|
||||||
|
(1)
|
The
options listed were granted under our 2004 Equity Compensation Plan.
Each
option expires on the earlier of the expiration date shown or 90
days
after termination of the recipient’s employment, except in cases of death
or disability. The option may be exercised to purchase vested shares
only.
Upon termination of employment, the option is forfeited with respect
to
any shares not then vested, except in cases of death or disability.
In the
event of a change in control, as defined in the option agreements,
the
option becomes fully vested and exercisable.
|
|
(2)
|
In
accordance with SEC rules, these columns show gains that could accrue
for
the respective options, assuming that the market price of our Common
Stock
appreciates from the date of grant over the maximum life of the
option at an annualized rate of 5% and 10%, respectively. If the
stock price does not increase above the exercise price at the time
of
exercise, realized value to the named executives from these options
will
be zero. Rules of the SEC permit us to use 5% and 10% in this
table. There can be no assurance that the price of our stock will
increase and this table does not constitute any prediction of the
future
value of our stock by us.
|
15
Aggregated
Option Exercises in the Fiscal Year ended December 31, 2005 and Option Values
at December 31, 2005
The
following table provides information concerning unexercised options held as
of
December 31, 2005, by each of our executive officers:
|
Number
of Securities
Underlying
Unexercised
Options
at
December 31, 2005
|
Value
of Unexercised
In-the-Money
Options at
December
31, 2005(1)
|
||||||||||||||||||
|
Name
|
Shares
Acquired
Upon
Exercise
|
Value
Realized
|
Exercisable
|
Unexercisable
|
Exercisable
|
Unexercisable
|
|||||||||||||
|
Michael
Nouri
|
0
|
n/a
|
250,000
|
100,000
|
$
|
1,892,500
|
$
|
39,000
|
|||||||||||
|
Henry
Nouri
|
0
|
n/a
|
250,000
|
100,000
|
$
|
1,892,500
|
$
|
39,000
|
|||||||||||
|
Thomas
Furr
|
0
|
n/a
|
75,000
|
50,000
|
$
|
577,500
|
$
|
19,500
|
|||||||||||
|
Anil
Kamath
|
0
|
n/a
|
75,000
|
50,000
|
$
|
577,500
|
$
|
19,500
|
|||||||||||
|
Scott
Whitaker
|
0
|
n/a
|
8,533
|
61,667
|
$
|
46,632
|
$
|
199,469
|
|||||||||||
|
Ronna
Loprete(2)
|
0
|
n/a
|
75,300
|
0
|
$
|
578,700
|
$
|
0
|
|||||||||||
___________
|
(1)
|
|
Based
on the closing price of $9.00 per share for our Common Stock on December
30, 2005, minus the exercise price, multiplied by the number of shares
issued upon the exercise of, or subject to, the option, without taking
into account any taxes that may be payable in connection with the
transaction.
|
|
(2)
|
|
Ronna
Loprete ceased to be an employee of the Company effective December
31,
2005.
|
Employment
Agreements
We
have
the following employment agreements with our named executive officers:
Dennis
Michael Nouri.
Elsewhere in this document, Mr. Nouri is referred to as Michael Nouri, because
he uses his middle name instead of his first name in most business
dealings. Effective April 1, 2004, covering employment commencing as of
June 1, 2004, we 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 that was about to expire. The new agreement had a
termination date of December 31, 2005, but it is 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 has a termination date of December 31, 2007,
which shall be renewed for additional two-year terms unless either party gives
notice of intention not to renew. The
agreement requires us to make a severance payment to Mr. Nouri in an amount
equal to twelve months of base salary, if either we terminate Mr. Nouri’ s
employment without “cause” (as defined in the agreement) or Mr. Nouri terminates
his employment for “good reason” (as defined in the agreement). The agreement
also contains a retention provision designed to provide incentive for Mr. Nouri
to remain employed by us following a “change of control” as defined in the
agreement. Under this retention provision, if Mr. Nouri remains employed by
the
surviving entity for a period of time after the change of control occurs
designated by the Board of Directors of the surviving entity, and either his
employment is terminated by the surviving entity without cause or by Mr. Nouri
for good reason, the surviving entity must pay Mr. Nouri an amount equal to
299%
of his highest annual salary and bonuses during the preceding five years. This
retention payment is in addition to other severance payments described above.
Mr. Nouri’s agreement contains non-competition and non-solicitation provisions.
Refer to “Certain
Relationships and Interested Transactions”
for
a
description of the salary deferral and payments of deferred salary with respect
to Mr. Nouri.
16
Henry
Nouri.
Effective April 1, 2004, covering employment commencing as of June 1, 2004,
we
entered into an employment agreement with Mr. Nouri, which provided for an
initial base salary of $150,000. The agreement replaced an employment agreement
dated July 14, 1999 that was about to expire. The new agreement had a
termination date of December 31, 2005, but it would be 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 has a termination date of December 31, 2007,
which shall be renewed for additional two-year terms unless either party gives
notice of intention not to renew. The
agreement requires us to make a severance payment to Mr. Nouri in an amount
equal to twelve months of base salary, if either we terminate Mr. Nouri’s
employment without “cause” (as defined in the agreement) or Mr. Nouri terminates
his employment for “good reason” (as defined in the agreement). The agreement
also contains a retention provision designed to provide incentive for Mr. Nouri
to remain employed by us following a “change of control” as defined in the
agreement. Under this retention provision, if Mr. Nouri remains employed by
the
surviving entity for a period of time after the change of control occurs
designated by the Board of Directors of the surviving entity, and either his
employment is terminated by the surviving entity without cause or by Mr. Nouri
for good reason, the surviving entity must pay Mr. Nouri an amount equal to
299%
of his highest annual salary and bonuses during the preceding five years. This
retention payment is in addition to other severance payments described above.
Mr. Nouri’s agreement contains non-competition and non-solicitation provisions.
Refer to “Certain
Relationships and Interested Transactions”
for
a
description of the salary deferral and payments of deferred salary with respect
to Mr. Nouri.
Thomas
Furr.
Effective April 1, 2004, covering the employment period commencing on June
1,
2004, we entered into an employment agreement which was amended effective
November 9, 2005. This agreement replaced an earlier agreement dated September
15, 2001 that was about to expire. The agreement provided for an initial base
salary of $70,000, which was increased to $90,000 effective July 1, 2004 and
$136,800 effective November 9, 2006. The
agreement had a termination date of December 31, 2005, but is automatically
extended 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. Since
neither party gave written notice of termination, the agreement was extended
for
an additional year and thus has a termination date of December 31, 2006, which
shall be renewed for additional one-year terms unless either party gives notice
of intention not to renew. The
agreement requires us to make a severance payment to Mr. Furr in an amount
equal
to three months of base salary, if either we terminate Mr. Furr’s employment
without cause (as defined in the agreement) or Mr. Furr terminates his
employment for “good reason” (as defined in the agreement). Mr. Furr’s agreement
contains non-competition and non-solicitation provisions.
17
Joan
A. Keston.
Effective June 1, 2005, covering employment commencing on such date, we entered
into an employment agreement which provided for an initial base salary of
$100,000, which was increased to $125,000 effective August 1, 2005 and to
$150,000 effective October 1, 2005. The agreement had a termination date of
June
30, 2006, but it would have been automatically extended 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. Ms. Keston’s agreement contained non-competition and non-solicitation
provisions. The agreement was accompanied by a grant of incentive stock option
for fifty thousand (50,000) shares of Common Stock at an exercise price of
eight
dollars and sixty-one cents ($8.61) vesting over a five (5) year period in
five
(5) equal installments, commencing one year from the date of the grant. Option
vesting would have been accelerated upon a change of control or corporate
reorganization such that all options would vest immediately. Ms. Keston’s
employment with us ended effective June 1, 2006. Under the terms of her option
agreements, those options expired ninety (90) days after the end of her
employment. Therefore, none of the shares subject to those grants will
vest.
Gary
Mahieu.
Effective October 17, 2005, covering employment commencing on such date, the
Company entered into an employment agreement which provided for an initial
base
salary of $150,000. The agreement has a termination date of October 17, 2007.
Mr. Mahieu’s agreement contains non-competition and non-solicitation provisions.
As consideration for the covenants not compete contained in the agreement,
Mr.
Mahieu is entitled to receive payments totaling $510,000 in equal quarterly
installments commencing January 2, 2006, with the final payment to be made
on
October 1, 2007. Mr. Mahieu does not have any right to receive any stock options
under his agreement.
Nicholas
A. Sinigaglia.
Effective March 21, 2006, covering employment commencing on such date, we
entered into an employment agreement 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 has a termination date
of
March 31, 2007, but it will be automatically extended for additional one-year
terms, unless either party provides the other with written notice of intention
not to renew at least thirty (30) days prior to the end of the term or of any
renewal period. Mr. Sinigaglia’s agreement contains non-competition and
non-solicitation provisions. The agreement was accompanied by a grant of
incentive stock option for fifty thousand (50,000) shares of Common Stock at
an
exercise price of two dollars and fifty cents ($2.50) vesting over a five (5)
year period in five (5) equal installments, commencing one year from the date
of
the grant. Option vesting is accelerated upon a change of control or corporate
reorganization such that all options would vest immediately.
Indemnity
Agreements.
In
addition to those agreements, we have also entered into indemnity agreements
with the following: Michael Nouri, Henry Nouri, Tom Furr, Joan Keston, Scott
Whitaker, and David E.Y. Sarna. These indemnification agreements provide that
the officers and directors will be indemnified, to the fullest extent permitted
under the Company’s Bylaws and Delaware law, for their expenses incurred in
connection with the SEC investigation involving us. Each officer or director
also agreed to repay these amounts to the Company should it ultimately be
determined that such indemnity was not permissible.
The
foregoing option grants are subject to the terms and conditions of the three
plans under which the options were granted. Set forth below is a summary of
the
terms of each of these plans. These are only summaries and do not include all
the provisions of these plans, which can only be understood by reading the
full
plans.
As
of the date of this Compensation Committee Report, the Compensation
Committee has one member, who is “independent” as defined by the Nasdaq
Marketplace Rules. It was comprised of three members, all of whom were
“independent” as of December 31, 2005 prior to the resignation of two
independent Board Members. The Committee operates under a written charter
adopted by the Board of Directors on July 22, 2005. Although the Committee’s
charter requires that the Committee have at least two members, at this time
the
Board of Directors does not have more than one member who can serve on the
Committee because it has not yet determined that more than one member of the
Board qualifies as “independent” as that term is defined by Nasdaq Marketplace
Rules. The Company is in the process of making this determination with regard
to
Mssrs. Elia , Pouponnot and Meese, and actively seeking additional independent
Directors to serve on the Board of Directors and this Committee.
18
Overview
of Compensation Philosophy and Objectives.
The
Compensation Committee is conscious of establishing compensation levels that
will attract and retain managerial talent desired by us, reward employees for
past contributions and motivate managerial efforts consistent with corporate
growth, strategic progress and the creation of stockholder value. Most of our
executives had employment contracts that were entered into prior to the
formation of the Compensation Committee, which contracts provide for a base
salary that can be increased. The Compensation Committee left in place the
compensation packages previously entered into by the Chief Executive Officer,
and in general has relied on recommendations made by the Chief Executive Officer
in awarding compensation packages. Due to the fact that the Company had
immaterial revenues until we acquired two other companies during October 2005,
and has only experienced net losses to date, there have been no increases in
the
base salaries of the Chief Executive Officer and the other named executive
officers during fiscal 2005. The Chief Executive Officer and the named executive
officers were granted stock options in fiscal 2005 as incentive compensation,
which are described in more detail below. Any future compensation packages
will
be reviewed and approved by the Compensation Committee.
We
establish the salaries for our executive officers based on readily available
public information regarding local market compensation levels, and, considering
the fact that we have immaterial revenues and have only experienced net losses
to date, we establish salaries for our executive officers mostly at the low
end
of the market salary ranges. The Human Resources Manager has collected relevant
market information using various websites. We value the contributions of all
employees and reward them through stock option awards to purchase shares of
our
Common Stock. Occasionally, we reward exceptional effort with an incentive
bonus, but this is not the standard practice since a bonus plan has not been
implemented.
Salary.
Factors
considered in determining salary increases for executive officers include:
(i)
length of time the executive has been employed by us and the last review and
salary increase; (ii) the nature, scope and level of the executive’s
responsibilities; (ii) accomplishment of tasks and goals such as the release
of
product, attainment of milestones regarding research and development, and
project completion; (iii) recommendations of the executive’s supervisor; (iv)
past performance when reviewing employment contract renewals; (v) market
analysis; (vi) the attitude toward his or her job and responsibilities, and
work
ethic of the employee; and (vii) the first three months of performance for
new
hires in determining whether to maintain or increase his or her initial salary.
Some of these same factors are considered in determining the salary for new
hires.
Stock
Options.
Factors
considered in determining awards of stock options under our Equity Compensation
Plan include: (i) the scale of awards based on past practices, (ii) our overall
practice regarding different managerial levels; and (iii) the executive’s past
performance and incentives for future performance and goals.
Chief
Executive Officer.
The
Compensation Committee has maintained the salary level of $170,000 for the
Chief
Executive Officer that was established in his contract dated April 1, 2004.
An
award of 100,000 stock options at an exercise price of $8.61 per share was
made
on July 22, 2005, when all other executives and employees were also awarded
stock options. Based on the local market analysis, the salary of the Chief
Executive Officer is in the low range.
During
fiscal 2005, the following events occurred, which the Committee believes are
relevant to considering the compensation of the Chief Executive Officer for
fiscal 2005: (i) we began trading our shares in the public securities market;
(ii) two companies were acquired that resulted in an increase in revenues;
(iii)
substantial strides were made during the fourth quarter of 2005 to integrate
the
operations, development and personnel of the two acquired subsidiaries with
us;
(iv) we launched key elements of its OneBizSM
platform
without significant delay; (v) we acquired, developed and launched the
accounting package on the OneBizSM
platform
which is currently being modified; (vi) we integrated into our
OneBizSM
platform
a simplified version its new CRM/SFA product we acquired in October 2005; (vii)
we launched our new HR product; (viii) we raised approximately $8 million for
working capital in 2005; (ix) the fair market value of our stock rose
progressively higher during 2005; and (x) the change in the number of
subscriptions to our OneBizSM
platform
on our core website.
Goals.
As we
increase our revenues and approach profitability, our goal and objective is
to
review our overall compensation program for fiscal 2005 to determine whether
each compensation element fits into the Company’s overall compensation
objectives.
|
THE
COMPENSATION COMMITTEE
Jeffrey
W. LeRose, Chairman
November
16, 2006
|
Compensation
Committee Interlocks and Insider Participation
On
July 22, 2005 our Board of Directors adopted the Compensation Committee Charter,
pursuant to which the Compensation Committee was comprised of two or more
members of the Board of Directors, each of whom was determined to be
“independent” as defined by Securities and Exchange Commission, stock exchange
and NASDAQ rules. Prior to the establishment of this Committee, all of our
Directors participated in compensation deliberations, including Michael Nouri,
Henry Nouri, Ronna Loprete and Thomas Furr, all of whom were executive officers.
The Compensation Committee’s charter requires the Committee to consult with the
Chief Executive Officer regarding the compensation of all other officers.
19
OWNERSHIP
OF SECURITIES
Principal
Stockholders and Share Ownership by Management
The
following table sets forth certain information regarding beneficial ownership
of
the Company’s Common Stock as of November 28, 2006: (i) by each person who is
known by us to beneficially own more than 5% of our Common Stock; (ii) by each
of our officers and directors; and (iii) by all of our officers and directors
as
a group. Unless otherwise noted, each of the persons listed below is believed
to
hold sole voting and sole investment power with respect to the shares
indicated:
|
Beneficial
Owner
Name
and Address
|
Amount
and
Nature
of
Beneficial
Ownership(1)(2)
|
Percent
of Class
|
|
|
Dennis
Michael Nouri(3)(4)(5)
c/o
Smart Online, Inc.
2530
Meridian Parkway
Durham,
North Carolina 27713
|
3,322,028
|
22
|
%
|
|
Henry
Nouri(3)(5)
c/o
Smart Online, Inc.
2530
Meridian Parkway
Durham,
North Carolina 27713
|
3,111,985
|
20
|
%
|
|
Thomas
Furr(6)
c/o
Smart Online, Inc.
2530
Meridian Parkway
Durham,
North Carolina 27713
|
420,637
|
3
|
%
|
|
Anil
Kamath(7)
c/o
Smart Online, Inc.
2530
Meridian Parkway
Durham,
North Carolina 27713
|
285,000
|
2
|
%
|
|
Atlas
Capital SA(8)
116
Rue du Rhone
CH-1204
Geneva,
Switzerland
|
2,180,750
|
14
|
%
|
|
Doron
Roethler(9)
c/o
Michal Raviv at
Granot,
Strauss, Adar & Co.
28
Bezalel Street
Ramat
Gan 52521, Israel
|
1,754,735
|
11
|
%
|
|
Jeffrey
W. LeRose(10)
c/o
Smart Online, Inc.
2530
Meridian Parkway
Durham,
North Carolina 27713
|
10,000
|
0
|
%
|
|
Gary
Mahieu (11)
c/o
Smart Online, Inc.
2530
Meridian Parkway
Durham,
North Carolina 27713
|
48,127
|
0
|
%
|
|
Nicholas
A. Sinigaglia (12)
c/o
Smart Online, Inc.
2530
Meridian Parkway
Durham,
North Carolina 27713
|
0
|
0
|
%
|
|
Shlomo
Elia
c/o
Smart Online, Inc.
2530
Meridian Parkway
Durham,
North Carolina 27713
|
60,972
|
0
|
%
|
|
Philippe
Pouponnot
c/o
Smart Online, Inc.
2530
Meridian Parkway
Durham,
North Carolina 27713
|
50,000
|
0
|
%
|
|
C.
James Meese, Jr.
c/o
Smart Online, Inc.
2530
Meridian Parkway
Durham,
NC 27713
|
0
|
0
|
%
|
|
All
officers and directors as a group (10 persons)
|
8,402,249
|
55
|
%
|
20
|
(1)
|
All
shares are common stock.
|
|
(2)
|
The
preceding table was prepared based solely upon the information furnished
to us by officers, directors and stockholders as of November 28,
2006 and
from corporate stock transfer ledgers. The number and percentage
of shares
beneficially owned is determined in accordance with Rule 13d-3 of
the
Securities Exchange Act of 1934, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under Rule
13d-3, a beneficial owner of a security includes any person who,
directly
or indirectly, through any contract, arrangement, understanding,
relationship, or otherwise has or shares: (i) voting power, which
includes
the power to vote, or to direct the voting of shares; and (ii) investment
power, which includes the power to dispose or direct the disposition
of
shares. Certain shares may be deemed to be beneficially owned by
more than
one person (e.g., if persons share the power to vote or the power
to
dispose of the shares). In addition, shares are deemed to be beneficially
owned by a person if the person has the right to acquire the shares
(for
example, upon exercise of an option or a warrant) within 60 days
of the
date as of which the information is provided. In computing the percentage
ownership of any person, the number of shares outstanding is deemed
to
include the amount of shares beneficially owned by such person (and
only
such person) by reason of these acquisition rights. As a result,
the
percentage of outstanding shares of any person as shown in this table
does
not necessarily reflect the person's actual ownership or voting power
with
respect to the number of shares of common stock actually outstanding
on
November 28, 2006. As of November 28, 2006, there were 15,388,149
shares
issued and outstanding and our officers and directors beneficially
owned
approximately 870,000 shares which can be acquired upon exercise
of stock
options within sixty (60) days after November 28, 2006, which options
were
treated the same as outstanding shares in calculating the percentage
ownership of our officers and directors.
|
|
(3)
|
Includes
2,841,985 shares owned by American Investment Holding Group, owned
by
Michael and Henry Nouri, and as to which they share the power to
vote and
the power to dispose of such shares.
|
|
(4)
|
Includes
87,043 shares owned by Charter Holding LLC, owned by Michael Nouri,
and
also includes 23,000 shares of csommon stock owned by a trust for
which
Michael Nouri is the trustee and is not a beneficiary. Does not include
265,631 shares owned by Ronna Nouri, wife of Michael Nouri.
|
|
(5)
|
Includes
270,000 shares which can be acquired upon the exercise of options
which
can be exercised at any time within the sixty (60) days after November
28,
2006. Does not include 80,000 shares subject to options which cannot
be
exercised within sixty (60) days after November 28, 2006.
|
|
(6)
|
Includes
85,000 shares which can be acquired upon the exercise of options
which can
be exercised at any time within the sixty (60) days after November
28,
2006. Does not include 40,000 shares subject to options which cannot
be
exercised within sixty (60) days after November 28, 2006.
|
|
(7)
|
Includes
85,000 shares which can be acquired upon exercise of options which
can be
exercised at any time within sixty (60) days after November 28,
2006. Does not include 40,000 shares subject to options which cannot
be exercised within sixty (60) days after November 28, 2006.
|
|
(8)
|
Atlas
Capital, SA had the right to require two other stockholders to purchase
all its Common Stock and warrants under certain circumstances. This
right
was terminated by agreement with Atlas Capital, SA on March 18, 2005.
Refer to “Certain Relationships and Related Transactions” for a
description of this put agreement.
|
|
(9)
|
Includes
(i) 1,323,619 shares owned by Greenleaf Ventures Ltd., a British
Virgin
Islands company, owned by Doron Roethler, (ii) 121,116 shares owned
by
Crystal Management Ltd., a company registered in Anguilla, owned
by Doron
Roethler, and (iii) 310,000 shares of common stock owned directly
by Doron
Roethler.
|
|
(10)
|
Includes
10,000 shares subject to options which can be exercised within sixty
(60)
days after November 28, 2006.
|
|
(11)
|
Does
not include 105,365 shares held by Christine Mahieu, wife of Gary
Maheiu.
|
|
(12)
|
Includes
50,000 shares subject to options which cannot be exercised within
sixty
(60) days after November 28, 2006.
|
21
PROPOSAL
NO. 2 — RATIFICATION OF APPOINTMENT OF
INDEPENDENT
AUDITORS
The
Audit
Committee has appointed Sherb & Co., LLP to audit the consolidated financial
statements of the Company for fiscal 2006. Sherb & Co. 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 & Co. is not
expected to be present at the 2006 Annual Meeting, 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 & Co. is not
ratified by a majority of the shares cast at the 2006 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.
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.
22
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, 2005 for filing with the
Securities and Exchange Commission.
|
THE
AUDIT COMMITTEE
Jeffrey
W. LeRose, Chairman
November
16, 2006
|
As
of the
date of the Audit Committee report set forth above, the Committee only had
one
member. Subsequent to the report, our Board of Directors has appointed an
additional director, Mr. Meese, to serve on and act as Chairman of this
committee, who is “independent” as defined by the Nasdaq Marketplace Rules.
Because of the timing of his appointment to the committee, Mr. Meese’s name does
not appear below the report.
The
Company engaged BDO Seidman LLP (“BDO”) as the Company’s independent registered
public accountants during 2004. During fiscal year 2005, however, the Audit
Committee approved a change in auditors to audit the Company’s financial
statements. The Audit Committee dismissed BDO effective November 15, 2005.
The
Audit Committee appointed Goldstein Golub Kessler LLP (“GGK”) to serve as the
Company’s independent registered public accountants, effective November 15,
2005. GGK thus replaced BDO. There were no “disagreements” (as such term is
defined in Item 304(a)(1)(iv) of Regulation S-K) with BDO at any time during
the
year ended December 31, 2003 and December 31, 2004 and the period January 1,
2005 through November 15, 2005 regarding any matter of accounting principles
or
practices, financial statement disclosure or auditing scope or procedures that
if not resolved to the satisfaction of BDO would have caused it to make
reference to such disagreements in its reports. In addition, during the same
periods, no “reportable events” (as such term is defined in Item 304(a)(1)(v)(A)
through (D) of Regulation S-K and its related instructions) arose in the context
of Smart Online’s relationship with BDO.
Smart
Online restated the interim financial statements in its Form 10-Q for the
quarter ended June 30, 2005, because in consultation with BDO, Smart Online
determined that Smart Online’s expenses for the second quarter were overstated
by $506,000. The restated financial statements therefore decreased its loss
by
$506,000. See Note 7 of Notes to Financial Statements in the Form 10-Q/A filed
by Smart Online on November 22, 2005. The reports of BDO for each of the fiscal
years ended December 31, 2004 and December 31, 2003 did not contain an adverse
opinion or disclaimer of opinion were not qualified or modified as to audit
scope or accounting principles. However, the report of BDO contained an
explanatory paragraph with respect to uncertainty as to Smart Online’s ability
to continue as a going concern.
During
each of the two most recent fiscal years and the period January 1, 2005 through
November 14, 2005, neither Smart Online nor anyone on its behalf consulted
with
GGK with respect to any accounting or auditing issues involving Smart Online.
In
particular, there was no discussion by Smart Online with GGK regarding the
type
of audit opinion that might be rendered on Smart Online’s financial statements,
the application of accounting principles applied to a specified transaction
or
any matter that was the subject of a disagreement or a “reportable event” as
defined in Item 304(a)(1)(v) of Regulation S-K and its related instructions.
23
During
fiscal year 2006, the Audit Committee approved an additional change in auditors
to audit the Company’s financial statements. GGK resigned as the Company’s
independent accountants, effective March 16, 2006. GGK notified Smart Online
on
March 17, 2006. Due to the short duration of GGK’s retention as Smart Online’s
outside accounting firm, GGK never provided a report on Smart Online’s financial
statements. From the time GGK was engaged as the Company’s independent auditors
on November 15, 2005 to the date of the termination of that relationship on
March 16, 2006, there have been 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 used in
Item 304(a)(1)(v) of Regulation SK).
On
April
3, 2006, the Audit Committee engaged Sherb & Co. (“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).
Independent
Auditor Fee Information
As
noted
above, we engaged BDO as its independent public accountants during 2004. In
November 2005, we engaged GGK. We did incur expenses related to GGK’s work,
although, as noted above, GGK resigned in March 2006 prior to releasing an
audit
opinion. In March 2006, we engaged Sherb as our principal accountant. The
amounts billed under the categories referenced below may contain a combination
of charges from the different firms that served as our independent accountant
during the referenced year.
Audit
Fees.
Aggregate fees billed for professional services rendered for the audit of our
2004 annual financial statements and reviews of financial statements included
in
our 2004 Form 10-Qs and SB-2 Registration statement were $157,983. The audits
for fiscal years 2002 and 2003 were performed during fiscal 2004. The audit
fees
also include review of our SB-2 Registration Statement and subsequent
amendments.
Aggregate
fees billed for professional services rendered for the audit of our 2005 annual
financial statements and reviews of financial statements included in our 2005
Form 10-Qs were $263,046. This amount represents fees incurred for audits of
our
annual statements for 2005, 2004, and 2003. Under the agreements with our
auditors referenced above, we paid a single price for the audits of the
financial statements for the three year period. These fees include the current
independent accountant’s audits of our 2003 and 2004 financial statements and
the review of an S-1 Registration Statement which has not yet been
filed.
Audit-Related
Fees.
In
2005, we incurred fees of approximately $260,000 related to the audits of
Computility, Inc. and iMart Incorporated for the years ended December 31, 2002,
2003 and 2004. Such audits were required for the acquisitions and related Form
8-K filings. Fees related to the 2005 audits of these entities are now part
of
the consolidated audit and included in “Audit Fees” above.
Tax
Fees.
The
principal accountant did not provide professional services related to tax
compliance, tax advice, and tax planning during fiscal years 2005 and
2004.
All
Other Fees.
None.
All
audit
and permissible non-audit services provided by the Company’s independent
auditors, 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 auditors after the creation of the
Company’s Audit Committee were pre-approved by or on behalf of the Company’s
Audit Committee.
24
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, 2006, as described in this proxy statement, the Board
of Directors presently knows of no other business to be conducted at the 2006
Annual Meeting. 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
Securities and Exchange Commission the accompanying proxy cannot be voted for
more than six nominees.
Pursuant
to the rules of the Securities and Exchange Commission, stockholder proposals
submitted for inclusion in the Company’s proxy statement and form of proxy for
the annual meeting to be held in 2007 must be received by the Company not later
than May 1, 2007, and must comply with the Commission’s rules in other
respects.
Other
stockholder proposals to be presented at the annual meeting in 2007, including
director nominations, must comply with the notice requirements of the Company’s
Bylaws and be delivered to the Company not later than May 1, 2007, nor earlier
than April 1, 2007. 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, 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 SaaS specifically,
(b) experience in the areas of accounting and finance, (c) mature business
judgment, (d) the candidate’s management and leadership experience, (e) the
candidate’s ability to manage a crisis, and (f) the candidate’s knowledge of
proper corporate governance.
The
Governance and Nominations 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. 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. The full Board
of Directors will then approve qualified nominees for appointment or election
to
the Board of Directors. The Company has engaged the National Association of
Corporate Directors to assist the Committee in identifying and evaluating
potential candidates.
Messrs.
Furr, LeRose, Meese, Elia, Pouponnot and Nouri were recommended for election
to
the Board of Directors at the 2006 Annual Meeting by the full Board of Directors
upon recommendation of the Governance and Nominations Committee. Mr. Elia was
originally recommended for appointment to the Board of Directors by Atlas
Capital, S.A. and Mr. Pouponnot was originally recommended for appointment
by
The Blueline Fund, L.P. Such recommendations were approved by the Governance
and
Nominations Committee for recommendation to the full Board of Directors and
approved by the full Board of Directors for appointment to the Board. The
Governance and Nominations Committee and the Board subsequently approved their
recommendation to the Company’s stockholders for election. Any stockholder
desiring to present a nomination for consideration by the Governance and
Nominations Committee prior to the 2007 Annual Meeting must do so in accordance
with the Company’s Bylaws. See “2007 Annual Meeting of Stockholders” above.
25
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 which (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 that 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 report on Form 10-K for the fiscal year ended December 31, 2005 is
available on the Company’s website located at www.smartonline.com,
as well
as on the website of the Securities and Exchange Commission at www.sec.gov.
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 Corporate 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
Corporate 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 Corporate Secretary as described above.
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:
November 29, 2006
26
APPENDIX
A
AUDIT
COMMITTEE CHARTER
SMART
ONLINE, INC.
CHARTER
OF THE AUDIT COMMITTEE
OF
THE
BOARD OF DIRECTORS
I. PURPOSE
The
Audit
Committee shall:
|
A.
|
Assist
the Board of Directors in fulfilling its responsibilities with respect
to
its oversight of:
|
| (i) |
The
quality and integrity of the corporation’s financial
statements;
|
|
(ii)
|
The
corporation’s compliance with legal and regulatory
requirements;
|
|
(iii)
|
The
independent auditor’s qualification and independence;
and
|
|
(iv)
|
The
performance of the corporation’s internal audit function and independent
auditors.
|
|
B.
|
Prepare
any reports that the rules of the Securities and Exchange Commission
(“SEC”) require to be included in the corporation’s annual proxy statement
or other documents from time to time required with respect to the
Audit
Committee’s functions.
|
II. STRUCTURE
AND OPERATIONS
|
A.
|
Composition
and Qualifications.
The Committee shall be comprised of all the members of the Board
of
Directors, who have been determined to be “independent” within the meaning
of both Rule 10A-3 promulgated under the Securities Exchange Act
of 1934,
as amended, and the rules of any securities exchange or market place
where
the securities of the corporations are traded, except that if there
are
more than three (3) “independent” members of the Board of Directors, the
members of the Committee shall consist of three (3) members of the
Board
of Directors, all of whom shall be independent as described above.
Each
member of the Committee shall certify to the corporation that they
are
“independent” as described above. No member of the Committee may serve on
the audit committee of more than three reporting companies, including
the
corporation, unless the Board of Directors determines that such
simultaneous service would not impair the ability of such member
to
effectively serve on the Committee, and discloses such determination
on
the corporation’s annual proxy statement. Each member of the Committee
shall have a working knowledge of basic finance and accounting practices
and at least one member shall be a “financial expert” as defined by the
SEC, be “financially sophisticated” as defined by the NASDAQ Marketplace
Rules and have such other qualifications as shall be required by
any
securities exchange or other market on which the corporation’s securities
are traded. No member of the audit committee shall receive compensation
from the corporation other than: (i) director’s fees for service as a
member of the Board of Directors of the corporation or any committee
of
the Board, including reasonable compensation for serving on the Committee
and regular benefits that other directors receive; and (ii) a pension
or
similar compensation for past performance, provided that such compensation
is not conditioned on continued or future service to the corporation.
No
member of the Committee shall be an affiliated person of the corporation
or any subsidiary of the
corporation.
|
A-1
|
B.
|
Appointment
and Removal.
The members of the Committee shall be appointed by the Board of Directors
upon the recommendation of the Corporate Governance and Nominating
Committee of the Board, and shall serve until such member’s successor is
duly elected and qualified or until such member’s earlier resignation or
removal. The members of the Committee may be removed, with or without
cause, by a majority vote of the Board of
Directors.
|
|
C.
|
Chairman.
Unless a Chairman is elected by the full Board of Directors, the
members
of the Committee shall designate a Chairman by the majority vote
of the
full Committee membership. The Chairman shall chair all regular sessions
of the Committee and set agendas for Committee
meetings.
|
|
D.
|
Subcommittees.
In
fulfilling its responsibilities, the Committee shall be entitled
to
delegate any or all of its responsibilities to a subcommittee of
the
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.
|
|
E.
|
Liability
and Duties.
It
is intended that members of the Audit Committee not have any greater
liability or higher standard in the performance of duties in their
service
on the Audit Committee than apply to members of the Board of Directors
who
are not members of the Audit Committee and that the same principles
of
Delaware corporate law shall apply to Audit Committee members as
apply to
members of the Board of Directors who are not members of the Audit
Committee, notwithstanding any financial expertise or experience
any
member of the Audit Committee may have. Nothing in this Charter shall
be
deemed to create any greater liability or higher standards for members
of
the Audit Committee.
|
III. MEETINGS
The
Committee shall meet at least quarterly, or more frequently as circumstances
dictate. The Chairman of the Board of Directors or any member of the Committee
may call meetings of the Committee. As part of its goal to foster open
communication, the Committee shall periodically meet separately with each member
of management, the person in charge of the corporation’s internal auditing
process, and the independent auditors to discuss any matters that the Committee
or any of these groups believe would be appropriate to discuss privately. In
addition, the Committee shall meet with the independent auditors and management
quarterly to review the corporation’s financial statements in a manner
consistent with that outlined in Section IV of this Charter.
IV. RESPONSIBILITIES
AND DUTIES
Outlined
below are certain continuing responsibilities that the Committee is expected to
fulfill in effecting its purpose as stated in Section I of this Charter. This
list of responsibilities is presented for illustrative purposes and is not
intended to be exhaustive. The Committee may conduct additional activities
as
appropriate in light of changing business, legislative, regulatory, legal or
other conditions. The Committee shall also fulfill other responsibilities
delegated to it from time to time by the Board.
The
Committee shall have the authority to retain outside legal, accounting or other
advisors for the purpose of obtaining any advice the Committee deems to be
necessary or appropriate to perform any of its duties, including the authority
to approve the fees payable to such advisors and any other terms of retention.
The corporation shall pay all fees approved by the Committee.
A-2
The
Committee shall have direct responsibility for the appointment, compensation,
retention, termination and oversight of independent auditors. Specifically,
and
without limiting the foregoing, the Committee shall approve the engagement
letter for the independent auditors. The Committee, in discharging its oversight
role, is empowered to study or investigate any matter or concern that the
Committee deems appropriate.
The
Committee shall be given full access to the corporation’s internal auditors,
corporate executives, compliance officer and independent accountants and any
and
all corporate records as necessary to carry out these
responsibilities.
Notwithstanding
the foregoing, the Committee is not responsible for certifying the corporation’s
financial statements or guaranteeing the auditor’s report. The fundamental
responsibility for the corporation’s financial statements and disclosures rests
with management. The
Committee is not required to plan or conduct audits or to determine the
corporation’s financial statements are true and accurate and are in accordance
with generally accepted accounting principles. Management is responsible for
preparing the corporation’s financial statements. The independent auditors are
responsible for auditing financial statements. The Committee is not required
to
conduct investigations, to resolve disagreements between management and the
independent auditor, or to assure compliance with laws and regulation and the
corporation’s internal policies.
A. Documents/Reports
Review
|
(i)
|
Review
with management and the independent auditors prior to public dissemination
the corporation’s annual audited financial statements included in Form
10-K and quarterly financials statements included in Form 10-Q, and
the
corporation’s disclosures under “Management’s Discussion and Analysis of
Financial Conditions and Results of Operations,” and a discussion with the
independent auditors of the matters required to be discussed by any
applicable Statements of Auditing
Standards.
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|
(ii)
|
Review
and discuss with management and the independent auditors the corporation’s
earnings press releases (paying particular attention to the use of
any
“pro forma” or “adjusted” or other non-GAAP information), as well as
financial information and earnings guidance provided to analysts
and
ratings agencies. The Committee’s discussions in this regard may be
general in nature (i.e., discussion of the types of information to
be
disclosed and the type of presentation to be made) and need not take
place
in advance of each earnings release or each instance in which the
corporation may provide earnings
guidance.
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|
(iii)
|
Perform
any functions required to be performed by it or otherwise appropriate
under applicable law, rules or regulations, the corporation’s bylaws and
the resolutions or other directives of the Board of Directors, including
the review of any certifications required to be made by management
in
accordance with applicable law or regulation of the SEC. The Committee
shall also review and approve any sub-certification made by employees
by
the corporation or other procedures used by management to support
any
certifications required to be made by management in accordance with
applicable law or regulation of the SEC to determine the effect of
such
procedures on the personnel of the corporation, recommend changes
to
procedures, and verify that certifications are made as
required.
|
A-3
B. Independent
Auditors
|
(i)
|
Retain
and terminate independent auditors and approve all audit engagement
fees
and terms, including, without limitation, the scope of the
audit.
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(ii)
|
Oversee
the work of any independent auditors employed by the corporation,
including reviewing the planning and staffing of the audit prior
to its
commencement, and facilitating the resolution of any disagreement
between
management and the auditor regarding financial reporting. Not less
often
than once each year, the Committee shall meet with the independent
auditors without management
present.
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(iii)
|
Approve
in advance any significant audit or non-audit engagement or relationship
between the corporation and the independent auditors; provided, however,
that the Committee shall not have any power to approve any services
that
are prohibited by applicable law or regulation from the SEC from
being
provided to the corporation by the independent auditors. Identify
alternative vendors for non-audit services and determine whether
the
interest of the corporation are best served by these non-audit services
being performed by alternative service providers. The Committee may
delegate to one or more of its members the authority to approve in
advance
all significant audit or non-audit services to be provided by the
independent auditors or alternative service providers so long as
such
decision is presented to the full Committee at a later
time.
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(iv)
|
Review,
no less often than annually, the qualifications, performance and
independence of the independent auditors. In conducting this review
and
evaluation, the Committee should: (x) obtain and review a report
by the
corporation’s independent auditor describing the auditor’s independence
and all relationships between the independent auditor and the corporation;
(y) confirm with any independent auditor complies with all applicable
partner rotation requirements under applicable law; and (z) consider
whether the lead auditor or reviewing partner should be rotated more
frequently than required by law;
and
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(v)
|
Ask
the independent auditors whether any person has taken any action
to
fraudulently influence, coerce, manipulate or mislead the independent
auditors for the purpose of making any financial statement materially
misleading.
|
C. Financial
Reporting Process
|
(i)
|
Review
the integrity of the corporation’s financial reporting processes, both
internal and external, in consultation with the independent auditors,
management, and internal auditors. In that connection, the Committee
should obtain and discuss with management and the independent auditor
reports regarding: (i) all critical accounting policies and practices
to
be used by the corporation; (ii) analyses prepared by management
and/or
the independent auditor setting forth significant financial reporting
issues and judgments made in connection with the preparation of the
financial statements, including all alternative treatments of financial
information within GAAP that have been discussed with the corporation’s
management, the ramifications of the use of the alternative disclosures
and treatments, and the treatment preferred by the independent auditor;
(iii) major issues regarding accounting principles and financial
statement
presentations, including any significant changes in the corporation’s
selection or application of accounting principles; (iv) major issues
as to
the adequacy of the corporation’s internal controls and any specific audit
steps adopted in light of any material control deficiencies; (v)
the view
of management and of the independent auditors about the quality,
not just
the acceptability, of accounting principles, the reasonableness of
significant judgments and the clarity of disclosures in financial
statements and Form 10-K and Form 10-Q; and (vi) any other material
written communications between the independent auditor and the
corporation’s management.
|
A-4
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(ii)
|
Review
periodically the effect of regulatory and accounting initiatives
on the
financial statements of the
corporation.
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|
(iii)
|
Review
with the independent auditor: (i) any “management” or “internal control”
letter issued or proposed to be issued to the corporation; (ii) any
audit
problems or other difficulties encountered by the auditor in the
course of
the audit process, including any restrictions on the scope of the
independent auditor’s activities or on access to requested information,
and any significant disagreements with management; and (iii) management’s
response to such matters.
|
| (iv) |
Review
and assess the status of the corporation’s compliance with Section
404 of the Sarbanes-Oxley Act and SEC rules related thereto,
including the
efforts management is making to identify and correct weaknesses
in the
corporation’s
controls.
|
D. Legal
Compliance/General
|
(i)
|
Discuss
with management the corporation’s guidelines and policies with respect to
risk assessment and risk
management.
|
|
(ii)
|
Set
clear hiring policies for employees or former employees of the independent
auditors. At a minimum, these policies should provide that any registered
public accounting firm may not provide audit services to the corporation,
if the chief executive officer, controller, chief financial officer,
chief
accounting officer or any person serving in an equivalent capacity
for the
corporation was employed by the registered public accounting firm
and
participated in the audit of the corporation within one (1) year
of the
initiation of the current audit or such longer period as may time
to time
be imposed by applicable law or any securities exchange or other
marketplace in which the securities of the corporation are then traded.
In
addition, the Committee shall require that management disclose any
intention to hire current or former personnel of the corporation’s current
or former independent auditors.
|
|
(iii)
|
Establish
procedures for: (i) the receipt, retention and treatment of complaints
received by the corporation regarding accounting, internal accounting
controls, or auditing matters; and (ii) the confidential, anonymous
submission by the corporation’s employees of concerns regarding
questionable accounting or auditing
matters.
|
|
(iv)
|
Review
with management the policies and procedures with respect to executive
officers’ expense accounts and perquisites, including, without limitation,
reviewing the expense accounts and travel reimbursements and the
use of
corporate assets of all officers of the corporation and all family
members
of any officers of the corporation.
|
|
(v)
|
Review
and establish procedures for communication with the corporation’s internal
and external legal counsel to facilitate reporting to the Committee
by
legal counsel of any evidence of material violations of securities
laws.
|
|
(vi)
|
Review
and establish policies to prevent the corporation’s personnel from
falsifying or destroying any records to impede any government
investigation.
|
A-5
|
(vii)
|
Establish
policies for the corporation to retain all documents relevant to
any
financial audit for at least five (5) years (or for such longer period
as
may be required by any applicable law or regulation or by any securities
exchange or other market in which the securities of the corporation
are
then traded) and to require the independent auditors to do the
same.
|
E. Reports
|
(i)
|
Prepare
all reports about the Committee required to be included in the
corporation’s proxy statement, pursuant to and in accordance with the
applicable rules and regulations of the SEC or by any securities
exchange
or other market in which the securities of the corporation are then
traded.
|
|
(ii)
|
Cause
the corporation to disclose to the public all approvals by the Committee
for the independent auditors to perform non-audit
work.
|
|
(iii)
|
Report
regularly to the full Board of Directors regarding the work of the
Committee, including with respect to any issues that arise with respect
to
the quality or integrity of the corporation’s financial statements, the
corporation’s compliance with legal and regulatory requirements, and the
performance and independence of the independent auditors and the
performance of the internal audit function. Reports to the Board
of
Directors may take the form of any oral report by the Chairman or
any
other member of the Committee designated to make such
report.
|
|
(iv)
|
Maintain
minutes or other records of meetings and activities of the
Committee.
|
V. ANNUAL
PERFORMANCE EVALUATION
The
Committee shall perform an annual review and evaluation of the performance
of
the Committee and its members, including by reviewing the compliance of the
Committee with this Charter and that the membership of the Committee is
consistent with applicable laws, rules and regulations. In addition, the
Committee shall review and assess, no less often than annually, the adequacy
of
this Charter and shall recommend to the full Board of Directors any changes
to
the Charter. The Committee shall conduct such evaluations and reviews in such
manner as it deems appropriate.
A-6
 |
VOTE
BY INTERNET OR
MAIL
QUICK * * * EASY * * * IMMEDIATE |
 |
|
SMART
ONLINE, INC.
Voting
by Internet or Mail is quick, easy and
immediate. As a
stockholder of Smart Online, Inc., you have the option of voting
your
shares electronically through the Internet or by returning the
proxy card
below. 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 December 10, 2006.
Vote
Your Proxy on the
Internet:
Go
to
www.continentalstock.com.
Have
your proxy card available when you access the
above website. Click on “Proxy Voting Log In” and follow the prompts to
vote your shares.
Vote
Your Proxy by
mail:
If
you are not voting by Internet, mark, sign, and
date your proxy card, then detach it, and return it in the postage-paid
envelope provided as soon as possible.
 FOLD
AND DETACH HERE AND READ THE REVERSE SIDE |
|
|
|
PROXY
|
Please
mark
your votes like this |
 |
|
1.
Election of Directors
|
FOR
ALL
NOMINEES |
WITHHOLD
AUTHORITY FOR ALL NOMINEES |
FOR
ALL EXCEPT
(See instructions below) |
|
NOMINEES:
01
Michael Nouri
02
Tom Furr
03 Jeffrey W. LeRose 04 Shlomo Elia 05 Philippe Pouponnot 06 C. James Meese, Jr. |
 |
|
|
(Instruction:
To withhold authority to vote for any
individual nominee(s), mark “FOR ALL EXCEPT” and strike a line to through that
nominee(s) name in the list above.)
|
|
|
FOR
|
AGAINST
|
ABSTAIN
|
|
2.
Ratification of the appointment of Sherb &
Co., LLP as independent auditors for the fiscal year ending December
31,
2006.
|
|
|
|
|
Any
proxy heretofore given by the undersigned is hereby
revoked.
Please
complete, sign and return this proxy whether or
not you intend to attend the meeting.
|
To
change the address on your account, please check
the box at the right and indicate your new address in the address
space
above. Please note that changes to the registered name(s) on
the account
may not be submitted via this method.
|
|
|
Please
check box if you intend to attend the annual
meeting in person.
|
|
COMPANY
ID:
PROXY
NUMBER:
ACCOUNT
NUMBER:
|
Signature
|
|
Signature
|
|
Date
|
|
,
2006.
|
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 2006 ANNUAL MEETING OF STOCKHOLDERS
The
undersigned hereby appoints Michael Nouri and Tom 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 2006
Annual
Meeting of Stockholders of Smart Online, Inc. to be held at Hilton Hotel–
Raleigh-Durham Airport, 4810 Old Page Road, Research Triangle Park, North
Carolina 27709, on Monday, December 11, 2006, at 9:30 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 of the Company for the fiscal year ending December 31, 2006, and,
in
the discretion of the persons acting pursuant to this proxy, on any other
maters
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 November 29, 2006, receipt of which is hereby
acknowledged.
(Please
sign and date on the reverse side and promptly return in the
enclosed envelope.)