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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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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x
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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)
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Title
of each class of securities to which transaction applies:
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Aggregate
number of securities to which transaction applies:
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Per
unit price or other underlying value of transaction computed pursuant
to
Exchange Act Rule 0-11 (set forth the amount on which the filing
fee is
calculated and state how it was determined):
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(4)
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Proposed
maximum aggregate value of transaction:
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Total
fee paid:
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Fee
paid previously with preliminary materials.
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Check
box if any part of the fee is offset as provided by Exchange Act
Rule
0-11(a)(2) and identify the filing for which the offsetting fee
was paid
previously. Identify the previous filing by registration statement
number,
or the Form or Schedule and the date of its filing.
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(1)
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Amount
Previously Paid:
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(2)
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Form,
Schedule or Registration Statement No.:
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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 JUNE
20, 2007
You
are
cordially invited to attend the Annual Meeting of Stockholders of Smart Online,
Inc., which will be held on Wednesday, June 20, 2007, at 9:30 a.m. local
time,
at the 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 seven directors
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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,
2007
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Stockholders
of record at the close of business on May 1, 2007, are entitled to notice
of and
to vote at the annual meeting and any and all adjournments or postponements
thereof.
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By
Order of the Board of Directors
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| /s/ James W. Gayton | |||
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James
W. Gayton
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Secretary
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Durham,
North Carolina
June
4,
2007
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 2007 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 Wednesday,
June 20, 2007, 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 seven directors; and (2) ratification of the
appointment of Sherb & Co., LLP as the Company’s independent auditors for
the fiscal year ending December 31, 2007.
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, 2007.
The
Company intends to mail its 2007 Annual Report, this proxy statement and
the
accompanying proxy card to stockholders beginning on or about June 8, 2007.
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 May 1, 2007 are entitled
to
vote at the meeting and any adjournments of the meeting. At that time, there
were 17,872,137 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 Tuesday, June 19, 2007 at 7:00 p.m. Eastern
time. If
you vote over the Internet you need not return your proxy
card.
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Voting
by Proxy Card.
You can vote by completing and returning your signed proxy card.
To vote
using your proxy card, please mark, date and sign the card and
return it
by mail in the accompanying postage-paid envelope. You should mail
your
signed proxy card sufficiently in advance for it to be received
by
Tuesday, June 19, 2007.
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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 over the Internet as
described above.
If
you
timely submit your proxy over the Internet or by proxy card as described
above
and have not revoked it, your shares will be voted or withheld from voting
in
accordance with the voting instructions you gave. If you timely submit your
proxy without giving contrary voting instructions, your shares will be voted
“FOR” election of the director nominees listed in this proxy statement, and
“FOR” ratification of the appointment of Sherb & Co., LLP as the
Company’s independent auditors for the fiscal year ending December 31, 2007.
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 seven 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 2007 will be approved if the votes cast for
approval exceed the votes cast against approval.
Abstentions
and broker non-votes will not be counted for purposes of determining whether
these proposals have received sufficient votes for approval.
PROPOSAL
NO.
1 — ELECTION OF DIRECTORS
All seven
of the persons nominated for election to the Board of Directors at the annual
meeting are currently serving as directors of the Company. The Company is
not
aware of any nominee who will be unable or will decline to serve as a director.
If a nominee becomes unable or declines to serve, the accompanying proxy
may be
voted for a substitute nominee, if any, designated by the Board of Directors.
The term of office of each person elected as a director will continue until
the
later of the next annual meeting of stockholders or until such time as his
successor has been duly elected and qualified.
The
following table lists the nominees for election and information about
each.
2
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Name
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Age
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Principal
Occupation and Background
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Dennis
Michael Nouri
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54
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President,
Chief Executive Officer, and Director. 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. He has been an
officer
and director of Smart Online since that time. 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, and marketing
and
publishing. 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. Mr. Nouri is a member of the National Association
of
Corporate Directors (“NACD”).
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Thomas
P. Furr
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40
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Chief
Operating Officer and Director. Mr. Furr is responsible for developing
and
implementing strategies to leverage existing direct and indirect
distribution channels. He became Vice President, Sales of Smart
Online in
2001. He became the Company’s 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’s southeast
direct sales efforts. Previously, from 1996 until 1999 he managed
East
Coast direct sales and channel efforts in Canada and South Africa
for
Information Retrieval Corporation, a leading multi-national back-end
CRM/help desk company. Mr. Furr holds a bachelor’s degree in finance from
East Carolina University.
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Jeffrey
W. LeRose
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62
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Chairman
of the Board and Director. Mr. LeRose was first appointed as a
Director on
September 13, 2005. Mr. LeRose is CEO and President of Research
Triangle
Software, an information technology company that he 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
“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 central North Carolina. Mr. LeRose received
his BA
from New Jersey City University.
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Shlomo
Elia
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64
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Director.
Mr.
Elia has served on the Company’s Board of Directors since November 16,
2006, and was originally recommended for appointment to the Board
by Atlas
Capital, S.A., one of the Company’s stockholders. Mr. Elia is a Director
of 3Pen Ltd. (“3Pen”), a private holding company focusing on business
opportunities in Internet infrastructure and telecommunications.
Prior to
founding 3Pen in 1999, Mr. Elia held several senior positions in
the
Israeli Defense Forces (“I.D.F.”), including the post of the Military
Governor of the West-Bank (1982-1984) and Commander of the Liaison
Unit
for South Lebanon (1984-1985). During his service, among other
activities,
General Elia was engaged for a year as a Research Fellow in the
Institute
of International Strategic Affairs at U.C.L.A. Since his retirement
from
the I.D.F., he is involved in communication projects in Nigeria
and West
Africa, and construction projects in Romania. Among his civilian
activities, Mr. Elia was Chairman of the National Tourist Board
and
currently is Chairman of 3Pen Technologies Ltd.. and co-chairman
of the
Israeli Soldiers Welfare Association. Mr. Elia holds a B.A. degree
in
Modern History of the Middle-East from Tel Aviv University.
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3
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Philippe
Pouponnot
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37
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Director.
Mr. Pouponnot has served on the Company’s Board of Directors since
November 16, 2006, and was originally recommended for appointment
to the
Board by the Blueline Fund, one of the Company’s stockholders. Mr.
Pouponnot is a Director of Azur Management SAL (“Azur”) a business engaged
in the study and management of assets and companies. Mr. Pouponnot
has
been a director of Azur since its founding in 1999. In his position
with
Azur, he has gained international experience working with banks
and
brokers in all phases of investment management, including administrative,
investment and commercial transactions. He also serves as an asset
and
investment manager for companies and high net worth individuals.
Mr.
Pouponnot has also worked closely with companies in a variety of
sectors
in matters ranging from formation to reorganization to
liquidation.
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C.
James Meese, Jr.
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65
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Director.
Mr. Meese has served on the Company’s Board of Directors since November
16, 2006. Mr. Meese is President and founder of Business Development
Associates, Inc. (“BDA”) a strategic advisory firm. Since
1989, BDA has provided advice and assistance to both middle market
and
emerging companies on issues of company valuations, acquisitions
and
divestitures, market development, corporate governance, capital
acquisition, strategic planning, exit strategies and organizational
structuring. Prior to 1989, Mr. Meese spent approximately 20 years
in
various senior corporate marketing, business development and finance
positions. Sixteen of those years were spent with West Pharmaceutical
Services Inc. (“West”). He was a member of the company’s Top Management
Committee during his last four years with West. Mr. Meese is also
a
director of Digital Recorders, Inc. (NASDAQ:TBUS) (“DRI”), The
Altoona Railroaders Memorial Museum, and The Raleigh Rescue Mission
and
its Foundation. He is a former Chair and current member of the
DRI Audit
Committee, chairs the Railroaders Museum Board, is president of
the
Raleigh Rescue Mission Board, and serves on a variety of committees
in his
directorships. He is a member of the NACD and is designated as
the
Company’s Audit Committee Financial Expert. Mr. Meese received a
B.A. degree in Economics from the University of Pennsylvania and
an M.B.A.
from Temple University.
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David
E. Colburn
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60
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Director.
Mr. Colburn was appointed to the Company’s Board of Directors on May 31,
2007. He served as President, Global Manufacturing Industry Practice,
Electronic Data Systems (“EDS”), a provider of business and technology
solutions, from 2004-2006. Mr. Colburn has been responsible for
developing
EDS's global manufacturing industry business and sales strategy
for its
automotive, industrial manufacturing, high tech and aerospace &
defense Segments. Mr. Colburn has previously served as EDS's Area
Director, Manufacturing - Automotive (2003 - 2004); Vice President
of the
Global Industry Group (2002 - 2003); and Vice President of Global
Industrial Manufacturing within the Global Industry Group (2001
- 2002).
In addition, Mr. Colburn has had a career where he has had
responsibilities as President of four different corporations in
the
Manufacturing and Industrial segments. Mr. Colburn has served as
chairman
and on the boards of directors of several automotive industry
associations. Mr. Colburn received a B.A. in Liberal Arts from
Robert
Wesleyan College, and previously served on that institution's Board
of
Trustees. He has enrolled in continuing education programs at,
among
others, the University of Michigan and the University of
Pennsylvania.
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4
The
Board of Directors recommends stockholders
vote
FOR election of the nominees named above.
The
names
of the Company’s executive officers are listed below. The Company’s executive
officers are appointed by its Board of Directors to hold office until their
successors are appointed.
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Name
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Age
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Position
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Michael
Nouri(1)(2)
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54
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President, Chief Executive Officer, and Director | |||||
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Henry
Nouri(2)
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51
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Executive Vice President | |||||
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Thomas
Furr
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40
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Chief Operating Officer, Director | |||||
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Anil
Kamath
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40
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Chief Technology Officer | |||||
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Nicholas
A. Sinigaglia
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38
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Chief Financial Officer and Principal Accounting Officer | |||||
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Gary
Mahieu
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39
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Chief Operating Officer and Vice President of Smart Commerce, Inc., a wholly owned subsidiary | |||||
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Mike
Stuart
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38
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Vice President - Sales | |||||
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Brian
Donaghy
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39
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Vice President - Product Strategy | |||||
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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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Henry
Nouri, Executive Vice President. Mr.
Nouri
co-founded Smart Online in 1993 and has been the Company’s Vice President since
that time. Currently, he manages the Company’s 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
for
the effective delivery of that information to the business user. In 1978,
Mr.
Nouri received a B.S. in Civil Engineering Technology from Florida International
University.
Anil
Kamath, Chief Technology Officer. Mr.
Kamath joined Smart Online as Director of Database Implementation in July
1999
and became Vice President, Technology in 2000; he became the Company’s Chief
Technology Officer in November 2005. Mr. Kamath is responsible for the
architecture of the Company’s web-native Software-as-a-Service platform,
supervises the development team, and provides architectural design direction
for
new software and hardware implementations. Before joining Smart Online he
was
the senior database architect for A4
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.
5
Nicholas
A. Sinigaglia, Chief Financial Officer.
Mr.
Sinigaglia joined the Company as its Controller in February 2006, and was
appointed to be the Company’s Chief Financial Officer in March 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
licensed certified public accountant in New York and North
Carolina.
Gary
Mahieu, Chief Operating Officer and Vice President of Smart Commerce, Inc.,
a
wholly owned subsidiary.
Mr.
Mahieu is responsible for the operations of the Company’s wholly owned
subsidiary, Smart Commerce, serving as its Chief Operating Officer and
Vice-President since the Company acquired iMart Incorporated (“iMart”) in
October of 2005. Mr. Mahieu founded and served as President and Chief Operating
Officer of iMart 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.
Mike
Stuart, Vice President of Sales.
Mr.
Stuart is responsible for sales and marketing. He joined Smart Online in
October
2005 as Director of CRM and was promoted to Vice President of Sales and
Marketing in January 2007. Mr. Stuart was the co-founder of Computility,
Inc.
(“Computility”) a leader in subscription computing and Software-as-a-Service
applications to member based organizations. Mr. Stuart served as Chief Executive
Officer of Computility until the Company purchased its assets in 2005. Mr.
Stuart has an extensive background in founding technology start-ups. He received
his BA from Baptist Bible College in 1992.
Brian
Donaghy, Vice President of Product Strategy.
Mr.
Donaghy is responsible for market focused product and strategy development.
He
joined Smart Online in October 2005 as Director of CRM Technology and was
promoted to Vice President of Product Strategy in January 2007. Mr. Donaghy
was
the co-founder of Computility, a leader in subscription computing and
Software-as-a-Service applications to member based organizations. Mr. Donaghy
served as Chief Technology Officer of Computility until the Company purchased
its assets in 2005. Mr. Donaghy has an extensive background in founding
technology start-ups. He is also a committed philanthropist, currently serving
on the United Way Board of Directors.
The
authorized size of the Board of Directors was increased to nine members,
with
the current number of directors set at seven, in 2007 by Board action amending
the Company’s Bylaws. Seven persons have been nominated for election at the
annual meeting. Under the rules of the Securities and Exchange Commission
(the
“SEC”), the accompanying proxy cannot be voted for more than seven
nominees.
The
Company is not required to comply with the listing requirements of The Nasdaq
Stock Market (“Nasdaq”) since its securities are not listed on Nasdaq. Nasdaq
listing requirements mandate that a majority of the members of a listed
company’s board of directors be comprised of “independent” directors as defined
under Nasdaq Marketplace Rules. Although not currently required, the Board
has
determined that four of the present directors — Messrs. LeRose, Meese,
Pouponnot, and Colburn — are each an “independent” director within the meaning
of Nasdaq Marketplace Rules. All four of these directors are standing for
election.
In
2006,
two directors resigned from the Company’s Board of Directors. On March 5, 2006,
Frank Coll resigned, and on June 23, 2006, David E.Y. Sarna resigned. The
Board
had determined that both Mr. Coll and Mr. Sarna were “independent” directors
within the meaning of Nasdaq Marketplace Rules.
6
The
Board
of Directors held 12 meetings during the fiscal year ended December 31, 2006.
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
2006 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. Each incumbent director attended the annual meeting of
stockholders in 2006.
Standing
Committees
The
Company’s Board of Directors has three standing committees: the Audit Committee,
the Compensation Committee and the Corporate Governance and Nominating
Committee. Copies of the charters of these committees, as they may be amended
from time to time, are available on our website at www.smartonline.com
or free
of charge at 2530 Meridian Parkway, 2nd Floor, Durham, North Carolina 27713.
Audit
Committee.
The
Audit Committee is composed of Mr. LeRose, Mr. Colburn and Mr. Meese. Mr.
Meese
serves as chairman of the Committee. The Company’s Board of Directors, in its
business judgment, has made an affirmative determination that all three meet
the
definition of “independent” director as that term is defined by Nasdaq
Marketplace Rules and SEC rules, and all three meet the special independence
requirements applicable to audit committee members. In addition, all three
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 meets the definition of “audit committee financial
expert” as that term is defined in Regulation S-K.
Philippe
Pouponnot served on the Audit Committee until May 31, 2007. Although the
Company’s Board of Directors determined that Mr. Pouponnot is an “independent”
director as defined under Nasdaq Marketplace Rules, it also determined that
he
does not meet the additional requirements of independence applicable to audit
committee members of a listed issuer under Rule 10A-3 of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”) due to his relationship with the
Blueline Fund, one of the Company’s stockholders. The Board of Directors
nevertheless appointed Mr. Pouponnot to the Audit Committee because the Board
determined that it was in the Company’s best interest to have an Audit Committee
composed of three directors and to utilize Mr. Pouponnot’s significant financial
experience through service on the Audit Committee. In addition, the Company’s
securities are quoted on the Over-the-Counter Bulletin Board and are not
listed
on a national securities exchange. Therefore, neither the SEC nor the Nasdaq
Marketplace Rules regarding independence are applicable to the Company’s Board
of Directors. Mr. Colburn was appointed to the Audit Committee on May 31,
2007
to replace Mr. Pouponnot.
As
current members of the Audit Committee, Mr. LeRose, Mr. Colburn and Mr. Meese
receive directly or have access to extensive information from reviews by
the
Company’s independent accountant. The Board of Directors believes that all three
of these persons have sufficient knowledge and experience in financial matters
to effectively perform their duties.
The
Audit
Committee was established by the Board of Directors for the purpose of
overseeing (1) the quality and integrity of the Company’s financial statements,
(2) compliance with legal and regulatory requirements, (3) independent auditor’s
qualifications and independence, (4) the performance of its internal audit
function, and (5) the independent auditors and the preparation of reports
required to be included in the Company’s annual proxy statement. The Audit
Committee met seven times during 2006.
Compensation
Committee. The
Compensation Committee is composed of Mr. Pouponnot, Mr. Meese and Mr. LeRose.
Mr. LeRose serves as chairman of the Committee.
The
Compensation Committee was established by the Company’s Board of Directors for
the purpose of assisting it in discharging its duties with respect to: (1)
the
formulation, implementation, review and modification of the compensation
of the
Company’s officers and directors and (2) the preparation of the annual report on
executive compensation for inclusion in the Company’s annual proxy statement.
The Compensation Committee met three times during 2006.
7
Corporate
Governance and Nominating Committee. The
Corporate Governance and Nominating Committee is composed of Mr. Pouponnot,
Mr.
Meese and Mr. LeRose. Mr. LeRose serves as chairman of the Committee.
The
Corporate Governance and Nominating Committee was established by the Board
of
Directors for the purpose of assisting it in discharging its duties with
respect
to (1) the identification of individuals qualified to become directors and
the
selection or recommendation of candidates for directorships to be filled
by the
Board of Directors or the stockholders; and (2) the development, maintenance
and
recommendation of a set of corporate governance principles applicable to
the
Company, and the periodic review of such principles. The Corporate Governance
and Nominating Committee met one time during 2006.
Compensation
Committee Interlocks and Insider Participation
During
fiscal 2006, the following current and former members of the Company’s Board of
Directors also served on the Compensation Committee: Jeffrey W. LeRose, Frank
Coll, David E.Y. Sarna, C. James Meese, Jr., and Philippe Pouponnot. None
of the
persons that served on the Compensation Committee during 2006 were current
or
former officers or employees of the Company, or had any relationship requiring
disclosure pursuant to Item 404 of Regulation S-K. During fiscal 2006, no
interlocking relationships existed between the Company’s Board of Directors or
Compensation Committee and the board of directors or compensation committee
of
any other company.
The
following table summarizes the compensation paid to non-employee directors
for
the fiscal year ended December 31, 2006:
2006
Director Compensation
|
Name
|
Fees
Earned or
Paid
in Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
All
Other
Compensation
($)
|
Total
($)
|
|||||||||||
|
Frank
Coll(1)
|
$
|
1,750
|
—
|
$
|
9,103
|
—
|
$
|
10,853
|
||||||||
|
David
E.Y. Sarna(2)
|
$
|
13,250
|
—
|
$
|
29,588
|
—
|
$
|
42,838
|
||||||||
|
Jeffrey
W. LeRose
|
$
|
29,250
|
—
|
$
|
26,927(3)
|
|
—
|
$
|
56,177
|
|||||||
|
Shlomo
Elia(4)
|
—
|
—
|
—
|
—
|
—
|
|||||||||||
|
Philippe
Pouponnot(4)
|
—
|
—
|
—
|
—
|
—
|
|||||||||||
|
C.
James Meese, Jr.
|
$
|
3,000(5)
|
|
—
|
—
|
—
|
$
|
3,000
|
||||||||
|
(1)
|
Resigned
as a director on March 5, 2006.
|
|
(2)
|
Resigned
as a director on June 23, 2006.
|
|
(3)
|
Includes
a stock option award to purchase 10,000 shares of the Company’s common
stock that is fully vested and exercisable as of December 31, 2006.
See
Note 2, “Summary of Significant Accounting Policies,” to the Company’s
consolidated financial statements in its Annual Report on Form
10-K filed
with the SEC on March 30, 2007 for a discussion of the assumptions
made in
the valuation of stock options.
|
|
(4)
|
Although
these directors qualify for payment under the Company’s Board Compensation
Policy, as of the end of the Company’s last fiscal year, they have waived
the receipt of any compensation.
|
|
(5)
|
In
February 2007, the Company’s Board of Directors amended the Company’s
Board Compensation policy. This amendment resulted in a retroactive
increase in cash compensation from $2,000 per month to $2,500 per
month
for Mr. Meese. This increase was made to reflect his additional
duties as
Chairman of the Company’s Audit Committee. Additional amounts payable as a
result of this retroactive increase were paid in February
2007.
|
8
In
the
first quarter of fiscal 2007, Jeffrey W. LeRose was granted a restricted
stock
award of 15,000 shares of the Company’s common stock. The restriction on these
shares lapses in equal installments quarterly for the year following the
award
if he is a member of the Board of Directors on such date.
In
the
second quarter of fiscal 2007, C. James Meese, Jr. entered into an option
agreement for the purchase of up to 20,000 shares of the Company’s common stock.
This option will vest in quarterly increments over the year following Mr.
Meese’s appointment to the Board in November 2006. The exercise price for these
options was set as the second trading day following the filing of the Company’s
Annual Report on Form 10-K for the year ending December 31, 2006. That document
was filed with the SEC on March 30, 2007. Also
in
the second quarter of fiscal 2007, David E. Colburn was granted a restricted
stock award of 10,000 shares of the Company’s common stock. The restriction on
these shares lapses in equal installments quarterly for the year following
the
award if he is a member of the Board of Directors on such date.
During
2006, the Company had in place a written compensation policy covering
compensation to its directors. Under this policy, directors who also served
as
employees were not eligible to receive any compensation. Over the course
of the
year, this policy was amended.
Under
the
policy in effect from January 1, 2006 through September 30, 2006, each
non-management member of the Board was entitled to a retainer fee of $5,000
and
an initial grant of 10,000 non-qualified stock options, having an exercise
price
equal to the fair market value of the Company’s stock on the date of the grant
upon initial election to the Board. These options vested quarterly over a
year’s
time, provided the optionee remained a member of the Board of Directors.
In
addition, at the time of the annual meeting of stockholders, each non-management
member of the Board who was re-elected to the Board (and who had been serving
on
the Board for at least six months prior to the date of the annual meeting)
was
to be granted an additional 10,000 non-statutory stock options, having an
exercise price equal to the fair market value of the Company’s stock on the date
of the grant. These options vested quarterly over a year’s time, provided the
optionee remained a member of the Board of Directors, and would accelerate
in
the event of a change in control. Non-management directors were also entitled
to
a meeting fee of $1,000 per meeting, and an additional meeting fee of $250
per
committee meeting.
The
Chairman of the Audit Committee was entitled to a retainer fee of $5,000
upon
initial election to the post of Chairman of the Audit Committee and an initial
grant of 24,000 non-qualified stock options, having an exercise price equal
to
the fair market value of the Company’s stock on the date of the grant. These
options were under the same vesting and subsequent award terms as those
described above for other non-management directors in the preceding paragraph.
The Audit Committee Chair was also entitled to a meeting fee of $2,000 per
each
meeting of the full Board of Directors or the Audit Committee, and $250 for
each
meeting of other Board committees of which such person is a member.
Effective
August 1, 2006 until November 17, 2006, this policy was revised to provide
that
non-management directors received a fee of $1,500 per month for their services,
while a non-management Chairman of the Board was to receive $4,000 per month
for
his or her services. In addition, upon appointment, each non-management director
was entitled to a grant of either an option for 20,000 shares of the Company’s
common stock, or 10,000 restricted shares of its common stock; and the Chairman
of the Board of Directors was entitled to a grant of either an option for
30,000
shares of the Company’s common stock, or 15,000 restricted shares of its common
stock.
At
the
time of this change, the Company only had one non-management member on the
Board
of Directors. Following the resignation of its President and Chief Executive
Officer as Chairman of the Board, the non-management member of the Board
was
elected to that position, and also served as the sole member of the Audit,
Compensation, and Corporate Governance and Nominating Committees. In light
of
this increase in responsibilities and demands on the sole non-management
director’s time, his compensation was increased as noted above.
9
From
November 17, 2006 through the end of the year, the policy was revised to
provide
that, in addition to the compensation described in the preceding paragraph,
the
Chairman of the Audit Committee was entitled to a fee of $2,000 per month
in
place of the fee per meeting described above. All other terms of the policy
remained in effect.
This
latter amendment to the compensation policy was made in conjunction with
the
appointment of three non-management members to the Company’s Board. One of these
newly appointed members was also elected to be Chairman of the Audit Committee
and determined to be an “audit committee financial expert” under SEC rules. In
light of the increased responsibilities of this position and being appointed
to
such position near the end of the Company’s fiscal year, it was determined that
the Chair of the Audit Committee should be entitled to compensation above
that
provided to other non-management members of the Board.
Subsequent
to the end of the fiscal year, this policy was amended again. Under the revised
plan, a non-management member of our Board is entitled to a fee of $1,500
per
month, plus $250 per month for each committee on which the member serves.
If the
director serves as the Chairman of the Audit Committee, the $1,500 is increased
to $2,000, but the director does not receive the $250 per month for serving
on
the Audit Committee. There were no changes in either the equity compensation
or
the compensation paid to the Chairman of the Board. The increase was made
to
reflect the additional work required as a member of a committee of the Board
of
Directors.
Each
non-management director is eligible for expense reimbursement for reasonable
travel and lodging expenses incurred in connection with his or her attendance
at
Board and committee meetings.
User
Advisory Board
The
Company organized a User Advisory Board, consisting of up to 10 professionals
representing expertise in a broad range of business areas to assist the
Company’s 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 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 the Board of Directors. 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 shares 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 User Advisory Board held one meeting during 2006.
Certain
Transactions
and Legal Proceedings
None
of
the Company’s directors, officers, affiliates, or holders of five percent (5%)
of its 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. In addition,
except
as
disclosed below, none of the directors or executive officers has, during
the
past five years:
|
(a)
|
|
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;
|
|
(b)
|
|
Been
convicted in a criminal proceeding or a subject of a pending criminal
proceeding;
|
|
(c)
|
|
Been
the subject of any order, judgment, or decree, not subsequently
reversed,
suspended or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining, barring, suspending or otherwise limiting
his
involvement in any type of business, securities, futures, commodities
or
banking activities; and
|
|
(d)
|
|
Been
found by a court of competent jurisdiction (in a civil action),
the SEC 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.
|
10
Michael
Nouri and Henry Nouri were officers and directors of two companies in Italy
that
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 the Company’s Board of Directors, its executive officers and persons
who hold more than 10% of its outstanding common stock are subject to the
reporting requirements of Section 16(a) of the Exchange Act, which requires
them
to file reports with respect to their ownership of the Company’s common stock
and their transactions in such common stock. Based upon the Company’s review of
the Section 16(a) reports in its records for 2006 fiscal year transactions
in
the common stock and their common stock holdings, the Company believes that,
except as noted below, all reporting requirements under Section 16(a) for
such
fiscal year were met in a timely manner by its directors, executive officers
and
greater than 10% beneficial owners.
Atlas
Capital, S.A. was delinquent in the filing of a Form 4 relating to the purchase
of shares of the Company’s common stock on March 3, 2006. The Form 4 for that
purchase was not filed until March 8, 2006.
Atlas
Capital, S.A. was delinquent in the filing of a Form 4 relating to the purchase
of shares of the Company’s common stock on June 29, 2006. The Form 4 for that
purchase was not filed until July 19, 2006.
Review
and Approval of Related Person Transactions
The
Audit
Committee recently adopted the Policy and Procedures with Respect to Related
Person Transactions, which is implemented through the Audit Committee and
is
designed to regularly monitor the appropriateness of any significant
transactions with related persons. The policy applies to any transaction
required to be disclosed under Item 404(a) of Regulation S-K in which (1)
the
Company a participant, (2) any related person (as defined in Item 404(a)
of
Regulation S-K) has a direct or indirect material interest and (3) the amount
involved exceeds $120,000. The Company’s policy requires notification to the
Chief Financial Officer prior to the consummation of any related person
transaction regardless of whether the related person has a material interest,
describing the related person’s interest in the transaction, the material facts
of the transaction, the benefits to the Company of the transaction, the
availability of other sources of comparable products or services, and an
assessment of whether the transaction is on terms that are comparable to
the
terms available to an unrelated third party or employees generally. The Chief
Financial Officer then evaluates the proposed transaction and, if he determines
that it is a related person transaction, submits the transaction to the Audit
Committee for approval. The Audit Committee considers all of the relevant
facts
and circumstances available to it including (if applicable) but not limited
to:
|
|
·
|
the
benefits to the Company;
|
||||
|
|
·
|
the
impact on a director’s independence in the event the related person is a
director, an immediate family member of a director or an entity
in which a
director is a partner, stockholder or executive
officer;
|
||||
|
|
·
|
the
availability of other sources for comparable products or
services;
|
||||
|
|
·
|
the
terms of the transaction; and
|
||||
|
|
·
|
the
terms available to unrelated third parties or to employees
generally.
|
||||
No
member
of the Audit Committee shall participate in any review, consideration or
approval of any related person transaction with respect to which such member
or
any of his or her immediate family members is the related person. The Audit
Committee approves only those related person transactions that are in, or
are
not inconsistent with, the best interests of the Company and its stockholders,
as the Audit Committee determines in good faith. If the transaction has already
been consummated, the Audit Committee will undergo the same analysis as it
does
with a proposed transaction, and if it determines that the consummated
transaction is a related person transaction, it will evaluate whether the
consummated related person transaction should be ratified, amended, terminated
or rescinded and whether any disciplinary action is appropriate.
11
The
Audit
Committee has reviewed and approved or ratified all related person transactions
that have taken place since the beginning of fiscal 2006.
Certain
Relationships and Related Transactions
Except
as
disclosed below, none of the following persons has, since January 1, 2006,
had
any material interest, direct or indirect, in any transaction with the Company
or in any presently proposed transaction that has or will materially affect
the
Company:
|
·
|
Any
of its directors or executive
officers;
|
|
·
|
Any
person proposed as a nominee for election as a
director;
|
|
·
|
Any
person who beneficially owns, directly or indirectly, shares carrying
more
than 5% of the voting rights attached to the Company’s outstanding shares
of common stock; and
|
|
·
|
Any
immediate family member of any of the foregoing
persons.
|
Non-Compete
Payments Made to Chief Operating Officer of Smart Commerce
In
October 2005, the Company purchased all of the stock of iMart. One of the
named
executive officers, Gary Mahieu, was a founder and shareholder of iMart,
and was
its principal executive officer. Following the purchase of iMart’s stock, Mr.
Mahieu entered into an employment agreement with Smart Commerce, the Company’s
wholly owned subsidiary. Under the terms of that agreement, the Company agreed
to make non-competition payments to Mr. Mahieu of an aggregate of $510,000
to be
made in eight equal quarterly installments of $63,750 through October 1,
2007.
In connection with obtaining a loan from Fifth Third Bank, the payment schedule
was modified to require all outstanding non-compete payments to be made by
February 2007. This amount was paid in full on February 7, 2007, and no
additional non-compete payments are owed to Mr. Mahieu.
Loans
Made by Certain Parties to the Chief Executive Officer
During
2005, the following loans were made by certain investors, consultants and/or
stockholders to the Company’s Chief Executive Officer: (i) $809,736.49 was
borrowed from Leon Sokolic, one of the Company’s stockholders, (ii) $77,971.20
was borrowed from Atlas Capital, S.A. one of the Company’s stockholders, (iii)
$80,000 was borrowed from Pete Coker, a principal of Tryon Capital, which
provided financial consulting services to the Company and received a warrant
and
cash fees, and (iv) $296,589 was borrowed from Berkley Financial Services,
Ltd.
(“Berkley”), which received compensation for services rendered to the Company
for investment banking and investor relations services, including during
the
period in which Berkley was making loans to the Chief Executive Officer
(collectively, the “Lenders”). Under Section 402 of the Sarbanes-Oxley Act of
2002, the Company is prohibited from making personal loans to its directors
and
executive officers, directly and indirectly. The Company believes that the
loans
to the Chief Executive Officer described above are not personal loans made
directly or indirectly by it to the Chief Executive Officer.
On
January 19, 2007, the Company’s Chief Executive Officer entered into Note
Cancellation Agreements with each of the Lenders. Under the terms of these
Note
Cancellation Agreements, the Chief Executive Officer transferred his personally
held shares of the Company’s common stock to the Lenders as consideration for
the cancellation of promissory notes held by the Lenders. Under these
agreements, the Chief Executive Officer transferred a total of 521,699 shares
of
common stock for the cancellation of principal and interest totaling
$1,306,178.66 as of December 31, 2006. The agreed upon per share value ranged
from $1.50 to $4.22 per share.
12
In
connection with the Note Cancellation Agreements, the Company entered into
Registration Rights Agreements with each of the Lenders described in the
preceding paragraphs. Under the terms of these Registration Rights Agreements,
each Lender must be given notice when the Company files a registration statement
under the Securities Act of 1933, as amended. Each Lender is then permitted
to
include its shares received in such registration statement. Under the
Registration Rights Agreements, parties electing to include such shares in
the
registration are to bear their proportionate share of the registration
expenses.
Certain
Investor Relations Service Provider and Company
Stockholder
In
February 2005, the Company entered into an investment banking agreement with
Berkley 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 the Company’s
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 the Company’s 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 Mr. Pouponnot and the Company. The Company entered into
a
Subscriber Rights Agreement with Mr. Pouponnot whereby it is obligated to
register these shares for resale by the purchaser by filing a registration
statement on or before September 30, 2006. If a registration statement is
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 30 day periods after the target registration date. At the Company’s
sole discretion, this penalty can be paid in the number of shares obtained
by
dividing the total penalty amount by the per share purchase price. The
Company filed a registration statement for these shares on April 3, 2007.
In
January 2007, the Company entered into an amendment to the registration rights
agreement with Mr. Pouponnot. Under this amendment, the penalty for late
registration was set at a fixed amount. The Company subsequently issued Mr.
Pouponnot 750 shares of its common stock as payment for this late
registration penalty with an aggregate value of $2,100 based upon a closing
price per share of $2.80 on the Over-the-Counter Bulletin Board on the date
of
issuance.
Mr.
Pouponnot has also entered into a Dribble Out Agreement with the Company
pursuant to which he may sell up to 25% of these shares during any rolling
30
day period, following the effective date of the registration
statement.
At
the
time of the sale to Mr. Pouponnot, he had not been appointed a member of
the
Company’s Board of Directors. Although the Dribble Out Agreement described above
still applies, any disposition of the shares sold to Mr. Pouponnot would
also
have to comply with our Insider Trading Policy.
13
Private
Placement of Common Stock to a Certain Affiliate by Chief Executive
Officer
On
October 10, 2006, Michael Nouri entered into a stock purchase agreement with
Doron Roethler, a current stockholder. Pursuant to this agreement, Mr. Nouri
sold 247,043 shares of the Company’s common stock from his personal holdings at
a price of $1.5176 per share. The Company entered into a Registration Rights
Agreement with Mr. Roethler in connection with this transaction under which
it
has an obligation to register the shares sold by Mr. Nouri to Mr. Roethler
on
the first registration statement filed by the Company following the sale,
with
Mr. Roethler bearing his proportionate share of the registration expenses.
Under
the terms of this agreement, the shares were delivered following the Company’s
execution of such Registration Rights Agreement, which occurred on January
19,
2007. The
Company filed a registration statement for these shares on April 3,
2007.
EXECUTIVE
COMPENSATION
Overview
of Compensation Philosophy and Objectives
The
Company established a Compensation Committee of the Board of Directors to
assist
the full Board in discharging its duties with respect to determining the
compensation to be paid to named executive officers listed in the Summary
Compensation Table below (the “named executive officers”). The objective of the
Compensation Committee is to establish compensation levels that will attract
and
retain managerial talent the Company desires, reward employees for past
contributions and motivate managerial efforts consistent with corporate growth,
strategic progress and the creation of stockholder value. As the Company
increases its revenues and approaches profitability, its goal and objective
is
to review the overall compensation program to determine whether each
compensation element fits into its overall compensation objectives. This
review
may result in changes to current procedures in determining executive
compensation, the implementation of new procedures, the identification of
specific corporate and/or personal performance measures in setting compensation
policies, or a re-evaluation of how total compensation is determined among
its
different elements.
Role
of Executive Officers
After
its
formation on July 22, 2005, the Compensation Committee left in place the
existing compensation packages previously entered into with several named
executive officers. In reaching these agreements, the Chief Executive Officer
acted on the Company’s behalf. The Chief Executive Officer also reviews the
performance of the Company’s other named executive officers that, as set forth
below, is used to determine the compensation of these named executive officers.
In general, the Compensation Committee has relied on recommendations made
by the
Chief Executive Officer in awarding compensation packages. The Compensation
Committee reviews the performance of the Chief Executive Officer.
Elements
of Executive Compensation
In
fiscal
2006, the principal components of compensation for our named executive officers
were salary and equity awards. Some of the Company’s named executive officers
have also received performance-based incentive compensation. The Company
has no
pre-established policy for determining the allocation of compensation between
cash and equity, or under what circumstances, terms or conditions to provide
certain named executive officers with performance-based incentive compensation.
However, some factors effecting the determination of the levels of each element
of total compensation include length of service; nature, scope and level
of
responsibilities; accomplishment of tasks and goals; market analysis; and
the
attitude and work ethic of the employee.
Salary.
Salaries are paid to the named executive officers in order to compensate
them
for their services. The Company established the salaries for the named executive
officers based on readily available public information regarding local market
compensation levels, and, considering the fact that the Company has immaterial
revenues and has only experienced net losses to date, the established salaries
for the named executive officers are mostly at the low end of the market
salary
ranges. The Company’s human resources manager has collected relevant market
information using various websites.
14
Many
of
the named executive officers 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. Any future compensation packages
will
be reviewed and approved by the Compensation Committee.
Factors
considered in determining salary increases for named executive officers include:
(i) length of time the executive has been employed by the Company and the
last
review and salary increase; (ii) the nature, scope and level of the executive’s
responsibilities; (iii) accomplishment of tasks and goals such as the release
of
new products or product enhancements, attainment of milestones regarding
research and development, and project completion; (iv) recommendations of
the
Chief Executive Officer; (v) past performance when reviewing employment contract
renewals; (vi) market analysis; and (vii) the attitude toward his or her
job and
responsibilities and work ethic of the executive.
During
fiscal 2006, most of the Company’s named executive officers did not receive any
increase in their salaries. Factors affecting the decision to freeze the
salaries of these named executive officers were (1) the suspension in the
trading of the Company’s securities by the SEC and the related investigation,
(2) the repeated need to enter into various financing transactions in order
to
continue operations, (3) the Company had immaterial revenues other than those
generated by Smart Commerce and Smart CRM, Inc., and (4) the Company has
only
experienced net losses to date.
Because
of the trading suspension, the related investigation, and the various financing
transactions noted above, the Company believes that the attention of the
named
executive officers was diverted from the Company’s core business operations,
possibly causing its performance to suffer. In addition, in light of the
lack of
adequate working capital, the Company tried to avoid any increase in costs
in
order to utilize the working capital it had to the greatest
extent possible. Following the end of fiscal 2006 and as described in further
detail below, several of the Company’s named executive officers have agreed to
reductions in their base salary and shifted to bonus compensation in an effort
to reduce costs.
The
lone
exception to this salary freeze was the salary increases provided to the
Company’s Chief Financial Officer, Nicholas A. Sinigaglia. Mr. Sinigaglia was
originally hired in February 2006 as the Company’s Controller. On March 21,
2006, he was appointed the Company’s Chief Financial Officer, replacing the
Company’s interim Chief Financial Officer, Scott Whitaker. In conjunction with
his promotion to that position, Mr. Sinigaglia received graduated increases
in
his annual salary according to the following schedule:
|
Dates
|
Annual
Salary
|
|||
|
March
21 through 31, 2006
|
$
|
90,000
|
||
|
April
1 though May 31, 2006
|
$
|
110,000
|
||
|
June
1 through August 31, 2006
|
$
|
120,000
|
||
|
September
1, 2006 to date
|
$
|
135,000
|
||
Factors
affecting the determination of the salary increases include comparable salaries
based on company size, industry and position, experience, capabilities; work
ethic; and responsibilities.
Equity
Awards.
Equity
awards are made to provide each named executive officer with both the incentive
and reward for achieving long-term success as reflected in the growth in
the
Company’s share value. The 2004 Equity Compensation Plan (the “2004 Plan”), is
currently in effect. The 2004 Plan replaced the 2001 Equity Compensation
Plan
(the “2001 Plan”), which in turn replaced the 1998 Stock Option Plan (the “1998
Plan”). Under the 2004 Plan, the named executive officers, among others, may be
awarded incentive stock options, restricted stock or a stock award. Under
its
terms, the committee administering the 2004 Plan determines the terms and
conditions of each award, including but not limited to the amount of the
award,
vesting, and expiration. The outstanding options issued to the Company’s named
executive officers under the 2001 Plan were fully vested upon the grant date.
Most of the stock options granted to named executive officers under the 2004
Plan vest at the rate of 20% per year for five years on the anniversary of
the
grant date. The Company’s Chief Financial Officer, who was hired and
subsequently appointed to that position in 2006, was awarded stock options
in
fiscal 2006. The 2004 Plan is administered by the Compensation Committee.
All
stock option awards were made at or above the fair market value of the Company’s
common stock on the date of the grant.
15
As
of
December 31, 2006, named executive officers have only been granted incentive
stock options under the 2004 Plan, but some named executive officers have,
in
prior years under prior plans, received awards of the Company’s common stock.
Awards under the 2004 Plan are generally made when a named executive officer
is
first appointed to his position, and periodically in connection with awards
that
may be made to other employees. At this time, the Company does not have a
plan
establishing the dates, amounts or types of these awards.
In
addition to the factors considered in determining named executive officers’ base
salary, factors considered in determining awards of stock options under the
2004
Plan include: (i) the scale of awards based on past practices, (ii) the
Company’s overall practice regarding different managerial levels; (iii) the
executive’s past performance, and (iv) creating incentives for both the
executive’s and the Company’s future performance and goals.
Beginning
January 1, 2006, the Company began accounting for stock option equity awards
as
required by Statement of Financial Accounting Standards No. 123 (revised
2004),
Share-Based Payment, (“SFAS No. 123R”). Under SFAS No. 123R, all share-based
payments to employees, including grants of employee stock options, must be
recognized in the Company’s financial statements based on their fair values. The
immediate effect has been to favor equity awards other than stock options
to
provide the Company’s named executive officers and other employees with equity
based compensation.
Performance-Based
Incentive Compensation.
In
prior years, certain of the Company’s named executive officers also received
bonus compensation upon meeting or exceeding certain goals that the Company
set
for them. In the past, these bonuses have been tied to the development and
release of certain applications within the OneBizSM
suite.
Factors that influence when the Company offers a bonus and the amount of
that
bonus include the importance of the goal to the Company’s overall success, the
effort required to complete the goal, current salary level and the time since
the last pay increase. No bonuses were paid to the Company’s named executive
officers in 2006 for the same reasons that the Company froze salaries to
most of
its named executive officers in 2006 as described above.
Recent
Developments
On
January 12, 2007, the Compensation Committee approved the modification of
the
2007 compensation for the following named executive officers: Michael Nouri,
Thomas Furr, and Henry Nouri. Under the modified compensation arrangements,
the
2007 annual base salary for each of these named executive officers was reduced
to $100,000. In consideration for this reduction in salary, the employees
orally
agreed
to, and
the
Compensation Committee approved,
a
performance based aggregate quarterly bonus. The bonus, if any, to be paid
to
each of these named executive officers was to be 2% of any "Free Cash Flow."
For
these purposes, "Free Cash Flow" is defined as the Company’s total revenue, less
operating expenses (with non-cash items added back), less principal debt
payments. After considering the potential amount of the bonus, the Compensation
Committee agreed to these reductions in salary as it would likely result
in an
overall reduction of the Company’s expenses and provide these officers with
incentive-based compensation to improve the Company’s financial health, which
was not an element of their compensation packages prior to this
change.
These
bonuses were to relate only to “Free Cash Flow” during 2007 as this bonus
arrangement was to expire on December 31, 2007. Compensation for these officers
was scheduled to return to pre-reduction levels on January 1, 2008, however,
the
Compensation Committee approved and these officers agreed to amend their
compensation arrangements. Effective April 16, 2007, each agreed to an increase
in their salary to its pre-reduction level and to be paid the bonus described
above for the period of the salary reduction. Because there was no “Free Cash
Flow,” no bonus is due or owing these officers.
On
April
18, 2007, the Company’s Chief Financial Officer was granted a restricted stock
award of 30,000 shares of the Company’s common stock. The restriction on these
shares lapses in three equal installments at the following dates: (1) the
date
of agreement, (2) the first anniversary of such date, and (3) on the second
anniversary of such date, if he is a service provider to the Company on such
date.
16
Compensation
Committee Processes and Procedures
The
Compensation Committee has two primary responsibilities: (1) the formulation,
implementation, review and modification of the compensation of the Company’s
officers and directors; and (2) the preparation of the annual report on
executive compensation for inclusion in the Company’s annual proxy statement.
The Compensation Committee’s duties include, among other things, setting the
compensation for officers and directors, making recommendations to the Board
of
Directors with respect to incentive compensation plans and equity-based
compensation plans, approving grants of stock options and other awards under
the
Company’s 2004 Equity Compensation Plan, and administering the Company’s defined
benefit and defined contribution plans, if any.
In
fulfilling its responsibilities, the Compensation Committee is entitled to
delegate any or all of its responsibilities to a subcommittee of the
Compensation Committee, to the extent consistent with applicable law, the
Company’s certificate of incorporation, bylaws, corporate governance guidelines,
and rules of any exchange or market on which the securities of the Company
are
then traded if compliance with such rules are required to begin or continue
trading.
As
part
of its review and establishment of the performance criteria and compensation
of
officers and directors of the Company, the Compensation Committee must
separately meet at least annually with the Company’s Chief Executive Officer,
the principal human resources executive and compliance officer, and with
any
other corporate officers as the Compensation Committee deems appropriate.
However, the Compensation Committee must also meet regularly without such
officers present, and in all cases such officers must not be present at the
meetings at which their performance and compensation is being discussed and
determined. The Compensation Committee has not engaged any compensation
consultant to determine or recommend the amount or form of executive and
director compensation.
Compensation
Committee Report
The
Compensation Committee has reviewed and discussed the Compensation Discussion
& Analysis required by Item 402(b) of Regulation S-K with management, and
based on such review and discussions, the Compensation Committee recommended
to
the Board of Directors that the Compensation Discussion & Analysis be
included in this proxy statement.
|
Jeffrey
W. LeRose (Chairman)
|
|||
|
C.
James Meese, Jr.
|
|||
|
Philippe
Pouponnot
|
The
following table shows the annual and long-term compensation paid to, or accrued
by the Company for, the Company’s Chief Executive Officer, the two individuals
who served as its Chief Financial Officer during 2006, and the next three
most
highly compensated executive officers for services rendered to the Company
during the fiscal year ended December 31, 2006. The persons identified on
the
table below are referred to as the Company’s “named executive
officers.”
17
2006
Summary Compensation Table
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Option
awards
($)
(1)
|
All
other
compensation
($)
|
Total
($)
|
|||||||||||
|
Dennis
Michael Nouri
|
2006
|
$
|
170,000
|
$
|
46,461
|
—
|
$
|
216,461
|
||||||||
|
President
and
|
|
|
|
|
|
|||||||||||
|
Chief
Executive Officer
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|||||||||||
|
Scott
Whitaker
|
2006
|
$
|
70,000
|
$
|
18,098
|
—
|
$
|
88,098
|
||||||||
|
Former
Chief Financial
|
|
|
|
|
|
|||||||||||
|
Officer
(2)
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|||||||||||
|
Nicholas
A. Sinigaglia
|
2006
|
$
|
108,333
|
$
|
17,197
|
—
|
$
|
125,530
|
||||||||
|
Chief
Financial Officer (2)
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|||||||||||
|
Henry
Nouri
|
2006
|
$
|
150,000
|
$
|
46,461
|
—
|
$
|
196,461
|
||||||||
|
Executive
Vice
|
|
|
|
|
|
|||||||||||
|
President
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|||||||||||
|
Gary
Mahieu
|
2006
|
$
|
150,000
|
—
|
—(3)
|
|
$
|
150,000
|
||||||||
|
COO
and Vice President
|
|
|
|
|
|
|||||||||||
|
of
Smart Commerce, Inc.
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|||||||||||
|
Thomas
Furr
|
2006
|
$
|
136,800
|
$
|
23,230
|
—
|
$
|
160,030
|
||||||||
|
Chief
Operating Officer
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|||||||||||
|
(1)
|
See
Note 2, “Summary of Significant Accounting Policies,” to the Company’s
consolidated financial statements for a discussion of the assumptions
made
in the valuation of stock options.
|
|
(2)
|
Scott
Whitaker ceased to be the Company’s Chief Financial Officer, and Nicholas
A. Sinigaglia was appointed its Chief Financial Officer, on March
21,
2006. Mr. Whitaker continues to serve as the Company’s
Controller/Bookkeeper.
|
|
(3)
|
Does
not include payments with respect to a covenant not to compete.
See
“Certain Relationships and Related Transactions”
above.
|
2006
Grants of Plan-Based Awards
|
|
|
Estimated
future payouts under
equity
incentive
plan awards
|
|
|
|||||||||||||||
|
Name
|
Grant
date
|
Threshold
(#)
|
Target
(#)
|
Maximum
(#)
|
Exercise
or
base
price of
option
awards
($/Sh)
|
Grant
date
fair
value of
stock
and
option
awards
|
|||||||||||||
|
Nicholas
A. Sinigaglia
|
03/24/06
|
0
|
50,000(1)
|
|
50,000
|
$
|
2.50(2)
|
|
$
|
2.50(2)
|
|
||||||||
|
(1)
|
The
incentive stock option award provides for only a single estimated
payout.
|
|
|
|
|
(2)
|
The
exercise price and fair market value were determined by the Compensation
Committee based on the light trading volume of the Company’s common stock
around the time of the grant and the per share price agreed to
in a
private placement of common stock that was scheduled to occur around
the
time of the grant.
|
The
option award was granted to Mr. Sinigaglia following his appointment as the
Company’s Chief Financial Officer. As indicated in the table and footnotes
above, the exercise price was set higher than the closing market price because
of the low trading volume in the Company’s common stock at the time of the
grant. During the month prior to the grant, the average trading volume for
the
Company’s common stock was approximately 2,900 shares per day. In addition, the
private placement of 400,000 shares of the Company’s common stock at $2.50 per
share was scheduled to close shortly after the grant date. Based on these
factors, the exercise price was set above the closing trading price of $2.00.
The option award provides for vesting over five years after the date of the
grant, with 20% of the award vesting on March 24 of each year following the
grant, provided Mr. Sinigaglia is still providing services to the Company.
The
full option vests and becomes exercisable immediately upon a change in control,
as defined in the option agreement. The award has a ten year term.
18
Employment
Agreements
The
Company has the following employment agreements with its named executive
officers. See “Potential Payments upon Termination or Change-in-Control” below
for additional material terms of these agreements.
Dennis
Michael Nouri.
Effective April 1, 2004, covering employment commencing as of June 1, 2004,
the
Company entered into an employment agreement, which provided for an initial
base
salary of $170,000. The agreement replaced an employment agreement dated
July
14, 1999 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 provides 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 the Company to make a severance payment to Mr. Nouri if either the
Company terminates Mr. Nouri’ s employment without “Cause” or Mr. Nouri
terminates his employment for “Good Reason,” because of death or “Disability,”
or following a “Change in Control” (all as described under “Potential Payments
upon Termination or Change-in-Control”). Mr. Nouri’s agreement contains
non-competition and non-solicitation provisions. The non-competition provision
prohibits him from directly or indirectly engaging in the same or similar
business as the Company’s in any jurisdiction where it does business for a
period of one year following the termination of employment for any reason.
The
non-solicitation provision prohibits the direct or indirect solicitation
of (a)
any of the Company’s customers to either purchase similar products or services
from others, (b) to take away the customers’ business from the Company, or (c)
to induce employees to leave their employment with the Company, for a period
of
one year following the termination of employment for any reason.
Henry
Nouri.
Effective April 1, 2004, covering employment commencing as of June 1, 2004,
the
Company 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 the Company to make a severance payment to Mr. Nouri if
either the Company terminates Mr. Nouri’ s employment without “Cause” or Mr.
Nouri terminates his employment for “Good Reason,” because of death or
“Disability,” or following a “Change in Control” (all as described under
“Potential Payments upon Termination or Change-in-Control”). Mr. Nouri’s
agreement contains non-competition and non-solicitation provisions. The
non-competition provision prohibits him from directly or indirectly engaging
in
the same or similar business as the Company’s in any jurisdiction where it does
business for a period of one year following the termination of employment
for
any reason. The non-solicitation provision prohibits the direct or indirect
solicitation of (a) any of the Company’s customers to either purchase similar
products or services from others, (b) to take away the customers’ business from
the Company, or (c) to induce employees to leave their employment with the
Company, for a period of one year following the termination of employment
for
any reason.
Thomas
Furr. Effective
April 1, 2004, covering the employment period commencing on June 1, 2004,
the
Company 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 provides 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 has given written notice of termination, the agreement has
been
extended through December 31, 2007, and shall be renewed for additional one-year
terms unless either party gives notice of intention not to renew. The
agreement requires the Company to make a severance payment to Mr. Furr if
either
the Company terminates Mr. Furr’s employment without “Cause” or Mr. Furr
terminates his employment for “Good Reason” (as described under “Potential
Payments upon Termination or Change-in-Control”). Mr. Furr’s agreement contains
non-competition and non-solicitation provisions. The non-competition provision
prohibits Mr. Furr from directly or indirectly engaging in the same or similar
business as the Company’s in any jurisdiction where it does business for a
period of two years following the termination of employment for any reason.
The
non-solicitation provision prohibits the direct or indirect solicitation
of (a)
any of the Company’s customers to either purchase similar products or services
from others, (b) to take away the customers’ business from the Company, or (c)
to induce employees to leave their employment with the Company, for a period
of
two years following the termination of employment for any reason.
19
Scott
Whitaker.
Effective April 1, 2004, covering employment commencing on such date, the
Company entered into an employment agreement which provided for an initial
annual base salary of $45,000, subject to approved increases. Effective March
2005, Mr. Whitaker’s salary was increased to $70,000. The agreement has no set
termination date. The agreement was accompanied by a grant of incentive stock
options for 25,000 shares of common stock at an exercise price of $5.00,
vesting
as follows: 20% on the first anniversary of the grant, and 416.67 shares
at the
end of each month thereafter. Mr. Whitaker’s agreement contains non-competition
and non-solicitation provisions. The non-competition provision prohibits
him
from directly or indirectly engaging in the same or similar business as the
Company’s in any jurisdiction where it does business for a period of one year
following the termination of employment for any reason. The non-solicitation
provision prohibits the direct or indirect solicitation of (a) any of the
Company’s customers to either purchase similar products or services from others,
(b) to take away the customers’ business from the Company, or (c) to induce
employees to leave their employment with the Company, for a period of one
year
following the termination of employment for any reason.
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.
The agreement requires the Company to make a severance payment to Mr. Mahieu
if
either the Company terminates Mr. Mahieu’s employment without “Cause” or Mr.
Mahieu terminates his employment for “Good Reason” (as described under
“Potential Payments upon Termination or Change-in-Control”). Mr. Mahieu’s
agreement contains non-competition and non-solicitation provisions. The
non-competition provision prohibits him from directly or indirectly engaging
in
the same or similar business as the Company’s in any jurisdiction where it does
business for a period of the later of (1) four years following the date of
the
agreement, or (2) one year following the termination of employment for any
reason. The non-solicitation provision prohibits the direct or indirect
solicitation of (a) any of the Company’s customers to either purchase similar
products or services from others, (b) to take away the customers’ business from
the Company, or (c) to induce employees to leave their employment with the
Company, for a period of the later of (1) four years following the date of
the
agreement, or (2) one year following the termination of employment for any
reason. As consideration for the covenants not to 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
originally scheduled to be made on October 1, 2007. As of February 7, 2007,
all
of these payments had been made to Mr. Mahieu.
Nicholas
A. Sinigaglia.
Effective March 21, 2006, covering employment commencing on such date, the
Company 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 30 days prior to the end of the
term
or of any renewal period. Because the required notice to terminate this
agreement was not provided, the agreement was renewed and the new termination
date is March 31, 2008. Mr. Sinigaglia’s agreement contains non-competition and
non-solicitation provisions. The non-competition provision prohibits him
from
directly or indirectly engaging in the same or similar business as the Company’s
in any jurisdiction where it does business for a period of one year following
the termination of employment for any reason. The non-solicitation provision
prohibits the direct or indirect solicitation of (a) any of the Company’s
customers to either purchase similar products or services from others, (b)
to
take away the customers’ business from the Company, or (c) to induce employees
to leave their employment with the Company, for a period of one year following
the termination of employment for any reason. The agreement was accompanied
by a
grant of incentive stock options for 50,000 shares of common stock at an
exercise price of $2.50 vesting over a five-year period in five equal
installments, commencing one year from the date of the grant. Option vesting
is
accelerated upon a change of control or corporate reorganization such that
all
options would vest immediately.
20
Indemnity
Agreements.
In
addition to the employment agreements, the Company has also entered into
indemnity agreements with the following: Michael Nouri, Henry Nouri, Thomas
Furr, Joan Keston (the Company’s former general counsel) and Scott Whitaker.
These indemnification agreements provide that the officers will be indemnified,
to the fullest extent permitted under the Company’s bylaws and Delaware law, for
their expenses incurred in connection with the SEC investigation involving
the
Company. Each officer also agreed to repay these amounts to the Company should
it ultimately be determined that such indemnity was not
permissible.
2006
Outstanding Equity Awards at Fiscal Year-End
|
|
Option
Awards
|
||||||||||||
|
Name
|
Number
of securities
underlying
unexercised
options
(#)
Exercisable
|
Number
of securities
underlying
unexercised
options
(#)
Unexercisable
|
Option
exercise
price
($/Sh)
|
Option
expiration
date
|
|||||||||
|
Dennis
Michael Nouri
|
250,000(1)
|
|
0
|
$
|
1.43
|
12/31/2008
|
|||||||
|
|
20,000(2)
|
|
80,000
|
$
|
8.61
|
07/22/2015
|
|||||||
|
Scott
Whitaker
|
200(3)
|
|
0
|
$
|
5.00
|
12/21/2008
|
|||||||
|
|
12,083(4)
|
|
12,917
|
$
|
3.50
|
04/01/2014
|
|||||||
|
|
5,000(5)
|
|
20,000
|
$
|
5.00
|
04/15/2015
|
|||||||
|
|
4,000(2)
|
|
16,000
|
$
|
8.61
|
07/22/2015
|
|||||||
|
Nicholas
A. Sinigaglia
|
0(6)
|
|
50,000
|
$
|
2.50
|
03/24/2016
|
|||||||
|
Henry
Nouri
|
250,000(1)
|
|
0
|
$
|
1.43
|
12/31/2008
|
|||||||
|
|
20,000(2)
|
|
80,000
|
$
|
8.61
|
07/22/2015
|
|||||||
|
Thomas
Furr
|
75,000(7)
|
|
0
|
$
|
1.30
|
02/05/2009
|
|||||||
|
|
10,000(2)
|
|
40,000
|
$
|
8.61
|
07/22/2015
|
|||||||
|
(1)
|
This
option was fully vested on December 31, 2003, the date of the
grant.
|
|
(2)
|
Vests
as to 20% of the award on each anniversary of the grant date for
five
years following July 22, 2005, the date of the grant.
|
|
(3)
|
Vests
as to 33-1/3% of the award on each anniversary of the grant date
for three
years following December 22, 1998, the date of the
grant.
|
|
(4)
|
Vests
as to 20% of the award on the first anniversary of the grant date,
which
was April 1, 2004, and as to 416.67 shares at the end of each month
thereafter.
|
|
(5)
|
Vests
as to 20% of the award on each anniversary of the grant date for
five
years following April 15, 2005, the date of the grant.
|
|
(6)
|
Vests
as to 20% of the award on each anniversary of the grant date for
five
years following March 24, 2006, the date of the grant.
|
|
(7)
|
This
option was fully vested on February 4, 2004, the date of the
grant.
|
21
Potential
Payments upon Termination or Change-in-Control
The
Company currently has employment agreements with certain of its named executive
officers which contain terms that provide for the potential payment of amounts
following termination. These payments include: (1) salary for services rendered
prior to termination date, (2) accrued but unused vacation, (3) continued
payment of base salary and participation in the Company’s benefits programs for
a designated period following termination, and (4) immediate vesting of
outstanding stock options. These payments are collectively referred to as
the
Termination Payments. The payments vary depending on the reason for termination.
Termination Payments (1) and (2) are made as a lump sum payment. The period
over
which Termination Payment (3) is made, if any, is set forth below.
Termination
With “Cause”
For
Michael Nouri and Henry Nouri, the Company would be obligated to make
Termination Payments (1) and (2) described above. In the employment agreements
with these named executive officers, “Cause” is defined as (1) participation in
a fraud or theft against the Company; (2) any chemical dependence which
materially adversely affects the performance of duties and responsibilities;
(3)
material breach of fiduciary obligations; (4) repeated and willful failure
to
materially perform his duties after written notice and opportunity to cure;
(5)
material breach of our policies or any provision of the employment agreement;
(6) gross misconduct resulting in substantial loss or damage to our reputation;
or (7) a knowing material violation of securities laws, rules or regulations.
For
Thomas Furr and Gary Mahieu, the Company would be obligated to make Termination
Payment (1) described above. In the employment agreements with these named
executive officers, “Cause” is defined as (1) participation in a fraud or act of
dishonesty against the Company; (2) any chemical dependence which affects
the
performance of duties and responsibilities; (3) breach of fiduciary obligations;
(4) willful failure to perform his duties; (5) breach of the Company’s policies
or any material provision of the employment agreement; or (6) conduct the
Company’s Board of Directors determined demonstrates unfitness to
serve.
Termination
Without “Cause” or Termination for “Good Reason”
For
Michael Nouri and Henry Nouri, the Company would be obligated to make all
categories of Termination Payments described above. The applicable period
of
time for Termination Payment (3) is twelve months. “Good Reason” is defined as
(1) demotion or diminution in position, title or duties, (2) reduction in
base
salary, (3) failure to be re-elected as a member of the Board, (4) relocation
of
their office more than 30 miles outside of Research Triangle Park, North
Carolina, or (5) a material breach of the employment agreement by the
Company.
22
For
Thomas Furr, the Company would be obligated to make Termination Payments
(1) and
(3) described above. The applicable period of time for Termination Payment
(3)
is three months. In the employment agreement with Mr. Furr, “Good Reason” is
defined as (1) demotion or diminution in position, title or duties, (2)
relocation of his office more than 30 miles outside of Research Triangle
Park,
North Carolina, or (3) a material breach of the employment agreement by the
Company.
For
Gary
Mahieu, the Company would be obligated to make Termination Payment (3) described
above. The applicable period of time for Termination Payment (3) is through
the
term of the employment agreement, which is currently scheduled to terminate
October 17, 2007. In the employment agreement with Mr. Mahieu, “Good Reason” is
defined as any action by the Company that results in constructive termination
without “Cause.”
Termination
Because of Death or Disability
For
Michael Nouri and Henry Nouri, the Company would be obligated to make
Termination Payments (1), (3) and (4) described above. The applicable period
of
time for Termination Payment (3) is twelve months. For Thomas Furr, the Company
would be obligated to make Termination Payment (1) described above. In the
employment agreements with these named executive officers, “Disability” is
defined as the inability to perform the named executive officer’s duties for 30
consecutive calendar days as a result of physical or mental illness or
injury.
Termination
Following “Change in Control”
For
Michael Nouri and Henry Nouri, the Company would be obligated to make
Termination Payments (1), (2) and (4) described above. In addition to these
payments, the surviving entity would be obligated to make the following payment
in lieu of Termination Payment (3). These employment agreements provide that
a
“Change in Control” occurs on the earliest of (1) the date a person or entity
becomes the beneficial owner of 30% of the Company’s outstanding common stock
(excluding persons or entities owning 50% or more of the Company’s common stock
as of the date of the agreement), or (2) the date the stockholders approve
a
definitive agreement to (a) merge the Company (unless the employee owns more
than 50% of the surviving entity), (b) sell substantially all of the Company’s
assets, or (c) liquidate or dissolve the Company. Under this retention
provision, if they remain 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 their employment is terminated by the surviving
entity without “Cause” or by the named executive officer for “Good Reason,” the
surviving entity must pay each an amount equal to the lesser of (1) 299%
of
their respective highest annual salary and bonus during the preceding five
years, or (2) the largest amount payable without triggering an excise tax
under
Section 280G of the Internal Revenue Code of 1986, as amended. This retention
payment is in addition to other severance payments described above and is
to be
made as a lump sum upon the effective date of the termination.
Option
agreements entered into with the named executive officers provide for an
acceleration of vesting following a “Change in Control” or a “Corporate
Reorganization.” In these option agreements, a “Change in Control” occurs when
(1) beneficial ownership of 50% or more of our outstanding common stock is
acquired by a person or group of persons (as defined in Section 13(d)(3)
of the
Exchange Act) other than financial investors, or (2) more than 50% of the
Company’s assets are transferred to a person or group of persons other than
financial investors. A “Corporate Reorganization” is defined as (1) the
dissolution or liquidation of the Company, (2) a capital reorganization or
merger, unless (a) such transaction involves only a parent or subsidiaries,
or
(b) immediately following such transaction, there is no change in a majority
of
the voting power, (3) a sale of substantially all of the Company’s assets, or
(4) the acquisition of the Company’s common stock that results in a change in a
majority of the voting power. Options to purchase an aggregate of 575,000
shares
of the Company’s common stock issued to Mssrs. Nouri, Nouri and Furr were fully
vested upon issuance, and therefore no acceleration would take
place.
Potential
Payments
The
following table lists the amounts that would have to be paid to each listed
named executive officer under the termination scenarios set forth above if
such
termination would have occurred on December 29, 2006:
|
|
|
Termination
with
“Cause”
|
Termination
Without
“Cause” or For “Good Reason”
|
Termination
Because
of Death
or
Disability
|
Termination
Following Change in Control
|
|||||||||||
|
Michael
Nouri
|
Salary(1)
|
$
|
19,615(2)
|
|
$
|
189,615(2)(4)
|
|
$
|
170,000(4)(5)
|
|
$
|
697,915(2)(4)(5)
|
|
|||
|
Equity
(3)
|
—
|
$
|
(496,800
|
)
|
$
|
(496,800
|
)
|
$
|
(496,800
|
)
|
||||||
|
Henry
Nouri
|
Salary(1)
|
|
$
|
17,308(2)
|
|
$
|
167,308(2)(4)
|
|
$
|
150,000(4)(5)
|
|
$
|
615,808(2)(4)(5)
|
|
||
|
Equity
(3)
|
—
|
$
|
(496,800)
|
|
$
|
(496,800)
|
|
$
|
(496,800
|
)
|
||||||
|
Scott
Whitaker
|
Salary
|
—
|
—
|
—
|
—
|
|||||||||||
|
Equity
(3)
|
—
|
—
|
—
|
$
|
(165,569
|
)
|
||||||||||
|
Nicholas
Sinigaglia
|
Salary
|
—
|
—
|
—
|
—
|
|||||||||||
|
Equity
(3)
|
—
|
—
|
—
|
$
|
(5,000
|
)
|
||||||||||
|
Thomas
Furr
|
Salary(1)
|
|
—
|
$
|
34,200(4)
|
|
—
|
—
|
||||||||
|
Equity
(3)
|
—
|
—
|
—
|
$
|
(248,400
|
)
|
||||||||||
|
Gary
Mahieu
|
Salary(1)
|
|
—
|
$
|
119,355(4)
|
|
—
|
—
|
||||||||
|
Equity
(3)
|
—
|
—
|
—
|
—
|
||||||||||||
|
(1)
|
Assumes
that all payments under Termination Payment (1) have been made
at the time
of termination.
|
|
(2)
|
Based
on the maximum vacation the named executive officer can
accrue.
|
|
(3)
|
The
value of the equity payments is determined based on the intrinsic
value
(i.e., the value based on the closing price of the Company’s common stock
less the per share exercise price of the option) of the options
that would
become vested if such termination occurred on December 29, 2006.
Negative
payment amounts indicate that the weighted average exercise price
of these
options exceeded the closing price of the Company’s common stock on
December 29, 2006, which was $2.40 per share. Therefore, if the
named
executive officer is terminated while the options are underwater,
the
actual payout to the named executive officer related to such options
would
be zero.
|
|
(4)
|
Based
on the employee’s base salary as of December 29,
2006.
|
|
(5)
|
Includes
the annual cost of insurance coverage provided for the named executive
officer and family as of December 31,
2006.
|
23
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 May 28, 2007: (i) by each person who is known
by the Company to beneficially own more than 5% of its common stock; (ii)
by
each of the Company’s named executive officers and directors; and (iii) by all
of the Company’s officers and directors as a group.
|
Beneficial
Owner
Name
and Address
|
Amount
and
Nature
of
Beneficial
Ownership(1)(2)
|
Percent
of Class
|
|||||
|
Atlas
Capital SA
116
Rue du Rhone
CH-1204
Geneva,
Switzerland
|
2,347,288
|
13.1
|
%
|
||||
|
Doron
Roethler(3)
c/o
Michal Raviv at
Granot,
Strauss, Adar & Co.
28
Bezalel Street
Ramat
Gan 52521, Israel
|
2,001,778
|
11.2
|
%
|
||||
|
Magnetar
Capital Master Fund, Ltd.
(4)
c/o
Magnetar Financial LLC
1603
Orrington Avenue
Evanston,
IL 60201
|
2,352,941
|
13.2
|
%
|
||||
|
Herald
Investment Trust, PLC
c/o
Hare & Co.(5)
1
Wall Street
New
York, NY 10286
|
1,176,471
|
6.6
|
%
|
||||
|
Michael
Nouri(6)
c/o
Smart Online, Inc.
2530
Meridian Parkway
Durham,
North Carolina 27713
|
1,052,407
|
5.9
|
%
|
||||
|
Scott
Whitaker (7)
c/o
Smart Online, Inc.
2530
Meridian Parkway
Durham,
North Carolina 27713
|
52,883
|
0.3
|
%
|
||||
24
|
Nicholas
A. Sinigaglia (8)
c/o
Smart Online, Inc.
2530
Meridian Parkway
Durham,
North Carolina 27713
|
40,000
|
0.2
|
%
|
||||
|
Henry
Nouri(9)
c/o
Smart Online, Inc.
2530
Meridian Parkway
Durham,
North Carolina 27713
|
1,507,984
|
8.4
|
%
|
||||
|
Thomas
Furr(10)
c/o
Smart Online, Inc.
2530
Meridian Parkway
Durham,
North Carolina 27713
|
429,737
|
2.4
|
%
|
||||
|
Gary
Mahieu(11)
c/o
Smart Online, Inc.
2530
Meridian Parkway
Durham,
North Carolina 27713
|
48,127
|
0.3
|
%
|
||||
|
Jeffrey
W. LeRose(12)
c/o
Smart Online, Inc.
2530
Meridian Parkway
Durham,
North Carolina 27713
|
25,000
|
0.1
|
%
|
||||
|
Shlomo
Elia
c/o
Smart Online, Inc.
2530
Meridian Parkway
Durham,
North Carolina 27713
|
60,972
|
0.3
|
%
|
||||
|
Philippe
Pouponnot
c/o
Smart Online, Inc.
2530
Meridian Parkway
Durham,
North Carolina 27713
|
50,750
|
0.3
|
%
|
||||
|
C.
James Meese, Jr.(13)
c/o
Smart Online, Inc.
2530
Meridian Parkway
Durham,
NC 27713
|
10,000
|
0.0
|
%
|
||||
|
David
E. Colburn (14)
c/o
Smart Online, Inc.
2530
Meridian Parkway
Durham,
NC 27713
|
0
|
0.0
|
%
|
||||
|
All
officers and directors as a group (13 persons)
|
3,474,977
|
19.4
|
%
|
|
(1)
|
All
shares are common stock.
|
|
(2)
|
The
preceding table was prepared based solely upon the information
furnished
to the Company by officers, directors and stockholders as of May
28, 2007
and from corporate stock transfer ledgers. The number and percentage
of
shares beneficially owned is determined in accordance with Rule
13d-3 of
the Exchange Act, and the information is not necessarily indicative
of
beneficial ownership for any other purpose. As of May 28, 2007,
there were
17,872,137 shares issued and outstanding, and the Company’s officers and
directors beneficially owned approximately 3,474,977 shares, including
shares which can be acquired upon exercise of stock options within
60 days
after May 28, 2007, which options were treated the same as outstanding
shares in calculating the percentage ownership of the Company’s officers
and directors.
|
25
|
(3)
|
Includes
(i) 1,323,619 shares
owned by Greenleaf Ventures Ltd., a British Virgin Islands company,
(ii)
121,116
shares owned by Crystal Management Ltd., a company registered in
Anguilla,
and (iii) 557,043 shares of common stock owned directly by Doron
Roethler.
Mr. Roethler exercises sole investment and voting power over the
shares
held by both Greenleaf Ventures, Ltd. and Crystal Management,
Ltd.
|
|
(4)
|
Includes
a warrant to purchase up to 784,314 shares of common stock which
can be
exercised within 60 days after March 31, 2007.
|
|
(5)
|
Includes
a warrant to purchase up to 392,157 shares of common stock which
can be
exercised within 60 days after March 31, 2007.
|
|
(6)
|
Includes
(1) 23,000 shares of common stock owned by a trust for which Michael
Nouri
is the trustee and is not a beneficiary and for which he exercises
sole
voting power, and (2) 290,000 shares which can be acquired upon
the
exercise of options which can be exercised at any time within the
60 days
after May 28, 2007. Does not include 60,000 shares subject to options
which cannot be exercised within 60 days after May 28, 2007, and
does not
include 264,731 shares owned by Ronna Nouri, wife of Michael
Nouri.
|
|
(7)
|
Includes
28,783 shares which can be acquired upon the exercise of options
which can
be exercised at any time within the 60 days after May 28, 2007.
Does not
include 41,417 shares subject to options which cannot be exercised
within
60 days after May 28, 2007.
|
|
(8)
|
Includes
30,000 shares issued as a restricted stock award under the Company’s 2004
Equity Compensation Plan, and 10,000 shares which can be acquired
upon the
exercise of options which can be exercised at any time within the
60 days
after May 28, 2007. Does not include 40,000 shares subject to options
which cannot be exercised within 60 days after May 28,
2007.
|
|
(9)
|
Includes
290,000 shares which can be acquired upon the exercise of options
which
can be exercised at any time within the 60 days after May 28, 2007.
Does
not include 60,000 shares subject to options which cannot be exercised
within 60 days after May 28, 2007.
|
|
(10)
|
Includes
95,000 shares which can be acquired upon the exercise of options
which can
be exercised at any time within the 60 days after May 28, 2007.
Does not
include 30,000 shares subject to options which cannot be exercised
within
60 days after May 28, 2007.
|
|
(11)
|
Does
not include 105,365 shares held by Christine Mahieu, wife of Gary
Maheiu.
|
|
(12)
|
Includes
15,000
shares issued as a restricted stock award under the Company’s 2004 Equity
Compensation Plan,
and 10,000 shares which can be acquired upon the exercise of options
which
can be exercised at any time within the 60 days after May 28,
2007.
|
|
(13)
|
Includes
10,000 shares which can be acquired upon the exercise of options
which can
be exercised at any time within the 60 days after May 28, 2007.
Does not
include 10,000 shares subject to options which cannot be exercised
within
60 days after May 28, 2007.
|
|
(14)
|
Does
not include 10,000 shares issued as a restricted stock award under
the
Company’s 2004 Equity Compensation Plan on May 31,
2007.
|
PROPOSAL
NO. 2 — RATIFICATION OF APPOINTMENT OF
INDEPENDENT
AUDITORS
The
Audit
Committee has appointed Sherb & Co., LLP (“Sherb”) to audit the consolidated
financial statements of the Company for fiscal 2007. Sherb was first engaged
as
the Company’s independent auditors for fiscal 2005 and continues to serve as the
Company’s independent auditors. A representative from Sherb is not expected to
be present at the 2007 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 is not ratified by
a
majority of the shares cast at the 2007 Annual Meeting, the Audit Committee
will
consider the appointment of other independent auditors for subsequent fiscal
years.
26
The
Board of Directors recommends
stockholders
vote FOR Proposal No. 2.
The
Audit
Committee serves at the pleasure of the Board of Directors and 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 Audit Committee also is responsible for establishing
procedures for: (i) the receipt, retention and treatment of complaints received
by the Company regarding accounting, internal accounting controls, or
auditing matters; and (ii) the confidential, anonymous submission by the
Company’s employees of concerns regarding questionable accounting or auditing
matters. 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.
In
the
performance of its oversight function, the Audit Committee formally retained
the
Company’s independent audit firm, has reviewed and discussed with management and
the independent auditors the audited financial statements 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.
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, 2006 for filing with
the
Securities and Exchange Commission.
|
THE
AUDIT COMMITTEE
|
|||
|
C.
James Meese, Jr., Chairman
|
|||
|
Jeffrey
W. LeRose
|
|||
|
Philippe
Pouponnot
|
|||
|
May
29, 2007
|
27
The
Company engaged BDO Seidman LLP (“BDO”) as the Company’s independent registered
public accountants during 2004. During fiscal 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 from 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 connection with 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 the Company’s relationship with BDO.
The
Company restated the interim financial statements in its Form 10-Q for the
quarter ended June 30, 2005, because in consultation with BDO, it determined
that its expenses for the second quarter were overstated by $506,000. The
restated financial statements therefore decreased its loss by $506,000. See
Note
7 to the financial statements in the Form 10-Q/A filed by the Company 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 and 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 the Company’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 the Company nor anyone on its behalf consulted
with
GGK with respect to any accounting or auditing issues involving the Company.
In
particular, there was no discussion by the Company with GGK regarding the
type
of audit opinion that might be rendered on its 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.
During
fiscal 2006, the Audit Committee approved an additional change in auditors
to
audit the Company’s financial statements. Goldstein Golub Kessler LLP (“GGK”)
resigned as the Company’s independent accountants, effective March 16, 2006. GGK
notified the Company on March 17, 2006. Due to the short duration of GGK’s
retention as
the
Company’s outside accounting firm, GGK never provided a report on its financial
statements. From the time GGK was engaged 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 S-K).
On
April
3, 2006, the Audit Committee engaged Sherb as the Company’s new independent
accountant to be the principal accountant to audit its financial statements.
During the fiscal years ended December 31, 2004 and 2005 and through April
3,
2006, neither the Company nor anyone on the Company’s behalf consulted with
Sherb regarding: (i) the application of accounting principles to a specific
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company’s financial statements; or (ii) any matter that
was either the subject of a “disagreement” (as defined in Item 304(a)(1)(iv) of
Regulation S-K) or a “reportable event” (as defined in Item 304(a)(1)(v) of
Regulation S-K). Sherb’s
report on the Company’s financials statement for fiscal 2005 contained an
explanatory paragraph that raised substantial doubt about the Company’s ability
to continue as a going concern. This going concern opinion was removed in
Sherb’s report on the Company’s financial statements for fiscal 2006.
Sherb’s
reports on the financial statements of the Company for the two fiscal years
ended December 31, 2005 and December 31, 2006 did not contain any other adverse
opinion or disclaimer of opinion, nor were those opinions otherwise qualified
or
modified as to audit scope or accounting principles.
28
Principal
Accounting Fees and Services
In
2004,
the Company engaged BDO as its independent public accountant. In November
2005,
the Company engaged GGK. The Company did incur expenses related to GGK’s work,
although GGK resigned in March 2006 prior to releasing an audit opinion.
In
March 2006, the Company engaged Sherb as its principal accountant. The amounts
billed under the categories referenced below may contain a combination of
charges from the different firms that served as the Company’s independent
accountant during its past two fiscal years.
Audit
Fees.
Aggregate fees billed for professional services rendered for the audit of
the
Company’s 2005 annual financial statements and reviews of financial statements
included in its Quarterly Reports on Form 10-Q filed during 2005 were
approximately $263,000. This amount represents fees incurred for audits of
the
Company’s annual statements for 2005, 2004, and 2003. Under the agreements with
the Company’s auditors referenced above, the Company paid a single price for the
audits of the financial statements for the three year period.
Aggregate
fees billed for the audit of our 2006 annual consolidated financial statements,
including the reviews of the Company’s Quarterly Reports on Form 10-Q filed
during 2006, were approximately $76,000.
Audit-Related
Fees.
In
2005, the Company incurred fees of approximately $260,000 related to the
audits
of Computility and iMart for the years ended December 31, 2004, 2003 and
2002.
Such audits were required for the acquisitions of these companies 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. There were no
audit-related fees in 2006.
Tax
Fees.
The
principal accountant did not provide professional services related to tax
compliance, tax advice, and tax planning during fiscal years 2006 and
2005.
All
Other Fees.
None.
All
audit
and permissible non-audit services provided by the Company’s independent
accountant, as well as the fees for such services, must be pre-approved by
the
Audit Committee. The Audit Committee may delegate to one or more designated
members of the Audit Committee the authority to pre-approve audit and
permissible non-audit services, provided such pre-approval decisions are
reported to the full Audit Committee at a later time. Any pre-approval is
generally for the current fiscal year, and any pre-approval is detailed as
to
the particular service or category of services. All audit and non-audit services
provided by the Company’s independent accountant after the creation of the Audit
Committee were pre-approved by or on behalf of the Audit Committee.
Other
than the election of directors and ratification of the appointment of
Sherb & Co., LLP as the Company’s independent auditors for the fiscal
year ending December 31, 2007, as described in this proxy statement, the
Board
of Directors presently knows of no other business to be conducted at the
2007
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
SEC the accompanying proxy cannot be voted for more than seven nominees.
Pursuant
to the rules of the SEC, stockholder proposals submitted for inclusion in
the
Company’s proxy statement and form of proxy for the annual meeting to be held in
2008 must be received by the Company not later than February 9, 2008, and must
comply with the Commission’s rules in other respects.
29
Other
stockholder proposals to be presented at the annual meeting in 2008, including
director nominations, must comply with the notice requirements of the Company’s
Bylaws and be delivered to the Company not later than April 21, 2008, nor
earlier than March 22, 2008. 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
Software-as-a-Service 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. The
Committee believes that the
minimum
qualifications for serving as a Company director are that a candidate
demonstrate, by significant accomplishment in his or her field, an ability
to
make a meaningful contribution to the Board’s oversight of the Company’s
business and affairs and have an impeccable record and reputation for honest
and
ethical conduct in his or her professional and personal activities.
Qualifications for consideration as a director nominee may vary according
to the
particular areas of expertise being sought as a complement to the existing
board
composition.
Once
candidates have been identified, the Committee will determine whether such
candidates meet the minimum qualifications for director nominees and will
recommend qualified nominees to the Board of Directors. 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.
Colburn, Furr, LeRose, Meese, Elia, Pouponnot and Nouri were recommended
for
election to the Board of Directors at the 2007 Annual Meeting by the full
Board
of Directors upon recommendation of the Governance and Nominations Committee.
Prior to the 2006 Annual Meeting, 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 re-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 “2008
Annual Meeting of Stockholders,” above.
The
Board
of Directors, as a matter of policy, desires to facilitate communications
between stockholders and directors to assist the Board in fulfilling its
responsibilities to all stockholders. To that end, the Board has established
a
process for use by stockholders who desire to bring matters to the Board’s
attention. The process is intended to provide stockholders one means of
communicating with directors and is not intended to be exclusive.
Any
stockholder who desires to send a communication to members of the Board may
submit it either by e-mail addressed to Corporate.Secretary@smartonline.com
or
by mail addressed to the attention of the Corporate Secretary at Smart Online,
Inc., P.O. Box 12794, Research Triangle Park, North Carolina 27709. All such
communications should include the mailing address, telephone number and e-mail
address, if any, of the person submitting the communication. All communications
properly submitted under these procedures, except those deemed inappropriate
as
noted below, will be delivered to all members of the Board periodically,
generally in advance of each regularly scheduled Board meeting. The Board
has
directed that the Secretary not forward communications 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.
30
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, 2006 is
available on the Company’s website located at www.smartonline.com,
as well
as on the website of the SEC 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:
June 4, 2007
31
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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 June 19, 2007.
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.
V'
FOLD
AND DETACH HERE AND READ THE REVERSE SIDE V'
PROXY
|
WITHHOLD
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FOR
ALL
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||||||||||
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AUTHORITY
|
EXCEPT
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Please
makr
your
votes like this
|
x
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||||||||
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FOR
ALL
|
FOR
ALL
|
(See
instructions
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NOMINEES
|
NOMINEES
|
below)
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FOR
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AGAINST
|
ABSTAIN
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1.
Election of Directors
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2.
Ratification of the appointment
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NOMINEES:
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01 Michael Nouri |
o
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o
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o
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of Sherb & Co., LLP as | ||||||
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02
Tom Furr
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independent auditors for the fiscal | ||||||||||
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03
Jeffrey W. LeRose
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year ending December 31, 2007. |
o
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o
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o
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04
Shlomo Elia
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05
Philippe Pouponnot
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Any
proxy heretofore given by the
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06
C. James Meese, Jr.
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undersigned is hereby revoked. | ||||||||||
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07
David E. Colburn
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| Please complete, sign and return this proxy whether or not you intend to attend the meeting. | |||||||||||
| (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.) |
To
change the address on your account, please check the box at the right
and
indicate
your new address in the address space to the left. Please note that
changes to
the registered name(s) on the account may not be submitted via this
method.
|
o
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Please
check box if you intend to attend the annual meeting in
person.
|
o
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COMPANY
ID:
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PROXY
NUMBER:
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ACCOUNT
NUMBER:
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Signature
________________________________________ Signature
________________________________________ Date _______________,
2007.
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 2007 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 2007 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 Wednesday,
June 20, 2007, 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, 2007, and, in the discretion of the persons acting
pursuant to this proxy, on any
other matters that properly come before the meeting or any adjournments thereof,
all as more specifically set
forth in the Notice of Annual Meeting of Stockholders and Proxy Statement,
each
dated June 4, 2007, receipt of
which is hereby acknowledged.
(Please
sign and date on the reverse side and promptly return in the enclosed
envelope.)