SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. ___)
Filed by the Registrant |_|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement |_| Confidential, for Use of the
|_| Definitive Proxy Statement Commission Only (as permitted
|_| Definitive Additional Materials by Rule 14a-6(e)(2))
|_| Soliciting Material Pursuant to
Rule 14a-12
SMARTSERV ONLINE, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|_| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1. Title of each class of securities to which transaction applies:
____________________________________________________________________
2. Aggregate number of securities to which transaction applies:
____________________________________________________________________
3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
____________________________________________________________________
4. Proposed maximum aggregate value of transaction:
____________________________________________________________________
5. Total fee paid:
____________________________________________________________________
Fee paid previously with preliminary materials: __________________________
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
1. Amount Previously Paid:
____________________________________________________________________
2. Form, Schedule or Registration Statement No.:
____________________________________________________________________
3. Filing Party:
____________________________________________________________________
4. Date Filed:
____________________________________________________________________
SMARTSERV ONLINE, INC.
2250 Butler Pike, Suite 150
Plymouth Meeting, PA 19462
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held November 21, 2005
---------------
To Our Stockholders:
The 2005 Annual Meeting of Stockholders of SmartServ Online, Inc.
(the "Company") will be held at [Place, Address, City, State, Zip], on November
21, 2005, beginning at 10:00 a.m., local time, for the following purposes:
1. To elect five directors to the Board of Directors, constituting of
(i) two Class II directors to serve until the 2006 Annual Meeting of
Stockholders, (ii) two Class III directors to serve until the 2007
Annual Meeting of Stockholders, and (iii) one Class I director to
serve until the 2008 Annual Meeting of Stockholders, or until their
successors have been elected and qualified;
2. To adopt an amendment to the Company's Certificate of Incorporation
to increase the authorized number of shares of capital stock;
3. To adopt an amendment to the Company's Certificate of Incorporation
to change the Company's name from "SmartServ Online, Inc." to
"Uphonia, Inc.";
4. To adopt the SmartServ Online, Inc. 2004 Stock Option Plan;
5. To approve conditional grants of stock options to certain directors
and key employees;
6. To ratify the selection of Carlin, Charron & Rosen, LLP as the
Company's independent registered public accounting firm for the
fiscal year ending December 31, 2005; and
7. To transact such other business as may properly come before the
meeting or any adjournments thereof. In their discretion, the
Proxies are authorized to vote upon such other business as may
properly come before the Annual Meeting or any adjournments thereof.
A proxy, if properly executed and received in time for the voting,
will be voted in the manner directed therein. If no direction is made, such
proxy will be voted FOR all proposals therein.
The Board of Directors has fixed the close of business on October
27, 2005 as the record date for determining stockholders entitled to notice of
the meeting and to vote at such meeting or any adjournments thereof, and only
stockholders of record at the close of business on October 27, 2005, are
entitled to notice of and to vote at such meeting or any adjournments thereof.
Your attention is directed to the attached Proxy Statement for
further information regarding each proposal to be made.
You are cordially invited to attend the meeting. Whether or not you
plan to attend, you are urged to complete, date and sign the enclosed proxy and
return it promptly. If you receive more than one form of proxy, it is an
indication that your shares are registered in more than one account, and each
such proxy must be completed and returned if you wish to vote all of your shares
eligible to be voted at the meeting.
By Order of the Board of Directors
----------------------------------------
Timothy G. Wenhold, Secretary
November ___, 2005
PLEASE COMPLETE AND RETURN THE PROXY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO
POSTAGE IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE MEETING AND DESIRE TO
VOTE IN PERSON AT THE MEETING, YOUR PROXY WILL BE RETURNED TO YOU UPON WRITTEN
NOTICE TO THE SECRETARY OF THE COMPANY REVOKING YOUR PROXY.
SMARTSERV ONLINE, INC.
2250 Butler Pike, Suite 150
Plymouth Meeting, PA 19462
PROXY STATEMENT FOR
THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON
NOVEMBER 21, 2005
This Proxy Statement is furnished in connection with the
solicitation of proxies on behalf of the Board of Directors of SmartServ Online,
Inc., a Delaware corporation (the "Company"), to be voted at the 2005 Annual
Meeting of Stockholders of the Company (the "Annual Meeting") to be held at
[Place/Address] on November 21, 2005, at 10:00 a.m., local time, and at any
adjournment or adjournments thereof.
All proxies delivered pursuant to this solicitation are revocable at
any time before they are exercised, by written notice to the Secretary of the
Company or by delivering a later dated proxy. Attendance at the Annual Meeting
will not, without delivery of the written notice described in the immediately
preceding sentence, constitute revocation of a proxy. The mailing address of the
principal executive offices of the Company is 2250 Butler Pike, Suite 150,
Plymouth Meeting, PA 19462. The Company's telephone number is (610) 397-0689.
This Proxy Statement and the enclosed form of proxy will be mailed to each
stockholder on or about November ___, 2005, together with the Annual Report on
Form 10-KSB for the year ended December 31, 2004.
All properly executed proxies delivered pursuant to this
solicitation and not revoked will be voted at the Annual Meeting in accordance
with the directions given. Regarding the election of Directors, in voting by
proxy, stockholders may vote in favor of all nominees or withhold their votes as
to all nominees or withhold their votes as to specific nominees. With respect to
any other proposals to be voted upon, stockholders may vote in favor of a
proposal, against a proposal or may abstain from voting. Stockholders should
specify their choices on the enclosed form of proxy. If no specific instructions
are given with respect to the matters to be acted upon, the shares represented
by a signed proxy will be voted FOR the election of all nominees, FOR the
proposal to adopt an amendment to the Company's Certificate of Incorporation to
increase the authorized number of shares of capital stock, FOR the proposal to
adopt an amendment to the Company's Certificate of Incorporation to change its
corporate name to Uphonia, Inc., FOR the proposal to adopt the SmartServ Online,
Inc. 2004 Stock Option Plan, FOR the proposal to approve the conditional grant
of stock options to certain key directors and executive officers, and FOR the
proposal to ratify the appointment of Carlin, Charron & Rosen, LLP as the
Company's independent registered public accounting firm for the fiscal year
ending December 31, 2005. Directors will be elected by a plurality of the votes
cast by the holders of the shares of Common Stock and Preferred Stock (voting on
an as-converted basis), voting in person or by proxy at the Annual Meeting.
Thus, abstentions will have no effect on the vote for election of directors.
Approval of the amendment to the Company's Certificate of Incorporation to
increase the authorized number of shares of capital stock shall require the
affirmative vote of the (i) holders of a majority of the outstanding shares of
Common Stock voting as a separate class, (ii) holders of a majority of the
outstanding shares of Preferred Stock voting as a separate class, and (iii)
holders of a majority of the outstanding shares of Common Stock and Preferred
Stock (voting on an as-converted basis). Approval of any other matters to come
before the Annual Meeting will require the affirmative vote of the holders of a
majority of the shares of Common Stock and Preferred Stock (voting on an
as-converted basis) of the Company present in person or by proxy at the Annual
Meeting. Abstentions are deemed present for quorum purposes and entitled to vote
and, therefore, will have the effect of a vote against any matter other than the
election of directors. Broker non-votes occur when a broker or other nominee
holding shares for a beneficial owner does not vote on a proposal because the
beneficial owner has not provided voting instructions and the broker does not
have discretionary authority to vote shares on the matter. Broker non-votes are
not considered to be shares "entitled to vote" (other than for quorum purposes)
and will not be included in vote totals. Accordingly, broker non-votes will have
the effect of a negative vote on the proposals to amend the Certificate of
Incorporation, and will have no effect on the outcome of any other matters to be
voted upon at the Annual Meeting.
Management is not aware at the date hereof of any matter to be
presented at the Annual Meeting other than the election of directors and the
other proposals described in the attached Notice of Annual Meeting of
Stockholders. If any other matter is properly presented, the persons named in
the proxy will vote thereon according to their best judgment.
The expense of soliciting proxies for the Annual Meeting, including
the cost of preparing, assembling and mailing the notice, proxy and Proxy
Statement, will be paid by the Company. The solicitation will be made by use of
the mails, through brokers and banking institutions, and by officers and regular
employees of the Company. Proxies may be solicited by personal interview, mail,
telephone or facsimile transmission.
Only owners of record of the common stock, $.01 par value per share,
of the Company ("Common Stock") and Series A convertible preferred stock, $.01
par value per share, of the Company ("Preferred Stock") at the close of business
on October 27, 2005 (the "Record Date"), are entitled to notice of and to vote
at the Annual Meeting or any adjournments or postponements thereof. Each owner
of record on the Record Date is entitled to one vote for each share of Common
Stock of the Company so held and ten votes for each share of the Preferred Stock
so held. There is no cumulative voting. On the Record Date, there were
___________ shares of Common Stock issued, outstanding and entitled to vote and
___________ shares of Preferred Stock issued, outstanding and entitled to vote
(constituting __ votes for the Preferred Stock on an as converted basis).
PROPOSAL NO. 1 - ELECTION OF DIRECTORS
The Company's Amended and Restated Certificate of Incorporation, as
amended, provides that the Board shall consist of between three and fifteen
members, as determined from time to time by the Board, divided into three
classes as nearly equal in number as possible. The size of the Board has
currently been set at five directors. The term of the current Class I directors
(John E. Goode and Robert B. Hartnett) expires at the 2005 Annual Meeting, the
term of the current Class II director (Paul J. Keeler) expires at the 2006
Annual Meeting and the term of the current Class III directors (Paul L.
Melchiorre and Robert M. Pons) expires at the 2007 Annual Meeting. The
successors to each class of directors whose terms expire at an Annual Meeting
will be elected to hold office for a term expiring at the Annual Meeting of
Stockholders held in the third year following the year of their election.
The terms of the Class II and Class III directors were scheduled to
expire at the Annual Meetings of Stockholders to be held in 2003 and 2004,
respectively. However, Annual Meetings of Stockholders were not held in 2003 and
2004 and the directors then in office continued to hold the elected office
because successors were not elected to replace them. Because none of the current
directors have been elected by stockholders, the Board of Directors determined
that all current directors should stand for election at this 2005 Annual Meeting
of Stockholders and their respective classes will be realigned as described
below.
In October 2004, Paul J. Keeler was appointed as a Class II director
to fill a vacancy. Mr. Keeler has been recommended for nomination by the
Nominating Committee and nominated by the Board to stand for reelection at the
2005 Annual Meeting of Stockholders, to hold office as a Class I director for a
three-year term set to expire at the 2008 Annual Meeting of Stockholders and
until his successor is elected and qualified. Robert B. Hartnett was appointed
as a Class I director on September 15, 2005 to fill a vacancy created by the
September 15, 2005 resignation of former director Timothy G. Wenhold. John E.
Goode was appointed as a Class I director in October 2004 to fill a vacancy
created by the October 2004 resignation of a former director. Messrs. Hartnett
and Goode have been recommended for nomination by the Nominating Committee and
nominated by the Board to stand for reelection as Class II directors at the 2005
Annual Meeting of Stockholders, to hold office for a one-year term set to expire
at the 2006 Annual Meeting of Stockholders (i.e., the remainder of the three
year term that would have commenced at the 2003 Annual Meeting if such a meeting
were held) and until their successors are elected and qualified. In August 2003,
Robert M. Pons was appointed as a Class III director to fill a vacancy, and in
November 2004, Paul L. Melchiorre was appointed a Class III director to fill the
vacancy created by the October 2004 resignation of former director Charles L.
Wood. Messrs. Pons and Melchiorre have been recommended for nomination by the
Nominating Committee and nominated by the Board to stand for reelection as Class
III directors at the 2005 Annual Meeting of Stockholders, to hold office for a
two-year term set to expire at the 2007 Annual Meeting (i.e., the remainder of
the three year term that would have commenced at the 2004 Annual Meeting if such
a meeting were held) and until their successors are elected and qualified.
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All nominees have consented to serve for the new terms, if elected.
Under a Stock Purchase Agreement dated May 15, 2000, TecCapital,
Ltd. ("TecCapital") has the right to designate one member of the Company's Board
of Directors. However, pursuant to a letter agreement dated January 28, 2005
between TecCapital and the Company, TecCapital agreed to waive, among other
things, the right to have a designee on the Board. TecCapital provided this
waiver in consideration of the grant to TecCapital of 500,000 shares of the
Company's Common Stock and the Company's agreement to use its best efforts to
register such shares and all other shares of the Company's Common Stock held by
TecCapital in a registration statement filed with the SEC. In the event that a
registration statement covering all of TecCapital's shares of Common Stock is
not declared effective within 270 days after the date of the letter agreement,
TecCapital may (in its sole discretion) return to the Company, within 330 days
from the date of the letter agreement, all of the shares of Common Stock, and in
such case the waiver granted would become void.
Recommendation of the Board of Directors Concerning the Election of Directors
The Board of Directors of the Company recommends a vote FOR (1) Paul
J. Keeler as a Class I director to hold office until the 2008 Annual Meeting of
Stockholders and until his successor is elected and qualified; (2) Robert M.
Pons and Paul L. Melchiorre as Class III directors to hold office until the 2007
Annual Meeting of Stockholders and until their successors are elected and
qualified; and (3) John E. Goode and Robert B. Hartnett as Class II directors to
hold office until the 2006 Annual Meeting of Stockholders and until their
successors are elected and qualified. Proxies received by the Board of Directors
will be so voted unless stockholders specify in their proxy a contrary choice.
DIRECTORS AND EXECUTIVE OFFICERS
Nominees
The following table sets forth the names and certain information
about each of the nominees for election as a director of the Company:
Director
Name Age Since
---- --- --------
Nominee for a three-year term expiring in 2008 (Class I Director):
Paul J. Keeler..........................................................................60 2004
Nominees for a two-year term expiring in 2007 (Class III Directors):
Robert M. Pons .........................................................................48 2003
Paul L. Melchiorre .....................................................................44 2004
Nominees for a one-year term expiring in 2006 (Class II Directors):
John E. Goode...........................................................................53 2004
Robert B. Hartnett......................................................................53 2005
Set forth below is a brief summary of the recent business experience
and background of each nominee for director and the Company's executive
officers:
Paul J. Keeler has been the Chairman of the Board of Directors of the Company
since October 2004. Mr. Keeler is currently a senior managing director of Medley
Global Advisors, LLC. Prior thereto, from _________ to _________, 2005, Mr.
Keeler was a managing partner at Convergence Consulting Group, LLC. From
February 1991 to February 2001, Mr. Keeler was a Principal at Morgan Stanley &
Co., and Head of Global Sales and Service for Morgan Stanley Capital
International, a joint venture between Morgan Stanley & Company, Inc. and
Capital Group Companies. Prior to that, Mr. Keeler served as Vice President of
Morgan Stanley Technology Services; President, Chief Executive Officer and Vice
Chairman of Tianchi Telecommunications Corp.; President and Chief Operating
Officer of Westinghouse Communications Software, Inc.; Vice President of
Strategic Accounts and Business Development for Reuters Holdings, PLC; and
Director, Northeast Metro Region, of MCI Communications. He also served as
President and CEO of Halcyon Securities Corporation and is a former member of
the New York and American Stock Exchanges. Mr. Keeler is presently a member of
the Board of Directors of DSL.net, Inc., a provider of high-speed data
communications, internet access and related services.
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Robert M. Pons has been the Chief Executive Officer and President of the Company
since January 24, 2004 and a director since August 28, 2003. He served as
Interim Chief Executive Officer from August 28, 2003 to January 24, 2004. Mr.
Pons had been a consultant to the Company from August 4, 2003 to January 24,
2004. From April 16, 1999 to April 15, 2002, Mr. Pons was founder and President
of FreedomPay, a stored value payment processing company enabling cashless
payments on wireless devices. From March 1999 through December 1999, Mr. Pons
was Chief Operating Officer of Real Time Data, a company in the data
transmission (telemetry) business. Prior thereto, from March 1, 1995 to April
15, 1999, Mr. Pons was President and CEO of LifeSafety Solutions, an enhancement
to the 9-1-1 public safety emergency system. Mr. Pons also held executive
positions with both MCI and Sprint. Mr. Pons is a member of the Board of
Directors of Network-1 Security Solutions, Inc., a software licensing company.
Paul L. Melchiorre has been a director of the Company since November 2004. Since
1998, Mr. Melchiorre has been the Vice-President of Operations of Ariba, a
spend-management software company. In 1992 Mr. Melchiorre joined SAP America as
the manager of the East Coast Region and in 1997 Mr. Melchiorre was appointed as
the Vice-President of Sales of SAP America, managing all strategic business
units and SAP North America.
John E. Goode has been a director of the Company since October 2004. From 1999
to 2001 Mr. Goode led the Methodology Group of Zefer Corporation, a consulting
company focused on Internet technology development, and from 1994 to 1998 Mr.
Goode was an independent consultant providing senior consulting experience and
methodology assistance to Waite and Company, a strategy consulting firm. For
over 30 years Mr. Goode has consulted and provided methodologies for leveraging
the power of emerging technologies and business practices to improve business
strategy, performance and profitability used by Fortune 500 companies, Internet
start-up companies and government agencies.
Robert B. Hartnett has been a director of the Company since September 15, 2005.
Mr. Hartnett is a private investor and the former Chairman of the Board and
Chief Executive Officer of Blue Ridge Networks. Prior to Blue Ridge Networks,
Mr. Hartnett served as president of Business Markets for WorldCom. A 20-year
veteran of MCI WorldCom, Mr. Hartnett held numerous senior level positions with
the company, including Chief Executive Officer of UUNET and President of
Business Sales and Service at MCI Communications. Mr. Hartnett received his BA
degree from John Carroll University and an MA in Communications Arts from Loyola
Marymount University. Mr.Hartnett also serves on the board of DSL.net.
Other Executive Officers
Timothy G. Wenhold, 43, has been the Executive Vice President, Chief Operating
Officer and Secretary of the Company since March 10, 2004 and a director from
October 30, 2004 through September 15, 2005. Mr. Wenhold had been a consultant
to the Company from August 4, 2003 to March 10, 2004. From May 1, 2002 to August
31, 2003, Mr. Wenhold was founder and President of Factory X, Inc. a
manufacturer of licensed high end movie, comic and gaming collectibles. Prior
thereto, from January 1, 1985 to May 1, 2002, Mr. Wenhold was founder and
President of Sintaks, Inc., a system integration and technology consulting firm.
Sintaks was acquired by Canon in 1998.
Len von Vital, 54, has been the Chief Financial Officer of the Company since
April 9, 2004. Mr. von Vital was engaged by the Company as a consultant to
provide financial services from January 27, 2004 to April 9, 2004. From February
11, 2002 to October 31, 2003, Mr. von Vital was Chief Financial Officer of 4GL
School Solutions, Inc., a developer and vendor of special education software and
services. From April 2001 to November 2001, Mr. von Vital was Chief Financial
Officer of eCal Corporation, a developer and vendor of enterprise Internet
calendaring and scheduling software and services and was a consultant in
December 2001 and January 2002. From July 2000 to March 2001, Mr. von Vital was
Chief Financial Officer of National Dental Corporation, an e-commerce start-up
and software company providing procurement savings to the dental industry, and
from March 2000 to June 2000, was Chief Financial Officer of Financialweb.com,
an e-financial services company. From October 1998 to February 2000, Mr. von
Vital was the Chief Financial Officer of ESPS, Inc., a provider of enterprise
business-to-business document management and publishing software and services.
ESPS had its initial public offering in June 1999. Mr. von Vital also served as
interim CEO of ESPS, Inc. from June 1999 until October 1999. Prior thereto, he
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held the positions of senior vice president of product management and Chief
Financial Officer for Astea International, Inc., a developer and vendor of
enterprise customer relationship management software and services, that had its
initial public offering in July 1995. He also held senior financial positions
during a twelve-year career with Decision Data Inc., an international provider
of plug-compatible IBM computer peripheral equipment and services, including
Vice President of Mergers and Acquisitions, Corporate Controller and Principal
Accounting Officer. Mr. von Vital is a certified public accountant.
Meetings of the Board of Directors; Committees
During the fiscal year ended December 31, 2004, the Board of
Directors held 9 meetings. During such period, each director attended at least
75% of the aggregate of (i) the number of meetings of the Board of Directors
held during the period he or she served on the Board, and (ii) the number of
committee meetings held during the period he or she served on such committee.
Compensation Committee. The Compensation Committee, currently
composed of Paul J. Keeler, John E. Goode and Paul L. Melchiorre, all of whom
are non-employee directors, reviews and advises the Company's directors with
regard to officer, director and employee compensation and administers the
Company's stock-based benefit plans. The Compensation Committee met one time
during the last fiscal year.
Audit Committee. The Audit Committee consists of Paul L. Melchiorre,
John E. Goode and Paul J. Keeler, none of whom is an officer or employee of the
Company. The Audit Committee is established in accordance with Section
3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. Each member
meets the independence requirements for audit committee members under the
listing standards of the Nasdaq Stock Market, as required by the Company's Audit
Committee Charter. The Company's Board of Directors has determined that a member
of the Audit Committee, Paul J. Keeler, qualifies as an "audit committee
financial expert" as defined in Item 401(e) of Regulation S-B promulgated by the
SEC. He is also "independent" as such term is defined in Item 7(d)(3)(iv)(B) of
Schedule 14A under the Securities Exchange Act of 1934, as amended. The
Committee provides assistance to the Company's directors in fulfilling the
Board's oversight responsibility as to the Company's accounting, auditing and
financial reporting and the quality and integrity of the financial reports of
the Company. The specific functions and responsibilities of the Audit Committee
are set forth in the written charter of the Audit Committee adopted by the Board
of Directors, a copy of which is attached as Appendix A to this proxy statement.
The Audit Committee reviews and reassesses the Charter annually and recommends
any changes to the Board for approval. A report of the Audit Committee appears
under the caption "Audit Committee Report," below. The Audit Committee met 4
times during the last fiscal year.
Nominating Committee. The Nominating Committee was created in
February, 2005 and is currently comprised of John E. Goode, Paul L. Melchiorre
and Paul J. Keeler. The members of the Nominating Committee are independent, as
independence for nominating committee members is defined under the listing
standards of the Nasdaq Stock Market. The Nominating Committee is responsible
for considering and making recommendations to the Board of Directors concerning
the appropriate size of the Board and nominees to stand for election or fill
vacancies on the Board. In particular, the Nominating Committee will identify,
recruit, consider and recommend candidates to fill positions on the Board in
accordance with its criteria for Board membership (as such criteria is generally
described below). In searching for qualified director candidates to nominate for
election at an Annual Meeting of Stockholders, the Nominating Committee will
initially consider nominating the current directors whose terms are expiring and
shall consider their past performance on the Board, along with the criteria for
Board membership, in determining whether to nominate them for re-election. In
connection with nominations for elections at Annual Meetings or to fill
vacancies in the Board, the Nominating Committee may solicit the current members
of the Board to identify qualified candidates through their business and other
organizational networks and may also retain director search firms as it
determines necessary in its own discretion.
The Nominating Committee will also consider any director candidates
proposed in good faith by a stockholder. To do so, a stockholder must send the
candidate's name, credentials, contact information and his or her written
consent to be considered as a candidate to the Company's Corporate Secretary.
The proposing stockholder should also include his or her contact information and
a statement of his or her share ownership. The Nominating Committee may from
time to time adopt a timeline within which stockholder nominations must be
received in order to be considered by the Nominating Committee, and the
Nominating Committee will publish this timeline in a press release or filing
with the Securities and Exchange Commission.
5
The Nominating Committee would then consider the potential pool of
director candidates derived from the foregoing process, select the top
candidates to fill the number of openings based on their qualifications, the
Board's needs (including the need for independent directors) and the criteria
for Board membership. The Nominating Committee will then conduct a thorough
investigation of the proposed candidates' backgrounds to ensure there is no past
history that would disqualify the candidate from serving as a director of the
Company. Those candidates that are selected and pass the background
investigation will be recommended to the full Board for nomination.
The criteria for a nominee to the Board includes, among other
things:
o The highest personal and professional ethics, strength of
character, integrity and values;
o Experience as a senior manager, chief operating officer or
chief executive officer of a relatively complex organization
or, if in a professional or scientific capacity, be accustomed
to dealing with complex problems, or otherwise shall have
obtained and excelled in a position of leadership;
o Education, experience, intelligence, independence, fairness,
reasoning ability, practical wisdom, and vision to exercise
sound, mature judgments on a macro and entrepreneurial basis
on matters which relate to the current and long-term
objectives of the Company;
o Competence and willingness to learn the Company's business and
confidence to express his/her personal views;
o The breadth of viewpoint and experience necessary for an
understanding of the diverse and sometimes conflicting
interests of stockholders and other constituencies, while
still recognizing the particular responsibilities of the Board
of Directors;
o The nominee should be of such an age at the time of election
to assure a minimum of three years of service as a director;
o The nominee should be free and willing to attend regularly
scheduled meetings of the Board of Directors and its
committees over a sustained period and otherwise be able to
contribute a reasonable amount of time to the affairs of the
Company and its affiliates; Participation on other boards (no
more than three other operating companies (i.e., excluding
charitable or civic organizations)) is desired in providing
breadth of experience to the Board;
o Personality, tact, sensitivity, and perspective to work well
with others;
o The stature and capability to represent the Company before the
public, stockholders, and other various individuals and groups
that affect the Company; The nominee should have the
capability to "network" with others for the benefit of the
Company; and
o Willingness to appraise objectively the performance of
management in the interest of the stockholders and possess an
inquiring and independent mind willing to question
management's assumptions when inquiry is appropriate.
While the Nominating Committee does not have a formal charter, the
Board adopted guidelines addressing the purpose and responsibilities of the
Nominating Committee in connection with it formation, which guidelines include
procedures for recruiting, considering and recommending nominees to the Board
and criteria for Board membership. Since the Nominating Committee was not
created until February 2005, there were no meeting of this Committee during the
last fiscal year.
6
Board Policies Regarding Communications With the Board of Directors and
Attendance at Annual Meetings
The Board of Directors maintains a process for stockholders to
communicate with the Board of Directors. Stockholders wishing to communicate
with the Board of Directors, or any individual member(s) of the Board of
Directors, can send a written communication to the attention of the Board of
Directors (or specific individual director(s), if applicable) at the following
address: c/o Corporate Secretary, 2250 Butler Pike, Suite 150, Plymouth Meeting,
PA 19462. The Corporate Secretary will forward such communication to the full
Board of Directors or to any individual director or directors to whom the
communication is directed unless the communication is unduly hostile,
threatening, illegal or similarly inappropriate, in which case the Corporate
Secretary has the authority to discard the communication or take appropriate
legal action regarding the communication.
While the Company does not have a formal written policy regarding
Board member attendance at its Annual Meeting, the Company actively encourages
its directors to attend the Annual Meeting of Stockholders. The Company did not
hold an Annual Meeting of Stockholders in 2004.
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors has:
o reviewed and discussed the audited financial statements for
the fiscal year ended December 31, 2004 with the Company's
management;
o discussed with the Company's independent registered public
accountants the matters required to be discussed by Statement
on Accounting Standards No. 61, as the same was in effect on
the date of the Company's financial statements;
o received the written disclosures and the letter from the
Company's independent registered public accountants required
by Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees), as the same was in effect
on the date of the Company's financial statements; and
o discussed with the Company's independent registered public
accountants their independence from the Company and its
management.
Management is responsible for the preparation, presentation and
integrity of the Company's financial statements, the financial reporting
process, accounting principles and internal controls and procedures designed to
assure compliance with accounting standards and applicable laws and regulations.
The Company's independent registered public accountants are responsible for
performing an independent audit of the financial statements in accordance with
generally accepted auditing standards and issuing a report thereon. The Audit
Committee's responsibility is to monitor and oversee these processes. The Audit
Committee has relied, without independent verification, on the information
provided to it and on the representations of management and the independent
registered public accountants that the financial statements have been prepared
in conformity with generally accepted accounting principles.
Based on the review and discussions referred to in the items above,
the Audit Committee recommended to the Board of Directors that the audited
financial statements for the fiscal year ended December 31, 2004 be included in
the Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 2004.
The Audit Committee
Paul L. Melchiorre, Chairman
John E. Goode
Paul J. Keeler
7
Directors' Compensation
Prior to the adoption by the Company of amendments to the
compensation paid to non-employee directors, which is discussed below, as of
June 4, 2005 each non-employee director was entitled to receive a $1,000 fee for
each Board meeting he or she attended. Additionally, each committee member was
entitled to receive up to $500 per committee meeting attended. Each director who
is not an officer or employee of the Company is reimbursed for his or her
out-of-pocket expenses incurred in connection with attendance at meetings or
other Company business.
On February 11, 2005, the Board approved amendments to the
compensation paid to the non-employee directors. As of February 11, 2005, the
non-employee directors are no longer entitled to receive per meeting fees and
will be compensated as described below. The non-employee directors will be paid
the following annual rates for service on the Board, which will be paid on a
quarterly basis:
o Non-employee board member -- $10,000
o Non-employee Chairman of the Board -- $60,000
o Committee Chairman -- $3,000
o Committee Member -- $2,000
The directors will be reimbursed for out-of-pocket expenses incurred in
attending meetings. The Board also intends to issue stock options to
non-employee directors from time to time as determined by the Board in its
discretion.
The Company also adopted a compensation plan for outside
(non-employee) directors effective June 4, 2004. Each outside director will
receive, upon election to the Board, an option to purchase 60,000 shares of the
Company's Common Stock. The exercise price will be the average of the mean
between the bid and the asked price for the Common Stock at the close of trading
for the trading day immediately preceding the option grant. The option will vest
in increments of 20,000 shares, at the first, second and third anniversaries of
the date of grant. The outside directors in office on the effective date of the
compensation plan, L. Scott Perry, Charles R. Wood, and Catherine Cassel
Talmadge (collectively, the "Former Directors") received such option grant on
August 1, 2004. Paul J. Keeler, John E. Goode, Paul L. Melchiorre and Robert B.
Hartnett (collectively, the "Current Directors"), the directors presently in
office, received such option grant on October 30, 2004, October 30, 2004,
November 1, 2004 and September 15, 2005, respectively. The option grants to the
Former Directors were initially scheduled to vest in increments of 20,000 shares
at December 31, 2004, 2005 and 2006. However, pursuant to letter agreements
between the Company and each Former Director, each dated October 30, 2004, each
of which was entered into in connection with such Former Director's resignation
as a director, 35,000 shares of the option grant to each Former Director
automatically vested and the balance of such option grant (25,000 shares) will
not be exercisable. The option grants to each of Messrs. Keeler, Goode,
Melchiorre and Hartnett will vest in increments of 20,000 shares, at the first,
second and third anniversaries of the date of grant.
On January 10, 2005, the Compensation Committee granted to the
current Chairman of the Board of Directors, Paul J. Keeler, a warrant to
purchase 250,000 shares of the Common Stock at an exercise price of $2.10 per
share, which was the closing stock price of the Common Stock on the date of
grant. These warrants, which have a 5 year term and are immediately exercisable,
were issued to Mr. Keeler for serving as the Chairman of the Board.
On July 18, 2005, the Board of Directors granted, subject to
shareholder approval, each of Messrs. Keeler, Goode and Melchiorre, the three
outside directors on that date, options to purchase 737,654; 259,062 and 259,062
shares, respectively, of Common Stock at an exercise price of $.50 per share,
for a total of 1,255,778 shares. On September 15, 2005, the Board of Directors
granted, subject to shareholder approval, options to purchase 259,062 shares of
Common Stock to Mr. Hartnett at an exercise price of $.50 per share. Each option
vests one-third on the date of grant and the remaining two-thirds in equal
quarterly amounts during the first and second years after the date of grant.
The former Chairman of the Board of Directors, L. Scott Perry, was
paid $5,000 per quarter in 2004 for serving as Chairman of the Board of
Directors. Mr. Perry was paid $15,000 in 2004 pursuant to this arrangement,
prior to his resignation in October 2004.
8
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's Directors and executive officers, and persons who own more than ten
percent of the Common Stock, to file with the Securities and Exchange Commission
("SEC") initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company. Officers, Directors and
greater than ten percent stockholders (collectively, "Reporting Persons") are
additionally required to furnish the Company with copies of all Section 16(a)
forms they file.
To the Company's knowledge, based solely on review of the copies of
such reports furnished to us and written representations of the Reporting
Persons that no other reports were required with respect to fiscal year 2004,
all Section 16(a) filing requirements applicable to the Reporting Persons were
complied with on a timely basis in fiscal year 2004, except that (i) as to John
E. Goode, the Form 3 to report his ownership of securities as of October 30,
2004, the date he was elected as a director, was filed on November 30, 2004, and
the Form 4 to report the grant of options on October 30, 2004 covering 60,000
shares of Common Stock was filed on November 30, 2004; (ii) as to Paul J.
Keeler, the Form 3 to report his ownership of securities as of October 30, 2004,
the date he was elected as a director, was filed on November 30, 2004, and the
Form 4 to report the grant of options on October 30, 2004 covering 60,000 shares
of Common Stock was filed on November 30, 2004; (iii) as to Paul L. Melchiorre,
the Form 4 to report the grant of options on November 1, 2004 covering 60,000
shares of Common Stock was filed on November 5, 2004; (iv) as to L. Scott Perry,
a former director, the Form 4 to report the grant of options on August 1, 2004
covering 60,000 shares of Common Stock was filed on April 13, 2005; (v) as to
Robert M. Pons, the Form 3 to report his ownership of securities as of August
28, 2003, the date he was elected as an officer and director, was filed on March
16, 2004, the Form 4 to report the grant of options on March 12, 2004 covering
1,300,000 shares of Common Stock was filed on March 16, 2004, and the Form 4 to
report the grant of options on December 20, 2004 covering 400,000 shares of
Common Stock was filed on January 14, 2005; (vi) as to Catherine Cassel
Talmadge, a former director, the Form 4 to report the sale of 100 shares of
Common Stock on January 23, 2002 by her daughter under a Uniform Gift to Minor
Account for which Ms. Talmadge is the custodian was filed on March 16, 2004, and
the Form 4 to report the grant of options on August 1, 2004 covering 60,000
shares of Common Stock was filed on March 30, 2005; (vii) as to Len von Vital,
the Form 4 to report the grant of options on April 9, 2004 covering 300,000
shares of Common Stock was filed on April 13, 2004; (viii) as to Timothy G.
Wenhold, the Form 4 to report the grant of options on March 12, 2004 covering
700,000 shares of Common Stock was filed on March 16, 2004, and the Form 4 to
report the grant of options on December 20, 2004 covering 250,000 shares of
Common Stock was filed on January 14, 2005; (ix) as to Charles Wood, a former
director, the Form 4 to report the grant of options on August 1, 2004 covering
60,000 shares of Common Stock was filed on March 23, 2005; (x) as to Robert B.
Hartnett, the Form 3 to report his ownership of securities as of September 15,
2005, the date he was elected as a director, was filed on ________________,
2005, and the Form 4 to report the grant of options on September 15, 2005
covering 60,000 shares of Common Stock was filed on ________________, 2005; (xi)
as to Kevin Kimberlin, a stockholder owning greater than ten percent of the
Company's Common Stock, the annual Form 5 required to be filed within 45 days
after the end of the Company's fiscal year, was not filed until March 31, 2004;.
9
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 1, 2005, certain
information with respect to the beneficial ownership of the Company's Common
Stock and Preferred Stock by (i) each person known by the Company to
beneficially own more than 5% of the Company's outstanding shares of Common
Stock or Preferred Stock, (ii) each or the Company's directors, (iii) each of
the Named Executive Officers and (iv) all of the Company's executive officers
and directors as a group.
Common Stock Series A Preferred Stock
Amount and Nature Percent of Amount and Nature Percent of
Name and Address of of Beneficial Outstanding of Beneficial Outstanding
Beneficial Owner (1) Ownership (2) Shares (3) Ownership (2) Shares(3) Total (4)
CAMOFI, LDC 3,000,000(15) 32.19% 0 0 17.60%
Caymon Islands
C/O Centrecourt Asset Managemetn
8th Floor
350 Madison Avenue
New York, NY 10017
Kevin Kimberlin 2,784,871(5)(6) 31.40% 46,065(6) 5.96% 19.56%(5)(6)
c/o Spencer Trask
535 Madison Avenue
New York, New York 10021
TecCapital, Ltd. 1,353,288 21.41% 0 * 9.63%
Cedar House
41 Cedar Avenue
Hamilton, HM 12, Bermuda
Crestview Capital Masters, LLC 488,600(7) 7.26% 32,667 4.23% 5.64%(7)
Crestview Fund
Crestview Fund II
Crestview Offshore Fund
95 Revere, Suite F
Northbrook, IL 60062
Headwater Holdings 421,204(8) 6.25% 14,059 1.82% 3.88%(8)
220 Montgomery Street,
Suite 500
San Francisco, CA 94104
Vitel Ventures, Inc. 427,313(9) 6.33% 20,544 2.66% 4.37%(9)
802 Grand Pavilion, 1st Floor
P.O. Box 30543 SMB
Grand Cayman
Cayman Islands, BWI
Nimesh Patel 333,333 5.27% 0 * 2.37%
84-21 37th Avenue
Jackson Heights, NY 11372
10
Common Stock Series A Preferred Stock
Amount and Nature Percent of Amount and Nature Percent of
Name and Address of of Beneficial Outstanding of Beneficial Outstanding
Beneficial Owner (1) Ownership (2) Shares (3) Ownership (2) Shares(3) Total (4)
Ashok Patel 333,333 5.27% 0 * 2.37%
84-21 37th Avenue
Jackson Heights, NY 11372
Kala Patel 333,334 5.27% 0 * 2.37%
84-21 37th Avenue
Jackson Heights, NY 11372
Robert M. Pons 2,584,301(10) 29.04% 0 * 15.54%(10)
Len von Vital 1,057,192(11) 14.33% 0 * 7.00%(11)
Timothy G. Wenhold 1,713,836(12) 21.33% 0 * 10.87%(12)
John E. Goode 106,345(16) 1.65% 0 * .75%
Paul J. Keeler 515,860(13) 7.55% 0 * 3.54%(13)
Paul L. Melchiorre 106,345(17) 1.65% 0 * .75%
All executive officers and
directors as a group (6 persons) 6,083,879(14) 49.07% 0 * 30.23%(14)
- ----------
* Less than 1%
(1) Addresses are only given for holders of 5% or more of our outstanding
common stock who are not currently officers or directors. This table
contains information furnished to us by the respective stockholders or
contained in filings made with the Securities and Exchange Commission
("SEC"), or, with respect to shares of common stock underlying certain
warrants, options and convertible preferred stock, from our records.
(2) Under the rules of the SEC, a person is deemed to be the beneficial owner
of a security if such person has or shares the power to vote or direct the
voting of such security or the power to dispose or direct the disposition
of such security. A person is also deemed to be a beneficial owner of any
securities if that person has the right to acquire beneficial ownership
within 60 days of September 1, 2005. For purposes of beneficial ownership
of our common stock, excludes shares of common stock that may be acquired
upon the conversion of Series A preferred stock held by such person. Also
excludes 1,628,507 shares of common stock in the aggregate subject to
issuance in connection with the payment of stock dividends to holders of
our preferred stock for the period ended September 1, 2005. Except as
otherwise indicated, the named entities or individuals have sole voting
and investment power with respect to the shares of common stock and
preferred stock beneficially owned.
(3) Represents the number of shares of common stock or preferred stock (as
applicable) beneficially owned as of September 1, 2005 by each named
person or group, expressed as a percentage of the sum of all of (i) the
shares of such class outstanding as of such date, and (ii) the number of
shares of such class not outstanding, but beneficially owned by such named
person or group as of such date (e.g., shares of common stock underlying
vested options or warrants). For purposes of beneficial ownership of our
common stock, excludes shares of common stock that may be acquired upon
the conversion of Series A preferred stock held by such person. There were
6,319,559 shares of common stock and 772,765 shares of Series A preferred
stock outstanding on September 1, 2005.
(4) The percentage in this column is based upon the total number of shares of
common stock beneficially owned, calculated by assuming conversion of all
of the outstanding Series A preferred shares.
(5) Includes holdings of (i) Spencer Trask Ventures, Inc., a Delaware
corporation and wholly-owned subsidiary of Spencer Trask & Co., a Delaware
corporation, of which Kevin Kimberlin is the controlling shareholder, (ii)
Spencer Trask Investment Partners LLC, a Delaware limited liability
company, of which Kevin Kimberlin is the non-member manager, and (iii)
Spencer Trask Private Equity Fund I, LP, Spencer Trask Private Equity Fund
II LP, Spencer Trask Private Equity Accredited Fund III, LLC, and Spencer
Trask Illumination Fund (collectively, the "Funds"), of which Kevin
Kimberlin is a 100% owner of the entity that is a 100% owner of the
manager of such Funds. Includes 2,496,753 shares of common stock subject
to warrants.
11
(6) Excludes 1,831,755 shares of common stock subject to warrants transferred
to employees of Spencer Trask and Spencer Trask & Co.
(7) Includes holdings of (i) Crestview Fund I, LP, (ii) Crestview Fund II, LP,
(iii) Crestview Offshore Fund and (iv) Crestview Capital Masters, LLC
(collectively, the "Crestview Entities")., Daniel Walsh, Stewart Flink and
Bob Hoyt share voting and investment power over the shares held by each of
the Crestview Entities. Includes 409,599 shares of common stock subject to
warrants.
(8) Includes 421,204 shares of common stock subject to warrants.
(9) Includes 427,312 shares of common stock subject to warrants.
(10) Includes of 50,000 shares of common stock subject to warrants and 969,046
shares of common stock subject to options. Also includes 1,560,255 shares
of common stock subject to options issued that are subject to stockholder
approval.
(11) Includes 93,750 shares of common stock subject to options. Also includes
963,442 shares of common stock subject to options issued that are subject
to stockholder approval.
(12) Includes 533,333 shares of common stock subject to options and 8,333
shares of common stock subject to warrants. Also includes 1,172,170 shares
of common stock subject to options issued that are subject to stockholder
approval.
(13) Includes 250,000 shares of common stock subject to warrants and 20,000
shares of common stock subject to options. Also includes 245,860 shares of
common stock subject to options issued that are subject to stockholder
approval.
(14) Includes 1,964,461 shares of common stock subject to options and warrants
issued to our executive officers and directors. Also includes 4,114,418
shares of common stock subject to options issued to directors and officers
that are subject to stockholder approval. Excludes 86,345 shares of common
stock subject to options issued to Robert Hartnett on September 15, 2005
that are subject to stockholder approval.
(15) Includes 3,000,000 shares of common stock subject to warrants.
(16) Includes 20,000 shares of common stock subject to options and 86,345
shares of common stock subject of options issued that are subject to
stockholder approval.
(17) Includes 20,000 shares of common stock subject to options and 86,345
shares of common stock subject of options issued that are subject to
stockholder approval.
EXECUTIVE COMPENSATION
Summary
The following table sets forth, for each of the last three full
fiscal years, information concerning annual and long-term compensation, paid or
accrued for services in all capacities during the such fiscal years, for the
Company's Chief Executive Officer during 2004 and for the two other executive
officers (collectively, the "Named Executive Officers") with base salary and
bonuses exceeding $100,000 during 2004:
Summary Compensation Table
Annual Compensation Long-term Compensation
----------------------------------------------------- -------------------------
Other
Annual Restricted Securities
Name and Principal Fiscal Compensation Stock Underlying All Other
Position Year Salary Bonus (1) Awards (2) Options(3) Compensation
- -------------------------------------------------------------------------------------------------------------------------------
Robert Pons (4) 2004 $ 236,000 $ 105,000 $ -- -- 1,700,000 $ 100,000
Chief Executive Officer 2003 44,000 -- -- -- 50,000 16,000
2002 -- -- -- -- -- --
Timothy G. Wenhold (5) 2004 113,333 85,000 -- -- 950,000 40,000
Chief Operating Officer 2003 -- -- -- -- 8,333 35,000
2002 -- -- -- -- -- --
Len von Vital (6) 2004 108,333 -- -- -- 300,000 20,875
Chief Financial Officer 2003 -- -- -- -- -- --
2002 -- -- -- -- -- --
(1) The aggregate amount of personal benefits not included in the Summary
Compensation Table does not exceed the lesser of either $50,000 or 10% of
the total annual salary and bonus paid to the Named Executive Officers.
(2) The Named Executive Officers did not receive any restricted stock awards
or long-term incentive plan payouts during fiscal 2004, 2003 or 2002.
12
(3) See description below under the heading "Stock Options" regarding the
grants made in 2004. In addition, Mr. Pons was granted warrants to
purchase 50,000 shares of Common Stock in 2003 pursuant to his Consulting
Agreement with the Company dated August 4, 2003 (see footnote 4 below).
Mr. Wenhold was granted warrants to purchase 8,333 shares of Common Stock
in 2003 pursuant to his Consulting Agreement with the Company dated August
1, 2003 (see footnote 5 below). This excludes grants during 2005 of
options to purchase 4,681,233; 3,516,863 and 2,890,616 shares to Messrs.
Pons, Wenhold and von Vital, respectively.
(4) Salary in 2003 reflects amounts paid under Mr. Pons' Consulting Agreement
with the Company dated August 4, 2003. Salary in 2004 includes $61,000
paid under his Consulting Agreement. Mr. Pons served as Interim Chief
Executive Officer from August 28, 2003 to January 24, 2004. He became the
Company's Chief Executive Officer on January 24, 2004. The entry in 2004
under "All Other Compensation" represents $100,000 paid to Mr. Pons by the
Company as a transaction fee in connection with the 2004 Private Placement
transaction, which fee was paid pursuant to the terms of his Consulting
Agreement and his Employment Agreement with the Company dated March 12,
2004.
(5) Mr. Wenhold became the Company's Chief Operating Officer on March 10,
2004. Amounts under "All Other Compensation" represent payments to Mr.
Wenhold under his Consulting Agreement with the Company dated August 4,
2003.
(6) Mr. von Vital became the Company's Chief Financial Officer on April 9,
2004. Amounts under "All Other Compensation" represent payments to Mr. von
Vital for consulting services provided by him to the Company in 2004.
Stock Options
The following table sets forth information with respect to stock
options granted to the Named Executive Officers in fiscal year 2004:
Option Grants in Last Fiscal Year
Number of % of Total Options Granted
Securities Underlying to Employees in the fiscal Exercise Expiration
Name Options Granted(6) year Price Date
- ------------------------------------------------------------------------------------------------ --------------------
Robert Pons 1,300,000(1) 39.4% $1.50 March 12, 2014
Robert Pons 400,000(2) 12.1% $2.07 December 20, 2014
Timothy G. Wenhold 700,000(3) 21.2% $1.50 March 12, 2014
Timothy G. Wenhold 250,000(4) 7.6% $2.07 December 20, 2014
Len von Vital 300,000(5) 9.1% $3.75 April 9, 2014
(1) This option to purchase 1,300,000 shares of Common Stock was granted
pursuant to an Option Agreement with Mr. Pons dated as of March 12, 2004.
This option vests as follows: (i) 557,141 shares on the date of grant
(March 12, 2004) and (ii) the balance of the 742,859 shares vests in equal
amounts as of the last day of each calendar quarter beginning with the
quarter ending March 31, 2004 and ending with the quarter ending December
31, 2007.
(2) This option to purchase 400,000 shares of Common Stock was granted
pursuant to an Option Agreement with Mr. Pons dated as of December 20,
2004. This option vests on the last day of each month in 36 equal monthly
installments beginning on December 31, 2004 and ending on November 30,
2007.
(3) This option to purchase 700,000 shares of Common Stock was granted
pursuant to an Option Agreement with Mr. Wenhold dated as of March 12,
2004. This option vests as follows: (i) 300,000 shares on the date of
grant (March 12, 2004) and (ii) the balance of the 400,000 shares vests in
equal amounts as of the last day of each calendar quarter beginning with
the quarter ending March 31, 2004 and ending with the quarter ending
December 31, 2007.
(4) This option to purchase 250,000 shares of Common Stock was granted
pursuant to an Option Agreement with Mr. Wenhold dated as of December 20,
2004. This option vests on the last day of each month in 36 equal monthly
installments beginning on December 31, 2004 and ending on November 30,
2007.
13
(5) This option to purchase 300,000 shares of Common Stock was granted
pursuant to an Option Agreement with Mr. von Vital dated as of April 9,
2004. This option vests on the last day of each calendar quarter in 16
equal quarterly installments beginning on June 30, 2004 and ending on
March 31, 2008.
(6) This table excludes conditional grants during 2005 of options to purchase
4,681,233; 3,516,863 and 2,890,616 shares to Messrs. Pons, Wenhold and von
Vital, respectively.
The following table sets forth information as to the number of
shares of Common Stock underlying unexercised stock options and the value of
unexercised in-the-money stock options at December 31, 2004:
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year End Option Value (1)(2)
Number of Securities Value of Unexercised
Shares Underlying Options at In-The-Money Options at
Acquired on Value Fiscal Year End Fiscal Year End Exercisable/
Name Exercise Realized Exercisable/Unexercisable Unexercisable
- --------------------------------------------------------------------------------------------------------------------
Robert Pons -- -- 742,856/957,144 $482,856/$394,144
Timothy G. Wenhold -- -- 400,000/550,000 $260,000/$215,000
Len von Vital -- -- 56,250/243,750 $0/$0
(1) Value is based on the closing price of the Company's Common Stock as
reported by the OTC Bulletin Board on December 31, 2004 ($2.15) less the
exercise price of the option.
(2) No stock options were exercised by the Named Executive Officers during the
fiscal year ended December 31, 2004.
Agreements with Named Executive Officers
The Company entered into an Employment Agreement with Robert Pons,
dated March 12, 2004. The agreement provides for a 4 year term with a base
annual salary of $210,000 in the first year of the term, subject to increases as
determined by the Board of Directors. Mr. Pons shall also be eligible for
bonuses in the event the Company meets certain performance goals related to
raising additional capital, revenue targets or other goals mutually set by Mr.
Pons and the Company. On February 11, 2005, the Compensation Committee approved
a 15% increase in Mr. Pons' base annual salary to $241,500 and a cash bonus
based on the following: (i) successful integration of KPCCD, Inc., a wholly
owned subsidiary of the Company acquired in January 2005 - 15% of base
compensation; (ii) successful introduction of Uphonia "brand" and equipment -
15% of base compensation; and (iii) attainment of cash flow break even or better
- - 35% of base compensation. The determination of the first two bonus items will
be based on specific parameters to be determined by the Compensation Committee
and the third item would be based on the actual results for calendar year 2005.
Mr. Pons also received options to purchase 1,300,000 shares and
400,000 shares of the Company's Common Stock under non-plan option agreements,
which options have exercise prices of $1.50 and $2.07 per share, respectively,
and a term of 10 years. The option agreement covering 1,300,000 shares provides
for 557,141 shares to vest immediately and the remaining 742,859 shares to vest
in equal amounts as of the last day of each calendar quarter commencing March
31, 2004. The option agreement covering 400,000 shares provides for the shares
to vest in thirty-six equally monthly installments (on the last calendar day of
each month) of 11,111 shares per month beginning December 31, 2004. The options
will vest immediately upon a Change of Control (as defined in his respective
option agreements) or in the event Mr. Pons is terminated Other Than for Cause
or he terminates employment for Good Reason (as each is defined under the
Employment Agreement). Mr. Pons will also receive 12 months of base salary upon
termination Other Than for Cause or if he terminates employment for Good Reason.
The Company entered into an Employment Agreement with Timothy G.
Wenhold, dated March 12, 2004. The agreement provides for a 4 year term with a
base annual salary of $170,000 in the first year of the term, subject to
increases as determined by the Board of Directors. Mr. Wenhold shall also be
eligible for bonuses in the event we meet certain performance goals related to
raising additional capital, revenue targets or other goals mutually set by Mr.
14
Wenhold and the Company. On February 11, 2005 the Compensation Committee
approved a 15% increase of base compensation for Mr. Wenhold to $195,500, and a
cash bonus based on the following: (i) successful integration of KPCCD, Inc. -
15% of base compensation; (ii) successful introduction of Uphonia "brand" and
equipment - 15% of base compensation; and (iii) attainment of cash flow break
even or better - 35% of base compensation. The determination of the first two
bonus items will be based on specific parameters to be determined by the
Compensation Committee and the third item would be based on the actual results
for calendar year 2005.
Mr. Wenhold also received options to purchase 700,000 shares and
250,000 shares of the Company's Common Stock under non-plan option agreements,
which options have exercise prices of $1.50 per share and $2.07 per share,
respectively, and a term of 10 years. The option agreement covering 700,000
shares provides for 300,000 shares to vest immediately and the remaining 400,000
shares to vest in equal amounts as of the last day of each calendar quarter
commencing March 31, 2004. The option agreement covering 250,000 shares provides
for the shares to vest in thirty-six equal monthly installments (on the last
calendar day of each month) of 6,944 per month beginning December 31, 2004. The
options will vest immediately upon a Change of Control (as defined in his option
agreement) or in the event Mr. Wenhold is terminated Other Than for Cause or he
terminates employment for Good Reason (as each is defined under the Employment
Agreement). Mr. Wenhold will also receive 12 months of base salary upon
termination Other Than for Cause or if he terminates employment for Good Reason.
On April 9, 2004, the date Mr. von Vital was hired as the Company's
Chief Financial Officer, he was granted options to purchase 300,000 shares of
Common Stock, under a non-plan option agreement, which options have an exercise
price of $3.75 per share and a term of ten years. This option vests on the last
day of each calendar quarter in 16 equal quarterly installments beginning on
June 30, 2004 and ending on March 31, 2008.
On July 18, 2005, the Board of Directors granted, subject to
shareholder approval, each of Messrs. Pons, Wenhold, and von Vital, the Names
Executive Officers, options to purchase 4,681,233; 3,516,863 and 2,890,616
shares, respectively, of Common Stock at an exercise price of $.50 per share,
Each option vests one-third on the date of grant and the remaining two-thirds in
equal quarterly amounts during the first and second years after the date of
grant.
On August 31, 2005, the Company entered into agreements with each of
Messrs. Pons, Wenhold, and von Vital, the Names Executive Officers, pursuant to
which each agreed to allow the Company to re-allocate to its new lender certain
authorized, but unissued shares of Common Stock which had previously been
reserved for issuance with respect to certain of their previously granted
options for 1,300,000; 700,000 and 300,000 shares, respectively. In return, the
Company agreed that, at such time as an increase to its authorized shares of
Common Stock was approved by the stockholders, the Company would reserve an
equivalent number of shares of Common Stock for issuance with respect to such
options. The purpose of this re-allocation was to allow the Company to satisfy,
in part, its contractual obligations to its new lender.
15
EQUITY COMPENSATION PLANS
The table below sets forth certain information as of our fiscal year
ended December 31, 2004 regarding the shares of our Common Stock available for
grant or granted under compensation plans that (i) were adopted by our
stockholders and (ii) were not adopted by our stockholders. The table below
excludes the 2004 Stock Option Plan, as discussed in Proposal No. 4 beginning on
page ___, and the conditional grant of stock options to certain key executive
officers and directors, as discussed in Proposal No. 5 beginning on page ___,
both of which have been approved by the Board of Directors, subject to
shareholder approval.
Equity Compensation Plan Information
Weighted-average Number of securities remaining
Number of securities to be exercise price of available for future issuance
issued upon exercise of outstanding options, under equity compensation
outstanding options, warrants warrants and rights plans (excluding securities in
and rights (#) ($) the first column of this table)
----------------------------- ------------------- -------------------------------
Equity compensation plans
approved by security
holders 8,167 $8.55 250,000
Equity compensation plans
not approved by security
holders 3,640,875 $1.94 200,000
--------- ----- -------
Total 3,649,042 $1.95 450,000
========= ===== =======
Description of Plans Not Adopted by Stockholders
The aggregate number of shares of the Company's Common Stock for
which options may be granted under the 1999 Stock Option Plan ("1999 Plan") is
66,667. Such options may be issued to key employees, officers, directors and
consultants. The 1999 Plan is administered by the Board of Directors. The Board
of Directors may grant only non-qualified stock options (options which do not
comply with section 422 of the Internal Revenue Code of 1986, as amended) under
the 1999 Plan. The 1999 Plan permits the administrators of the plan, in their
sole discretion, to allow the cashless exercise of options. As of December 31,
2004, there were options to purchase 17,000 shares of Common Stock issued and
outstanding and -0- available for grant pursuant to the 1999 Plan.
On December 28, 1999, the Board of Directors granted Stephen Lawlor,
then a director, an option to purchase 3,333 shares of Common Stock at an
exercise price of $102.042 per share. Such option vested immediately and expired
on December 27, 2004.
The aggregate number of shares of the Company's Common Stock for
which options may be granted under the 2000 Stock Option Plan ("2000 Plan") is
225,000. Such options may be issued to key employees, officers who are key
employees, directors and consultants. The 2000 Plan is administered by the Board
of Directors. The Board of Directors may grant only non-qualified stock options
(options which do not comply with section 422 of the Internal Revenue Code of
1986, as amended) under the 2000 Plan. The 2000 Plan permits the administrators
of the plan, in their sole discretion, to allow the cashless exercise of
options. As of December 31, 2004, there were options to purchase 113,717 shares
of Common Stock issued and outstanding and -0- shares of common stock available
for grant pursuant to the 2000 Plan.
The Company adopted a compensation plan (the "Non-Employee Director
Plan") for outside (non-employee) directors effective June 4, 2004. Each outside
director will receive an option for 60,000 shares. The option will vest in
increments of 20,000 shares at the first, second and third anniversaries of the
date of grant. The options expire ten years from the date of grant. In August
2004, the Company granted options to purchase 60,000 shares of Common Stock to
all three of its then non-employee directors pursuant to the Non-Employee
Director Plan, which options have an exercise price of $1.75 per share. In
November 2004 each of these non-employee directors resigned and 35,000 shares
16
vested for each director. During the quarter ended December 31, 2004, the
Company granted options to purchase 60,000 shares of Common Stock to all three
non-employee directors pursuant to the Non-Employee Director Plan which options
have an exercise price of $1.67 per share and a term of 10 years. The options
vest annually over three years commencing October 30, 2005. The options will
vest immediately upon a Change of Control (as defined in their option
agreements).
In connection with entering into an Employment Agreement on March
12, 2004, the Company granted to Robert Pons, the President and Chief Executive
Officer, an option to purchase 1,300,000 shares of Common Stock, which option
has an exercise price of $1.50 per share and a term of 10 years. The option
provides for 557,141 shares to vest immediately and the remaining 742,859 shares
to vest in equal amounts as of the last day of each calendar quarter commencing
March 31, 2004. The option will vest immediately upon a Change of Control (as
defined in his option agreement) or in the event Mr. Pons is terminated Other
Than for Cause or he terminates employment for Good Reason (as each is defined
under the Employment Agreement).
In connection with entering into an Employment Agreement on March
12, 2004, the Company granted to Timothy Wenhold, the Company's Executive Vice
President and Chief Operating Officer, an option to purchase 700,000 shares of
Common Stock, which option has an exercise price of $1.50 per share and a term
of 10 years. The option provides for 300,000 shares to vest immediately and the
remaining 400,000 shares to vest in equal amounts as of the last day of each
calendar quarter commencing March 31, 2004. The option will vest immediately
upon a Change of Control (as defined in his option agreement) or in the event
Mr. Wenhold is terminated Other Than for Cause or he terminates employment for
Good Reason (as each is defined under the Employment Agreement)
In April 2004, the Company granted to Len von Vital, its Chief
Financial Officer, an option to purchase 300,000 shares of Common Stock, which
options have an exercise price of $3.75 per share, and a term of 10 years. The
options vest in equal amounts over four years as of the last day of each
calendar quarter commencing September 30, 2004. The options will vest
immediately upon a Change of Control (as defined in Mr. von Vital's option
agreements).
In April 2004, the Company granted to Matthew Stecker and Daniel
Wainfan, its then Chief Technology Officer and Vice President of Marketing,
respectively, an option for each to purchase 150,000 and 100,000 shares of
Common Stock, respectively, which options have exercise prices of $1.50 and
$3.25 per share, respectively, and a term of 10 years. The options vest in equal
amounts over four years as of the last day of each calendar quarter commencing
September 30, 2004. The employment of each of Messrs. Stecker and Wainfan with
the Company was terminated on April 15, 2005. Pursuant to the terms of the
option agreements, the options will automatically terminate on April 15, 2006,
the date which is one year from the employment termination date of each of
Messrs. Stecker and Wainfan.
In December 2004, the Company granted to Messrs. Pons and Wenhold
options to purchase 400,000 and 250,000 shares of Common Stock, respectively,
which options have an exercise price of $2.07 per share and a term of 10 years.
The options vest monthly over three years commencing December 31, 2004. The
options will vest immediately upon a Change of Control (as defined in their
option agreements).
In December 2004, the Company granted to Dan Wainfan, the Company's
then Vice President of Marketing, an option to purchase 100,000 shares of Common
Stock, which option has an exercise price of $1.56 per share and a term of 10
years. The option vests quarterly over three years commencing March 31, 2005.
Pursuant to the terms of the option agreement, the options will automatically
terminate on April 15, 2006, the date which is one year from the employment
termination date of Mr. Wainfan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 31, 2005, the Company executed agreements to obtain
financing from CAMOFI Master, LDC, a Cayman Islands limited duration company
(the "Lender"), consisting of a Senior Secured Convertible Note in the principal
amount of $500,000 (the "Senior Note") and a Revolving Convertible Note in the
principal amount of $1,900,000 (the "Revolving Note") which availability is
based upon the Company's eligible accounts receivable. Based on such
availability, the Revolving Note may be increased to $2,500,000. The term of the
financing is for 30 months from the closing date.
17
Interest is payable monthly in arrears at WSJ Prime plus 4%, in cash
or, at the Company's option, subject to the conditions thereto (including those
as to trading volume) being met, in registered Common Stock valued at 85% of the
volume weighted average trading price for the Common Stock for the 10 days prior
to the payment date.
The Senior Note and the Revolving Note may be converted into Common
Stock at a fixed conversion price that is $0.50 per share. The conversion price
is subject to full ratchet anti-dilution protection.
The Company will reduce the principal amount of the Senior Note by
1/24th per month starting six months after closing, payable in cash or, subject
to conditions thereto (including those as to trading volume) being met, in
registered Common Stock. If such amortization is in cash, the payments will be
at 102% of the monthly principal amortization amount. The Company may pay the
principal amortization with Common Stock valued at 85% of the volume weighted
average trading price for the Common Stock for the 10 days prior to the payment
date if, among other things, our trading volume is in excess of a stated amount.
The Senior Note and Revolving Note are senior in right of payment to
any and all of the Company's indebtedness and are secured by a first lien on all
of the Company's assets. The loan is guaranteed by the Company's subsidiary,
KPCCD, Inc.
The Company has the right to prepay in cash all or a portion of the
Senior Note and Revolving Note at 115% of the principal amount plus accrued
interest to the date of repayment.
The Company is required to prepay in cash, half of the outstanding
Senior Note and Revolving Note at 115% of the principal amount plus accrued
interest to the date of repayment on the closing of a qualified offering as
defined in the agreement or, in the event that no qualified offering occurs
during the term, at maturity.
The Company issued the Lender five year warrants to purchase an
aggregate of 3,000,000 shares of Common Stock at an exercise price of $.50 per
share. Such warrants are exercisable on a cashless basis and are subject to full
ratchet anti-dilution protection.
The Company is required to file with the SEC a registration
statement covering the shares of Common Stock underlying the Senior Note,
Revolving Note and the warrants within 30 days and have it declared effective
within 90 days of the closing date. If the registration statement is not filed
within 30 days or declared effective within 90 days of the closing date, the
Company will pay liquidated damages to the lender. The damages will be paid in
cash in an amount equal to 1 1/2% of the Senior Note for the first 30 days (or
part thereof) after the 30th or 90th day, and an additional 1 1/2% for any
subsequent 30-day period (or part thereof) thereafter.
The Company used approximately $1,010,000 (including fees) to post a
letter of credit in favor of Sprint as required by the Company's contract with
Sprint. The balance of the funds would be used for working capital.
The lender has the right to invest up to 50% of any additional
equity financing contemplated by the Company or any of its subsidiaries during
the term of the loan on terms no less favorable than those proposed by third
party investors in such contemplated equity financing.
On January 28, 2005, the Company entered into an agreement with
TecCaptial, Ltd. ("TEC") pursuant to which TEC agreed to waive and release
certain rights TEC has under a certain stock purchase agreement dated May 12,
2000 TEC provided these waivers and releases in consideration for the grant to
TEC of 500,000 shares of the Company's Common Stock. The Company believes that
TEC is the beneficial owner of more than ten percent of the Company's Common
Stock. In the event that a registration statement covering all of TEC's shares
of Common Stock is not declared effective within 270 days after the date of the
agreement, TEC may (in its sole discretion ) return all of the shares to the
Company within 330 days from the date of the agreement, and in such case the
waivers and releases granted in the agreement would become void and TEC could
pursue any claims against the Company as if such waivers and releases had never
been granted.
18
On January 7, 2005, the Company acquired all of the issued and
outstanding capital stock of KPCCD, Inc. ("KPCCD") pursuant to a Stock Purchase
Agreement by and among Nimesh Patel, Ashok Patel and Kala Patel (collectively,
the "Sellers") and the Company, dated December 19, 2004 ("KPCCD Agreement").
Following the closing of this acquisition, KPCCD became a wholly-owned
subsidiary of the Company. Pursuant to the terms of the Agreement, the Company
issued an aggregate of 1,000,000 shares of its Common Stock to the Sellers as
consideration for acquiring KPCCD. As a result, each of the Sellers owns more
than 5% of the Company's issued and outstanding Common Stock, as described above
in Security Ownership of Certain Beneficial Owners and Management.
In connection with the closing of the transactions contemplated by
the KPCCD Agreement, on January 7, 2005 KPCCD, the Sellers and Prima
Communications, Inc. ("Prima"), a company controlled by the Sellers, entered
into a Master Vendor Agreement ("Vendor Agreement"). Under the Vendor Agreement,
Prima will sell to KPCCD at cost all of KPCCD's requirements of international
prepaid calling cards for up to one year after January 7, 2005. Upon
termination, amounts outstanding at the time of the termination shall be paid to
Prima and, under certain circumstances, KPCCD will be required to purchase from
Prima all inventory that Prima is holding and has ordered for future sale.
According to information provided to the Company by Prima management, inventory
held and ordered by Prima for future purchase by KPCCD consisted of
international prepaid calling cards amounting to approximately $1.2 million at
June 30, 2005. Such inventory, in its entirety, has been purchased by KPCCD and
sold to KPCCD's customers through the date of this filing and the balance at
June 30, 2005 is representative of the approximate amount that may be held by
Prima for future purchase.
Additionally, per the terms of the KPCCD Agreement, immediately
prior to the closing KPCCD distributed to Prima all of KPCCD's cash, accounts
receivable, inventory (including prepaid calling cards) and accounts payable.
The KPCCD Agreement also provides the Sellers with certain registration rights
with regard to the Company's Common Stock they received in the transaction. In
particular, the Sellers received "piggyback" registration rights for a period of
two years after the closing, which requires the Company to use best efforts to
include the Sellers' shares in any registration statement under the Securities
Act of 1933 that the Company otherwise files with the Securities and Exchange
Commission to register its Common Stock, except for certain registration
statements relating to an equity line of credit, employee benefit plans or
certain business combinations.
In connection with the transactions contemplated by the KPCCD
Agreement, the Company entered into employment agreements with each of Nimesh
Patel to be employed as President of KPCCD and Kala Patel to be employed as Vice
President of KPCCD, each dated January 7, 2005 (collectively, the "KPCCD
Employment Agreements"). Nimesh Patel and Kala Patel are each entitled to annual
compensation in the amount of $180,000 during the period in which the Vendor
Agreement is in effect, under the terms of their respective Employment
Agreements. Upon termination of the Vendor Agreement, the annual compensation
under each KPCCD Employment Agreement will be reduced to $120,000. Additionally,
under each of their respective Employment Agreements, Nimesh Patel and Kala
Patel are each entitled to a bonus equal to 17.5% of KPCCD's net operating cash
flow in excess of $50,000. The KPCCD Employment Agreements cannot be terminated
during the period in which the Vendor Agreement is in effect either by the
Company with or without cause or by Nimesh Patel or Kala Patel, voluntarily.
The Company entered into a consulting arrangement with Spencer Trask
in May 2003 providing that Spencer Trask would render corporate financial
consulting, financial advisory, and investment banking services to the Company
("Trask Consulting Agreement"). Under the Trask Consulting Agreement, the
Company agreed to pay consulting fees of $7,500 per month commencing July 1,
2003 thru May 31, 2004 and issued Spencer Trask 83,333 shares of Common Stock.
As part of the consulting arrangement, Spencer Trask acted as a
finder and assisted the Company with sales of Units consisting of convertible
debentures and warrants from May 2003 through November 2003 in the aggregate
amount of $2,685,000. The Company paid Spencer Trask a finders fee consisting of
$349,050 in cash (including finders fees and non-accountable expenses), 152,223
shares of Common Stock and a warrant to purchase 749,146 shares of Common Stock
at exercise prices ranging from $1.50 to $1.90 per share. The Company also
reimbursed Spencer Trask for $20,000 of legal expenses and $5,000 of
out-of-pocket expenses.
19
Under the terms of the Trask Consulting Agreement, the Company is
obligated to pay Spencer Trask a fee as a result of the closing of the Company's
acquisition of nReach, based on 5% of the first two-million dollars of the
aggregate consideration of such acquisition, 4% of the next two million dollars
or portion thereof, 3% of the third $2,000,000 or portion thereof, and 2.5% of
the balance of the consideration. For purposes of determining the aggregate
consideration, the total value of liabilities assumed are included, and fees on
any contingent payment shall be paid to Spencer Trask when such contingent
payment is made. Spencer Trask has agreed to accept shares of the Company's
Common Stock in lieu of cash with respect to such fees.
Under the terms of the Trask Consulting Agreement, in the event that
within 18 months after May 31, 2004 (under certain conditions), the Company
sells, outside the ordinary course of business, the Company or any of its
assets, securities or business by means of a merger, consolidation, joint
venture or exchange offer, or any transaction resulting in any change in control
of the Company or its assets or business, or the Company purchases, outside the
ordinary course of business, another company or any of its assets, securities or
business by means of a merger, consolidation, joint venture or exchange offer,
or the Company receives an investment in the Company (other than an investment
pursuant to an agented offering, which will be subject to compensation pursuant
to a separate arrangement with Spencer Trask), the Company will owe Spencer
Trask a cash fee and in some instances, warrants.
Spencer Trask served as the placement agent for the Company's $10
million private offering of investment Units consisting of shares of the
Company's Series A preferred stock and warrants to purchase Common Stock, which
transaction closed in February 2004 (the "2004 Private Placement"). In
accordance with the terms of the Placement Agency Agreement, dated January 29,
2004, Spencer Trask received compensation consisting of (i) a cash fee of
$1,002,500, or 10% of the aggregate purchase price of all of the Units acquired
for cash, (ii) a non-accountable expense allowance of $300,750, or 3% of the
aggregate proceeds of all Units sold for cash in the transaction, and (iii)
warrants to purchase a number of shares of Common Stock equal to 20% of the
shares of Common Stock underlying the securities in the Units sold for cash,
constituting in the aggregate warrants to purchase 1,336,666 shares of Common
Stock at $1.50 per share and warrants to purchase 1,336,666 shares of Common
Stock at $2.82 per share.
The Company entered into a consulting agreement with Robert Pons,
dated August 4, 2003 ("Pons Consulting Agreement"), whereby Mr. Pons rendered
consulting services to the Company related to its business activities, strategic
planning, and market research and strategic due diligence on proposed business
opportunities. The agreement had an initial term of four months and was
continued until Mr. Pons became the Company's Chief Executive Officer on January
24, 2004. As compensation for such services, the Company agreed to pay him a
cash fee of $15,000 per month ($4,000 of which was deferred until the Company
closed a financing on no less than $2.5 million), issued to him a warrant to
purchase 41,667 shares of Common Stock, which was changed to 50,000 shares of
Common Stock, and agreed to pay him a transaction fee equal to 1% of (i) any
cash or securities received by the Company from any equity transaction during
the term of the agreement and (ii) sales revenue received and recognized by the
Company resulting from his assistance. The warrant expires in August 2008, is
convertible at the price of $2.04 per share, and became exercisable in December
2003. The Pons Consulting Agreement was entered into prior to Mr. Pons becoming
our Interim Chief Executive Officer on August 28, 2003. Pursuant to the terms of
the Pons Consulting Agreement and his employment agreement with the Company, Mr.
Pons received $100,000 from the Company in 2004 as a transaction fee in
connection with the 2004 Private Placement transaction. See "Agreements with
Named Executive Officers" above for a description of Mr. Pons' employment
agreement.
In connection with the resignations of three directors from our
Board of Directors, the Company entered into Letter Agreements with each of
Catherine Cassel Talmadge ("Talmadge"), Charles R. Wood ("Wood") and L. Scott
Perry ("Perry", and with Talmadge and Wood, individually, a "Former Director"
and collectively, the "Former Directors"), each dated October 30, 2004. The
Letter Agreement with each Former Director provides that 35,000 shares of that
certain Option dated August 1, 2004 issued to such Former Director pursuant to
the Non-Employee Director Option Plan will automatically vest and the Company
will indemnify such Former Director with respect to his or her service as a
director substantially in accordance with the Company's By-Laws. The Company
also agreed that it will purchase and maintain insurance on behalf of such
Former Director in his or her capacity as a director of the Company, to the
fullest extent provided under the Delaware General Corporation Law.
20
Additionally, each Former Director agreed to waive any and all
meeting fees and other directors compensation which would otherwise be due with
respect to his or her position as a director or participation at Board meetings
and Committee meetings, and to release the Company and its subsidiaries,
directors, officers and employees from all claims such Former Director may have
against such persons except for the indemnification rights described above. The
Company agreed to release each Former Director from any claims the Company may
have to the fullest extent permitted under Delaware law, except for liability
(i) for breach of the duty of loyalty, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which such Former Director derived an improper personal
benefit.
In December 2000, the Company's Board of Directors authorized the
issuance of a line of credit to Sebastian Cassetta, our former Chief Executive
Officer, for an amount not to exceed $500,000. Such amount bore interest at the
prime rate and matured on March 20, 2004. Pursuant to the terms of the note,
interest for the period January 2, 2001 to June 30, 2002 had been accrued and
was payable at maturity. Commencing July 1, 2002 until maturity, interest was
payable same-annually in arrears on January 1st and July 1st. In October 2003
the Company agreed to forgive this loan over a three year period pursuant to the
Separation Agreement the Company entered into with Mr. Cassetta effective as of
October 21, 2003 (the "Cassetta Separation Agreement").
The Cassetta Separation Agreement terminated Mr. Cassetta's rights
under his employment agreement, including without limitation, any rights to
compensation and severance, in exchange for the consideration set forth therein,
including the following: (i) a cash payment for unpaid base salary and accrued
vacation of $18,990.30, payable on or before October 31, 2003, (ii) forgiveness
of the loans described in the preceding paragraph, and (iii) extension of the
Put Right contained in Mr. Cassetta's Restricted Stock Agreement dated December
28, 1998, allowing Mr. Cassetta 1 year (i.e., until September 2004) instead of
60 days to either repay a promissory note (the "Cassetta Note") in the original
principal amount of $457,496.86 plus accrued interest, or return 94,707
restricted shares of our Common Stock in full satisfaction of the Cassetta Note
and accrued interest thereon. During the quarter ended September 30, 2004, all
94,706 shares of stock, which were pledged as collateral for the Cassetta Note,
were assigned and transferred to the Company and the outstanding debt and
accrued interest of $569,670 in the aggregate was cancelled.
In January 2000, the Company issued Mr. Mario Rossi, our former
Executive Vice President and Chief Technology Officer and a Director, 34,347
shares of restricted Common Stock in exchange for Mr. Rossi's note in the amount
of $152,500 (the "Rossi Note"). The Rossi Note was secured by the Common Stock
issued to Mr. Rossi. In connection with his retirement, we entered into a
Separation Agreement with Mr. Rossi effective as of October 21, 2003 (the "Rossi
Separation Agreement"). The Rossi Separation Agreement terminated Mr. Rossi's
rights under his employment agreement, including without limitation, any rights
to compensation and severance, in exchange for the consideration set forth
therein, including the following: (i) a cash payment for unpaid base salary and
vacation of $16,667.00 payable in two equal installments on October 31, 2003 and
November 20, 2003, (ii) a cash payment for unpaid contractual base salary of
$112,500.00, of which $81,370.69 was offset against Mr. Rossi's obligation to us
of $47,004.00 in accrued interest on the Rossi Note, and the remaining
$31,129.31 was paid in two equal installments on April 21, 2004 and October 21,
2004, (iii) a warrant to purchase 41,667 shares of Common Stock at no less than
$2.40 per share, and (iv) pursuant to Mr. Rossi's rights under a Restricted
Stock Agreement, cancellation of the principal amount of the Rossi Note upon
delivery by Mr. Rossi to the Company of the 34,347 shares of restricted stock
securing the Rossi Note. In January 2004, Mr. Rossi assigned and transferred all
34,347 restricted shares of Common Stock to the Company in full satisfaction of
the outstanding non-recourse debt of $68,000.
Pursuant to the terms of the 2004 Private Placement, the Company was
required to file a Registration Statement with the SEC and have it declared
effective no later than 120 days after April 30, 2004, or by August 29, 2004.
The Registration Statement was filed on May 13, 2004 but it has not yet been
declared effective by the SEC and as a result, the Company incurred liquidated
damages in the form of a monthly cash requirement equal to 2% of the aggregate
purchase price of the offering, or approximately $266,000 per month. Liquidated
damages are due monthly until the event of default is cured. The Company
proposed a settlement to limit the liquidated damages. In December 2004, in full
21
settlement of the default, the Company established a pool of 1,000,000 warrants
with an exercise price of $2.50 per share and a two year term. The pool of
warrants was allocated among each participant based on the investor's
proportionate participation in the 2004 Private Placement. As of March 1, 2005,
69% of the representative warrant ownership of the 1,000,000 warrants responded
to the proposal and of that amount, 4% declined the proposal. The remaining 31%
have not responded to the offer.
PROPOSAL NO. 2 - APPROVAL OF AMENDMENT TO THE COMPANY'S
CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF CAPITAL STOCK
On September 26, 2005, the Board of Directors adopted, subject to
stockholder approval, an amendment to the Company's Amended and Restated
Certificate of Incorporation, as amended ("Certificate of Incorporation"), to
increase the authorized number of shares of capital stock from 41,000,000 to
211,000,000. If approved by the stockholders, the Company will file a
Certificate of Amendment with the Secretary of State of the State of Delaware
amending the first paragraph of Article Four of the Certificate of Incorporation
for the Company to read in its entirety as follows:
ARTICLE FOUR
The aggregate number of shares which the Corporation
shall have the authority to issue is 211,000,000 shares,
divided into two classes: (i) 200,000,000 shares of
Common Stock, par value $.01 per share (the "Common
Stock"); and (ii) 11,000,000 shares of preferred stock,
par value $.01 per share (the "Preferred Stock").
The Company's Certificate of Incorporation currently authorizes the
issuance of 40,000,000 shares of Common Stock, par value $.01 per share and
1,000,000 shares of Preferred Stock, par value $.01 per share. As of October __,
2005, a total of ___________ shares of Common Stock were issued and outstanding
and ________ were unissued and not reserved, and ________ shares of Preferred
Stock were issued and outstanding and ________ shares were unissued and not
reserved. ___________ shares of Common Stock are reserved for issuance upon the
exercise of options, ___________ shares of Common Stock are reserved for
issuance upon the conversion of Series A Preferred Stock and __________ shares
of Common Stock are reserved for issuance upon the exercise of warrants. A
general description of the Company's capital stock is include below and
summarizes all material rights of holders of such stock but does not purport to
be complete.
The primary purpose of this amendment is to allow the Company to
meet its contractual obligations to reserve shares of Common Stock for issuance
upon conversion of certain debt and the exercise of certain warrants and
options, and to have sufficient shares available for consummating a possible new
future investment in the Company. The additional authorized shares also would be
available for issuance at such times and for such corporate purposes as the
Board of Directors may approve.
The Company entered into loan documents with CAMOFI Master LDC on
August 31, 2005 which provided for, among other things, conversion of the
maximum amount of the Company's borrowing (which could be up to $3,000,000) into
shares of Common Stock at the rate of $.50 per share and the issuance of a
warrant to purchase 3,000,000 shares of Common Stock at an exercise price of
$.50 per share. At the time of entering into the loan, the Company was required
to reserve for issuance an aggregate of 9,000,000 shares of Common Stock upon
such conversion and exercise; however, the Company was able to reserve only
approximately 6,000,000 shares of Common Stock (after taking into account the
accommodations of Messrs. Pons, Wenhold and von Vital described below). The
balance of the Company's authorized Common Stock was either issued or reserved
for issuance.
On August 31, 2005, Messrs Pons, Wenhold and von Vital each agreed
that the Company could re-allocate to CAMOFI an aggregate of 2,300,000 shares of
Common Stock which had been reserved for issuance with respect to options
granted to them. The purpose of the re-allocation was to allow the Company to
satisfy, in part, its contractual obligations to its new lender. In return, the
Company, the Company agreed, that at such time as an increase to its authorized
shares of Common Stock was approved by the stockholders, the Company would
reserve 2,300,000 shares of Common Stock for issuance with respect to such
options.
22
The Company also intends to raise additional financing, through some
combination of borrowings or the sale of equity or debt during 2005. The Company
is pursuing financing alternatives to fund the Company's cash deficiency. As of
the end of September, 2005, the Company believes that its cash resources are
sufficient to fund operating losses and working capital requirements for
approximately the next four to five months. The Company has no commitment for
financing, but anticipates that any lender or investor in the Company is likely
to require the Company to either issue or set aside shares for conversion of
debt or preferred stock and/or for exercise of warrants which could be issued as
part of such financing.
Without this amendment, the Company will not have a sufficient
number of authorized but unissued shares of Common Stock to fulfill its
obligations to its new lender and Messrs. Pons, Wenhold and von Vital, as well
as not having the necessary shares available for any new lender or investor. The
Company does not have any other present plans, agreements or understandings
regarding the issuance of the proposed additional authorized shares of Common
Stock. The Board of Directors recommends the adoption of this amendment in order
to provide the Company greater flexibility in connection with raising additional
capital through the issuance of Common Stock and/or Preferred Stock. The
amendment to the Certificate of Incorporation will enable the Company to have an
adequate number of authorized and unissued shares of Common Stock and/or
Preferred Stock for use in the immediate future.
In addition to achieving greater flexibility in corporate planning,
having such additional authorized shares will give the Company the ability to
issue shares without the expense and delay of a special stockholders' meeting. A
delay may deprive the Company of the flexibility that the Board of Directors
views as important in facilitating the effective use of shares of Common Stock
and Preferred Stock and to quickly close any possible new borrowings or
investment. The increase in the authorized number of shares of Common Stock and
Preferred Stock could have an anti-takeover effect. It is possible that the
additional shares could be used to discourage an attempt to acquire or to
takeover the Company through the dilution of the stock ownership of a potential
acquirer.
Except as required or limited by the Certificate of Incorporation,
applicable law or stock market listing standards (if any), if this amendment is
adopted by stockholders, the Board of Directors will have authority to issue the
additional shares without further action on the part of the stockholders.
Moreover, subject to limitations set forth in the Certificate of Incorporation
of the Company, the Board of Directors will have authority to determine the
terms of any Preferred Stock to be issued, including among other terms, dividend
rates, conversion prices, voting rights, preemptive rights, redemption prices
and maturity dates. Any issuance of these shares, other than on a pro-rata basis
to all stockholders, would reduce each stockholder's percentage interest in the
Company. The Certificate of Incorporation provides that the Company is
prohibited, without the prior written consent of the holders of at least
two-thirds of the then outstanding shares of Series A Preferred Stock, from
creating or issuing any additional shares of preferred stock or securities of
the Company which rank senior to or equal with the Series A Preferred Stock with
respect to payment of dividends or liquidation or other distribution of assets
(other than debt securities issued in connection with certain enumerated
borrowings or credit arrangements where the principal consideration for such
transaction is not the issuance of such securities).
The Certificate of Incorporation and Bylaws of the Company contain
certain provisions that are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors and which may have the
effect of delaying, deferring or preventing a future takeover or change in
control of the Company unless such takeover or change in control is approved by
our Board of Directors.
Common Stock
The holders of the Company's common stock are entitled to one vote
for each share held of record on all matters submitted to a vote of
stockholders. The Certificate of Incorporation and By-Laws of the Company do not
provide for cumulative voting rights in the election of directors. Accordingly,
holders of a majority of the shares of Common Stock entitled to vote in any
election of directors may elect all of the directors standing for election,
subject to the voting rights of our preferred stockholders. Holders of Common
Stock are entitled to receive ratably such dividends as may be declared by the
Board out of funds legally available for such distributions, subject to any
23
preferential dividend rights of holders of our Preferred Stock. In the event of
our liquidation, dissolution or winding up, holders of Common Stock are entitled
to share ratably in the assets remaining after payment of liabilities, subject
to the prior rights of any holder of shares of our Preferred Stock. Holders of
Common Stock have no preemptive, conversion or redemption rights. All of the
outstanding shares of Common Stock are fully-paid and nonassessable. Preferred
Stock
The Company's Board of Directors may, without stockholder approval,
establish and issue shares of one or more series of Preferred Stock having the
designations, number of shares, dividend rates and preferences, liquidation
preferences, redemption provisions, sinking fund provisions, conversion or
exchange rights, voting rights and other rights, preferences and limitations
that the Board may determine. The Board may authorize the issuance of Preferred
Stock with voting, conversion and economic rights senior to the Common Stock so
that the issuance of Preferred Stock could adversely affect the market value of
the Common Stock. The creation of one or more series of Preferred Stock may
adversely affect the voting power or other rights of the holders of Common
Stock. The issuance of Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could, among
other things and under some circumstances, have the effect of delaying,
deferring or preventing a change in control without any action by stockholders.
Recommendation of the Board of Directors Concerning the Amendment to the
Certificate of Incorporation to Increase the Number of Authorized Shares of
Capital Stock
The Board of Directors of the Company recommends a vote FOR the
Approval of the Amendment to the Certificate of Incorporation to Increase the
Number of Authorized Shares of Capital Stock. Proxies received by the Board of
Directors will be so voted unless stockholders specify in their proxies a
contrary choice.
PROPOSAL NO. 3 - APPROVAL OF AMENDMENT TO THE COMPANY'S
CERTIFICATE OF INCORPORATION TO CHANGE NAME TO UPHONIA, INC.
On September 26, 2005, the Board of Directors adopted, subject to
stockholder approval, an amendment to the Company's Certificate of Incorporation
to change the Company's name to "Uphonia, Inc." If approved by the stockholders,
the Company will file a Certificate of Amendment with the Secretary of State of
the State of Delaware amending Article One of the Certificate of Incorporation
for the Company to read in its entirety as follows:
ARTICLE ONE
The name of the corporation (hereinafter called the
"Corporation") is Uphonia, Inc.
The Board of Directors of the Company believes that the change of the Company's
name will better reflect the Company's business, enhance the Company's
reputation, re-enforce the branding of its prepaid mobile phone service and
leverage the marketing efforts undertaken on behalf of the UPHONIA(TM) brand.
Recommendation of the Board of Directors Concerning the Amendment to the
Certificate of Incorporation to Change the Name of the Company to "Uphonia,
Inc."
The Board of Directors of the Company recommends a vote FOR the
Approval of the Amendment to the Certificate of Incorporation to Increase Change
the Name of the Company to "Uphonia, Inc." Proxies received by the Board of
Directors will be so voted unless stockholders specify in their proxies a
contrary choice.
24
PROPOSAL NO. 4 - APPROVAL OF ADOPTION OF 2004 SMARTSERV ONLINE, INC. STOCK
OPTION PLAN
The Board of Directors adopted (subject to stockholder approval) the
SmartServ Online, Inc. 2004 Stock Option Plan (the "Plan") on November 29, 2004,
a copy of which is attached to this Proxy Statement as Appendix B. The Plan
authorizes a committee appointed by the Board of Directors (which may be the
Company's Compensation Committee) to grant options to purchase the Company's
Common Stock to employees of the Company and non-employee members of the Board
of Directors. The purpose of the Plan is (i) to provide employees and
non-employee directors of the Company an opportunity to acquire a larger
personal financial interest in the Company through stock ownership, (ii) to
provide an incentive for employees and non-employee directors to continue to
promote the best long term interests of the Company and its stockholders by
creating incremental stockholder value and enhancing its long-term performance
and (iii) to provide an incentive for employees and non-employee directors to
associate and remain associated with the Company.
Due to the nature of the Plan, the benefits to be received by or
allocated to any of the eligible participants, either individually or as a
group, cannot be determined at this time, except for the conditional grants
described below. On January 3, 2005, the Committee designated by the Board of
Directors to administer the Plan ("Committee") granted, subject to stockholder
approval of the Plan, options to purchase an aggregate of 8,000 shares of Common
Stock at an exercise price of $2.50 per share to certain employees of the
Company. The table below summarizes these conditionally granted stock options
under the Plan. If this Proposal No. 4 is approved by stockholders, the
remaining shares of Common Stock available for grant under the Plan will be used
to make additional awards from time to time to eligible participants under the
Plan.
New Plan Benefits
2004 Stock Option Plan
Number of Shares Underlying Value of Options
Options Granted Subject to Option Exercise Granted Subject to
Name and Position Stockholder Approval (#)(1)(2) Price Per Share($) Stockholder Approval ($)(3)
- ----------------- ------------------------------ ------------------ ---------------------------
Named Executive Officer Group 0 n/a n/a
Executive Officer Group 0 n/a n/a
Non-Executive Officer 0 n/a n/a
Director Group
Non-Executive Officer 8,000 $2.50 $0
Employee Group
- ----------
(1) These stock options were granted by the Committee subject to stockholder
approval of the Plan. The stock options expire 5 years from the date of
grant.
(2) These stock options vest and become exercisable, subject to stockholder
approval, on January 3, 2005, the date approved by the Committee.
(3) This column represents the difference on September 26, 2005 between the
closing market price of the Company's Common Stock ($.50) and the option
exercise price.
The following is a summary of the key provisions of the Plan.
1. NUMBER OF SHARES. The aggregate number of shares reserved and
available for grant under the Plan is 200,000 shares of Common Stock, adjusted
for any stock dividend, stock split, recapitalization, reorganization or other
subdivision or combination of the Common Stock, payment of a share dividend or
other increase or decrease in the number of shares of the Common Stock
outstanding effected without receipt of consideration by the Company.
25
2. ADMINISTRATION. The Plan is required to be administered by a
committee appointed by the Board (the "Committee"). Either (i) the Committee
must consist of at least two individuals and each member of the Committee must
qualify as a non-employee director within the meaning of Rule 16b-3(b)(3) under
the Securities Exchange Act of 1934, as amended, and the regulations promulgated
thereunder; or (ii) (A) at least two members of the Committee must qualify as
such non-employee directors, (B) any member of the Committee who does not so
qualify may not participate in any action of the committee with respect to the
grant of any stock option under the Plan, and (C) the Plan shall be deemed to be
administered by the full Board, the actions of the Committee under the Plan
shall be deemed merely advisory to the Board, and the Board's approval shall be
required for all actions of the Committee under the Plan, including without
limitation the grant of each stock option. To the extent necessary or desirable
(as may be determined by the Board) each member of the Committee shall also
qualify as an "outside director" under Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code"). The Compensation Committee of the Company
administers the Plan and presently consists of Paul L. Melchiorre, John E. Goode
and Paul J. Keeler.
3. ELIGIBILITY. All employees of the Company and non-employee
members of the Board are eligible to become participants in the Plan, as
determined by the Committee from time to time. Management contemplates that as
many as 14 employees and directors of the Company may participate in the Plan.
4. EFFECTIVE DATE. If approved by the stockholders, the Plan will
become effective as of November 29, 2004 ("Effective Date"). No stock option
shall be granted before the Effective Date or more than ten years after the
Effective Date.
5. PLAN AWARDS. The Plan authorizes the Committee to award options
to purchase a specified number of shares of Common Stock. Each award shall be
evidenced by a written stock option agreement, which shall specify the terms and
conditions of the grant, as determined by the Committee in its discretion,
subject to the limitations set forth in the Plan. The exercise price of an
option shall be the fair market value of the underlying shares on the date the
option is awarded. No stock option shall be exercisable after the date that is
ten years from the date the option is granted. Tax-qualified incentive stock
options ("ISOs") may be awarded to participants who are employees of the
Company, subject to the limitations described in the Plan. Non-qualified stock
options ("NQOs") may be awarded to participants who are employees of the Company
and also to members of the Board. As of September 26, 2005, the closing price of
the Common Stock was $.50 per share.
6. INTERPRETATION. The Committee has the power to interpret the
Plan, prescribe, amend and rescind rules and regulations relating to the Plan,
determine the terms and provisions of the respective stock options and make all
other determinations it deems necessary or advisable for administration of the
Plan. The determinations of the Committee on all matters regarding the Plan will
be conclusive. The Committee's determinations under the Plan need not be uniform
and may be made by it selectively among individuals who receive or are eligible
to receive stock options under the Plan, whether or not such individuals are
similarly situated.
7. AMENDMENTS AND TERMINATION. The Board may from time to time
alter, amend or suspend the Plan, or may at any time terminate the Plan, except
that it may not, without the approval of the stockholders of the Company, (i)
increase the total number of shares of Common Stock available for grant under
the Plan (except as otherwise provided in the Plan), (ii) modify the class of
eligible employees under the Plan, or (iii) effect a change related to an ISO
granted under the Plan that is inconsistent with Section 422 of the Code.
Additionally, no action taken by the Board may materially and adversely affect
an outstanding stock option without the consent of the holder of such option.
8. DISSOLUTION, MERGER AND CONSOLIDATION. Upon the dissolution or
liquidation of the Company, or upon a merger or consolidation of the Company in
which the Company is not the surviving corporation, each stock option granted
under the Plan shall expire as of the effective date of such transaction.
However, the Committee is required to give at least 30 days' prior written
notice of such an event to each optionee during which time he or she shall have
a right to exercise his or her stock option and, subject to prior expiration
pursuant to the terms thereof, each stock option shall be exercisable after
receipt of such written notice prior to the effective date of such transaction.
Upon a merger or consolidation of the Company in which the Company is not the
surviving corporation, in lieu of such notice, each such stock option shall be
converted to an option to acquire shares of the surviving corporation.
26
9. TRANSFERABILITY. No stock option may be transferred, assigned,
pledged or hypothecated (whether by operation of law or otherwise), except as
provided by will or the applicable laws of descent or distribution, or subject
to execution, attachment or similar process.
FEDERAL TAX CONSEQUENCES OF PLAN
The following is a summary of the principal federal tax consequences
of the Plan under the Code based on laws and regulations in effect on the date
of this Proxy Statement, which laws and regulations are subject to change, and
does not purport to be a complete description of the federal tax aspects of the
Plan.
A participant does not realize taxable income upon the award of a
stock option. If the option qualifies as an ISO, the participant does not
realize taxable income upon exercise of the option (except for purposes of the
alternative minimum tax). The maximum value of shares of Common Stock (measured
at the time of the award) subject to ISOs granted to any participant which can
become exercisable in any calendar year is $100,000. Provided the participant
holds the Common Stock for at least one year and until the end of the two-year
period from the date the option was awarded, the gain or loss upon the sale of
the Common Stock will be treated as capital gain or loss. If the participant
sells the stock before satisfying both of these holding period requirements,
this is known as a "disqualifying disposition." In the event of a disqualifying
disposition, the lesser of (1) the excess of the fair market value of the Common
Stock at the time of exercise over the exercise price, or (2) the excess (if
any) of the fair market value of the Common Stock at the time of sale over the
exercise price will be taxable to the participant as ordinary income. The
Company will not be entitled to any tax deduction in connection with an ISO,
except that the Company will be entitled to a deduction equal to the amount that
is taxable to the participant as ordinary income as a result of a disqualifying
disposition.
If a stock option is an NQO, the participant will realize ordinary
compensation income at the time of exercise equal to the excess of the fair
market value of the Common Stock at the time of exercise over the exercise
price, and the Company will be entitled to a tax deduction for the same amount.
Recommendation of the Board of Directors Concerning the SmartServ Online, Inc.
2004 Stock Option Plan
The Board of Directors of the Company recommends a vote FOR Adoption
of the SmartServ Online, Inc. 2004 Stock Option Plan. Proxies received by the
Board of Directors will be so voted unless stockholders specify in their proxies
a contrary choice.
PROPOSAL NO. 5 - APPROVAL OF CONDITIONAL STOCK OPTION GRANTS TO CERTAIN KEY
EXECUTIVE OFFICERS AND DIRECTORS
On July 18, 2005, the Board of Directors approved (subject to
stockholder approval) the grant of non-qualified stock options to certain of its
key executive officers and directors to purchase shares of the Company's Common
Stock. In addition, the Board of Directors approved (subject to stockholder
approval) the grant of non-qualified stock options to Robert B. Hartnett on
September 15, 2005, the date of Mr. Hartnett's appointment as a director, The
table below summarizes these conditionally granted stock options and provides
other information as to the persons who received these stock options.
27
New Plan Benefits
Number of Shares Underlying Value of Options
Options Granted Subject to Option Exercise Granted Subject to
Name and Position Stockholder Approval (#) Price Per Share ($) Stockholder Approval ($)(1)
- ----------------- ------------------------ ------------------- ---------------------------
Robert M. Pons 4,681,233 $0.50 $0
Chief Executive Officer,
President and Director
Timothy G. Wenhold 3,516,863 $0.50 $0
Chief Operating Officer,
and Executive
Vice-President
Len von Vital 2,890,616 $0.50 $0
Chief Financial Officer
Paul J. Keeler 737,654 $0.50 $0
Chairman of the Board
John E. Goode 259,062 $0.50 $0
Director
Paul L. Melchiorre 259,062 $0.50 $0
Director
Robert B. Hartnett 259,062 $0.50 $0
Director
Executive Officer Group 12,344,490 $0.50 $0
Non-Executive Officer 1,255,778 $0.50 $0
Director Group
Non-Executive Officer 470,592 $0.50 $0
Employee Group
- ----------
(1) This column represents the difference on September 26, 2005 between the
closing market price of the Company's Common Stock ($.50) and the option
exercise price.
If the stock options listed in the table above are approved by the stockholders,
the grant date of each such option shall be as of July 18, 2005, the date of
approval by the Board of Directors. Each option grant will vest in three equal
annual installments of one-third each beginning on the grant date and shall have
a term of ten years. As of September 26, 2005, the closing price of the Common
Stock was $.50 per share.
FEDERAL TAX CONSEQUENCES OF CONDITIONAL STOCK OPTION GRANTS.
Neither the conditional grant of the stock options nor the
shareholders' approval of those grants would or will result in the realization
of any taxable income to the optionees. A grantee will realize ordinary
compensation income at the time of exercise of his or her stock option equal to
the excess of the fair market value of the Common Stock at the time of exercise
over the exercise price, and the Company will be entitled to a tax deduction for
the same amount.
Recommendation of the Board of Directors Concerning the Conditional Grant of
Stock Options to Certain Key Executive Officers and Directors
The Board of Directors of the Company recommends a vote FOR the
Approval of the Conditional Grant of Stock Options to Certain Key Executive
Officers and Directors. Proxies received by the Board of Directors will be so
voted unless stockholders specify in their proxies a contrary choice.
PROPOSAL NO. 6 - RATIFICATION OF APPOINTMENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee ("Audit Committee") of the Board of Directors
has selected Carlin, Charron & Rosen, LLP ("Carlin Charron") to serve as the
Company's independent registered public accounting firm for the fiscal year
ending December 31, 2005. Carlin Charron performed the audit for the fiscal year
ended December 31, 2004 and is considered by management of the Company to be
well qualified. The Company has been advised by that firm that neither it nor
any member thereof has any financial interest, direct or indirect in the Company
or any of its subsidiaries, in any capacity. One or more representatives of
Carlin Charron is expected to be present at this year's Annual Meeting of
Stockholders with an opportunity to make a statement if he or she desires to do
so and to answer appropriate questions with respect to that firm's examination
of the Company's financial statements and records for the fiscal year ended
December 31, 2004.
28
Although the submission of the appointment of Carlin Charron is not
required by the By-Laws of the Company, the Board is submitting it to the
stockholders to ascertain their views. If the stockholders do not ratify the
appointment, the Audit Committee will not be bound to seek other independent
registered public accounting firms for 2005, but the selection of other
independent registered public accounting firms will be considered in future
years.
Audit and Other Fees Paid to Independent Registered Public Accounting Firm
The following table presents fees billed by Ernest & Young ("E&Y")
and Grant Thornton, LLP ("Grant Thornton") for professional services rendered to
the Company in fiscal years ended December 31, 2004 and December 31, 2003.
Services Rendered* Fiscal 2003 Fiscal 2004
----------------- ----------- -----------
Audit Fees $ 101,910 $ 237,572
Audit-Related Fees $ 0 $ 0
Tax Fees $ 0 $ 11,244
All Other Fees $ 0 $ 0
- ----------
* E&Y served as the Company's independent auditors during fiscal year 2002 and
until November 6, 2003. Grant Thornton served as the Company's independent
registered public accounting firm from November 24, 2003 until December 15, 2004
and performed the audit for fiscal year 2003. Carlin Charron was engaged as our
new independent registered public accounting firm on December 15, 2004 and
performed the audit for fiscal year 2004. Carlin Charron did not bill any fees
to the Company in fiscal year 2004. See "Changes in Certifying Accountant" below
for more details.
Audit Fees
The audit fees are billed for professional services rendered for the
audit of the Company's annual financial statements, the reviews of the financial
statements included in the Company's Quarterly Reports on Form 10-QSB, and
services provided in connection with SEC registration statements. Of the fiscal
2004 amount, $221,072 was billed by Grant Thornton relating to its audit of the
Company's annual financial statements, it review of Quarterly Reports in Form
10-QSB for the quarters ended March 31, 2004, June 30, 2004 and September 30,
2004, services provided in connection with SEC registration statements and
meeting with the Company's Audit Committee. The remaining amount, $16,500 was
billed by E&Y. Of the fiscal 2003 amount, $11,910 was billed by Grant Thornton
relating to its review of the Company's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 2003 and meeting with the Audit Committee, and the
remaining $60,000 billed by Grant Thornton relates to its audit of the Company's
financial statements for the fiscal year ended December 31, 2003. All other
amounts were billed by E&Y.
Audit-Related Fees
The Company did not incur any audit-related fees from its
independent auditors for fiscal year 2003 or 2004.
Tax Fees
The tax fees billed in fiscal year 2004 consist principally of
preparing United States federal, state and local income tax returns for the tax
year ended December 31, 2003.
29
All Other Fees
The Company did not incur any fees from its independent auditors for
any other services (other than audit services, audit-related services and tax
services) in fiscal year 2003 or 2004.
Changes in Certifying Accountant
2004
On December 20, 2004, the Audit Committee of the Board of Directors
of the Company selected Carlin Charron as its new independent registered public
accounting firm, in replacement of Grant Thornton. On December 15, 2004, Grant
Thornton advised the Company that it declined to stand for re-election as the
Company's independent registered public accounting firm.
During the Company's fiscal year ended December 31, 2003 and the
subsequent interim period from January 1, 2004 through December 14, 2004, there
were no disagreements with Grant Thornton on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of Grant Thornton,
would have caused it to make reference to the subject matter of the disagreement
in connection with its report on the Company's consolidated financial
statements.
The audit report issued by Grant Thornton on the consolidated
financial statements of the Company as of and for the year ended December 31,
2003 did not contain an adverse opinion or a disclaimer of opinion, nor were
they modified as to uncertainty, audit scope, or accounting principles.
The Company provided Grant Thornton with a copy of the disclosure in
the Company's Current Report on Form 8-K/A filed with the SEC on January 10,
2005, which disclosure is not materially different than the disclosure contained
herein, and requested that Grant Thornton furnish the Company with a letter
addressed to the SEC stating whether Grant Thornton agrees with such statements,
and if not, stating in which respects it does not agree. A copy of Grant
Thornton's letter, dated January 10, 2005, was filed as Exhibit 16.1 to the
Company's Current Report on Form 8-K/A filed with the SEC on January 10, 2005.
During the Company's 2002 and 2003 fiscal years and the interim
period during 2004, the Company did not consult Carlin Charron regarding the
application of accounting principles to a specific completed or contemplated
transaction or the type of audit opinion that might be rendered on the Company's
financial statements.
2003
On November 6, 2003, the Company received a letter from E&Y in which
it advised the Company that E&Y was resigning as the Company's independent
auditors. Prior to receipt of such letter, the Audit Committee had authorized
management to seek to retain another accounting firm.
The report of E&Y on the Company's consolidated financial statements
as of and for the fiscal years ended December 31, 2001 and 2002 contained a
"going concern opinion," questioning the Company's ability to continue as a
going concern, but did not contain any other adverse opinion or disclaimer of
opinion, nor was the report modified as to audit scope or accounting principles.
In connection with its audit for the fiscal year ended December 31, 2002, and
during the subsequent interim period from January 1, 2003 through November 6,
2003, there were no disagreements with E&Y on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if they had occurred and not been resolved to
the satisfaction of E&Y, would have caused E&Y to make reference to such
disagreements in its reports on the consolidated financial statements for such
years.
E&Y furnished a letter to the SEC stating its agreement with certain
statements made in the Company's Current Report on Form 8-K filed with the SEC
on November 14, 2003, which statements are not materially different than the
statements made herein. A copy of E&Y's letter, dated November 13, 2003, was
filed as Exhibit 16.1 to the Company's Current Report on Form 8-K filed with the
SEC on November 14, 2003.
30
On November 24, 2003, the Company engaged Grant Thornton as its
independent auditors for the fiscal year ending December 31, 2003. The decision
to engage Grant Thornton was approved by the Audit Committee and the Board of
Directors.
During the Company's 2001 and 2002 fiscal years and subsequent
interim period through November 24, 2003, the Company did not consult with Grant
Thornton regarding (1) the application of accounting principles to a specified
transaction, either completed or proposed, (2) the type of audit opinion that
might be rendered on our financial statements, or (3) any other matter that was
the subject of a disagreement or a reportable event as set forth in Item
304(a)(i)(iv) of Regulation S-B of the SEC.
Grant Thornton reviewed the disclosures contained in a Form 8-K
filed by the Company on December 2, 2003 regarding its appointment. The Company
advised Grant Thornton that it had the opportunity to furnish the Company with a
letter addressed to the SEC concerning any new information, clarifying the
Company's disclosures in such Form 8-K, or stating any reason why Grant Thornton
does not agree with any statements made by the Company in such Form 8-K. Grant
Thornton advised the Company that nothing had come to its attention which would
cause it to believe that any such letter was necessary.
Pre-Approval Policy for Services by Independent Registered Public Accounting
Firm
The Company's Audit Committee has implemented procedures for the
preapproval of all engagements of the independent registered public accounting
firm for both audit and permissible non-audit services. Under these procedures,
all services provided by the independent registered public accounting firm must
be approved by the Audit Committee prior to the commencement of the services.
During 2004, no audit or non-audit services performed by the Company's
independent auditors were conducted and not pre-approved.
Recommendation of the Board Concerning the Ratification of Appointment of
Independent Registered Public Accounting Firm
The Board of Directors of the Company recommends that stockholders
vote FOR the ratification of the appointment of Carlin, Charron & Rosen, LLP as
the Company's independent registered public accounting firm for the 2005 fiscal
year. Proxies received by the Board of Directors will be so voted unless
stockholders specify in their proxies a contrary choice.
OTHER BUSINESS
Management knows of no other matters that will be presented at the
Annual Meeting of Stockholders. However, if any other matter properly comes
before the meeting, or any adjournment or postponement thereof, it is intended
that proxies in the accompanying form will be voted in accordance with the
judgment of the persons named therein.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be included in the Company's proxy
statement for presentation at the 2006 Annual Meeting of Stockholders pursuant
to Rule 14a-8 of the Securities Exchange Act of 1934, as amended, must be
received by the Company's Chief Financial Officer at 2250 Butler Pike, Suite
150, Plymouth Meeting, PA 19462 on or before July [7], 2006, to be eligible for
inclusion in such proxy statement.
If notice of a stockholder proposal intended to be presented at the
2006 Annual Meeting of Stockholders is not received by the Company on or before
September [20], 2006 (whether or not the stockholder wishes the proposal to be
included in the proxy statement for such Annual Meeting), the Company (through
management proxy holders) may exercise discretionary voting authority on such
proposal when and if the proposal is raised at the Annual Meeting without any
reference to the matter in the proxy statement.
31
FORM 10-KSB
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2004 ACCOMPANIES THIS PROXY STATEMENT. THE COMPANY WILL
FURNISH TO EACH PERSON WHOSE PROXY IS BEING SOLICITED, UPON WRITTEN REQUEST, ANY
EXHIBIT DESCRIBED IN THE LIST ACCOMPANYING THE FORM 10-KSB, UPON THE PAYMENT, IN
ADVANCE, OF REASONABLE FEES RELATED TO THE COMPANY'S FURNISHING SUCH EXHIBIT(S).
REQUESTS FOR COPIES OF SUCH EXHIBIT(S) SHOULD BE DIRECTED TO LEN VON VITAL,
CHIEF FINANCIAL OFFICER, AT THE COMPANY'S PRINCIPAL ADDRESS AS SHOWN ON THE
COVER PAGE OF THIS PROXY STATEMENT.
By Order of the Board of Directors
Robert M. Pons
President and
Chief Executive Officer
Date: October ___, 2005
Plymouth Meeting, PA
32
APPENDIX A
CHARTER OF THE
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
OF SMARTSERV ONLINE, INC.
PURPOSE
The primary function of the Audit Committee is to assist the Board of
Directors (the "Board") of SmartServ Online, Inc. (the "Corporation") in
fulfilling its oversight responsibilities by reviewing: the financial reports
and other financial information provided by the Corporation to any governmental
body or the public; the Corporation's systems of internal controls regarding
finance, accounting, legal compliance and ethics that management and the Board
have established; and the Corporation's auditing, accounting and financial
reporting processes generally. Consistent with this function, the Audit
Committee should encourage continuous improvement of, and should foster
adherence to, the Corporation's policies, procedures and practices at all
levels. The Audit Committee's primary duties and responsibilities are to:
o Serve as an independent and objective party to monitor the
Corporation's financial reporting process and internal control
system.
o Review and appraise the audit efforts of the Corporation's
independent accountants.
o Provide an open avenue of communication among the independent
accountants, financial and senior management.
The Audit Committee will fulfill these responsibilities by carrying out the
activities enumerated in this Charter and such other activities consistent with
this Charter as may from time to time be necessary or appropriate.
COMPOSITION
The Audit Committee shall be comprised of three or more members of the
Board as determined by the Board, each of whom shall be independent directors,
and free from any relationship that, in the opinion of the Board, would
interfere with the exercise of his or her independent judgment as a member of
the Audit Committee. For purposes of this Charter, the definition of independent
directors will be based on the Nasdaq rules for audit committees, as amended.
All members of the -Audit Committee must be able to read and understand
fundamental financial statements, and at least one member of the Committee must
have past employment experience in finance or accounting or other comparable
experience or background.
The members of the Audit Committee shall be elected by the Board at the annual
organizational meeting of the Board and shall serve at the pleasure of the Board
or until their successors shall be duly elected and qualified. Unless a chairman
of the Audit
Committee (the "Chairman") is elected by the Board, the members of the Committee
may designate a Chairman by majority vote of the full Audit Committee
membership.
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MEETINGS
The Audit Committee shall meet from time to time as called by the Chairman
or as requested by the independent accountants. The Audit Committee may ask
members of management or others to attend meetings of the Audit Committee and
provide pertinent information as necessary. As part of its responsibility to
foster open communication, the Audit Committee shall meet at least annually with
management and the independent accountants in separate executive sessions to
discuss any matters that the Audit Committee or any of these groups believe
should be discussed privately. In addition, the Audit Committee or its Chairman
shall discuss with management the Corporation's quarterly financial statements
consistent with its duties and responsibilities as defined below. The Audit
Committee shall maintain minutes or other records of meetings and activities of
the Audit Committee.
RESPONSIBILITIES AND DUTIES
The duties of the Audit Committee shall include the following:
Documents/Reports Review
Review this Charter periodically and at least annually and update this Charter
as conditions dictate.
Review with the independent accountants, prior to its filing or prior to its
release, as the case may be, the Corporation's Annual Report on SEC Form 10-KSB.
Review with the independent accountants the Corporation's interim financial
statements to be included in the Corporation's Quarterly Report on SEC Form
l0-QSB and the matters required to be discussed by Statement of Auditing
Standards No. 61 as it may be modified or supplemented. The Chairman may
represent the entire Audit Committee for purposes of this review.
Review such other reports or other financial information submitted to the
Securities and Exchange Commission or the public as the Audit Committee shall
deem appropriate. The Chairman may represent the entire Audit Committee for
purposes of this review.
Independent Accountants
Recommend to the Board the selection of the independent accountants for each
fiscal year, confirm and assure their independence and approve the fees and
other compensation to be paid to the independent accountants. On an annual
basis, the Audit Committee should review and discuss with the accountants all
significant relationships which effect the accountants' independence.
Recommend to the Board the advisability of having the independent public
accountants make specified studies and reports as to auditing matters,
accounting procedures, tax or other matters.
Review the performance of the independent accountants and approve any proposed
discharge of the independent accountants when circumstances warrant.
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Review all reports and all significant communications between the independent
public accountants and the Corporation's management, including the management
recommendation letter.
Periodically consult with the independent accountants out of the presence of
management about internal controls and the completeness and accuracy of the
Corporation's financial statements.
Financial Reporting Processes
In consultation with the independent accountants, review the integrity of the
Corporation's financial reporting processes, both internal and external.
Consider the independent accountants' judgments about the quality and
appropriateness of the Corporation's accounting principles as applied in its
financial reporting.
Consider and approve, if appropriate, major changes to the Corporation's
auditing and accounting principles and practices as suggested by the independent
accountants or management.
Determine the appropriateness of an internal audit function and authorize its
establishment.
Process Improvement
Establish regular and separate systems of reporting to the Audit Committee by
each of management and the independent accountants regarding any significant
judgments made in management's preparation of the financial statements and the
view of each as to appropriateness of such judgments.
Following completion of the annual audit, review separately with each of
management and the independent accountants any significant difficulties
encountered during the course of the audit, including any restrictions on the
scope of work or access to required information.
Review any significant disagreement among management and the independent
accountants in connection with the preparation of any of the Corporation's
financial statements.
Review with the independent accountants and management the extent to which
changes or improvements in financial or accounting practices, as approved by the
Audit Committee, have been implemented.
Ethical and Legal Compliance
Review the Corporation's policy as to business conduct (the "Policy") and ensure
that management has established a system to enforce the Policy.
Review management's monitoring of the Corporation's compliance with the Policy
and ensure that management has the proper review system in place to ensure that
the Corporation's financial statements, reports and other financial information
disseminated to governmental organizations and the public satisfy legal
requirements.
Review activities, organizational structure and qualifications of the internal
auditing department.
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Review, with the Corporation's counsel, legal compliance matters including
corporate securities trading policies.
Review, with the Corporation's counsel, any legal matter that could have a
significant impact on the Corporation's financial statements.
Perform any other activities consistent with this Charter, the Corporation's
By-laws and governing law, as the Audit Committee or the Board deems necessary
or appropriate.
The Audit Committee may retain independent counsel, accountants or others to
assist it in the conduct of any investigation.
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APPENDIX B
2004 STOCK OPTION PLAN
OF
SMARTSERV ONLINE, INC.
1. Purpose. The purpose of this Plan is: (i) to provide Employees and
Non-Employee Directors of the Company and its Subsidiaries an opportunity to
acquire a larger personal financial interest in the Company through common stock
ownership, (ii) to provide an incentive for Employees and Non-Employee Directors
to continue to promote the best long term interests of the Company and its
shareholders by creating incremental shareholder value and enhancing its
long-term performance, and (iii) to provide an incentive for Employees and
Non-Employee Directors to associate or remain associated with the Company. Some
or all of the Stock Options granted to Employees (but not Non-Employee
Directors) pursuant to this Plan may, but need not, be structured to qualify as
Incentive Stock Options.
2. Definitions. The following definitions shall apply for purposes of this
Plan and any agreement relating to a Stock Option:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time, and the regulations promulgated and the rulings issued
thereunder.
(c) "Committee" shall mean the committee of Board members appointed
to administer the Plan pursuant to Section 3(a), below, or, if applicable
pursuant to Section 3(a), the Board. In cases where the Board administers the
Plan, references to the Committee shall be deemed to refer to the Board, except
that the Board shall not be subject to the requirements applicable to the
Committee under Section 3(a).
(d) "Common Stock" shall mean shares of common stock, $.01 par
value, issued by SmartServ Online, Inc. or such class of shares to which such
shares are converted hereafter.
(e) "Company" shall mean SmartServ Online, Inc.
(f) "Effective Date" shall mean the date on which this Plan, as
hereby amended and restated, is approved by the Board.
(g) "Employee" shall mean an individual who is an employee of the
Company or a Subsidiary under general common law principles. An individual who
is an "Employee," as so defined, may also be a member of the Board or the Board
of Directors of a Subsidiary (but not a Non-Employee Director).
(h) "Incentive Stock Option" or "ISO" shall mean a Stock Option that
qualifies under section 422 of the Code.
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(i) "Non-Employee Director" shall mean a member of the Board or the
board of directors of a Subsidiary who is not an Employee.
(j) "Non-Qualified Option" shall mean a Stock Option granted under
this Plan that is not an Incentive Stock Option.
(k) "Plan" shall mean the 2004 Stock Option Plan of SmartServ
Online, Inc., as evidenced hereby, or as amended from time to time.
(l) "Stock Option" shall mean an option issued pursuant to this
Plan.
(m) "Subsidiary" shall mean any corporation (other than the Company)
in an unbroken chain of corporations beginning with the Company if, at the time
of the granting of a Stock Option, each of the corporations other than the last
corporation in the chain owns stock possessing 50 percent or more of the total
combined voting power of all classes of stock in one of the other corporations
in the chain.
3. Administration.
(a) Committee; Board Approval. The Plan shall be administered by a
Committee appointed by, and which serves at the discretion of, the Board. The
Board may designate the Company's Compensation Committee as the "Committee"
hereunder provided the Compensation Committee meets the requirements of this
Section. Notwithstanding any other provision of the Plan, at all times one of
the following two provisions shall apply: (i) the Committee shall consist of at
least two individuals and each member of the Committee shall qualify as a
"non-employee director," within the meaning of Rule 16b-3(b)(3) under the
Securities Exchange Act of 1934, as amended, and the regulations promulgated
thereunder; or (ii) (A) at least two members of the Committee must qualify as
such non-employee directors, (B) any member of the Committee who does not so
qualify may not participate in any action of the Committee with respect to the
grant of any Stock Option under the Plan, and (C) the Plan shall be deemed to be
administered by the full Board, the actions of the Committee under the Plan
shall be deemed merely advisory to the Board, and the Board's approval shall be
required for all actions of the Committee under the Plan, including without
limitation the grant of each Stock Option. To the extent necessary or desirable
(as may be determined by the Board from time to time) each member of the
Committee shall also qualify as an "outside director" under Section 162(m) of
the Code and the regulations issued thereunder. The members of the Committee
shall meet such additional criteria as may be necessary or desirable to comply
with regulatory or stock exchange rules or exemptions. The Company shall pay all
reasonable expenses of the Committee.
(b) Powers. Within the limits of the express provisions of the Plan,
the Committee shall determine: (i) the Employees and Non-Employee Directors to
whom Stock Options hereunder shall be granted, (ii) the time or times at which
such Stock Options shall be granted, (iii) the amount and form of any Stock
Options, including, but not limited to, whether any Stock Option granted to an
Employee is structured to be an ISO, and (iv) the limitations, restrictions and
conditions applicable to any Stock Option granted to any Employee or
Non-Employee Director, including, but not limited to, whether the right to
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exercise any Stock Option, in whole or in part, will be subject to a vesting
schedule. In making such determinations, the Board may take into account the
nature of the services rendered by such Employees, or Non-Employee Directors or
classes thereof, their present and potential contributions to the Company's
success and such other factors as the Board in its discretion shall deem
relevant.
(c) Interpretations. Subject to the express provisions of the Plan,
the Committee may interpret the Plan, prescribe, amend and rescind rules and
regulations relating to it, determine the terms and provisions of the respective
Stock Options and make all other determinations it deems necessary or advisable
for the administration of the Plan.
(d) Determinations. The determinations of the Committee on all
matters regarding the Plan shall be conclusive.
(e) Nonuniform Determinations. The Committee's determinations under
the Plan including without limitation, selection of the individuals to receive
Stock Options, the terms and provisions of Stock Options thereof and the
agreements evidencing the same, need not be uniform and may be made by it
selectively among individuals who receive or are eligible to receive Stock
Options under the Plan, whether or not such individuals are similarly situated.
4. Maximum Limitations. The aggregate number of shares of Common Stock
available for grants of Stock Options under the Plan is 200,000 shares, subject
to adjustment pursuant to Section 8, below. Shares of Common Stock issued
pursuant to the Plan may be either authorized but unissued shares or shares now
or hereafter held in the treasury of the Company. In the event that, prior to
the end of the period during which Stock Options may be granted under the Plan,
any Stock Option under the Plan expires unexercised or is terminated,
surrendered or canceled without being exercised, in whole or in part, for any
reason, the number of shares theretofore subject to such Stock Option, or the
unexercised, terminated, forfeited or unearned portion thereof, shall be added
to the remaining number of shares of Common Stock available for grant as a Stock
Option under the Plan, including a grant to a former holder of such Stock
Option, upon such terms and conditions as the Committee shall determine, which
terms may be more or less favorable than those applicable to such former Stock
Option.
5. Conditions of Options. Any Stock Option granted pursuant to this Plan
shall, by its terms, be subject to the following limitations and conditions:
(a) Option Price. The option price for each Stock Option shall be
the fair market value of the number of shares of Common Stock subject thereto at
the time of the grant thereof.
(b) Term of Option. No Stock Option shall be exercisable after the
date that is 10 years from the date it is granted.
(c) Time of Grants. No Stock Option shall be granted before the
Effective Date or more than 10 years after the Effective Date.
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6. Exercise of Stock Options.
(a) In General. Subject to Section 5, above, Stock Options shall be
subject to such terms and conditions, shall be exercisable at such time or
times, and shall be evidenced by such form of written option agreement between
the optionee and the Company as the Committee shall determine; provided that
such determinations are not inconsistent with the other provisions of the Plan,
and with Section 422 of the Code in the case of an ISO.
(b) Manner of Exercise of Options and Payment for Common Stock.
Stock Options may be exercised by an optionee by giving written notice to the
Corporate Secretary of the Company stating the number of shares of Common Stock
with respect to which the Stock Option is being exercised and tendering payment
therefor. At the time that a Stock Option granted under the Plan, or any part
thereof, is exercised, payment for the Common Stock issuable thereupon shall be
made in full in cash or by certified check or, if permitted by the terms of the
Stock Option, in shares of Common Stock of the Company (the number of such
shares paid for each share subject to the Stock Option, or part thereof, being
exercised shall be determined by dividing the option price by the fair market
value per share of the Common Stock on the date of exercise). In addition, if
the terms of a Stock Option so provide, the optionee may pay the exercise price
by directing the Company to withhold from those shares of Common Stock that
would otherwise be received upon the exercise of the Stock Option that number of
shares of Common Stock having an aggregate fair market value as of the date of
exercise equal to the Stock Option's exercise price, or the applicable portion
of the Stock Option's exercise price if the Stock Option is not exercised in
full. The shares of Common Stock so withheld shall not be deemed to have been
issued for purposes of the aggregate-share limitation set forth in Section 4,
above. As soon as reasonably possible following such exercise, a certificate
representing shares of Common Stock purchased, registered in the name of the
optionee, shall be delivered to the optionee.
(c) Exercise During First Six Months. A Stock Option may be
exercised during the first six months of its term only to the extent that its
exercise would not violate the provisions of Section 16 of the Securities and
Exchange Act of 1934 and the applicable regulations thereunder, as amended.
7. Transferability. No Stock Option may be transferred, assigned, pledged
or hypothecated (whether by operation of law or otherwise), except as provided
by will or the applicable laws of descent or distribution, or subject to
execution, attachment or similar process. Any attempted assignment, transfer,
pledge, hypothecation or other disposition of a Stock Option, or levy of
attachment or similar process upon the Stock Option not specifically permitted
herein shall be null and void and without effect. A Stock Option may be
exercised only by an Employee or Non-Employee Director during his or her
lifetime, or by his or her estate or the person who acquires the right to
exercise such Stock Option upon his or her death by bequest or inheritance, to
the extent permitted by the terms of the Stock Option.
8. Adjustment Provisions. The aggregate number of shares of Common Stock
with respect to which Stock Options may be granted, the aggregate number of
shares of Common Stock subject to each outstanding Stock Option, and the option
price per share of each such Stock Option, may all be appropriately adjusted as
the Committee shall determine for any increase or decrease in the number of
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shares of issued Common Stock resulting from a division or consolidation of
shares, whether through reorganization, recapitalization, stock split, stock
distribution or combination of shares, or the payment of a share dividend or
other increase or decrease in the number of such shares outstanding effected
without receipt of consideration by the Company.
9. Dissolution, Merger and Consolidation. Upon the dissolution or
liquidation of the Company, or upon a merger or consolidation of the Company in
which the Company is not the surviving corporation, each Stock Option granted
hereunder shall expire as of the effective date of such transaction; provided,
however, that the Committee shall give at least 30 days' prior written notice of
such event to each optionee during which time he or she shall have a right to
exercise his or her wholly or partially unexercised Stock Option (without regard
to installment exercise limitations, if any) and, subject to prior expiration
pursuant to the terms thereof, each Stock Option shall be exercisable after
receipt of such written notice and prior to the effective date of such
transaction; provided further, however, that upon a merger or consolidation of
the Company in which the Company is not the surviving corporation, in lieu of
such notice, each such Stock Option shall be converted to an option to acquire
shares of the surviving corporation, the number of which shall be based on the
relative values of the Common Stock and such surviving corporation's common
stock on the date of such merger or consolidation.
10. Incentive Stock Options. Some or all of the Stock Options granted to
Employees pursuant to this Plan may be options which are intended to be ISOs.
Only those Stock Options which, by their terms, are expressly intended to
qualify as ISOs shall be considered as such. In addition to the other provisions
of this Plan, the provisions of this Section 10 apply to grants of ISOs
hereunder. In the event of a conflict between any provision of this Section 10
and provision of any other Section of this Plan, the provision of this Section
10 shall prevail.
(a) Identity of Optionees. ISOs may be granted only to Employees
(and not Non-Employee Directors).
(b) More-than-10% Shareholders. No Employee may receive an ISO under
the Plan if such Employee, at the time the Stock Option is granted, owns,
directly or indirectly within the meaning of Section 424(d) of the Code, stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company, or any subsidiary (as defined in Section 424(f) of the
Code) thereof, unless the option price for such ISO is at least 110% of the fair
market value of the Common Stock subject to such ISO on the date of grant and
such ISO is not exercisable after the date that is five years from the date such
Stock Option is granted.
(c) Limitation on Amounts. The aggregate fair market value
(determined with respect to each ISO as of the date of grant) of the capital
stock with respect to which ISOs are exercisable for the first time by an
Employee during any calendar year (under this Plan or any other plan of the
Company or any Subsidiary) shall not exceed $100,000.
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(d) Shareholder Approval. No Stock Option shall qualify as an ISO
unless within 12 months of the Effective Date, this Plan has been approved by
shareholders of the Company in accordance with all applicable provisions of the
Company's corporate charter, bylaws and applicable State law prescribing the
method and degree of shareholder approval required for the issuance of corporate
stock or options. If the applicable State law does not prescribe a method and
degree of shareholder approval, the Plan must be approved by a majority of the
votes cast at a duly convened meeting at which a quorum representing a majority
of all outstanding voting stock is, either in person or by proxy, present and
voting on the Plan, or by a method and degree that would be treated as adequate
under applicable State law in the case of an action requiring shareholder
approval.
11. Miscellaneous.
(a) Legal and Other Requirements. The obligation of the Company to
sell and deliver Common Stock under the Plan shall be subject to all applicable
laws, regulations, rules and approvals, including, but not by way of limitation,
the effectiveness of a registration statement under the Securities Act of 1933
if deemed necessary or appropriate by the Company. Certificates for shares of
Common Stock issued hereunder may be legended as the Committee shall deem
appropriate.
(b) No Obligation To Exercise Stock Options. The granting of a Stock
Option shall impose no obligation upon an optionee to exercise such Stock
Option.
(c) Termination and Amendment of Plan. The Board, without further
action on the part of the shareholders of the Company, may from time to time
alter, amend or suspend the Plan, or may at any time terminate the Plan, except
that it may not, without the approval of the shareholders of the Company as
described in Section 10(d), above: (i) increase the total number of shares of
Common Stock available for grant under the Plan except as provided in Section 8,
above; (ii) modify the class of eligible Employees under the Plan; or (iii)
effect a change relating to an ISO granted hereunder that is inconsistent with
Section 422 of the Code. No action taken by the Board under this Section, either
with or without the approval of the shareholders of the Company, may materially
and adversely affect any outstanding Stock Option without the consent of the
holder thereof.
(d) Application of Funds. The proceeds received by the Company from
the sale of Common Stock pursuant to Stock Options will be used for general
corporate purposes.
(e) Withholding Taxes. Upon the exercise of any Stock Option, the
Company shall have the right to require the optionee to remit to the Company an
amount sufficient to satisfy all federal, state and local withholding tax
requirements (if any) then applicable prior to the delivery of any certificate
or certificates for shares of Common Stock. An optionee may elect to have the
Company withhold from those shares of Common Stock that would otherwise be
received upon the exercise of any Stock Option a number of shares having a fair
market value equal to the minimum (and not more than the minimum) statutory
amount necessary to satisfy the Company's applicable federal, state, local and
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foreign income and employment tax withholding obligations in connection with the
exercise of the Stock Option. Upon the disposition of any Common Stock acquired
by the exercise of a Stock Option, the Company shall have the right to require
the optionee to remit to the Company an amount sufficient to satisfy all
federal, state and local withholding tax requirements (if any) then applicable
as a condition to the registration of the transfer of such Common Stock on its
books. Whenever under the Plan payments are to be made by the Company in cash or
by check, such payments shall be net of any amounts sufficient to satisfy all
federal, state and local withholding tax requirements.
(f) Right To Terminate Employment or Service as a Director. Nothing
in the Plan or any agreement entered into pursuant to the Plan shall confer upon
any Employee or Non-Employee Director the right to continue in the employment or
other service of the Company or any Subsidiary, or affect any right which the
Company or any Subsidiary may have to terminate the employment or service of
such Employee or Non-Employee Director.
(g) Rights as a Shareholder. No optionee shall have any right as a
shareholder with respect to shares of Common Stock subject to a Stock Option
unless and until certificates for such shares are issued to him or her.
(h) Leaves of Absence and Disability. The Committee shall be
entitled to make such rules, regulations and determinations as it deems
appropriate under the Plan in respect of any leave of absence taken by or
disability of any Employee or Non-Employee Director. Without limiting the
generality of the foregoing, the Board shall be entitled to determine: (i)
whether or not any such leave of absence shall constitute a termination of
employment within the meaning of the Plan, and (ii) the impact, if any, of any
such leave of absence on Stock Options granted under the Plan theretofore made
to any Employee or Non- Employee Director who takes such leave of absence.
(i) Fair Market Value. Whenever the fair market value of Common
Stock is to be determined under the Plan as of a given date, such fair market
value shall be: (i) if the Common Stock is traded on the over-the-counter
market, the average of the mean between the bid and the asked price for the
Common Stock at the close of trading for the trading day immediately preceding
such given date; (ii) if the Common Stock is listed on a national securities
exchange, the average of the closing prices of the Common Stock on the composite
tape for the trading day immediately preceding such given date; and (iii) if the
Common Stock is neither traded on the over-the-counter market nor listed on a
national securities exchange, such value as the Committee, in good faith, shall
determine. Notwithstanding any provision of the Plan to the contrary, no
determination made with respect to the fair market value of Common Stock subject
to an ISO shall be inconsistent with Section 422 of the Code.
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(j) Notices. Every direction, revocation or notice authorized or
required by the Plan shall be deemed delivered to the Company on the date it is
personally delivered to the Corporate Secretary of the Company at its principal
executive offices or three business days after it is sent by registered or
certified mail, postage prepaid, addressed to the Corporate Secretary at such
offices, and shall be deemed delivered to an optionee on the date it is
personally delivered to him or her or three business days after it is sent by
registered or certified mail, postage prepaid, addressed to him or her at the
last address shown for him or her on the records of the Company.
(k) Applicable Law. All questions pertaining to the validity,
construction and administration of the Plan and Stock Options granted hereunder
shall be determined in conformity with the laws of the Commonwealth of
Pennsylvania, to the extent not superseded by federal law.
(l) Elimination of Fractional Shares. If under any provision of the
Plan which requires a computation of the number of shares of Common Stock
subject to a Stock Option, the number so computed is not a whole number of
shares of Common Stock, such number of shares of Common Stock shall be rounded
down to the next whole number.
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