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
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement |_| Confidential, For Use of
|_| Definitive Proxy Statement the Commission Only (as
|_| Definitive Additional Materials permitted by Rule 14a-6
|_| Soliciting Material Pursuant to (e)(2)
ss.240.14a-12
PATRON SYSTEMS, INC.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|X| No Fee Required
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(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:
================================================================================
(4) Proposed maximum aggregate value of transaction:
================================================================================
(5) Total fee paid:
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|_| Fee paid with preliminary materials:
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|_| Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the form or
schedule and the date of its filing.
(1) Amount previously paid:
================================================================================
(2) Form, Schedule or Registration Statement No.:
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(4) Date filed:
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PATRON SYSTEMS, INC.
-----------------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
-----------------------------------------------------
TIME.................................. 10:00 a.m. Central Daylight Time
on June 22, 2006.
PLACE................................. The Union League Club
65 West Jackson Blvd.
Chicago, IL 60604
ITEMS OF BUSINESS..................... (1) To elect one Class I
director, one Class II
director, and one Class
III director to our
Board of Directors;
(2) To adopt the Patron
Systems, Inc. 2006
Stock Incentive Plan;
(3) To approve the
amendment of our Second
Amended and Restated
Certificate of
Incorporation, as
amended, to provide for
a 1-for-30 reverse
stock split of our
issued and outstanding
common stock; and
(4) To transact such other
business as may
properly come before
the Meeting and any
adjournment or
postponement.
RECORD DATE........................... You can vote if, at the close of
business on May 10, 2006, you
were a stockholder of the
Company.
PROXY VOTING.......................... All stockholders are cordially
invited to attend the Annual
Meeting in person. However, to
ensure your representation at
the Annual Meeting, you are
urged to vote promptly by
signing and returning the
enclosed Proxy card.
May 22, 2006 Robert Cross
CHIEF EXECUTIVE OFFICER
PATRON SYSTEMS, INC.
5775 FLATIRON PARKWAY, SUITE 230
BOULDER, COLORADO 80301
(303) 541-1005
PROXY STATEMENT
--------------------------------------------------------------------------------
These Proxy materials are delivered in connection with the solicitation by the
Board of Directors ("Board") of Patron Systems, Inc., a Delaware corporation
("Patron," the "Company," "we," "us," or "our"), of Proxies to be voted at our
2006 Annual Meeting of stockholders and at any adjournments or postponements
thereof.
You are invited to attend our Annual Meeting of stockholders on June 22, 2006,
beginning at 10:00 a.m. Central Daylight Time. The meeting will be held at The
Union League Club, 65 West Jackson Blvd., Chicago, Illinois 60604.
It is anticipated that the 2005 Annual Report and this Proxy Statement and the
accompanying Proxy will be mailed to stockholders on or about May 22, 2006.
STOCKHOLDERS ENTITLED TO VOTE. Holders of our Common Stock, par value $0.01 per
share ("Common Stock"), Series A-1 Convertible Preferred Stock, par value $0.01
per share ("Series A-1 Preferred Stock") and Series A Convertible Preferred
Stock, par value $0.01 per share ("Series A Preferred Stock" and together with
the Series A-1 Preferred Stock, "Preferred Stock"), at the close of business on
May 10, 2006 ("Record Date") are entitled to receive this notice and to vote
their shares at the Annual Meeting. As of May 10, 2006, there were 56,398,360
shares of Common Stock, 35,422,755 shares of Series A-1 Preferred Stock and 964
shares of Series A Preferred Stock outstanding.
VOTING. Each share of Common Stock is entitled to one vote on each matter
properly brought before the meeting. Each share of Preferred Stock is entitled
to one vote for each share of Common Stock into which such share of Preferred
Stock is convertible, on each matter properly brought before the meeting.
Abstentions will be counted toward the tabulation of votes cast on proposals
submitted to stockholders and will have the same effect as negative votes, while
broker non-votes will not be counted as votes cast for or against such matters.
PROXIES. Your vote is important. If your shares are registered in your name, you
are a stockholder of record. If your shares are in the name of your broker or
bank, your shares are held in street name. We encourage you to vote by Proxy so
that your shares will be represented and voted at the meeting even if you cannot
attend. All stockholders can vote by written Proxy card. Your submission of the
enclosed Proxy will not limit your right to vote at the Annual Meeting if you
later decide to attend in person. IF YOUR SHARES ARE HELD IN STREET NAME, YOU
MUST OBTAIN A PROXY, EXECUTED IN YOUR FAVOR, FROM THE HOLDER OF RECORD IN ORDER
TO BE ABLE TO VOTE AT THE meeting. If you are a stockholder of record, you may
revoke your Proxy at any time before the meeting either by filing with the
Secretary of the Company, at its principal executive offices, a written notice
of revocation or a duly executed Proxy bearing a later date, or by attending the
Annual Meeting and expressing a desire to vote your shares in person. All shares
entitled to vote and represented by properly executed Proxies received prior to
the Annual Meeting, and not revoked, will be voted at the Annual Meeting in
accordance with the instructions indicated on those Proxies. If no instructions
are indicated on a properly executed Proxy, the shares represented by that Proxy
will be voted as recommended by the Board.
QUORUM. The presence, in person or by Proxy, of a majority of the votes entitled
to be cast by the stockholders entitled to vote at the Annual Meeting is
necessary to constitute a quorum. Abstentions and broker non-votes will be
included in the number of shares present at the Annual Meeting for determining
the presence of a quorum. Broker non-votes occur when brokers, who hold their
customers' shares in street name, sign and submit proxies for such shares and
vote such shares on some matters, but not others. Typically, this would occur
when brokers have not received any instructions from their customers, in which
case the brokers, as the holders of record, are permitted to vote on "routine"
matters, which typically include the election of directors.
ELECTION OF DIRECTORS. The three nominees for director receiving the highest
number of votes of the Common Stock and Preferred Stock, voting as a single
class, at the Annual Meeting will be elected. If any nominee is unable or
unwilling to serve as a director at the time of the Annual Meeting, the Proxies
will be voted for such other
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nominee(s) as shall be designated by the current Board to fill any vacancy. The
Company has no reason to believe that any nominee will be unable or unwilling to
serve if elected as a director.
ADOPTION OF PATRON SYSTEMS, INC. 2006 STOCK INCENTIVE PLAN. The adoption of the
Patron Systems, Inc. 2006 Stock Incentive Plan will require the affirmative vote
of a majority of the shares of Common Stock and Preferred Stock, voting as a
single class, present or represented and entitled to vote at the Annual Meeting.
AMENDMENT TO THE COMPANY'S SECOND AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION. The approval of the amendment to the Company's Second Amended and
Restated Certificate of Incorporation, as amended ("Certificate of
Incorporation"), to provide for a 1-for-30 reverse stock split of our issued and
outstanding Common Stock will require the affirmative vote of (i) a majority of
the outstanding shares of Common Stock as of the record date voting as a
separate class, (ii) a majority of the outstanding shares of Series A-1
Preferred Stock as of the record date voting as a separate class, (iii) a
majority of the outstanding shares of Series A Preferred Stock as of the record
date voting as a separate class, and (iv) a majority of the outstanding shares
of Common Stock, Series A-1 Preferred Stock and Series A Preferred Stock as of
the record date voting as a single class.
SOLICITATION OF PROXIES. All expenses of our solicitation of proxies, including
the cost of mailing this Proxy Statement to our stockholders, will be borne by
us. In addition to solicitation by use of the mails, proxies may be solicited
from stockholders by our directors, officers and employees in person or by
telephone or other means of communication. Such directors, officers and
employees will not be additionally compensated, but may be reimbursed for
reasonable out-of-pocket expenses in connection with such solicitation. We may
retain a proxy solicitation firm for assistance in connection with the
solicitation of proxies for the Annual Meeting. Arrangements will also be made
with brokerage houses, custodians, nominees and fiduciaries for the forwarding
of proxy solicitation materials to beneficial owners of shares held of record by
such brokerage houses, custodians, nominees and fiduciaries, and we will
reimburse such brokerage houses, custodians, nominees and fiduciaries for their
reasonable expenses incurred in connection therewith.
OTHER MATTERS. In the event a stockholder proposal was not submitted to the
Company prior to the date of this Proxy Statement, the enclosed Proxy will
confer authority on the Proxyholders to vote the shares in accordance with their
best judgment and discretion if the proposal is presented at the Meeting. As of
the date hereof, no stockholder proposal has been submitted to the Company, and
management is not aware of any other matters to be presented for action at the
Meeting. However, if any other matters properly come before the Meeting, the
Proxies solicited hereby will be voted by the Proxyholders in accordance with
the recommendations of the Board. Such authorization includes authority to
appoint a substitute nominee for any Board' nominee identified herein where
death, illness or other circumstance arises which prevents such nominee from
serving in such position and to vote such Proxy for such substitute nominee.
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ITEM 1: ELECTION OF DIRECTORS
Item 1 is the election of one Class I director, one Class II director, and one
Class III director to the Board. As provided in our Certificate of
Incorporation, our Board is grouped into three classes, as nearly equal in
number as possible. Directors hold office for staggered terms of three years.
The classification of our Board is intended to provide for the election of
directors to one of the three classes each year to succeed the directors whose
terms are expiring.
At the 2006 Annual Meeting, each director will be elected to a class for a term
expiring as designated below as the Company has not held an Annual Meeting of
Stockholders since 2003. Our bylaws presently provide that the number of
directors may be amended from time to time by resolution adopted by the
affirmative vote of a majority of the whole Board. Upon completion of the
Company's recapitalization involving the issuance of Series A-1 Preferred Stock
in settlement of all claims, liabilities, demands, damages, etc., the Board will
pursue increasing the number of directors to seven members. The number of
directors is currently fixed at three.
Unless otherwise instructed, the Proxy holders will vote the Proxies received by
them for the nominees named below. If any nominee is unable or unwilling to
serve as a director at the time of the Annual Meeting, or any postponement or
adjournment thereof, the Proxies will be voted for such other nominee(s) as
shall be designated by the then current Board to fill any vacancy. The Company
has no reason to believe that any nominee will be unable or unwilling to serve
if elected as a director.
The Board proposes the election of the following nominee as a Class I director:
George Middlemas
If elected, the foregoing nominee is expected to serve until the 2009 Annual
Meeting of Stockholders.
The Board proposes the election of the following nominee as a Class II director:
Robert Cross
If elected, the foregoing nominee is expected to serve until the 2007 Annual
Meeting of Stockholders.
The Board proposes the election of the following nominee as a Class III
director:
Braden Waverley
If elected, the foregoing nominee is expected to serve until the 2008 Annual
Meeting of Stockholders.
The three nominees for election as directors at the Annual Meeting who receive
the highest number of affirmative votes will be elected.
The principal occupation and certain other information about the nominees and
certain executive officers are set forth on the following pages.
RECOMMENDATION
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ELECTION OF THE NOMINEES
LISTED ABOVE.
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DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, positions and ages of the Company's
current executive officers and directors. Officers are appointed by the Board
and their terms of office are, except to the extent governed by an employment
contract, at the discretion of the Board.
-------------------------- ------ ----------------------------------------
NAME AGE POSITION HELD
-------------------------- ------ ----------------------------------------
Robert Cross 68 Chief Executive Officer and Director
-------------------------- ------ ----------------------------------------
Braden Waverley 39 Chief Operating Officer
-------------------------- ------ ----------------------------------------
Martin T. Johnson 54 Chief Financial Officer
-------------------------- ------ ----------------------------------------
Brett Newbold 53 President and Chief Technology Officer
-------------------------- ------ ----------------------------------------
Robert E. Yaw II 59 Chairman
-------------------------- ------ ----------------------------------------
George Middlemas 59 Director
-------------------------- ------ ----------------------------------------
DIRECTORS
GEORGE MIDDLEMAS Mr. Middlemas is Managing General Partner of Apex
CURRENT DIRECTOR Investment Partners. Prior to joining Apex in 1991,
AND CLASS I Mr. Middlemas was a Senior Vice President and
NOMINEE Principal of Inco Venture Capital Management. Prior
thereto, he was Vice President and a member of the
investment commitment committee of Citicorp Venture
Capital. Mr. Middlemas was a founder of both America
Online (AOL) and RSA Security (NASDAQ: RSAS). Mr.
Middlemas holds a B.A. in history and political
science from Pennsylvania State University; an M.A. in
political science from the University of Pittsburgh;
and an M.B.A. from the Harvard Graduate School of
Business Administration. Mr. Middlemas has served as a
director since February 28, 2005 with a term expiring
at the Company's 2006 Annual Meeting of Stockholders.
Mr. Middlemas also serves on the board of directors
and the compensation committee of the board of
directors of Pure Cycle Corporation.
ROBERT CROSS Robert Cross joined the Company on February 28, 2005
CURRENT DIRECTOR as its Chief Executive Officer. Mr. Cross has more
AND CLASS II than twenty years CEO-level experience in the
NOMINEE development and marketing of information technologies,
including secure systems for intelligence agencies and
NATO markets. From 1984 through 2004, Mr. Cross was
Chief Executive Officer of Cross Technologies, Inc., a
business process outsourcing firm specializing in the
structuring and commercialization of information
technologies. From 1993 through 1998, Mr. Cross was
President and CEO of Nanophase Technologies Corp.
(NASDAQ: NANX). From 1984 through 1989, he was
Chairman and CEO of Delta Data Systems Corp., a
manufacturer of secure computers and peripherals for
government intelligence agencies. From 1983 to 1984,
Mr. Cross led the financial turnaround of Control
Video Corporation, predecessor to America Online
(AOL). Prior thereto, Mr. Cross was General Counsel of
Electronic Data Systems. Prior thereto, Mr. Cross was
a securities counsel with Winthrop Stimson Putnam &
Roberts. Mr. Cross received his business and legal
education at Washington University in St. Louis. He is
a Marine Corps veteran, and is an active member of
Business Executives for National Security and the
Illinois Technology Development Alliance. Mr. Cross
has served as a director since February 28, 2005 with
a term expiring at the Company's 2006 Annual Meeting
of Stockholders.
BRADEN WAVERLEY Mr. Waverley joined the Company on February 17, 2006
CLASS III NOMINEE as its Chief Operating Officer. Mr. Waverley has been
an active advisor to start-up companies in technology
services, distribution and software, Mr. Waverley was
most recently President of Vsource, Inc., a publicly
traded business process outsourcing (BPO) services
firm from 2002 to 2004. While at Vsource, he was
responsible for sales, marketing, solutions
development, public and investor relations, and
strategic planning. Under his leadership the Company
expanded
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account acquisition, positioning the business for a
successful sale to an Asian based investment group.
From 1996 to 2001, Mr. Waverley was with Dell Inc.,
where he was Vice President and General Manager in
the company's Canadian operations. With full P&L
responsibility for the Consumer and Small Business
Divisions, he grew the combined business unit to over
$500 million in sales and the top market share
position in Canada. Previously, he held marketing and
general management posts for Dell's business
throughout the Asia-Pacific region, where he grew a
new business unit over five-fold, with sales in
excess of $250 million. Prior to Dell, Mr. Waverley
co-founded Paradigm Research, a successful management
consulting firm specializing in business process
automation and redesign strategies. Clients came from
industries such as computer hardware, software and
wireless technology. Earlier, Mr. Waverley held
operations and marketing management positions at
Motorola, Inc. Mr. Waverley holds a bachelors degree
from the University of Wisconsin at Madison, and a
masters of business administration from the J.L.
Kellogg Graduate School of Management at Northwestern
University.
ROBERT E. YAW II Mr. Yaw started his career with Citicorp International
CURRENT DIRECTOR and later joined the Investment Banking Department of
Salomon Brothers in 1973. In 1975, at the request of
William R. Salomon, Mr. Yaw created its Global
Telecommunications Group. In 1980, Mr. Yaw and Mr.
Lewis Ranieri created mortgage securitization through
a partnership with AT&T and Bank of America. Also in
1980, Mr. Yaw became Chairman of Salomon Brothers' New
Products Group--formally coordinating Salomon
Brothers' public offering origination and distribution
processes. In 1981, Mr. Yaw assumed senior
responsibility for Salomon Brothers' Private Placement
Group--the leading U.S. private placement agent
throughout his tenure. Thereafter, he has been an
advisor, founder, and Director of private and public
companies, including partnerships with Prudential
Insurance Company of America and New York Life
Insurance Company and he has held staff positions with
the United States Senate Foreign Relations Committee,
United States Senate Republican Policy Committee, and
the Presidential Commission on the Causes and
Prevention of Violent Crime. Mr. Yaw completed his
undergraduate education at Bowdoin College and Clare
College (Cambridge University) in 1968, and his
graduate legal education at Georgetown University and
the University of London in 1973. Mr. Yaw has served
as a director since October 10, 2002 with a term
expiring at the Company's 2006 Annual Meeting of
Stockholders.
EXECUTIVE OFFICERS
ROBERT CROSS Mr. Cross's biography is listed above.
CHIEF EXECUTIVE
OFFICER
BRADEN WAVERLEY Mr. Waverley's biography is listed above.
CHIEF OPERATING
OFFICER
BRETT NEWBOLD Mr. Newbold rejoined the Company on February 28, 2005
PRESIDENT AND as its President and Chief Technology Officer. From
CHIEF TECHNOLOGY October 2002 until June 2003, Mr. Newbold was the
OFFICER Company's Chief Technology Officer and President,
Technology Products Group. Mr. Newbold has more than
twenty-five years of software development and
technology company management experience. From 1989
through 1997, Mr. Newbold was Vice President/Research
& Development, New Technologies for Oracle Corporation
(NASDAQ: ORCL), where he held senior operating
management responsibility for the selection,
development and integration of new technologies,
reporting directly to Oracle's Chief Executive
Officer, Mr. Larry Ellison. Thereafter, Mr. Newbold
was President and Chief Operating Officer of Open Text
Corporation (NASDAQ: OTEX), a market leader of
collaboration and knowledge management software. Since
1999, Mr. Newbold served as an Executive Consultant to
various software development companies. Mr. Newbold
received
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his undergraduate education in physics at the
University of Washington.
MARTIN T. JOHNSON Mr. Johnson joined the Company on February 17, 2006 as
CHIEF FINANCIAL its Chief Financial Officer. Mr. Johnson has served as
OFFICER an independent consultant providing financial,
strategy and operations consulting services since
2002. From 2000 to 2001, he was Vice President -
Planning and Business Development for Cabletron
Systems, a provider of network hardware, network
management software and consulting services. From 1999
to 2000, Mr. Johnson was Senior Vice President, Chief
Financial Officer for MessageMedia, Inc., a
publicly-held e-mail messaging services and software
company. From 1993 to 1999, he worked for Technology
Solutions Company, a publicly-held management and
information technology professional services firm.
Initially, he led the business case consulting
practice serving as Vice President, Business Case
Consulting and from February 1994 was the firm's
Senior Vice President and Chief Financial Officer.
From 1990 to 1993, he was Corporate Controller for The
Marmon Group, Inc., a $4.5 billion autonomous
association of over 70 independent member companies.
From 1987 to 1990, he was Vice President-Finance and
Chief Financial Officer of COMNET Corporation, a
publicly-held computer software and computer services
firm and was also Vice President-Finance and Chief
Financial Officer for its publicly-held subsidiary,
Group 1 Software, Inc. Mr. Johnson holds a bachelor of
science in electrical engineering degree from Lehigh
University and a masters degree in management from the
J.L. Kellogg Graduate School of Management at
Northwestern University.
FURTHER INFORMATION CONCERNING THE BOARD
MEETINGS AND COMMITTEES
The Board held 7 meetings during fiscal 2005. The Board also acted 15 times by
unanimous written consent during fiscal 2005. All directors attended 75% or more
of all the meetings of the Board in fiscal 2005. The Board does not have an
Audit Committee, Compensation Committee or Nominating Committee.
While we do not require members of our Board to attend the Company's Annual
Meeting of stockholders, each director is encouraged to do so. Our stockholders
acted by written consent for our most recent annual meeting held in 2003.
AUDIT COMMITTEE FUNCTIONS
Our Board performs the functions of an audit committee and does not operate
pursuant to a charter in connection with the performance of such functions. Our
Board is responsible for the engagement of the Company's independent public
accountants, reviews the scope of the audit to be conducted by the independent
public accountants, and periodically meets with the independent public
accountants and the Chief Financial Officer of the Company to review matters
relating to the Company's financial statements, the Company's accounting
principles and its system of internal accounting controls.
In fulfilling its responsibilities for the financial statements for fiscal year
2005, the Board:
o Reviewed and discussed the audited financial statements for
the year ended December 31, 2005 with management and Marcum &
Kliegman, L.P. ("Marcum"), the Company's independent
registered public accounting firm;
o Discussed with Marcum the matters required to be discussed by
Statement on Auditing Standards No. 61 relating to the conduct
of the audit; and
o Received written disclosures and a letter from Marcum
regarding its independence as required by Independence
Standards Board Standard No. 1, and has discussed with Marcum
their independence.
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Based on its review of the audited financial statements and discussions with
management and Marcum, the Board approved the inclusion of the audited financial
statements be included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2005 for filing with the Securities and Exchange
Commission.
NOMINATING COMMITTEE FUNCTIONS
Our Board performs the functions of a nominating committee and does not operate
pursuant to a charter in connection with the performance of such functions. We
believe that since there are only three directors, it is appropriate for the
entire Board to undertake the functions of the nominating committee. We have
determined that Mr. Middlemas is "independent" as that term is defined in
Section 4200 of the Marketplace Rules as required by the NASDAQ Stock Market. In
carrying out its function to nominate candidates for election to the Board, the
Board considers the mix of skills, experience, character, commitment, and
diversity of background, all in the context of the requirements of the Board at
that point in time. The Board believes that each candidate should be an
individual who has demonstrated integrity and ethics in such candidate's
personal and professional life, has an understanding of elements relevant to the
success of a publicly-traded company and has established a record of
professional accomplishment in such candidate's chosen field. Each candidate
should be prepared to participate fully in board activities, including
attendance at, and active participation in, meetings of the Board, and not have
other personal or professional commitments that would interfere with or limit
such candidate's ability to do so.
If the Company is legally required by contract or otherwise to provide third
parties with the ability to nominate directors (E.G., preferred stock rights to
elect directors upon a dividend default, stockholder agreements and management
agreements), the selection and nomination of such directors need not be subject
to the Board's nominating and review process.
A stockholder of the Company may nominate one or more persons for election as a
director at an annual meeting of stockholders by submitting information
regarding such nominee to the Company's Chief Executive Officer. Candidates
nominated by stockholders will be reviewed by the Board according to the
requirements set forth above.
STOCKHOLDER COMMUNICATIONS WITH THE BOARD.
Our Board has adopted three methods by which our stockholders may communicate
with the Board regarding matters of substantial importance to the Company. These
methods are as follows:
1. PROCEDURES FOR SUBMISSION OF COMMUNICATIONS REGARDING AUDIT AND
ACCOUNTING MATTERS. Our Board has in place procedures for (a) the receipt,
retention, and treatment of communications received by us regarding accounting,
internal accounting controls, or auditing matters; and (b) the submission by our
employees, on a confidential and anonymous basis, of communications regarding
questionable accounting or auditing matters. These procedures allow any person
to submit a good faith communication regarding these various audit, internal
accounting control and accounting matters to the Board, or to our management,
and any employee to do so on a confidential and anonymous basis, without fear of
dismissal or retaliation of any kind. Ultimately, the Board will oversee
treatment of communications in this area, and therefore any submissions would be
reviewed by all members of the Board.
2. CODE OF ETHICAL CONDUCT. Our Code of Ethical Conduct identifies the
e-mail addresses for each of our Chief Executive Officer, Robert Cross, Chief
Financial Officer, Martin T. Johnson, and the Chairman of our Board, Robert Yaw.
This allows individuals to contact those members of our management in connection
with matters concerning the code and our company's overall ethical values and
standards.
3. INVESTOR RELATIONS. Our Chief Executive Officer, Robert Cross,
addresses all of our investor relations matters. Stockholders are free to
contact Mr. Cross at (303) 541-1005. Mr. Cross determines whether inquiries or
other communications with respect to investor relations should be relayed to our
Board or to other management. Typical communications relayed to our Board or
other management involve stockholder proposal matters, audit and accounting
matters addressed in item 1 above, and matters related to our code of ethical
conduct addressed in item 2 above.
7
ITEM 2: ADOPTION OF PATRON SYSTEMS, INC. 2006 STOCK INCENTIVE PLAN
The Patron Systems, Inc. 2006 Stock Incentive Plan ("Plan") was adopted by the
Board of Directors on May 10, 2006, subject to approval by the Company's
stockholders. If approved by the stockholders, the Plan will become effective as
of June 22, 2006, the date of the Annual Meeting. Under the Plan, the Company is
authorized to grant equity-based awards in the form of stock options, restricted
common stock, stock units and stock appreciation rights to employees (including
executive officers), non-employee directors and consultants of the Company and
its subsidiaries.
The Board of Directors believes that equity-based incentive compensation plans
provide an important means of attracting, retaining and motivating employees,
non-employee directors and other service providers and recommends that
stockholders approve the adoption of the Plan. Because non-employee directors
and executive officers of the Company are eligible to receive awards under the
Plan, they have a personal interest in the approval of the adoption of the Plan.
The purpose of the Plan is (a) to recognize and compensate selected employees
and consultants who contribute to the success of the Company and its
subsidiaries, (b) to attract and retain employees and consultants and (c) to
provide incentive compensation to employees and consultants based on the
performance of the Company and its subsidiaries. The Board of Directors believes
that employees, non-employee directors and other service providers who have an
investment in the Company are more likely to meet and exceed performance goals.
The Board proposes that the stockholders approve the adoption of the Plan.
PRINCIPAL FEATURES OF THE PLAN
The following summary briefly describes the principal features of the Plan and
is qualified in its entirety by reference to the full text of the Plan, a copy
of which is attached hereto as Appendix "A" in the form proposed.
GENERAL. The Plan may be administered by the Board or another committee of the
Board. The Plan is currently administered by the Board. If the Board designates
that a committee shall administer the Plan, that committee must be comprised of
"non-employee directors" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934 ("Exchange Act") and "outside directors" under Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). The Board
may also appoint one or more separate committees of the Board, each composed of
one or more directors of the Board, who need not satisfy the requirements noted
above, who may administer the Plan with respect to employees who are not
considered officers or directors of the Company under Section 16 of the Exchange
Act. Subject to the provisions of the Plan, the Board will have full and final
authority to select the employees, officers, directors and consultants to whom
awards will be granted thereunder, to grant the awards and to determine the
terms and conditions of the awards and the number of shares to be issued
pursuant thereto.
ELIGIBILITY. Employees, non-employee directors and other service providers of
the Company and our affiliates who, in the opinion of the Board, are in a
position to make a significant contribution to the success of the Company and
our affiliates are eligible to participate in the Plan. The Board determines the
type and size of award and sets the terms, conditions, restrictions and
limitations applicable to the award within the confines of the Plan's terms. As
of May 10, 2006, there were approximately 27 employees and 2 non-employee
directors who would be eligible to participate in the Plan.
AVAILABLE SHARES. The maximum number of shares available for grant under the
Plan is 5,600,000 shares of Common Stock, on a post-reverse-split basis (as
described in Item 3 below). The number of shares available for award under the
Plan is subject to adjustment for certain corporate changes in accordance with
the provisions of the Plan. The aggregate number of shares available for grant
will increase annually by the lower of (i) 1,000,000 shares, (ii) 5% of the
outstanding shares on the last day of the immediately preceding year, or (iii)
an amount determined by the Board. Currently, the maximum number of shares
available for grant of awards under the Plan to any one participant is 1,500,000
shares during any fiscal year.
8
AWARDS. The Plan authorizes the Board to enter into any type of arrangement with
an eligible employee that, by its terms, involves or might involve the issuance
of (1) shares of Common Stock, (2) options to purchase Common Stock, (3) stock
appreciation rights based on Common Stock and (4) stock units based on Common
Stock. An award may consist of one such arrangement or two or more such
arrangements in tandem or in the alternative.
An award may provide for the issuance of Common Stock for any lawful
consideration, including services rendered to the Company. An award granted
under the Plan may include a provision conditioning or accelerating the receipt
of benefits, either automatically or in the discretion of the Board, upon the
occurrence of specified events, including a change of control of the Company, an
acquisition of a specified percentage of the voting power of the Company or a
dissolution, liquidation, merger, reclassification, sale of substantially all of
the property and assets of the Company or other significant corporate
transaction. Any stock option granted may be an incentive stock option within
the meaning of Section 422 of the Code or a nonqualified stock option.
An award under the Plan may permit the recipient to pay all or part of the
purchase price of the shares or other property issuable pursuant to the award,
and/or to pay all or part of the recipient's tax withholding obligations with
respect to such issuance, in cash or by delivering previously owned shares of
capital stock of the Company.
STOCK OPTIONS. The Plan provides for the grant of incentive stock options
intended to meet the requirements of Section 422 of the Code and nonqualified
stock options that are not intended to meet those requirements. Incentive stock
options may be granted only to employees of the Company and its affiliates. All
options will be subject to terms, conditions, restrictions and limitations
established by the Board, as long as they are consistent with the terms of the
Plan.
The Board will determine when an option will vest and become exercisable. No
option will be exercisable more than ten years after the date of grant (or, in
the case of an incentive stock option granted to a 10% stockholder, five years
after the date of grant). Unless otherwise provided in the option award
agreement, options terminate within a certain period of time following a
participant's termination of employment or service by reason of death,
disability or retirement, for any reason other than death, disability,
retirement, or for cause.
The exercise price of a stock option granted under the Plan may not be less than
the fair market value of the Common Stock on the date of grant. Incentive stock
options must be granted at 100% of fair market value. (or, in the case of an
incentive stock option granted to a 10% stockholder, 110% of fair market value).
The closing price on the OTC Bulletin Board for the Common Stock on May 10, 2006
was $0.069.
The exercise price of a stock option may be paid in cash or, in the discretion
of the Board, with previously acquired shares of Common Stock, through services
rendered, through an irrevocable direction to a securities broker to sell shares
and to deliver all or part of the sale proceeds to the Company, through an
irrevocable direction to a securities broker or lender to pledge shares, as
security for a loan, and to deliver all or part of the loan proceeds to the
Company, by promissory note or by any other form of consideration that is
consistent with applicable law.
STOCK APPRECIATION RIGHTS OR SARS. A stock appreciation right or SAR entitles
the participant to receive an amount in cash and/or shares of Common Stock, as
determined by the Board, equal to the amount by which the Company's Common Stock
appreciates in value after the date of the award. The Board will determine when
the SAR will vest and become exercisable. The Board will set other terms,
conditions, restrictions and limitations on SARs, including rules as to
exercisability after termination of employment or service.
RESTRICTED STOCK. Restricted stock awards consist of shares of Common Stock that
must be returned to the Company if certain conditions are not satisfied. The
Board will determine the restriction period and may impose other terms,
conditions and restrictions on restricted stock, including vesting upon
achievement of performance goals pursuant to a performance award and
restrictions under applicable securities laws. The Board also may require the
participant to pay for restricted stock. Subject to the terms and conditions of
the award agreement related to restricted stock, a participant holding
restricted stock will have the right to receive dividends on the shares of
restricted stock during the restriction period, vote the restricted stock and
enjoy all other stockholder rights related to the shares of Common Stock. Upon
expiration of the restriction period, the participant is entitled to receive
shares of Common Stock not subject to restriction.
9
STOCK UNITS. Stock units are fictional shares of Common Stock. The Board will
determine the restriction period and may impose other terms, conditions and
restrictions on stock units. Upon the lapse of restrictions, the participant is
entitled to receive shares of Common Stock or an amount of cash equal to the
fair market value of such shares of Common Stock as provided in the award
agreement. An award of stock units may include the grant of a right to dividend
equivalents. Such right entitles the holder to be credited with an amount equal
to all cash dividends paid on one share while the stock unit is outstanding.
Dividend equivalents may be converted into additional stock units. Settlement of
dividend equivalents may be made in the form of cash, shares, or in a
combination of both. Prior to distribution, any dividend equivalents which are
not paid shall be subject to the same conditions and restrictions (including
without limitation, any forfeiture conditions) as the stock units to which they
attach. The Board will determine when the stock units will vest and become
exercisable. The Board will set other terms, conditions, restrictions and
limitations on stock units, including rules as to exercisability after
termination of employment or service.
PERFORMANCE STANDARDS. The number of Shares or other benefits granted, issued,
retainable and/or vested under an award under the Plan may be made subject to
the attainment of performance goals for a specified period of time relating
performance criteria specified in the Plan applied to either the Company as a
whole or to a business unit or subsidiary, either individually, alternatively or
in any combination, and measured either annually or cumulatively over a period
of years, on an absolute basis or relative to a pre-established target, to
previous years' results or to a designated comparison group or index, in each
case as specified by the Board in the award notice. The Board may appropriately
adjust any evaluation of the performance criteria referenced above to exclude
certain events occurring during the period over which performance is measured.
The Board shall determine the performance criteria not later than the 90th day
of the performance period, and shall determine and certify, for each
participant, the extent to which the performance criteria have been met. The
Board may not in any event increase the amount of compensation payable under the
Plan upon the attainment of a performance goal to a participant who is a
"covered employee" within the meaning of Section 162(m) of the Code.
PLAN DURATION. The Plan will become effective upon its adoption by the Company's
stockholders at the Annual Meeting on June 22, 2006. Unless terminated earlier
by the Board, the Plan will automatically terminate on June 21, 2016.
AMENDMENTS. The Board may amend or terminate the Plan at any time and in any
manner, subject to the following: (1) no recipient of any award may, without his
or her consent, be deprived thereof or of any of his or her rights thereunder or
with respect thereto as a result of such amendment or termination; and (2) if
any law, rule or regulation requires that any such amendment be approved by the
Company's stockholders, then such amendment will not be effective until it has
been approved by the Company's stockholders.
EFFECT OF SECTION 16(b) OF THE SECURITIES EXCHANGE ACT OF 1934. The acquisition
and disposition of Common Stock by officers, directors and more than 10%
stockholders of the Company ("Insiders") pursuant to awards granted to them
under the Plan may be subject to Section 16(b) of the Exchange Act. Pursuant to
Section 16(b), a purchase of Common Stock by an Insider within six months before
or after a sale of Common Stock by the Insider could result in recovery by the
Company of all or a portion of any amount by which the sale proceeds exceed the
purchase price. Insiders are required to file reports of changes in beneficial
ownership under Section 16(a) of the Exchange Act upon acquisitions and
dispositions of shares. Rule 16b-3 provides an exemption from Section 16(b)
liability for certain transactions pursuant to certain employee benefit plans.
The Plan is designed to comply with Rule 16b-3.
TRANSFERABILITY. Unless the agreement evidencing the award expressly provides
otherwise, no award may be sold, transferred, pledged, assigned or disposed of,
except by will or the laws of descent and distribution, provided, however, that
an ISO may be transferred or assigned only to the extent consistent with Section
422 of the Code.
WITHHOLDING TAXES. Participants are required to make arrangements satisfactory
to the Company for the satisfaction of any withholding tax obligations that
arise in connection with the Plan. Payment of withholding taxes may be made by
withholding shares of Common Stock from any payment of Common Stock due or by
the delivery by the participant to the Company of previously acquired shares of
Common Stock, in either case having an aggregate fair market value equal to the
amount of the required withholding taxes. No payment will be made and no shares
of Common Stock will be issued pursuant to any award made under the Plan until
the applicable tax withholding obligations have been satisfied.
10
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES. The following is a general
discussion of the principal federal income tax consequences under the Plan.
Because the United States federal income tax rules governing options and related
payments are complex and subject to change, optionees are advised to consult
their tax advisors prior to exercise of options or dispositions of stock
acquired pursuant to option exercise. The Plan does not constitute a qualified
retirement plan under Section 401(a) of the Code (which generally covers trusts
forming part of a stock bonus, pension or profit-sharing plan funded by the
employer and/or employee contributions which are designed to provide retirement
benefits to participants under certain circumstances) and is not subject to the
Employee Retirement Income Security Act of 1974 (the pension reform law which
regulates most types of privately funded pension, profit sharing and other
employee benefit plans).
CONSEQUENCES TO EMPLOYEES: INCENTIVE STOCK OPTIONS. No income is recognized for
federal income tax purposes by an optionee at the time an Incentive Stock Option
is granted, and, except as discussed below, no income is recognized by an
optionee upon his or her exercise of an Incentive Stock Option. If the optionee
disposes of the shares received upon exercise after two years from the date such
option was granted and after one year from the date such option is exercised,
the optionee will recognize long-term capital gain or loss when he or she
disposes of his or her shares. Such gain or loss generally will be measured by
the difference between the exercise price of the option and the amount received
for the shares at the time of disposition. If the optionee disposes of shares
acquired upon exercise of an Incentive Stock Option within two years after being
granted the option, or within one year after acquiring the shares, any amount
realized from such disqualifying disposition will be taxable at ordinary income
rates in the year of disposition to the extent that the lesser of (a) the fair
market value of the shares on the date the Incentive Stock Option was exercised,
or (b) the fair market value at the time of such disposition, exceeds the
Incentive Stock Option exercise price. Any amount realized upon disposition in
excess of the fair market value of the shares on the date of exercise will be
treated as short-term or long-term capital gain, depending upon the length of
time the shares have been held. The use of stock acquired through exercise of an
Incentive Stock Option to exercise an Incentive Stock Option will constitute a
disqualifying disposition if the applicable holding period requirements have not
been satisfied. For alternative minimum tax purposes, the excess of the fair
market value of the stock as of the date of exercise over the exercise price of
the Incentive Stock Option is included in computing that year's alternative
minimum taxable income. However, if the shares are disposed of in the same year,
the maximum alternative minimum taxable income with respect to those shares is
the gain on disposition. There is no alternative minimum taxable income from a
disqualifying disposition in subsequent years. The exercise of an Incentive
Stock Option is to be considered wages subject to withholding for FICA purposes
to the extent of the spread between the exercise price and value of the Common
Stock as of the date of the exercise.
CONSEQUENCES TO EMPLOYEES: NON-STATUTORY OPTIONS. An optionee recognizes no
income at the time Non-Statutory Options are granted under the Plan. In general,
at the time shares are issued to an optionee pursuant to exercise of
Non-Statutory Options, the optionee will recognize income taxable at ordinary
income tax rates equal to the excess of the fair market value of the shares on
the date of exercise over the exercise price of such shares, unless the stock
received is not transferable and subject to a substantial risk of forfeiture
under Code Section 83 (stock received by you which is subject to continued
employment or subject to the six month holding period under Section 16(b) of the
Securities Act of 1934 is deemed to be subject to a substantial risk of
forfeiture under Code Section 83). An optionee will recognize gain or loss on
the subsequent sale of shares acquired upon exercise of Non-Statutory Options in
an amount equal to the difference between the selling price and the tax basis of
the shares, which will include the price paid plus the amount included in the
optionee's taxable income by reason of the exercise of the Non-Statutory
Options. Provided the shares are held as a capital asset, any gain or loss
resulting from a subsequent sale will be short-term or long-term capital gain or
loss depending upon the length of time the shares have been held.
CONSEQUENCES TO EMPLOYEES: RESTRICTED STOCK. The receipt of restricted stock
will not result in a taxable event to the participant until the expiration of
any repurchase rights retained by the Company with respect to such stock, unless
the participant makes an election under Section 83(b) of the Code to be taxed as
of the date of purchase. If no repurchase rights are retained, or if a Section
83(b) election is made, the participant will recognize ordinary income in an
amount equal to the excess of the fair market value of such shares on the date
of purchase over the purchase price paid for such shares. Even if the purchase
price and the fair market value of the shares are the same (in which case there
would be no ordinary income), a Section 83(b) election must be made to avoid
deferral of the date ordinary income is recognized. The election must be filed
with the Internal Revenue Service not later than thirty (30) days after the date
of transfer. If no Section 83(b) election is made or if no repurchase rights are
retained, a taxable
11
event will occur on each date the participant's ownership rights vest (e.g.,
when the Company's repurchase rights expire) as to the number of shares that
vest on that date, and the holding period for long-term capital gain purposes
will not commence until the date the shares vest. The participant will recognize
ordinary income on each date shares vest in an amount equal to the excess of the
fair market value of such shares on that date over the amount paid for such
shares. The income from the restricted stock will also be subject to income and
employment tax withholding in the year such income is includible in the
participant's income.
CONSEQUENCES TO EMPLOYEES: STOCK APPRECIATION RIGHTs. Individuals who receive
stock appreciation rights under the Plan will generally recognize taxable income
upon exercise of the stock appreciation right. The income received from the
exercise of the stock appreciation right will be ordinary and will be equal to
the amount of cash received or the value of the appreciated stock. This amount
will generally be reportable in the participant's income in the year of receipt,
however, if the stock appreciation right is exercised for stock and the stock is
subject to a substantial risk of forfeiture, it will be subject to tax as
restricted stock (see above discussion). The income from a stock appreciation
right will also be subject to income and employment tax withholding in the year
such income is includible in the participant's income.
CONSEQUENCES TO THE COMPANY: INCENTIVE STOCK OPTIONS, The Company will not be
allowed a deduction for federal income tax purposes at the time of the grant or
exercise of an Incentive Stock Option. There are also no United States federal
income tax consequences to the Company as a result of the disposition of shares
acquired upon exercise of an Incentive Stock Option if the disposition is not a
disqualifying disposition. At the time of a disqualifying disposition by an
optionee, the Company will be entitled to a deduction for the amount received by
the optionee to the extent that such amount is taxable to the optionee at
ordinary income tax rates.
CONSEQUENCES TO THE COMPANY: NON-STATUTORY OPTIONS AND OTHER GRANTS. The Company
generally will be entitled to a deduction for United States federal income tax
purposes in the same year and in the same amount as the optionee is considered
to have recognized income taxable at ordinary income tax rates in connection
with the exercise of Non-Statutory Options or other grants received under the
Plan. In certain instances, the Company may be denied a deduction for
compensation attributable to awards granted to certain officers of the Company
to the extent that such compensation exceeds $1,000,000 in a given year.
CONSEQUENCES OF STOCK UNITS. There will be no federal income tax consequences to
either the participant or the employer upon the grant of restricted stock units.
Generally, the participant will recognize ordinary income subject to withholding
upon the receipt of cash and/or transfer of shares of Common Stock in payment of
the restricted stock units in an amount equal to the aggregate of the cash
received and the fair market value of the Common Stock so transferred. Subject
to certain deduction limitations, the Company generally will be entitled to a
corresponding tax deduction equal to the amount includible in the participant's
income. Generally, a participant will also recognize ordinary income subject to
withholding upon the payment of any dividend equivalents paid with respect to an
award in an amount equal to the cash the participant receives. Subject to
certain deduction limitations, the Company generally will be entitled to a
corresponding tax deduction equal to the amount includible in the participant's
income.
APPLICATION OF SECTION 409A OF THE CODE. Recently enacted Section 409A of the
Code imposes an additional 20% tax and interest on an individual receiving
nonqualified deferred compensation under a plan that fails to satisfy certain
requirements. For purposes of Section 409A of the Code, "nonqualified deferred
compensation" includes equity-based incentive programs, including some stock
options, stock appreciation rights and restricted stock unit programs. Generally
speaking, Section 409A of the Code does not apply to incentive stock options,
nonqualified stock options granted at fair market value if no deferral is
provided beyond exercise, or restricted stock. In limited circumstances, SARs
are exempt from Section 409A of the Code.
Awards made pursuant to the Plan will be designed to comply with the
requirements of Code Section 409A to the extent the awards granted under the
Plan are not exempt from coverage. However, if the Plan fails to comply with
Section 409A of the Code in operation, a participant could be subject to the
additional taxes and interest.
12
NEW PLAN BENEFITS
Because awards under the Plan are discretionary, benefits or amounts that will
hereinafter be received by or allocated to the CEO, the named executive
officers, all current executive officers as a group, the non-executive directors
as a group, and all employees who are not executive officers, are not presently
determinable.
RECOMMENDATION
The adoption of the Patron Systems, Inc. 2006 Stock Incentive Plan will require
the affirmative vote of a majority of the shares of Common Stock and Preferred
Stock, voting as a single class, present or represented and entitled to vote at
the Annual Meeting.
All Proxies will be voted to approve this amendment unless a contrary vote is
indicated on the enclosed Proxy card.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ADOPTION OF THE PATRON
SYSTEMS, INC. 2006 STOCK INCENTIVE PLAN.
13
ITEM 3: AMENDMENT OF SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
The Board is requesting stockholder approval of an amendment (the "Amendment")
to the Company's Second Amended and Restated Certificate of Incorporation to
provide for a 1-for-30 reverse stock split of our issued and outstanding Common
Stock.
On May 10, 2006, our Board of Directors adopted and declared advisable a
resolution approving an amendment to our Certificate of Incorporation to
effectuate a pro-rata reverse split of our issued and outstanding Common Stock
by which every thirty (30) shares will become one share (the "Reverse Split").
The principal effect of the Reverse Split will be to decrease the number of
issued and outstanding shares of our Common stock. Except for adjustments that
may result from the treatment of fractional shares as described below, each
holder of Common Stock will hold the same percentage of Common Stock outstanding
immediately following the Reverse Split as such stockholder held immediately
prior to the Reverse Split. The relative voting and other rights that accompany
the shares of Common Stock will not be affected by the Reverse Split.
The Company's Certificate of Incorporation, as amended, presently authorizes the
issuance of 150,000,000 shares of Common Stock and 75,000,000 shares of
Preferred Stock, each having a par value of $0.01 per share. Of the 150,000,000
presently authorized shares of Common Stock, 56,398,360, shares were issued and
outstanding on May 10, 2006, the record date. An aggregate of approximately
429,020,474 shares of Common Stock have been reserved for issuance as of the
record date pursuant to outstanding options, warrants, an accommodation
agreement and Preferred Stock. Accordingly, no shares of Common Stock remain
available for corporate purposes. In addition, pursuant to this Proxy, the
Company is seeking stockholder approval of the Patron Systems, Inc. 2006 Stock
Incentive Plan. Accordingly, assuming the proposal to adopt the Plan is approved
by our stockholders, an additional 5,600,000 shares of Common Stock, on a
post-Reverse Split basis will be reserved for issuance. The Board considers it
advisable to have additional shares of Common Stock available for issuance for
possible future stock dividends or stock splits and for other corporate
purposes. In Addition, the Board believes it is desirable that the Company have
the flexibility to issue shares of Common Stock without further stockholder
action, except as required by law.
The Board has unanimously adopted a resolution setting forth the following
proposed amendment to the Company's Certificate of Incorporation pursuant to
which Section (A) of Article IV of the Company's Certificate of Incorporation
will be amended to read in its entirety as follows:
"Authorized Capital Stock. The total number of shares of capital stock
which the Corporation shall have authority to issue is 225,000,000,
consisting of 150,000,000 shares of common stock, with the par value of
$0.01 per share ("Common Stock"), and 75,000,000 shares of preferred
stock, with the par value of $0.01 per share. Simultaneously with the
effective date of the filing of this amendment to the Second Amended
and Restated Certificate of Incorporation (the "Effective Date"), each
share of Common Stock of the Corporation issued and outstanding or held
as treasury shares immediately prior to the Effective Date (the "Old
Common Stock") shall automatically be reclassified and continued (the
"Reverse Split"), without any action on the part of the holder thereof,
as one-thirtieth of one share (0.033333) of Common Stock. The
Corporation shall not issue fractional shares on account of the Reverse
Split. Holders of Old Common Stock who would otherwise be entitled to a
fraction of a share on account of the Reverse Split shall receive, upon
surrender of all of such holder's stock certificates formerly
representing shares of Old Common Stock, in lieu of such fractional
share, one whole share of Common Stock.
The Corporation's stated capital shall be reduced by an amount equal to
the aggregate par value of the shares of Common Stock issued prior to
the effectiveness of this Certificate of Amendment which, as a result
of the Reverse Split provided for herein, are no longer issued shares
of Common Stock."
EFFECTIVE DATE OF THE AMENDMENT. The Amendment will become effective on the
close of business on the date we file the Certificate of Amendment ("Certificate
of Amendment") of the Certificate of Incorporation with the Delaware Secretary
of State (the "Effective Date"). The complete text of the form of the
Certificate of Amendment is set forth as APPENDIX "B" to this Proxy Statement.
We anticipate that the Effective Date will occur on or around
14
June 26, 2006. However, the exact timing of the filing of the Certificate of
Amendment will be determined by our Board of Directors based upon its evaluation
as to when the Amendment will be most advantageous to us and our stockholders,
and the Board of Directors reserves the right to delay filing the Certificate of
Amendment for up to six (6) months. In addition, the Board of Directors reserves
the right, notwithstanding stockholder approval and without further action by
the stockholders, to elect not to proceed with the Amendment if, at any time
prior to filing the Certificate of Amendment, the Board of Directors, in its
sole discretion, determines that it is no longer in the best interests of the
Company and the stockholders.
Stockholders do not have the statutory right to dissent and obtain appraisal of
their shares under Delaware law in connection with the Amendment.
EFFECT OF THE REVERSE SPLIT. Upon effectiveness of the Certificate of Amendment,
without further action by us or our stockholders, the outstanding shares of
Common Stock held by stockholders of record as of the Effective Date will be
converted into the right to receive a number of shares of common stock (the "New
Common Stock") calculated based on a reverse split ratio of one-for-thirty
shares. For example, if a stockholder presently holds 1,500 shares of Common
Stock, that stockholder will hold 50 shares of New Common Stock following the
Reverse Split.
REASONS FOR THE REVERSE SPLIT. The Reverse Split and resulting anticipated
increase in the price of our Common Stock should enhance the acceptability and
marketability of our Common Stock to the financial community and investing
public. Many institutional investors have policies prohibiting them from holding
lower-priced stocks in their portfolios, which reduces the number of potential
buyers of our Common Stock. Additionally, analysts at many brokerage firms are
reluctant to recommend lower-priced stocks to their clients or monitor the
activity of lower-priced stocks. Brokerage houses also frequently have internal
policies that discourage individual brokers from dealing in lower-priced stocks.
Further, because brokers' commissions on lower-priced stock generally represent
a higher percentage of the stock price than commissions on higher priced stock,
investors in lower-priced stocks pay transaction costs which are a higher
percentage of their total share value, which may limit the willingness of
individual investors and institutions to purchase our Common Stock.
Additionally, in connection with the entry into final and binding settlements
with respect to any and all claims, liabilities, demands, causes of action,
costs, expenses, attorneys fees, damages, indemnities, and obligations of every
kind and nature ("Claims") of our existing creditors and/claim holders
("Claimants"), we negotiated the issuance of one share of our Series A-1
Preferred Stock for each $0.80 of Claims held by such Claimants. Each share of
Series A-1 Preferred Stock is currently convertible, on a pre-Reverse Split
basis, into 10 shares of Common Stock, and will automatically convert upon the
effectiveness of the Amendment. In light of the fact that we did not have
sufficient shares of authorized but unissued Common Stock to issue shares of
Common Stock to the Claimants, we issued shares of our Series A-1 Preferred
Stock. Presently, we do not have sufficient shares of authorized but unissued
Common Stock to reserve for the potential issuance of these shares upon
conversion of the shares of Series A-1 Preferred Stock. The effectuation of the
Reverse Split will increase the availability of authorized shares of Common
Stock so as to effectuate the conversion of the shares of Series A-1 Preferred
Stock into shares of Common Stock.
We have also issued shares of Series A Preferred Stock in connection with a
financing transaction. Each share of Series A Preferred Stock is currently
convertible, on a pre-Reverse Split basis, into 62,500 shares of Common Stock.
Presently, we do not have sufficient shares of authorized but unissued Common
Stock to reserve for the potential issuance of these shares upon conversion of
the shares of Series A Preferred Stock. The effectuation of the Reverse Split
will increase the availability of authorized shares of Common Stock so as to
facilitate the conversion of the shares of Series A Preferred Stock into shares
of Common Stock.
Our Board considers it advisable to have additional shares available for
issuance under our employee benefit plans, to raise capital in a public or
private offering, for acquisitions and other strategic transactions, for
possible future stock dividends or stock splits and for other corporate
purposes. In addition, our Board believes it is desirable that we have the
flexibility to issue shares of Common Stock without further stockholder action,
except as required by law. We have no current agreements to enter into any stock
offerings or strategic transactions, nor do we presently have any plans,
proposals or arrangements, written or otherwise, to issue any of the newly
available authorized shares of Common Stock for any purpose, including future
acquisitions and/or financings, other than in connection with the conversion of
Preferred Shares.
15
The Reverse Split may result in some stockholders owning "odd-lots" of less than
100 shares. Brokerage commissions and other costs of transactions in odd-lots
may be higher, particularly on a per-share basis, than the cost of transactions
in even multiples of 100 shares.
RISK FACTOR. We cannot assure stockholders that the post-Reverse Split market
price of our Common Stock will increase proportionately to the ratio for the
Reverse Split. Further, the Reverse Split will result in approximately 136
million post-Reverse Split shares of Common Stock (accounting for automatic
conversion of the Series A-1 Preferred Stock) available for future issuance. As
such, should we determine to issue more Common Stock, the number of shares of
Common Stock available for issuance due to the Reverse Split may result in the
dilution of the currently outstanding Common Stock.
NO FRACTIONAL SHARES. We will not issue any fractional shares in connection with
the Reverse Split. Holders of old Common Stock who would otherwise be entitled
to a fraction of a share on account of the Reverse Split shall receive, upon
surrender of all of such holder's stock certificates formerly representing
shares of the old Common Stock, in lieu of such fractional share, one whole
share of Common Stock.
EXCHANGE OF STOCK CERTIFICATES. The Reverse Split will occur automatically on
the Effective Date, regardless of when stockholders physically surrender their
stock certificates for new stock certificates. When effected, our transfer
agent, American Stock Transfer & Trust Company, will act as exchange agent
("Exchange Agent") to implement the exchange of stock certificates. As soon as
practicable after the Effective Date, we or the Exchange Agent will send a
letter to each stockholder of record at the Effective Date for use in
transmitting certificates representing shares of our Common Stock ("Old
Certificates") to the Exchange Agent. The letter of transmittal will contain
instructions for the surrender of Old Certificates to the Exchange Agent in
exchange for certificates representing the appropriate number of whole shares of
New Common Stock. No new stock certificates will be issued to a stockholder
until such stockholder has surrendered all Old Certificates, together with a
properly completed and executed letter of transmittal, to the Exchange Agent.
Stockholders would then receive a new certificate in exchange for certificates
representing the number of whole shares of New Common Stock into which their
shares of Common Stock have been converted as a result of the Reverse Split.
Until surrendered, we will deem outstanding Old Certificates held by
stockholders to be canceled and only to represent the number of whole shares of
New Common Stock to which these stockholders are entitled. All expenses of the
exchange of certificates will be borne by us.
YOU SHOULD NOT SEND YOUR OLD
CERTIFICATES TO THE EXCHANGE AGENT UNTIL YOU
HAVE RECEIVED THE LETTER OF TRANSMITTAL
POTENTIAL ANTI-TAKEOVER EFFECTS. Certain provisions of our Certificate of
Incorporation, bylaws and Delaware law may have the effect of delaying,
deferring or discouraging another person from acquiring control of the Company.
Our Certificate of Incorporation, as amended, allows our Board to issue an
additional 39,576,281 shares of preferred stock, in one or more series and with
such rights and preferences including voting rights, without further shareholder
approval. In the event that the Board designates additional series of preferred
stock with rights and preferences, including super-majority voting rights, and
issues such preferred stock, the preferred stock could make our acquisition by
means of a tender offer, a proxy contest or otherwise, more difficult, and could
also make the removal of incumbent officers and directors more difficult. As a
result, these provisions may have an anti-takeover effect. The preferred stock
authorized in our articles of incorporation, as amended, may inhibit changes of
control that are not approved by our Board. These provisions could limit the
price that future investors might be willing to pay in the future for our Common
Stock. This could have the effect of delaying, deferring or preventing a change
in control of the Company. The issuance of preferred stock could also
effectively limit or dilute the voting power of our stockholders. According,
such provisions of our Certificate of incorporation may discourage or prevent an
acquisition or disposition of our business that could otherwise be in the best
interest of our stockholders.
Following the Amendment, we will have available approximately 136 million
(accounting for automatic conversion of the Series A-1 Preferred Stock)
authorized but unissued shares of our Common Stock available for future issuance
without stockholder approval. These additional shares may be used for a variety
of corporate purposes, including a future public offering to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued shares of Common Stock may enable our Board to issue
shares of stock to
16
persons friendly to existing management. As a result, our issuance of these
shares could have an anti-takeover effect.
In addition, our Board is grouped into three classes, as nearly equal in number
as possible. Directors hold office for staggered terms of three years and one of
the three classes is elected each year to succeed the directors whose terms are
expiring. The staggered nature of election of members to our Board may make it
difficult to effect a change of incumbent management and control. As our Board
currently consists of 3 members, it would take two annual meetings to replace a
majority of our Board. This feature may also serve to entrench management and
make their removal more difficult.
Finally, we are subject to the provisions of Section 203 of the Delaware General
Corporation Law. That section provides, with some exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or affiliate, or associate of the person, who is an "interested
stockholder" for a period of three years from the date that the person became an
interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the board of directors of the corporation before the person becomes an
interested stockholder; (ii) the interested stockholder acquires 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder, excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by some employee
stock ownership plans; or (iii) on or after the date the person becomes an
interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. An "interested
stockholder" is defined as any person that is (a) the owner of 15% or more of
the outstanding voting stock of the corporation or (b) an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the three-year period immediately
prior to the date on which it is sought to be determined whether the person is
an interested stockholder.
The Amendment is not the result of any specific effort to accumulate our
securities or to obtain control of our company by means of a merger, tender
offer, solicitation in opposition to management or otherwise. The Amendment is
not part of a plan by management to adopt a series of provisions having an
anti-takeover effect and management does not presently intend to propose other
anti-takeover measures in future proxy solicitations.
EFFECT ON OUTSTANDING SHARES. Except for de minimus adjustments that may result
from the treatment of fractional interests as described above, once the Reverse
Split is completed, the number of shares of our Common Stock owned by each
stockholder will be reduced in the same proportion as the reduction in the total
number of shares outstanding, such that the percentage of our Common Stock owned
by each stockholder will remain unchanged. The number of shares of Common Stock
that may be purchased upon exercise of outstanding options, warrants, and other
securities convertible into, or exercisable or exchangeable for, shares of our
Common Stock, and the exercise or conversion prices for these securities, will
be adjusted in accordance with their terms as of the Effective Date.
On the Effective Date, each share of Series A-1 Preferred Stock will convert
into one third (1/3) of a share of Common Stock (on a post-Reverse Split basis).
ACCOUNTING CONSEQUENCES. The par value of our Common Stock will remain unchanged
at $0.01 per share after the Reverse Split. However, the Common Stock as
designated on our balance sheet will be adjusted downward in respect of the
shares of the New Common Stock to be issued in the Reverse Split such that the
stated value of the Common Stock will become an amount equal to the aggregate
par value of the shares of New Common Stock being issued in the Reverse Split,
and the Additional Paid-in Capital as designated on our balance sheet will be
increased by an amount equal to the amount by which the stated capital was
decreased. Additionally, net loss per share would increase proportionately as a
result of the Reverse Split. We do not anticipate that any other accounting
consequence would arise as a result of the Reverse Split.
FEDERAL INCOME TAX CONSEQUENCES. The following is a summary of the material
anticipated United States federal income tax consequences of the Amendment to
our stockholders. This summary is based on the United States federal income tax
laws now in effect and as currently interpreted, and does not take into account
possible changes in such laws or interpretations. This summary is provided for
general information only and does not address all aspects of the possible
federal income tax consequences of the Amendment and is not intended as tax
advice to any person. In particular, this summary does not consider the federal
income tax consequences to our stockholders in
17
light of their individual investment circumstances or to holders subject to
special treatment under the federal income tax laws, and does not address any
consequences of the Amendment under any state, local, or foreign tax laws.
We believe that our stockholders who exchange their Common Stock solely for New
Common Stock should generally recognize no gain or loss for federal income tax
purposes. A stockholder's aggregate tax basis in its shares of New Common Stock
received should be the same as the stockholder's aggregate tax basis in the
Common Stock exchanged therefor. The holding period of the New Common Stock
received by that stockholder should include the period during which the
surrendered Common Stock was held, provided all such Common Stock was held as a
capital asset at the Effective Date.
We will not recognize any gain or loss as a result of the Reverse Split.
RECOMMENDATION
The approval of the Amendment to the Company's Second Amended and Restated
Certificate of Incorporation will require (i) a majority of the outstanding
shares of Common Stock as of the record date voting as a separate class, (ii) a
majority of the outstanding shares of Series A-1 Preferred Stock as of the
record date voting as a separate class, (iii) a majority of the outstanding
shares of Series A Preferred Stock as of the record date voting as a separate
class, and (iv) a majority of the outstanding shares of Common Stock, Series A-1
Preferred Stock and Series A Preferred Stock as of the record date voting as a
single class.
THE BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE AMENDMENT TO THE
COMPANY'S SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION.
18
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, as to the Chief Executive Officer and the other
four most highly compensated executive officers at the end of the fiscal year
ended December 31, 2005 (collectively the "Named Executive Officers") whose
compensation exceeded $100,000 during the fiscal year ended December 31, 2005,
information concerning all compensation paid for services to us in all
capacities.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------- -------------------------------
AWARDS PAYOUTS
-------------------------------
Other Securities
Annual Restricted underlying
Salary Bonus Compensation Stock options / LTIP All Other
Name and Principal Position Year ($) ($) ($) Award(s)($) SARs (#) Payouts Compensation
----------------------------------------------------------------------------------------------------------------------------------
Robert Cross(1) 2005 186,458 82,388 0 0 1,000,000 0 0
Director, Chief Executive 2004 0 0 0 0 0 0 0
Officer 2003 0 0 0 0 0 0 0
----------------------------------------------------------------------------------------------------------------------------------
Brett Newbold(2) 2005 150,624 0 0 0 0 0 0
President & Chief Technology 2004 0 0 0 0 0 0 0
Officer 2003 159,000 0 0 0 0 0 0
----------------------------------------------------------------------------------------------------------------------------------
William Hammon(3) 2005 157,500 0 0 0 400,000 0 0
Chief Marketing Officer 2004 0 0 0 0 0 0 0
2003 0 0 0 0 0 0 0
----------------------------------------------------------------------------------------------------------------------------------
James E. Morriss(4) 2005 141,666 0 0 0 600,000 0 0
Vice President - 2004 0 0 0 0 0 0 0
Engineering 2003 0 0 0 0 0 0 0
----------------------------------------------------------------------------------------------------------------------------------
Heidi B. Newton(5) 2005 142,500 15,000 0 0 200,000 0 0
Vice President - Finance 2004 0 0 0 0 0 0 0
and Administration 2003 0 0 0 0 0 0 0
----------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Cross became Patron's Chief Executive Officer on February 28, 2005.
On July 1, 2005, Mr. Cross was granted an option to purchase 1,000,000
shares of the Company's Common Stock at a per share exercise price of
$0.65. This option terminates on June 30, 2015.
(2) Mr. Newbold was named Patron's President and Chief Technology Officer
on February 28, 2005. Previously, Mr. Newbold was Patron's Chief
Technology Officer and President, Technology Products Group joining the
Company on October 11, 2002. He later terminated his employment as of
June 30, 2003.
(3) Mr. Hammon became Patron's Chief Marketing Officer upon the acquisition
of Entelagent on March 30, 2005. On August 17, 2005, Mr. Hammon
received an option to purchase 400,000 shares of the Company's Common
Stock at a per share exercise price of $0.34. This option grant
terminates on August 16, 2015. Mr. Hammon's employment with the Company
ended on January 9, 2006.
(4) Mr. Morriss became Patron's Vice President-Engineering on March 31,
2005. On August 17, 2005, Mr. Morriss was granted an option to purchase
600,000 shares of the Company's Common Stock at a per share exercise
price of $0.34. This option terminates on August 16, 2015.
(5) Ms. Newton became Patron's Vice President - Finance and Administration
on February 26, 2005. On August 17, 2005 Ms. Newton was granted an
option to purchase 200,000 shares of the Company's Common Stock at a
per share exercise price of $0.34. This option terminates on August 16,
2015.
19
OPTION GRANTS IN THE YEAR ENDED DECEMBER 31, 2005
NUMBER OF
SECURITIES % OF TOTAL OPTIONS
UNDERLYING OPTIONS GRANTED TO EMPLOYEES EXERCISE EXPIRATION
NAME GRANTED IN FISCAL YEAR(1) PRICE(2) DATE
-------------------- ------------------ -------------------- -------- ----------
Robert Cross ....... 1,000,000 18.8% $0.65(3) 6/30/15
Brett Newbold ...... -- -- -- --
William Hammon ..... 400,000 7.5% $0.34 8/16/15
James E. Morriss ... 600,000 11.3% $0.34 8/16/15
Heidi B. Newton .... 200,000 3.8% $0.34 8/16/15
(1) The total number of stock options granted to employees during the year
ended December 31, 2005 was 5,315,000 shares.
(2) The exercise price of such options was equal to closing price on the
trading day immediately preceding the date of grant, except as noted.
(3) Mr. Cross' options were granted at a per share exercise price of $0.65.
The closing price on the date of grant was $0.68.
DIRECTOR COMPENSATION
Patron's non-employee directors do not receive compensation for their services.
Directors are reimbursed for travel expenses associated with attendance at Board
meetings. There were no reimbursement of travel expenses in each of the years
ended December 31, 2005 and 2004.
EXECUTIVE EMPLOYMENT AGREEMENTS
ROBERT W. CROSS
On February 28, 2005, the Company's Board approved the appointment of Mr. Cross
as our Chief Executive Officer and Acting Chief Financial Officer.
On July 1, 2005, we entered into an employment agreement with Mr. Cross in
connection with Mr. Cross's employment for a one-year term, subject to automatic
renewal, commencing on July 1, 2005, as Chief Executive Officer. The Employment
Agreement provides for a base salary of $200,000 per year with a non-recoverable
draw of $100,000 (grossed up for taxes) during the first six months of the
Agreement. In the event that his employment is terminated, Mr. Cross shall
continue to receive his base salary and shall be entitled to continued
participation in our executive benefit plans for a period of six (6) months. The
Employment Agreement also provides for a performance bonus determined in
accordance with quarterly revenue milestones that are to be established by the
Board. Mr. Cross is eligible to receive a bonus of up to 100% of quarterly base
salary for each quarter that the Company achieves the agreed upon revenue
milestones. Additionally, the Employment Agreement provides for the grant of
1,000,000 stock options at an exercise price of $0.65 per share with the options
vesting 25% on July 1, 2005, 25% on September 30, 2005, 25% on December 31, 2005
and 25% on March 31, 2006. The options expire on June 30, 2012.
Mr. Cross's employment agreement will terminate on the expiration of the
agreement's term, his death, or delivery of written notice of termination by us
to Mr. Cross if he were to suffer a permanent disability rendering him unable to
perform his duties and obligations under the agreement for 90 days in any
12-month period. We can terminate Mr. Cross's employment by delivery of written
notice of such termination "for cause" or "without cause" (as such terms are
defined in his employment agreement) to Mr. Cross. Mr. Cross can terminate his
employment by delivery of written notice of termination "for good reason" (as
such term is defined in his employment agreement) to us. Mr. Cross agrees not to
compete with us or solicit certain of our employees or clients for a period of
one year after the termination of his employment.
20
On March 7, 2006, the Patron Board of Directors, in executive session without
Mr. Cross being present, approved a bonus arrangement ("Bonus Arrangement") for
Mr. Cross. The Bonus Arrangement provides for (i) a cash bonus equal to
$200,000, grossed up for taxes (the "Cash Bonus"), (ii) the Cash Bonus would be
payable only after agreement has been reached with creditors holding the
applicable percentage of Patron's creditor obligations agree to convert their
obligations under the Creditor and Claimant Liabilities Restructuring and when
the funding escrow established by Laidlaw has been released (the "Eligibility
Date"), (iii) 50% of the Cash Bonus would be paid on the Eligibility Date, and
the other 50% would be paid in ten equal monthly installments beginning one
month following the Eligibility Date, and (iv) on the Eligibility Date, Mr.
Cross would be granted a stock option in an amount representing an aggregate
2.5% of the outstanding shares of Company common stock on the Eligibility Date
("Initial Cross Grant"). Additionally, upon the completion of the Creditor and
Claimant Liabilities Restructuring, Mr. Cross will be granted an additional
option ("Cross Additional Option") which together with the Cross Initial Grant
shall enable Mr. Cross to purchase, along with the Cross Initial Grant shares of
Company common stock representing 2.5% of the common stock issued and
outstanding after completion of the Creditor and Claimant Liabilities
Restructuring on a fully-diluted basis. These options have a term of 10 years
and vest 20% on the date of grant and 1/48th of the balance on the last day of
each month for the next 48 months following the Eligibility Date.
BRETT NEWBOLD
On February 28, 2005, we entered into an employment agreement with Brett Newbold
in connection with Mr. Newbold's employment for a one-year term, subject to
automatic renewal, commencing on February 28, 2005, as President and Chief
Technology Officer. Mr. Newbold will receive a minimum annual base salary of
$190,000 during each fiscal year of the agreement, subject to adjustment on an
annual basis by the Board. In the event that his employment is terminated, Mr.
Newbold shall continue to receive his base salary and shall be entitled to
continued participation in our executive benefit plans for a period of six (6)
months. Mr. Newbold is eligible to receive (i) an annual bonus of 50% of his
annual base salary if certain financial performance measures are attained and
(ii) such discretionary bonuses as may be authorized by the Board from time to
time for executive employees. Mr. Newbold also is eligible to participate in
stock option and other employee benefit plans of the Company that may be in
effect from time to time.
Mr. Newbold's employment agreement will terminate on the expiration of the
agreement's term, his death, or delivery of written notice of termination by us
to Mr. Newbold if he were to suffer a permanent disability rendering him unable
to perform his duties and obligations under the agreement for 90 days in any
12-month period. We can terminate Mr. Newbold's employment by delivery of
written notice of such termination "for cause" or "without cause" (as such terms
are defined in his employment agreement to Mr. Newbold. Mr. Newbold can
terminate his employment by delivery of written notice of termination "for good
reason" (as defined in his employment agreement) to us. Mr. Newbold agrees not
to compete with us or solicit certain of our employees or clients for a period
of two years after the termination of his employment.
BRADEN WAVERLEY
On February 17, 2006, the Company entered into an employment agreement (the
"Waverley Agreement") with Braden Waverley ("Waverley"), the Company's new Chief
Operating Officer. The term of the Waverley Agreement is one year with automatic
one-year renewal unless Mr. Waverley is provided with written notice of
non-renewal 90 days prior to expiration of the current term of the Waverley
Agreement. The Waverley Agreement provides for a base salary of $200,000 per
year. The Waverley Agreement provides for a performance bonus determined in
accordance with revenue milestones established by the Board on a quarterly
basis. Mr. Waverley is eligible to receive a bonus of up to 75% of base salary
for each quarter that the Company achieves the agreed upon revenue milestones.
Additionally, the Waverley Agreement provides for the grant of stock options in
an amount representing an aggregate 3.5% of the outstanding shares of Company
Common Stock on the date of grant ("Waverley Initial Grant"). The Waverley
Initial Grant is for 2,201,119 shares at an exercise price of $0.055 per share.
Additionally, upon the completion of the resolution of Claims through the
issuance of Series A-1 Preferred Stock, Mr. Waverley will be granted an
additional option ("Waverley Additional Option") which together with the
Waverley Initial Grant shall enable Mr. Waverley to purchase, along with the
Waverley Initial Grant, shares of Company Common Stock representing 3.5% of the
Common Stock issued and outstanding after completion of the Creditor and
Claimant Liabilities Restructuring on a fully-diluted basis. These options have
a term of 10 years and vest 20% on the date of
21
grant and 1/48th of the balance on the last day of each month for the next 48
months following the effective date of this agreement.
MARTIN T. JOHNSON
On February 17, 2006, the Company entered into an employment agreement (the
"Johnson Agreement") with Martin T. Johnson ("Johnson"), the Company's new Chief
Financial Officer. The term of the Johnson Agreement is one year with automatic
one-year renewal unless Mr. Johnson is provided with written notice of
non-renewal 90 days prior to expiration of the current term of the Johnson
Agreement. The Johnson Agreement provides for a base salary of $180,000 per
year. The Johnson Agreement provides for a performance bonus determined in
accordance with revenue milestones established by the Board on a quarterly
basis. Mr. Johnson is eligible to receive a bonus of up to 50% of base salary
for each quarter that the Company achieves the agreed upon revenue milestones.
Additionally, the Johnson Agreement provides for the grant of stock options in
an amount representing an aggregate 1.25% of the outstanding shares of Company
Common Stock on the date of grant ("Johnson Initial Grant"). The Johnson Initial
Grant is for 786,114 shares at an exercise price of $0.055 per share.
Additionally, upon the completion of the resolution of Claims through the
issuance of Series A-1 Preferred Stock, Mr. Johnson will be granted an
additional option ("Johnson Additional Option") which together with the Johnson
Initial Grant shall enable Mr. Johnson to purchase, along with the Johnson
Initial Grant, shares of Company Common Stock representing 1.25% of the Common
Stock issued and outstanding after completion of the Creditor and Claimant
Liabilities Restructuring on a fully-diluted basis. These options have a term of
10 years and vest 20% on the date of grant and 1/48th of the balance on the last
day of each month for the next 48 months following the effective date of this
agreement.
22
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our Common Stock as of May 10, 2006, by (i) each person (or group
of affiliated persons) who is known by us to beneficially own more than 5% of
the outstanding shares of our Common Stock, (ii) each of our directors, director
nominees and executive officers, and (iii) all of our executive officers,
director nominees and directors as a group. Under Rule 13d-3, certain shares may
be deemed to be beneficially owned by more than one person (if, for example,
persons share the power to vote or the power to dispose of the shares). In
addition, shares are deemed to be beneficially owned by a person if the person
has the right to acquire the shares (for example, upon exercise of an option)
within 60 days of the date as of which the information is provided. In computing
the percentage ownership of any person, the amount of shares outstanding is
deemed to include the amount of shares beneficially owned by such person (and
only such person) by reason of these acquisition rights. As a result, the
percentage of outstanding shares of any person as shown in this table does not
necessarily reflect the person's actual ownership or voting power with respect
to the number of shares of Common Stock actually outstanding at May 10, 2006. As
of May 10, 2006, there were 56,398,360 shares of Common Stock outstanding.
Except as otherwise indicated, the address of each of the executive officers,
directors and more than 5% stockholders named below is c/o Patron Systems, Inc.,
5775 Flatiron Parkway, Suite 230, Boulder, CO 80301.
AMOUNT AND NATURE OF
CERTAIN BENEFICIAL OWNERS BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------------- -------------------- ----------------
DIRECTORS, DIRECTOR NOMINEES &
EXECUTIVE OFFICERS
Robert W. Cross(1) 1,066,667 1.9%
Braden Waverley(2) 623,650 1.1%
Brett Newbold(3) 4,075,000 7.2%
Martin T. Johnson(4) 222,732 *
James E. Morriss(5) 272,000 *
Heidi B. Newton 202,114 *
Robert E. Yaw II(6) 2,950,000 5.2%
George M. Middlemas 22,751 *
ALL DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP(7) 9,434,914 16.7%
5% STOCKHOLDERS
Apex Investment Fund V, L.P.(8) 11,547,838 20.5%
225 W. Washington St.,
Suite 1500
Chicago, Illinois 60606
* Less than 1%
(1) Consists of 1,000,000 shares of Common Stock that may be acquired from
the Company within 60 days of May 10, 2006 upon the exercise of
outstanding stock options.
(2) Consists of 623,650 shares of Common Stock that may be acquired from
the Company within 60 days of May 10, 2006 upon the exercise of
outstanding stock options.
(3) Consists of 1,475,000 shares of Common Stock that are directly owned by
Mr. Newbold, and 2,600,000 shares of Common Stock owned by Newbold,
Inc., a corporation of which Mr. Newbold is the sole stockholder.
23
(4) Consists of 222,732 shares of Common Stock that may be acquired from
the Company within 60 days of May 10, 2006 upon the exercise of
outstanding stock options.
(5) Consists of 225,000 shares of Common Stock that may be acquired from
the Company within 60 days of May 10, 2006 upon the exercise of
outstanding stock options.
(6) Consists of 950,000 shares of Common Stock that are directly owned by
Mr. Yaw, and 2,000,000 shares of Common Stock owned by Mr. Yaw's
spouse.
(7) Consists of 2,071,382 shares of Common Stock that may be acquired from
the Company within 60 days of May 10, 2006 upon the exercise of
outstanding stock options.
(8) Consists of 11,547,838 shares of Common Stock that may be acquired from
the Company within 60 days of May 10, 2006 upon the exercise of
outstanding warrants.
The following table sets forth certain information regarding beneficial
ownership of our Series A-1 Preferred Stock as of May 10, 2006, by (i) each
person (or group of affiliated persons) who is known by us to beneficially own
more than 5% of the outstanding shares of Series A-1 Preferred Stock, (ii) each
of our directors, director nominees and executive officers, and (iii) all of our
executive officers, director nominees and directors as a group, as applicable.
Under Rule 13d-3, certain shares may be deemed to be beneficially owned by more
than one person (if, for example, persons share the power to vote or the power
to dispose of the shares). In addition, shares are deemed to be beneficially
owned by a person if the person has the right to acquire the shares (for
example, upon exercise of an option) within 60 days of the date as of which the
information is provided. In computing the percentage ownership of any person,
the amount of shares outstanding is deemed to include the amount of shares
beneficially owned by such person (and only such person) by reason of these
acquisition rights. As a result, the percentage of outstanding shares of any
person as shown in this table does not necessarily reflect the person's actual
ownership or voting power with respect to the number of shares of Series A-1
Preferred Stock actually outstanding at May 10, 2006. As of May 10, 2006, there
were 35,422,755 shares of Series A-1 Preferred Stock outstanding.
AMOUNT AND NATURE OF PERCENT OF
CERTAIN BENEFICIAL OWNERS BENEFICIAL OWNERSHIP CLASS
------------------------- -------------------- ----------
5% HOLDERS
Apex Investment Fund V, L.P. 10,607,316 29.9%
225 W. Washington St.,
Suite 1500
Chicago, Illinois 60606
Per Gustafsson 2,790,592 7.9%
Sodergatan 20A
Vaxjo, Sweden 35235
Sherleigh Associates Inc. 2,312,500 6.6%
Profit Sharing Plan
c/o Jack Silver
920 5th Avenue, Apt. 3B
New York, NY 10021
Patrick J. Allin 1,875,000 5.3%
311 Belle Foret Drive
Lake Bluff, IL 60044
Richard Linting 1,777,261 5.0%
830 Temple Hills Drive
Laguna Beach, CA 92651
24
The following table sets forth certain information regarding beneficial
ownership of our Series A Preferred Stock as of May 10, 2006, by (i) each person
(or group of affiliated persons) who is known by us to beneficially own more
than 5% of the outstanding shares of Series A Preferred Stock, (ii) each of our
directors, director nominees and executive officers, and (iii) all of our
executive officers, director nominees and directors as a group, as applicable.
Under Rule 13d-3, certain shares may be deemed to be beneficially owned by more
than one person (if, for example, persons share the power to vote or the power
to dispose of the shares). In addition, shares are deemed to be beneficially
owned by a person if the person has the right to acquire the shares (for
example, upon exercise of an option) within 60 days of the date as of which the
information is provided. In computing the percentage ownership of any person,
the amount of shares outstanding is deemed to include the amount of shares
beneficially owned by such person (and only such person) by reason of these
acquisition rights. As a result, the percentage of outstanding shares of any
person as shown in this table does not necessarily reflect the person's actual
ownership or voting power with respect to the number of shares of Series A
Preferred Stock actually outstanding at May 10, 2006. As of May 10, 2006, there
were 964 shares of Series A Preferred Stock outstanding.
AMOUNT AND NATURE OF PERCENT OF
CERTAIN BENEFICIAL OWNERS BENEFICIAL OWNERSHIP CLASS
------------------------- -------------------- ----------
5% HOLDERS
Apex Investment Fund V, L.P. 250 25.9%
225 W. Washington St.,
Suite 1500
Chicago, Illinois 60606
Acro Van Nieuwland 120 12.4%
Bunde 8
2970 Schilde
Belgium
Peter Nordin APS 93.3334 9.7%
Bakkevei 2A
DK 3070
Snekkersten, Denmark
Graham Smith 52 5.4%
Vicolo Sport 15
20029 Turbigo
Milan, Italy
CHANGES IN CONTROL
On January 12, 2006, we issued a Stock Subscription Agreement & Mutual Release
to each of our creditors and claimants pursuant to which we would sell to such
creditors and/or claimants shares of Series A-1 Preferred Stock in exchange for
a final and binding settlement with respect to any and all claims, liabilities,
demands, causes of action, costs, expenses, attorneys fees, damages,
indemnities, and obligations of every kind and nature that such creditors and/or
claimants may have with the Company. If all creditors and/or claimants accept
the Company's offer, the Company will issue an aggregate of approximately
40,061,645 shares of Series A-1 Preferred Stock. The shares of Series A-1
Preferred Stock will automatically convert into 400,616,445 shares of the Common
Stock at such time that the Company amends its Certificate of Incorporation to
provide for the conversion of all shares of Series A-1 Preferred Stock. Based on
56,398,360 shares of Common Stock outstanding as of May 10, 2006, if the
automatic conversion of the maximum number of shares of Series A-1 Preferred
Stock were to occur on such date, the creditors and/or claimants would own
approximately 87.72% of the issued and outstanding shares of the Company's
Common Stock. As of May 10, 2006, 35,422,755 shares of Series A-1 Preferred
Stock were outstanding, convertible into 354,227,555 shares of Common Stock.
On March 27, 2006, pursuant to the consummation of the Series A Preferred
financing for aggregate proceeds of $4,820,501, the Company issued to the
purchasers of Series A Preferred Stock an aggregate of 964 shares of Series A
Preferred Stock and warrants to purchase an aggregate of 20,085,446 shares of
Common Stock. The 964 shares of Series A Preferred Stock are, subject to certain
conditions, convertible at the option of the holders thereof, into 60,256,264
shares of the Company's Common Stock. Based on 56,398,360 shares of the
Company's Common Stock outstanding as of May 10, 2006, if all holders of Series
A Preferred Stock elected to convert all of their shares of Series A Preferred
Stock and to exercise all of their warrants issued in connection with the Series
A Preferred
25
financing on such date, such holders of Series A Preferred Stock and warrants
would own approximately 58.8% of the issued and outstanding shares of Common
Stock.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth information concerning our equity
compensation plans as of December 31, 2005.
NUMBER OF SECURITIES NUMBER OF SECURITIES REMAINING
TO BE ISSUED UPON WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE
EXERCISE OF EXERCISE PRICE OF UNDER EQUITY COMPENSATION
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, PLANS (EXCLUDING SECURITIES
WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
PLAN CATEGORY (a) (b) (c)
-------------------------------- -------------------- ------------------- -----------------------------
Equity compensation plans -- -- --
approved by security holders
Equity compensation plans not 14,337,233 $0.59 --
approved by security holders[1]
TOTAL 14,337,233 $0.59 --
----------
[1] Represents options granted pursuant to individual option agreements.
CERTAIN TRANSACTIONS WITH SIGNIFICANT STOCKHOLDERS,
DIRECTORS AND EXECUTIVE OFFICERS
Other than the transactions described below, within the last two years there has
not been, nor is there currently proposed, any transaction or series of similar
transactions to which we were or will be a party:
o in which the amount involved exceeds $60,000; and
o in which any director, executive officer, other stockholders
of more than 5% of our equity securities or any member of
their immediate family had or will have a direct or indirect
material interest.
In 2002 we, through our then Chief Executive Officer, Patrick J. Allin, agreed
to reimburse recurring office expenses of the non-executive Chairman of the
Board in the aggregate of $142,500. The monthly recurring amount of $9,500
continued through June of 2003 at which time the office was relocated and the
amount increased to $15,000 per month. The aggregate office expense in 2003 and
2004 was $147,000 and $180,000, respectively. This accrual continued through May
31, 2005, at which time the monthly office expense of $15,000 ceased to accrue.
From April 30, 2002 (Inception) to December 31, 2004, J. William Hammon, our
Chief Marketing Officer, and his spouse, have advanced $345,712 in the aggregate
to us. For $119,000 of this total amount, we issued two notes, payable on demand
and accruing interest at a rate of 10% per annum. In an effort to secure legal
counsel and pay certain reimbursable expenses, we completed two Private
Placements of restricted securities for $200,000 in the aggregate, which funds
were deposited into the personal bank account of Mr. Hammon. From this account,
he paid certain of our outstanding obligations, including legal retainers and
fees and reimbursable expenses of officers and stockholders. The $200,000 in
private placement funds were netted against the total he advanced to us.
Beginning on July 1, 2005, and continuing through December 31, 2005, we
completed, through 12 separate fundings, a $5,234,000 financing (the "Interim
Bridge Financing III") through the issuance of (i) 10% Junior Convertible
Promissory Notes (the "Bridge III Notes") and (ii) warrants to purchase up to
2,617,000 shares of
26
common stock (the "Bridge III Warrants") to, among other existing investors,
Apex Investment Fund V, L.P. ("Apex"). The Bridge III Warrants have a term of 5
years and an exercise price of $0.60 per share.
The Bridge III Notes had an initial term of 120 days (due on various dates
beginning October 28, 2005) with interest at 10% per annum and featured an
option for the Company to extend the term for an additional 60 days to various
dates beginning December 28, 2005. Upon the extension of the maturity date of
the Bridge III Notes, the contractual interest rate would increase to 12% per
annum, and the Company would be required to issue warrants (the "Bridge III
Extension Warrants") to purchase such number of shares of the Company's common
stock equal to one-half of a share for each $1.00 of principal then outstanding.
The Bridge III Extension Warrants issuable upon extension of the maturity date
of the Bridge III Notes feature a term of 5 years and an exercise price of $0.60
per share. The Company has agreed to file with the SEC, a registration statement
for the resale of the restricted shares of its common stock issuable upon
exercise of the conversion option that would be issuable in this transaction, on
a best efforts basis.
Beginning on October 29, 2005, the Company elected to extend the contractual
maturity date of the various Bridge III Notes for an additional 60 days to
various dates beginning December 28, 2005, which caused the contractual interest
rate to increase to 12% per annum. In addition, the Company was required to
issue the 1,200,000 Bridge III Extension Warrants to purchase such number of
shares of common stock equal to 1/2 of a share for each $1.00 of principal
amount outstanding. All of the Bridge III Notes have been redeemed in exchange
for the issuance of shares of Series A-1 Preferred Stock.
On July 1, 2005, the Company issued a Bridge III Note in the principal amount of
$1,650,000 and Bridge III Warrants to purchase 825,000 shares of Common Stock to
Apex. The aggregate fair value of these Bridge III Warrants amounted to
$415,891.
On August 19, 2005, the Company issued a Bridge III Note in the principal amount
of $450,000 and Bridge III Warrants to purchase 225,000 shares of Common Stock
to Apex. The fair value of these Bridge III Warrants amounted to $55,263.
On September 30, 2005, the Company issued a Bridge III Note in the principal
amount of $1,200,000 and Bridge III Warrants to purchase 600,000 shares of
Common Stock to Apex. The fair value of these Bridge III Warrants amounted to
$57,143.
On October 16, 2005, the Company issued a Bridge III Note in the principal
amount of $360,000 and Bridge III Warrants to purchase 180,000 shares of Common
Stock to Apex. The fair value of these Bridge III Warrants amounted to $9,018.
On October 24, 2005, the Company issued a Bridge III Note in the principal
amount of $75,000 and Bridge III Warrants to purchase 37,500 shares of Common
Stock to Apex. The fair value of these Bridge III Warrants amounted to $1,879.
On October 29, 2005, the Company issued Bridge III Extension Warrants to
purchase 825,000 shares of Common Stock to Apex. The fair value of these Bridge
III Extension Warrants amounted to $42,394.
On October 31, 2005, the Company issued a Bridge III Note in the principal
amount of $385,000 and Bridge III Warrants to purchase 192,500 shares of Common
Stock to Apex. The fair value of these Bridge III Warrants amounted to $9,644.
On November 16, 2005, the Company issued a Bridge III Note in the principal
amount of $225,000 and Bridge III Warrants to purchase 112,500 shares of Common
Stock to Apex. The fair value of these Bridge III Warrants amounted to $4,431.
On November 21, 2005, the Company issued a Bridge III Note in the principal
amount of $150,000 and Bridge III Warrants to purchase 75,000 shares of Common
Stock to Apex. The fair value of these Bridge III Warrants amounted to $2,954.
27
On November 29, 2005, the Company issued a Bridge III Note in the principal
amount of $210,000 and Bridge III Warrants to purchase 105,000 shares of Common
Stock to Apex. The fair value of these Bridge III Warrants amounted to $4,135.
On December 8, 2005, the Company issued a Bridge III Note in the principal
amount of $229,000 and Bridge III Warrants to purchase 114,500 shares of Common
Stock to Apex. The fair value of these Bridge III Warrants amounted to $4,757.
On December 17, 2005, the Company issued Bridge III Extension Warrants to
purchase 225,000 shares of Common Stock to Apex. The fair value of these Bridge
III Extension Warrants amounted to $9,544.
On March 27, 2006, in repayment and full settlement of aggregate obligations
outstanding to Apex amounting to $8,112,177, including obligations outstanding
under the Bridge III Notes issued to Apex, the Company issued to Apex 10,140,221
shares of Series A-1 Preferred Stock.
On April 3, 2006, in repayment and full settlement of aggregate obligations
outstanding to Apex amounting to $373,676, including obligations outstanding
under the Bridge III Notes issued to Apex, the Company issued to Apex 467,095
shares of Series A-1 Preferred Stock.
We also have employment agreements with certain of our executive officers. The
terms of those employment agreements have been previously disclosed.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act, as amended, requires our directors and
executive officers and the holders of more than 10% of our Common Stock to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of our equity securities. Based upon our review
of Forms 3, 4 and 5 submitted to us, we are aware that the following individuals
failed to file on a timely basis, as disclosed in the forms above, reports
required by Section 16(a) of the Exchange Act: Robert Cross, our Chief Executive
Officer, failed to timely file one report reporting one transaction; Brett
Newbold, our President and Chief Technology Officer failed to timely file one
report reporting one transaction; Heidi B. Newton, our Vice President-Finance
and Administration, failed to timely file one report reporting one transaction;
James E. Morriss, our Vice President-Engineering, failed to timely file one
report reporting one transaction; and J. William Hammon, our former Chief
Marketing Officer failed to timely file one report reporting one transaction.
STOCKHOLDER PROPOSALS
Any stockholder who intends to present a proposal at the 2007 Annual Meeting of
stockholders for inclusion in the Company's Proxy Statement and Proxy form
relating to such Annual Meeting must submit such proposal to the Company at its
principal executive offices by December 24, 2006. In addition, in the event a
stockholder proposal is not received by the Company by March 9, 2007, the Proxy
to be solicited by the Board for the 2007 Annual Meeting will confer
discretionary authority on the holders of the Proxy to vote the shares if the
proposal is presented at the 2007 Annual Meeting without any discussion of the
proposal in the Proxy Statement for such meeting.
SEC rules and regulations provide that if the date of the Company's 2007 Annual
Meeting is advanced or delayed more than 30 days from the date of the 2006
Annual Meeting, stockholder proposals intended to be included in the proxy
materials for the 2007 Annual Meeting must be received by the Company within a
reasonable time before the Company begins to print and mail the proxy materials
for the 2007 Annual Meeting. Upon determination by the Company that the date of
the 2007 Annual Meeting will be advanced or delayed by more than 30 days from
the date of the 2006 Annual Meeting, the Company will disclose such change in
the earliest possible Quarterly Report on Form 10-Q.
INDEPENDENT PUBLIC ACCOUNTANTS
Our Board has selected Marcum & Kliegman LLP ("Marcum & Kliegman") as our
independent public accountant for the current fiscal year ending December 31,
2006. We anticipate that a representative of Marcum & Kliegman will attend the
Annual Meeting for the purpose of responding to appropriate questions. At the
Annual Meeting, a representative of Marcum & Kliegman will be afforded an
opportunity to make a statement if he or she so desires.
28
As reported on a current report filed with the Securities & Exchange Commission
on February 10, 2004, on January 21, 2004, we received notification from Grant
Thornton LLP ("Grant Thornton") of its decision to resign as our independent
public accountants.
Grant Thornton's reports on the our consolidated financial statements as of
September 30, 2002 and for the period from inception (April 30, 2002) through
September 30, 2002 and as of December 31, 2002 and for the period from inception
(April 30, 2002) through December 31, 2002 did not contain an adverse opinion or
disclaimer of opinion and were not qualified as to uncertainty, audit scope, or
accounting principles except such reports did contain an explanatory paragraph
related to the Company's ability to continue as a going concern. During the
fiscal period ended December 31, 2002 and through the date of Grant Thornton's
resignation, there were no disagreements with Grant Thornton on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreement, 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 reports. During the interim period
ending September 30, 2002, the fiscal period ended December 31, 2002 and the
subsequent interim periods preceding such resignation, there were no "reportable
events" (as that term is defined in Items 304(a)(l)(v) of Regulation S-K) except
as follows:
o During the course of reviewing the Company's quarterly
unaudited financial statements on Form 10-QSB in 2003, the
Company had on numerous occasions in 2003 been provided with
confirmation letters from an investor, InterCap Group LLC,
committing to $50 million in financing. In reliance on these
documents and other discussions with the investor about such
financing, management continually believed it had met the
conditions precedent to funding and that the funding would be
imminent, having disclosed in its Form 10-QSB for the quarter
ending September 30, 2003 that the funding would take place no
later than January 5, 2004. In its letter of resignation,
Grant Thornton concluded based on background information
related to the investor it had independently obtained and
later had been brought to its attention by management through
subsequent discussions, that this background information had
not been brought to Grant Thornton's attention on a timely
basis. In its resignation letter, Grant Thornton indicated
that it believed a representation made by the Company that
Hogan & Hartson LLP ("Hogan") had agreed to be re-engaged as
the Company's legal counsel upon payment of outstanding fees
was not factual based upon its own inquires made to Hogan. In
addition, Grant Thornton also indicated that the Company had
not been forthcoming with contact information requested from
the Company for an official reference regarding the background
of the investor. These factors, coupled with newly found
information concerning the investor's background, and the fact
that the funding had never occurred as promised by the
investor, led Grant Thornton to conclude that it could no
longer rely on the Company's representations and, as a result,
Grant Thornton was unwilling to be associated with the
financial statements prepared by our management, and
accordingly, advised us that Grant Thornton was withdrawing
its audit reports and those audit reports could no longer be
relied upon.
Based on our subsequent discussion with a representative of Hogan, we believe
our statements made to Grant Thornton regarding our relationship with Hogan at
the time were true, and that there was either a miscommunication or
misunderstanding between Grant Thornton and Hogan. In addition, at the time of
Grant Thornton's resignation, we were unaware that Grant Thornton had not been
provided with the official reference information for the investor it had
requested.
Lastly, our disclosure of the InterCap funding was based on written and verbal
communication from InterCap and verified by knowledgeable third parties. We
believe the statements made in previous filings and press releases accurately
and completely described InterCap's commitments at the time of each disclosure.
Our Board did not recommend or approve the resignation of Grant Thornton.
We requested that Grant Thornton furnish us with a letter addressed to the
Securities and Exchange Commission ("SEC") stating whether or not it agreed with
our statements in our filings with the SEC. We do not have a record of receipt
of such a letter.
29
On October 27, 2004, the Board resolved to engage Marcum & Kliegman LLP as our
new independent accountants to audit our financial statements for the period
from April 30, 2002 through December 31, 2002, and for the fiscal years ended
December 31, 2003 and 2004. We engaged Marcum & Kliegman as our new independent
accountants as of November 15, 2004. During the two most recent fiscal years and
the interim period preceding the engagement of Marcum & Kliegman, we have not
consulted with Marcum & Kliegman regarding any matters specified in Items
304(a)(2)(i) or (ii) of Regulation S-B.
AUDIT FEES
The aggregate fees billed for each of the fiscal years ended December 31, 2005
and 2004, for professional services rendered by the principal accountant for the
audit of our annual financial statements were $364,786 and $60,000,
respectively.
AUDIT-RELATED FEES
The aggregate fees billed for the fiscal year ended December 31, 2005 for
professional services rendered by the principal accountant for audit related
services associated with the preparation of the acquisition Form 8-K filing was
$30,214.
TAX FEES
None.
ALL OTHER FEES
None.
Our Board is directly responsible for interviewing and retaining our independent
public accountant, considering the accounting firm's independence and
effectiveness, and pre-approving the engagement fees and other compensation to
be paid to, and the services to be conducted by, the independent public
accountant. The Board does not delegate these responsibilities. During each of
the fiscal years ended December 31, 2005 and December 31, 2004, respectively,
our Board pre-approved 100% of the services described above.
SOLICITATION OF PROXIES
It is expected that the solicitation of Proxies will be by mail. The cost of
solicitation by management will be borne by the Company. The Company will
reimburse brokerage firms and other persons representing beneficial owners of
shares for their reasonable disbursements in forwarding solicitation material to
such beneficial owners. Proxies may also be solicited by certain of our
directors and officers, without additional compensation, personally or by mail,
telephone, telegram or otherwise.
30
ANNUAL REPORT ON FORM 10-KSB
THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB, AS AMENDED, WHICH HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31,
2005, WILL BE MADE AVAILABLE TO STOCKHOLDERS WITHOUT CHARGE UPON WRITTEN REQUEST
TO THE COMPANY, 5775 FLATIRON PARKWAY, SUITE 230, BOULDER, COLORADO 80301.
ON BEHALF OF THE BOARD OF DIRECTORS
Robert Cross
CHIEF EXECUTIVE OFFICER
Boulder Colorado
May 22, 2006
31
APPENDIX A
PATRON SYSTEMS, INC.
2006 STOCK INCENTIVE PLAN
(Adopted by the Board of Directors on May 10, 2006)
TABLE OF CONTENTS
Page
----
SECTION 1. ESTABLISHMENT AND PURPOSE.....................................1
SECTION 2. DEFINITIONS...................................................1
(a) "Affiliate"...................................................1
(b) "Award".......................................................1
(c) "Board of Directors"..........................................1
(d) "Change in Control"...........................................1
(e) "Code"........................................................2
(f) "Company".....................................................2
(g) "Consultant"..................................................2
(h) "Employee"....................................................2
(i) "Exchange Act"................................................3
(j) "Exercise Price"..............................................3
(k) "Fair Market Value"...........................................3
(l) "ISO".........................................................3
(m) "Nonstatutory Option" or "NSO"................................3
(n) "Offeree".....................................................3
(o) "Option"......................................................3
(p) "Optionee"....................................................3
(q) "Outside Director"............................................4
(r) "Parent"......................................................4
(s) "Participant".................................................4
(t) "Plan"........................................................4
(u) "Post-Reverse Split Basis"....................................4
(v) "Purchase Price"..............................................4
(w) "Restricted Share"............................................4
(x) "Restricted Share Agreement"..................................4
(y) "SAR".........................................................4
(z) "SAR Agreement"...............................................4
(aa) "Service".....................................................4
(bb) "Share".......................................................4
(cc) "Stock".......................................................4
(dd) "Stock Option Agreement"......................................4
(ee) "Stock Unit"..................................................4
(ff) "Stock Unit Agreement"........................................5
(gg) "Subsidiary"..................................................5
(hh) "Total and Permanent Disability"..............................5
SECTION 3. ADMINISTRATION................................................5
(a) General; Committee Composition................................5
(b) Committee for Non-Officer Grants..............................5
(c) Committee Procedures..........................................5
A-i
(d) Administrator Responsibilities................................5
SECTION 4. ELIGIBILITY...................................................7
(a) General Rule..................................................7
(b) Ten-Percent Stockholders......................................7
(c) Attribution Rules.............................................7
(d) Outstanding Stock.............................................7
SECTION 5. STOCK SUBJECT TO PLAN.........................................7
(a) Basic Limitation..............................................7
(b) Award Limitation..............................................7
(c) Additional Shares.............................................8
SECTION 6. RESTRICTED SHARES.............................................8
(a) Restricted Stock Agreement....................................8
(b) Payment for Awards............................................8
(c) Vesting.......................................................8
(d) Voting and Dividend Rights....................................8
(e) Restrictions on Transfer of Shares............................8
SECTION 7. TERMS AND CONDITIONS OF OPTIONS...............................9
(a) Stock Option Agreement........................................9
(b) Number of Shares..............................................9
(c) Exercise Price................................................9
(d) Withholding Taxes.............................................9
(e) Exercisability and Term.......................................9
(f) Exercise of Options..........................................10
(g) Effect of Change in Control..................................10
(h) Leaves of Absence............................................10
(i) No Rights as a Stockholder...................................10
(j) Modification, Extension and Renewal of Options...............10
(k) Restrictions on Transfer of Shares...........................10
(l) Buyout Provisions............................................11
SECTION 8. PAYMENT FOR SHARES...........................................11
(a) General Rule.................................................11
(b) Surrender of Stock...........................................11
(c) Services Rendered............................................11
(d) Cashless Exercise............................................11
(e) Exercise/Pledge..............................................11
(f) Promissory Note..............................................11
(g) Other Forms of Payment.......................................11
(h) Limitations under Applicable Law.............................12
A-ii
SECTION 9. STOCK APPRECIATION RIGHTS....................................12
(a) SAR Agreement................................................12
(b) Number of Shares.............................................12
(c) Exercise Price...............................................12
(d) Exercisability and Term......................................12
(e) Effect of Change in Control..................................12
(f) Exercise of SARs.............................................12
(g) Modification or Assumption of SARs...........................13
SECTION 10. STOCK UNITS..................................................13
(a) Stock Unit Agreement.........................................13
(b) Payment for Awards...........................................13
(c) Vesting Conditions...........................................13
(d) Voting and Dividend Rights...................................13
(e) Form and Time of Settlement of Stock Units...................13
(f) Death of Recipient...........................................14
(g) Creditors' Rights............................................14
SECTION 11. ADJUSTMENT OF SHARES.........................................14
(a) Adjustments..................................................14
(b) Dissolution or Liquidation...................................14
(c) Reorganizations..............................................15
(d) Reservation of Rights........................................15
SECTION 12. DEFERRAL OF AWARDS...........................................15
SECTION 13. AWARDS UNDER OTHER PLANS.....................................16
SECTION 14. PAYMENT OF DIRECTOR'S FEES IN SECURITIES.....................16
(a) Effective Date...............................................16
(b) Elections to Receive NSOs, Restricted Shares or
Stock Units..................................................16
(c) Number and Terms of NSOs, Restricted Shares or
Stock Units..................................................16
SECTION 15. LEGAL AND REGULATORY REQUIREMENTS............................16
SECTION 16. WITHHOLDING TAXES............................................17
(a) General......................................................17
(b) Share Withholding............................................17
SECTION 17. OTHER PROVISIONS APPLICABLE TO AWARDS........................17
(a) Transferability..............................................17
A-iii
(b) Qualifying Performance Criteria..............................17
SECTION 18. NO EMPLOYMENT RIGHTS.........................................18
SECTION 19. DURATION AND AMENDMENTS......................................18
(a) Term of the Plan.............................................18
(b) Right to Amend or Terminate the Plan.........................18
(c) Effect of Termination........................................18
SECTION 20. EXECUTION....................................................18
A-iv
PATRON SYSTEMS, INC.
2006 STOCK INCENTIVE PLAN
SECTION 1. ESTABLISHMENT AND PURPOSE.
The Plan (as hereinafter defined) was adopted by the Board of Directors
on May 10, 2006, and shall become effective as of June 22, 2006, provided it is
approved by the holders of at least a majority of the shares of common stock and
preferred stock present or represented and voting on the proposal to approve
this Plan at the 2006 annual meeting of the stockholders of the Company duly
held in accordance with applicable law (the "Effective Date"). The purpose of
the Plan is to promote the long-term success of the Company (as hereinafter
defined) and the creation of stockholder value by (a) encouraging Employees (as
hereinafter defined), Outside Directors (as hereinafter defined) and Consultants
(as hereinafter defined) to focus on critical long-range objectives, (b)
encouraging the attraction and retention of Employees, Outside Directors and
Consultants with exceptional qualifications and (c) linking Employees, Outside
Directors and Consultants directly to stockholder interests through increased
stock ownership. The Plan seeks to achieve this purpose by providing for Awards
(as hereinafter defined) in the form of restricted shares, stock units, options
(which may constitute incentive stock options or nonstatutory stock options) or
stock appreciation rights. The Plan shall be administered by the Administrator,
as provided in Section 3 hereof. For the purposes hereof, "Administrator" shall
mean the Board of Directors (as defined hereinafter) or any committee authorized
by the Board of Directors to administer the Plan, pursuant to the terms hereof.
SECTION 2. DEFINITIONS.
(a) "Affiliate" shall mean any entity other than a Subsidiary, if
the Company and/or one of more Subsidiaries own not less than
50% of such entity.
(b) "Award" shall mean any award of an Option, a SAR, a Restricted
Share or a Stock Unit under the Plan.
(c) "Board of Directors" shall mean the Board of Directors of the
Company, as constituted from time to time.
(d) "Change in Control" shall mean the occurrence of any of the
following events:
(i) A change in the composition of the Board of Directors
occurs, as a result of which fewer than one-half of
the incumbent directors are directors who either:
(A) Had been directors of the Company on the
"look-back date" (as defined below) (the
"original directors"); or
(B) Were elected, or nominated for election, to
the Board of Directors with the affirmative
votes of at least a majority of the
aggregate of the original directors who were
still in office at the time of the election
or nomination and the directors whose
election or nomination was previously so
approved (the "continuing directors"); or
A-1
(ii) Any "person" (as defined below) who by the
acquisition or aggregation of securities, is or
becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing
50% or more of the combined voting power of the
Company's then outstanding securities ordinarily (and
apart from rights accruing under special
circumstances) having the right to vote at elections
of directors (the "Base Capital Stock"); except that
any change in the relative beneficial ownership of
the Company's securities by any person resulting
solely from a reduction in the aggregate number of
outstanding shares of Base Capital Stock, and any
decrease thereafter in such person's ownership of
securities, shall be disregarded until such person
increases in any manner, directly or indirectly, such
person's beneficial ownership of any securities of
the Company; or
(iii) The consummation of a merger or consolidation of the
Company with or into another entity or any other
corporate reorganization, if persons who were not
stockholders of the Company immediately prior to such
merger, consolidation or other reorganization own
immediately after such merger, consolidation or other
reorganization 50% or more of the voting power of the
outstanding securities of each of (A) the continuing
or surviving entity and (B) any direct or indirect
parent corporation of such continuing or surviving
entity; or
(iv) The sale, transfer or other disposition of all or
substantially all of the Company's assets.
For purposes of subsection (d)(i) above, the term "look-back" date
shall mean the later of (1) the Effective Date or (2) the date 12 months prior
to the date of the event that may constitute a Change in Control.
For purposes of subsection (d)(ii) above, the term "person" shall have
the same meaning as when used in Sections 13(d) and 14(d) of the Exchange Act
but shall exclude (1) a trustee or other fiduciary holding securities under an
employee benefit plan maintained by the Company or a Parent or Subsidiary and
(2) a corporation owned directly or indirectly by the stockholders of the
Company in substantially the same proportions as their ownership of the Stock.
Any other provision of this Section 2(d) notwithstanding, a transaction
shall not constitute a Change in Control if its sole purpose is to change the
state of the Company's incorporation or to create a holding company that will be
owned in substantially the same proportions by the persons who held the
Company's securities immediately before such transaction.
(e) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(f) "Company" shall mean Patron Systems, Inc.
(g) "Consultant" shall mean a consultant or advisor who provides
bona fide services to the Company, a Parent, a Subsidiary or
an Affiliate as an independent contractor or a member of the
board of directors of a Parent or a Subsidiary who is not an
Employee.
(h) "Employee" shall mean any individual who is a common-law
employee of the Company, a Parent or a Subsidiary.
A-2
(i) "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
(j) "Exercise Price" shall mean, in the case of an Option, the
amount for which one Common Share may be purchased upon
exercise of such Option, as specified in the applicable Stock
Option Agreement. "Exercise Price," in the case of a SAR,
shall mean an amount, as specified in the applicable SAR
Agreement, which is subtracted from the Fair Market Value of
one Common Share in determining the amount payable upon
exercise of such SAR.
(k) "Fair Market Value" with respect to a Share, shall mean the
market price of one Share of Stock, determined by the
Administrator as follows:
(i) If the Stock was traded over-the-counter on the date
in question but was not traded on The Nasdaq Stock
Market, then the Fair Market Value shall be equal to
the last transaction price quoted for such date by
the OTC Bulletin Board or, if not so quoted, shall be
equal to the mean between the last reported
representative bid and asked prices quoted for such
date by the principal automated inter-dealer
quotation system on which the Stock is quoted or, if
the Stock is not quoted on any such system, by the
"Pink Sheets" published by the National Quotation
Bureau, Inc.;
(ii) If the Stock was traded on The Nasdaq Stock Market,
then the Fair Market Value shall be equal to the last
reported sale price quoted for such date by The
Nasdaq Stock Market;
(iii) If the Stock was traded on a United States stock
exchange on the date in question, then the Fair
Market Value shall be equal to the closing price
reported for such date by the applicable
composite-transactions report; and
(iv) If none of the foregoing provisions is applicable,
then the Fair Market Value shall be determined by the
Administrator in good faith on such basis as it deems
appropriate.
In all cases, the determination of Fair Market Value by the
Administrator shall be conclusive and binding on all persons.
(l) "ISO" shall mean an employee incentive stock option described
in Section 422 of the Code.
(m) "Nonstatutory Option" or "NSO" shall mean an employee stock
option that is not an ISO.
(n) "Offeree" shall mean an individual to whom the Administrator
has offered the right to acquire Shares under the Plan (other
than upon exercise of an Option).
(o) "Option" shall mean an ISO or Nonstatutory Option granted
under the Plan and entitling the holder to purchase Shares.
(p) "Optionee" shall mean an individual or estate who holds an
Option or SAR.
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(q) "Outside Director" shall mean a member of the Board of
Directors who is not a common-law employee of, or paid
consultant to, the Company, a Parent or a Subsidiary.
(r) "Parent" shall mean any corporation (other than the Company)
in an unbroken chain of corporations ending with the Company,
if each of the corporations other than the Company owns stock
possessing 50% or more of the total combined voting power of
all classes of stock in one of the other corporations in such
chain. A corporation that attains the status of a Parent on a
date after the adoption of the Plan shall be a Parent
commencing as of such date.
(s) "Participant" shall mean an individual or estate who holds an
Award.
(t) "Plan" shall mean this Patron Systems, Inc. 2006 Stock
Incentive Plan, as amended from time to time.
(u) "Post-Reverse-Split-Basis" shall mean subsequent to the
consummation of a reverse stock split by the Company of the
outstanding Stock whereby each holder of Stock receives one
(1) Share for each thirty (30) Shares held by such holder of
Stock.
(v) "Purchase Price" shall mean the consideration for which one
Share may be acquired under the Plan (other than upon exercise
of an Option), as specified by the Administrator.
(w) "Restricted Share" shall mean a Share awarded under the Plan.
(x) "Restricted Share Agreement" shall mean the agreement between
the Company and the recipient of a Restricted Share which
contains the terms, conditions and restrictions pertaining to
such Restricted Shares.
(y) "SAR" shall mean a stock appreciation right granted under the
Plan.
(z) "SAR Agreement" shall mean the agreement between the Company
and an Optionee which contains the terms, conditions and
restrictions pertaining to his or her SAR.
(aa) "Service" shall mean service as an Employee, Consultant or
Outside Director.
(bb) "Share" shall mean one share of Stock, as adjusted in
accordance with Section 8 (if applicable).
(cc) "Stock" shall mean the Common Stock of the Company.
(dd) "Stock Option Agreement" shall mean the agreement between the
Company and an Optionee that contains the terms, conditions
and restrictions pertaining to his Option.
(ee) "Stock Unit" shall mean a bookkeeping entry representing the
equivalent of one Share, as awarded under the Plan.
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(ff) "Stock Unit Agreement" shall mean the agreement between the
Company and the recipient of a Stock Unit which contains the
terms, conditions and restrictions pertaining to such Stock
Unit.
(gg) "Subsidiary" shall mean any corporation, if the Company and/or
one or more other Subsidiaries own not less than 50% of the
total combined voting power of all classes of outstanding
stock of such corporation. A corporation that attains the
status of a Subsidiary on a date after the adoption of the
Plan shall be considered a Subsidiary commencing as of such
date.
(hh) "Total and Permanent Disability" shall mean that the Optionee
is unable to engage in any substantial gainful activity by
reason of any medically determinable physical or mental
impairment that can be expected to result in death or that has
lasted, or can be expected to last, for a continuous period of
not less than 12 months.
SECTION 3. ADMINISTRATION.
(a) GENERAL; COMMITTEE COMPOSITION. The Plan shall be administered
by the Board of Directors. The Board of Directors may also
designate a committee of the Board of directors to administer
the Plan, which committee shall consist of two or more
directors of the Company, who shall be appointed by the Board
of Directors. In addition, to the extent that the Company has
a class of stock registered under Section 12 of the Exchange
Act or is subject to the reporting obligations under Section
13(a) or Section 15(d) of the Exchange Act, the composition of
the committee shall satisfy (i) such requirements as the
Securities and Exchange Commission may establish for
administrators acting under plans intended to qualify for
exemption under Rule 16b-3 (or its successor) under the
Exchange Act; and (ii) such requirements as the Internal
Revenue Service may establish for outside directors acting
under plans intended to qualify for exemption under Section
162(m)(4)(C) of the Code.
(b) COMMITTEE FOR NON-OFFICER GRANTS. The Board of Directors may
also appoint one or more separate committees of the Board of
Directors, each composed of one or more directors of the
Company who need not satisfy the requirements of Section 3(a),
who may administer the Plan with respect to Employees who are
not considered officers or directors of the Company under
Section 16 of the Exchange Act, may grant Awards under the
Plan to such Employees and may determine all terms of such
grants. The Board of Directors may also authorize one or more
officers of the Company to designate Employees, other than
officers under Section 16 of the Exchange Act, to receive
Awards and/or to determine the number of such Awards to be
received by such persons; provided, however, that the Board of
Directors shall specify the total number of Awards that such
officers may so award.
(c) COMMITTEE PROCEDURES. The Board of Directors shall designate
one of the members of each committee provided for hereunder as
chairman. Each committee may hold meetings at such times and
places as it shall determine. The acts of a majority of any
committee members present at meetings at which a quorum
exists, or acts reduced to or approved in writing by all
committee members, shall be valid acts of such committee.
(d) ADMINISTRATOR RESPONSIBILITIES. Subject to the provisions of
the Plan, the Administrator shall have full authority and
discretion to take the following actions:
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(i) To interpret the Plan and to apply its provisions;
(ii) To adopt, amend or rescind rules, procedures and
forms relating to the Plan;
(iii) To authorize any person to execute, on behalf of the
Company, any instrument required to carry out the
purposes of the Plan;
(iv) To determine when Awards are to be granted under the
Plan;
(v) To select the Offerees and Optionees;
(vi) To determine the number of Shares to be made subject
to each Award;
(vii) To prescribe the terms and conditions of each Award,
including (without limitation) the Exercise Price and
Purchase Price, and the vesting or duration of the
Award (including accelerating the vesting of Awards,
either at the time of the Award or thereafter,
without the consent of the Participant), to determine
whether an Option is to be classified as an ISO or as
a Nonstatutory Option, and to specify the provisions
of the agreement relating to such Award;
(viii) To amend any outstanding Award agreement, subject to
applicable legal restrictions and to the consent of
the Participant if the Participant's rights or
obligations would be materially impaired;
(ix) To prescribe the consideration for the grant of each
Award or other right under the Plan and to determine
the sufficiency of such consideration;
(x) To determine the disposition of each Award or other
right under the Plan in the event of a Participant's
divorce or dissolution of marriage;
(xi) To determine whether Awards under the Plan will be
granted in replacement of other grants under an
incentive or other compensation plan of an acquired
business;
(xii) To correct any defect, supply any omission, or
reconcile any inconsistency in the Plan or any Award
agreement;
(xiii) To establish or verify the extent of satisfaction of
any performance goals or other conditions applicable
to the grant, issuance, exercisability, vesting
and/or ability to retain any Award; and
(xiv) To take any other actions deemed necessary or
advisable for the administration of the Plan.
Subject to the requirements of applicable law, the Administrator may
designate persons other than members of the Administrator to carry out
its responsibilities and may prescribe such conditions and limitations
as it may deem appropriate, except that the Administrator may not
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delegate its authority with regard to the selection for participation
of or the granting of Options or other rights under the Plan to persons
subject to Section 16 of the Exchange Act. All decisions,
interpretations and other actions of the Administrator shall be final
and binding on all Offerees, all Optionees, and all persons deriving
their rights from an Offeree or Optionee. No member of the
Administrator shall be liable for any action that he has taken or has
failed to take in good faith with respect to the Plan, any Option, or
any right to acquire Shares under the Plan.
SECTION 4. ELIGIBILITY.
(a) GENERAL RULE. Only Employees shall be eligible for the grant
of ISOs. Only Employees, Consultants and Outside Directors
shall be eligible for the grant of Restricted Shares, Stock
Units, Nonstatutory Options or SARs.
(b) TEN-PERCENT STOCKHOLDERS. An Employee who owns more than 10%
of the total combined voting power of all classes of
outstanding stock of the Company, a Parent or Subsidiary shall
not be eligible for the grant of an ISO unless such grant
satisfies the requirements of Section 422(c)(5) of the Code.
(c) ATTRIBUTION RULES. For purposes of Section 4(b) above, in
determining stock ownership, an Employee shall be deemed to
own the stock owned, directly or indirectly, by or for such
Employee's brothers, sisters, spouse, ancestors and lineal
descendants. Stock owned, directly or indirectly, by or for a
corporation, partnership, estate or trust shall be deemed to
be owned proportionately by or for its stockholders, partners
or beneficiaries.
(d) OUTSTANDING STOCK. For purposes of Section 4(b) above,
"outstanding stock" shall include all stock actually issued
and outstanding immediately after the grant. "Outstanding
stock" shall not include shares authorized for issuance under
outstanding options held by the Employee or by any other
person.
SECTION 5. STOCK SUBJECT TO PLAN.
(a) BASIC LIMITATION. Shares offered under the Plan shall be
authorized but unissued Shares or treasury Shares. The
aggregate number of Shares authorized for issuance as Awards
under the Plan shall not exceed 5,600,000 Shares on a
Post-Reverse-Split Basis, plus an annual increase on the first
day of each fiscal year during the term of the Plan, beginning
January 1, 2007, in each case in an amount equal to the lesser
of (i) 1,000,000 Shares, (ii) 5% of the outstanding Shares on
the last day of the immediately preceding year, or (iii) an
amount determined by the Board of Directors. The limitations
of this Section 5(a) shall be subject to adjustment pursuant
to Section 11. The number of Shares that are subject to
Options or other rights outstanding at any time under the Plan
shall not exceed the number of Shares which then remain
available for issuance under the Plan. The Company, during the
term of the Plan, shall at all times reserve and keep
available sufficient Shares to satisfy the requirements of the
Plan.
(b) AWARD LIMITATION. Subject to the provisions of Section 11, and
without limiting the powers of the Board of Directors, the
Board of Directors may limit the number of Shares underlying
or relating to Options, SARs, Restricted Shares or Stock Units
that a Participant may receive under the Plan in any calendar
year, or place any other limitations on the number and
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types of Awards (or the Shares underlying or relating to
Awards) that may be granted to a Participant under the Plan.
The maximum number of Shares that may be subject to all Awards
granted under the Plan to any one Participant during any
fiscal year is 1,500,000 shares, on a Post-Reverse Split
Basis.
(c) ADDITIONAL SHARES. If Restricted Shares or Shares issued upon
the exercise of Options are forfeited, then such Shares shall
again become available for Awards under the Plan. If Stock
Units, Options or SARs are forfeited or terminate for any
other reason before being exercised, then the corresponding
Shares shall again become available for Awards under the Plan.
If Stock Units are settled, then only the number of Shares (if
any) actually issued in settlement of such Stock Units shall
reduce the number available under Section 5(a) and the balance
shall again become available for Awards under the Plan. If
SARs are exercised, then only the number of Shares (if any)
actually issued in settlement of such SARs shall reduce the
number available in Section 5(a) and the balance shall again
become available for Awards under the Plan.
SECTION 6. RESTRICTED SHARES.
(a) RESTRICTED STOCK AGREEMENT. Each grant of Restricted Shares
under the Plan shall be evidenced by a Restricted Stock
Agreement between the recipient and the Company. Such
Restricted Shares shall be subject to all applicable terms of
the Plan and may be subject to any other terms that are not
inconsistent with the Plan. The provisions of the various
Restricted Stock Agreements entered into under the Plan need
not be identical.
(b) PAYMENT FOR AWARDS. Subject to the following sentence,
Restricted Shares may be sold or awarded under the Plan for
such consideration as the Administrator may determine,
including (without limitation) cash, cash equivalents,
full-recourse promissory notes, past services and future
services. To the extent that an Award consists of newly issued
Restricted Shares, the Award recipient shall furnish
consideration with a value not less than the par value of such
Restricted Shares in the form of cash, cash equivalents, or
past services rendered to the Company (or a Parent or
Subsidiary), as the Administrator may determine.
(c) VESTING. Each Award of Restricted Shares may or may not be
subject to vesting. Vesting shall occur, in full or in
installments, upon satisfaction of the conditions specified in
the Restricted Stock Agreement. A Restricted Stock Agreement
may provide for accelerated vesting in the event of the
Participant's death, disability or retirement or other events.
The Administrator may determine, at the time of granting
Restricted Shares of thereafter, that all or part of such
Restricted Shares shall become vested in the event that a
Change in Control occurs with respect to the Company.
(d) VOTING AND DIVIDEND RIGHTS. The holders of Restricted Shares
awarded under the Plan shall have the same voting, dividend
and other rights as the Company's other stockholders. A
Restricted Stock Agreement, however, may require that the
holders of Restricted Shares invest any cash dividends
received in additional Restricted Shares. Such additional
Restricted Shares shall be subject to the same conditions and
restrictions as the Award with respect to which the dividends
were paid.
(e) RESTRICTIONS ON TRANSFER OF SHARES. Restricted Shares shall be
subject to such rights of repurchase, rights of first refusal
or other restrictions as the Administrator may
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determine. Such restrictions shall be set forth in the
applicable Restricted Stock Agreement and shall apply in
addition to any general restrictions that may apply to all
holders of Shares.
SECTION 7. TERMS AND CONDITIONS OF OPTIONS.
(a) STOCK OPTION AGREEMENT. Each grant of an Option under the Plan
shall be evidenced by a Stock Option Agreement between the
Optionee and the Company. Such Option shall be subject to all
applicable terms and conditions of the Plan and may be subject
to any other terms and conditions which are not inconsistent
with the Plan and which the Administrator deems appropriate
for inclusion in a Stock Option Agreement. The Stock Option
Agreement shall specify whether the Option is an ISO or an
NSO. The provisions of the various Stock Option Agreements
entered into under the Plan need not be identical. Options may
be granted in consideration of a reduction in the Optionee's
other compensation.
(b) NUMBER OF SHARES. Each Stock Option Agreement shall specify
the number of Shares that are subject to the Option and shall
provide for the adjustment of such number in accordance with
Section 11.
(c) EXERCISE PRICE. Each Stock Option Agreement shall specify the
Exercise Price. The Exercise Price of an ISO shall not be less
than 100% of the Fair Market Value of a Share on the date of
grant, except as otherwise provided in 4(c), and the Exercise
Price of an NSO shall not be less 100% of the Fair Market
Value of a Share on the date of grant. Notwithstanding the
foregoing, a Stock Option Agreement may specify that the
exercise price of an NSO may vary in accordance with a
predetermined formula. Subject to the foregoing in this
Section 7(c), the Exercise Price under any Option shall be
determined by the Administrator at its sole discretion. The
Exercise Price shall be payable in one of the forms described
in Section 8.
(d) WITHHOLDING TAXES. As a condition to the exercise of an
Option, the Optionee shall make such arrangements as the
Administrator may require for the satisfaction of any federal,
state, local or foreign withholding tax obligations that may
arise in connection with such exercise. The Optionee shall
also make such arrangements as the Administrator may require
for the satisfaction of any federal, state, local or foreign
withholding tax obligations that may arise in connection with
the disposition of Shares acquired by exercising an Option.
(e) EXERCISABILITY AND TERM. Each Stock Option Agreement shall
specify the date when all or any installment of the Option is
to become exercisable. The Stock Option Agreement shall also
specify the term of the Option; provided that the term of an
ISO shall in no event exceed 10 years from the date of grant
(five years for Employees described in Section 4(b)). A Stock
Option Agreement may provide for accelerated exercisability in
the event of the Optionee's death, disability, or retirement
or other events and may provide for expiration prior to the
end of its term in the event of the termination of the
Optionee's Service. Options may be awarded in combination with
SARs, and such an Award may provide that the Options will not
be exercisable unless the related SARs are forfeited. Subject
to the foregoing in this Section 7(e), the Administrator at
its sole discretion shall determine when all or any
installment of an Option is to become exercisable and when an
Option is to expire.
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(f) EXERCISE OF OPTIONS. Upon Termination of Service. Each Stock
Option Agreement shall set forth the extent to which the
Optionee shall have the right to exercise the Option following
termination of the Optionee's Service with the Company and its
Subsidiaries, and the right to exercise the Option of any
executors or administrators of the Optionee's estate or any
person who has acquired such Option(s) directly from the
Optionee by bequest or inheritance. Such provisions shall be
determined in the sole discretion of the Administrator, need
not be uniform among all Options issued pursuant to the Plan,
and may reflect distinctions based on the reasons for
termination of Service.
(g) EFFECT OF CHANGE IN CONTROL. The Administrator may determine,
at the time of granting an Option or thereafter, that such
Option shall become exercisable as to all or part of the
Shares subject to such Option in the event that a Change in
Control occurs with respect to the Company.
(h) LEAVES OF ABSENCE. An Employee's Service shall cease when such
Employee ceases to be actively employed by, or a Consultant
to, the Company (or any subsidiary) as determined in the sole
discretion of the Board of Directors. For purposes of Options,
Service does not terminate when an Employee goes on a bona
fide leave of absence, that was approved by the Company in
writing, if the terms of the leave provide for continued
service crediting, or when continued service crediting is
required by applicable law. However, for purposes of
determining whether an Option is entitled to ISO status, an
Employee's Service will be treated as terminating 90 days
after such Employee went on leave, unless such Employee's
right to return to active work is guaranteed by law or by a
contract. Service terminates in any event when the approved
leave ends, unless such Employee immediately returns to active
work. The Company determines which leaves count toward
Service, and when Service terminates for all purposes under
the Plan.
(i) NO RIGHTS AS A STOCKHOLDER. An Optionee, or a transferee of an
Optionee, shall have no rights as a stockholder with respect
to any Shares covered by his Option until the date of the
issuance of a stock certificate for such Shares. No
adjustments shall be made, except as provided in Section 11.
(j) MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. Within the
limitations of the Plan, the Administrator may modify, extend
or renew outstanding options or may accept the cancellation of
outstanding options (to the extent not previously exercised),
whether or not granted hereunder, in return for the grant of
new Options for the same or a different number of Shares and
at the same or a different exercise price, or in return for
the grant of the same or a different number of Shares. The
foregoing notwithstanding, no modification of an Option shall,
without the consent of the Optionee, materially impair his or
her rights or obligations under such Option.
(k) RESTRICTIONS ON TRANSFER OF SHARES. Any Shares issued upon
exercise of an Option shall be subject to such special
forfeiture conditions, rights of repurchase, rights of first
refusal and other transfer restrictions as the Administrator
may determine. Such restrictions shall be set forth in the
applicable Stock Option Agreement and shall apply in addition
to any general restrictions that may apply to all holders of
Shares.
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(l) BUYOUT PROVISIONS. The Administrator may at any time (a) offer
to buy out for a payment in cash or cash equivalents an Option
previously granted or (b) authorize an Optionee to elect to
cash out an Option previously granted, in either case at such
time and based upon such terms and conditions as the
Administrator shall establish.
SECTION 8. PAYMENT FOR SHARES.
(a) GENERAL RULE. The entire Exercise Price or Purchase Price of
Shares issued under the Plan shall be payable in lawful money
of the United States of America at the time when such Shares
are purchased, except as provided in Section 8(b) through
Section 8(g) below.
(b) SURRENDER OF STOCK. To the extent that a Stock Option
Agreement so provides, payment may be made all or in part by
surrendering, or attesting to the ownership of, Shares which
have already been owned by the Optionee or his representative.
Such Shares shall be valued at their Fair Market Value on the
date when the new Shares are purchased under the Plan. The
Optionee shall not surrender, or attest to the ownership of,
Shares in payment of the Exercise Price if such action would
cause the Company to recognize compensation expense (or
additional compensation expense) with respect to the Option
for financial reporting purposes.
(c) SERVICES RENDERED. At the discretion of the Administrator,
Shares may be awarded under the Plan in consideration of
services rendered to the Company or a Subsidiary prior to the
award. If Shares are awarded without the payment of a Purchase
Price in cash, the Administrator shall make a determination
(at the time of the award) of the value of the services
rendered by the Offeree and the sufficiency of the
consideration to meet the requirements of Section 6(b).
(d) CASHLESS EXERCISE. To the extent that a Stock Option Agreement
so provides, payment may be made all or in part by delivery
(on a form prescribed by the Administrator) of an irrevocable
direction to a securities broker to sell Shares and to deliver
all or part of the sale proceeds to the Company in payment of
the aggregate Exercise Price.
(e) EXERCISE/PLEDGE. To the extent that a Stock Option Agreement
so provides, payment may be made all or in part by delivery
(on a form prescribed by the Administrator) of an irrevocable
direction to a securities broker or lender to pledge Shares,
as security for a loan, and to deliver all or part of the loan
proceeds to the Company in payment of the aggregate Exercise
Price.
(f) PROMISSORY NOTE. To the extent that a Stock Option Agreement
or Restricted Stock Agreement so provides, payment may be made
all or in part by delivering (on a form prescribed by the
Company) a full-recourse promissory note. However, the par
value of the Common Shares being purchased under the Plan, if
newly issued, shall be paid in cash or cash equivalents.
(g) OTHER FORMS OF PAYMENT. To the extent that a Stock Option
Agreement or Restricted Stock Agreement so provides, payment
may be made in any other form that is consistent with
applicable laws, regulations and rules.
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(h) LIMITATIONS UNDER APPLICABLE LAW. Notwithstanding anything
herein or in a Stock Option Agreement or Restricted Stock
Agreement to the contrary, payment may not be made in any form
that is unlawful, as determined by the Administrator in its
sole discretion.
SECTION 9. STOCK APPRECIATION RIGHTS.
(a) SAR AGREEMENT. Each grant of a SAR under the Plan shall be
evidenced by a SAR Agreement between the Optionee and the
Company. Such SAR shall be subject to all applicable terms of
the Plan and may be subject to any other terms that are not
inconsistent with the Plan. The provisions of the various SAR
Agreements entered into under the Plan need not be identical.
SARs may be granted in consideration of a reduction in the
Optionee's other compensation.
(b) NUMBER OF SHARES. Each SAR Agreement shall specify the number
of Shares to which the SAR pertains and shall provide for the
adjustment of such number in accordance with Section 11.
(c) EXERCISE PRICE. Each SAR Agreement shall specify the Exercise
Price. A SAR Agreement may specify an Exercise Price that
varies in accordance with a predetermined formula while the
SAR is outstanding.
(d) EXERCISABILITY AND TERM. Each SAR Agreement shall specify the
date when all or any installment of the SAR is to become
exercisable. The SAR Agreement shall also specify the term of
the SAR. A SAR Agreement may provide for accelerated
exercisability in the event of the Optionee's death,
disability or retirement or other events and may provide for
expiration prior to the end of its term in the event of the
termination of the Optionee's service. SARs may be awarded in
combination with Options, and such an Award may provide that
the SARs will not be exercisable unless the related Options
are forfeited. A SAR may be included in an ISO only at the
time of grant but may be included in an NSO at the time of
grant or thereafter. A SAR granted under the Plan may provide
that it will be exercisable only in the event of a Change in
Control.
(e) EFFECT OF CHANGE IN CONTROL. The Administrator may determine,
at the time of granting a SAR or thereafter, that such SAR
shall become fully exercisable as to all Common Shares subject
to such SAR in the event that a Change in Control occurs with
respect to the Company.
(f) EXERCISE OF SARS. Upon exercise of a SAR, the Optionee (or any
person having the right to exercise the SAR after his or her
death) shall receive from the Company (a) Shares, (b) cash or
(c) a combination of Shares and cash, as the Administrator
shall determine. The amount of cash and/or the Fair Market
Value of Shares received upon exercise of SARs shall, in the
aggregate, be equal to the amount by which the Fair Market
Value (on the date of surrender) of the Shares subject to the
SARs exceeds the Exercise Price.
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(g) MODIFICATION OR ASSUMPTION OF SARS. Within the limitations of
the Plan, the Administrator may modify, extend or assume
outstanding SARs or may accept the cancellation of outstanding
SARs (whether granted by the Company or by another issuer) in
return for the grant of new SARs for the same or a different
number of shares and at the same or a different exercise
price. The foregoing notwithstanding, no modification of a SAR
shall, without the consent of the holder, materially impair
his or her rights or obligations under such SAR.
SECTION 10. STOCK UNITS.
(a) STOCK UNIT AGREEMENT. Each grant of Stock Units under the Plan
shall be evidenced by a Stock Unit Agreement between the
recipient and the Company. Such Stock Units shall be subject
to all applicable terms of the Plan and may be subject to any
other terms that are not inconsistent with the Plan. The
provisions of the various Stock Unit Agreements entered into
under the Plan need not be identical. Stock Units may be
granted in consideration of a reduction in the recipient's
other compensation.
(b) PAYMENT FOR AWARDS. To the extent that an Award is granted in
the form of Stock Units, no cash consideration shall be
required of the Award recipients.
(c) VESTING CONDITIONS. Each Award of Stock Units may or may not
be subject to vesting. Vesting shall occur, in full or in
installments, upon satisfaction of the conditions specified in
the Stock Unit Agreement. A Stock Unit Agreement may provide
for accelerated vesting in the event of the Participant's
death, disability or retirement or other events. The
Administrator may determine, at the time of granting Stock
Units or thereafter, that all or part of such Stock Units
shall become vested in the event that a Change in Control
occurs with respect to the Company.
(d) VOTING AND DIVIDEND RIGHTS. The holders of Stock Units shall
have no voting rights. Prior to settlement or forfeiture, any
Stock Unit awarded under the Plan may, at the Administrator's
discretion, carry with it a right to dividend equivalents.
Such right entitles the holder to be credited with an amount
equal to all cash dividends paid on one Share while the Stock
Unit is outstanding. Dividend equivalents may be converted
into additional Stock Units. Settlement of dividend
equivalents may be made in the form of cash, in the form of
Shares, or in a combination of both. Prior to distribution,
any dividend equivalents which are not paid shall be subject
to the same conditions and restrictions (including without
limitation, any forfeiture conditions) as the Stock Units to
which they attach.
(e) FORM AND TIME OF SETTLEMENT OF STOCK UNITS. Settlement of
vested Stock Units may be made in the form of (a) cash, (b)
Shares or (c) any combination of both, as determined by the
Administrator. The actual number of Stock Units eligible for
settlement may be larger or smaller than the number included
in the original Award, based on predetermined performance
factors. Methods of converting Stock Units into cash may
include (without limitation) a method based on the average
Fair Market Value of Shares over a series of trading days.
Vested Stock Units may be settled in a lump sum or in
installments. The distribution may occur or commence when all
vesting conditions applicable to the Stock Units have been
satisfied or have lapsed, or it may be deferred to any later
date. The amount of a deferred distribution may be increased
by an
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interest factor or by dividend equivalents. Until an Award of
Stock Units is settled, the number of such Stock Units shall
be subject to adjustment pursuant to Section 11.
(f) DEATH OF RECIPIENT. Any Stock Units Award that becomes payable
after the recipient's death shall be distributed to the
recipient's beneficiary or beneficiaries. Each recipient of a
Stock Units Award under the Plan shall designate one or more
beneficiaries for this purpose by filing the prescribed form
with the Company. A beneficiary designation may be changed by
filing the prescribed form with the Company at any time before
the Award recipient's death. If no beneficiary was designated
or if no designated beneficiary survives the Award recipient,
then any Stock Units Award that becomes payable after the
recipient's death shall be distributed to the recipient's
estate.
(g) CREDITORS' RIGHTS. A holder of Stock Units shall have no
rights other than those of a general creditor of the Company.
Stock Units represent an unfunded and unsecured obligation of
the Company, subject to the terms and conditions of the
applicable Stock Unit Agreement.
SECTION 11. ADJUSTMENT OF SHARES.
(a) ADJUSTMENTS. In the event of a subdivision of the outstanding
Stock, a declaration of a dividend payable in Shares, a
declaration of a dividend payable in a form other than Shares
in an amount that has a material effect on the price of
Shares, a combination or consolidation of the outstanding
Stock (by reclassification or otherwise) into a lesser number
of Shares, a recapitalization, a spin-off or a similar
occurrence, the Administrator shall make such adjustments as
it, in its sole discretion, deems appropriate in one or more
of:
(i) The number of Options, SARs, Restricted Shares and
Stock Units available for future Awards under Section
5;
(ii) The limitations set forth in Sections 5(a) and (b);
(iii) The number of Shares covered by each outstanding
Option and SAR;
(iv) The Exercise Price under each outstanding Option and
SAR; or
(v) The number of Stock Units included in any prior Award
which has not yet been settled.
Except as provided in this Section 11, a Participant shall
have no rights by reason of any issue by the Company of stock
of any class or securities convertible into stock of any
class, any subdivision or consolidation of shares of stock of
any class, the payment of any stock dividend or any other
increase or decrease in the number of shares of stock of any
class.
(b) DISSOLUTION OR LIQUIDATION. To the extent not previously
exercised or settled, Options, SARs and Stock Units shall
terminate immediately prior to the dissolution or liquidation
of the Company.
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(c) REORGANIZATIONS. In the event that the Company is a party to a
merger or other reorganization, outstanding Awards shall be
subject to the agreement of merger or reorganization. Such
agreement shall provide for:
(i) The continuation of the outstanding Awards by the
Company, if the Company is a surviving corporation;
(ii) The assumption of the outstanding Awards by the
surviving corporation or its parent or subsidiary;
(iii) The substitution by the surviving corporation or its
parent or subsidiary of its own awards for the
outstanding Awards;
(iv) Full exercisability or vesting and accelerated
expiration of the outstanding Awards; or
(v) Settlement of the full value of the outstanding
Awards in cash or cash equivalents followed by
cancellation of such Awards.
(d) RESERVATION OF RIGHTS. Except as provided in this Section 11,
an Optionee or Offeree shall have no rights by reason of any
subdivision or consolidation of shares of stock of any class,
the payment of any dividend or any other increase or decrease
in the number of shares of stock of any class. Any issue by
the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall not
affect, and no adjustment by reason thereof shall be made with
respect to, the number or Exercise Price of Shares subject to
an Option. The grant of an Option pursuant to the Plan shall
not affect in any way the right or power of the Company to
make adjustments, reclassifications, reorganizations or
changes of its capital or business structure, to merge or
consolidate or to dissolve, liquidate, sell or transfer all or
any part of its business or assets.
SECTION 12. DEFERRAL OF AWARDS.
The Administrator (in its sole discretion) may permit or require a
Participant to:
(a) Have cash that otherwise would be paid to such Participant as
a result of the exercise of a SAR or the settlement of Stock
Units credited to a deferred compensation account established
for such Participant by the Administrator as an entry on the
Company's books;
(b) Have Shares that otherwise would be delivered to such
Participant as a result of the exercise of an Option or SAR
converted into an equal number of Stock Units; or
(c) Have Shares that otherwise would be delivered to such
Participant as a result of the exercise of an Option or SAR or
the settlement of Stock Units converted into amounts credited
to a deferred compensation account established for such
Participant by the Administrator as an entry on the Company's
books. Such amounts shall be determined by reference to the
Fair Market Value of such Shares as of the date when they
otherwise would have been delivered to such Participant.
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A deferred compensation account established under this Section 12 may
be credited with interest or other forms of investment return, as determined by
the Administrator. A Participant for whom such an account is established shall
have no rights other than those of a general creditor of the Company. Such an
account shall represent an unfunded and unsecured obligation of the Company and
shall be subject to the terms and conditions of the applicable agreement between
such Participant and the Company. If the deferral or conversion of Awards is
permitted or required, the Administrator (in its sole discretion) may establish
rules, procedures and forms pertaining to such Awards, including (without
limitation) the settlement of deferred compensation accounts established under
this Section 12.
SECTION 13. AWARDS UNDER OTHER PLANS.
The Company may grant awards under other plans or programs. Such awards
may be settled in the form of Shares issued under this Plan. Such Shares shall
be treated for all purposes under the Plan like Shares issued in settlement of
Stock Units and shall, when issued, reduce the number of Shares available under
Section 5.
SECTION 14. PAYMENT OF DIRECTOR'S FEES IN SECURITIES.
(a) EFFECTIVE DATE. No provision of this Section 14 shall be
effective unless and until the Board of Directors has
determined to implement such provision.
(b) ELECTIONS TO RECEIVE NSOS, RESTRICTED SHARES OR STOCK UNITS.
An Outside Director may elect to receive his or her annual
retainer payments and/or meeting fees from the Company, if
any, in the form of cash, NSOs, Restricted Shares or Stock
Units, or a combination thereof, as determined by the Board of
Directors. Such NSOs, Restricted Shares and Stock Units shall
be issued under the Plan. An election under this Section 14
shall be filed with the Company on the prescribed form.
(c) NUMBER AND TERMS OF NSOS, RESTRICTED SHARES OR STOCK UNITS.
The number of NSOs, Restricted Shares or Stock Units to be
granted to Outside Directors in lieu of annual retainers and
meeting fees that would otherwise be paid in cash shall be
calculated in a manner determined by the Board of Directors.
The terms of such NSOs, Restricted Shares or Stock Units shall
also be determined by the Board of Directors.
SECTION 15. LEGAL AND REGULATORY REQUIREMENTS.
Shares shall not be issued under the Plan unless the issuance and
delivery of such Shares complies with (or is exempt from) all applicable
requirements of law, including (without limitation) the Securities Act of 1933,
as amended, the rules and regulations promulgated thereunder, state securities
laws and regulations and the regulations of any stock exchange on which the
Company's securities may then be listed, and the Company has obtained the
approval or favorable ruling from any governmental agency which the Company
determines is necessary or advisable. The Company shall not be liable to a
Participant or other persons as to: (a) the non-issuance or sale of Shares as to
which the Company has been unable to obtain from any regulatory body having
jurisdiction the authority deemed by the Company's counsel to be necessary to
the lawful issuance and sale of any Shares under the Plan; and (b) any tax
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consequences expected, but not realized, by any Participant or other person due
to the receipt, exercise or settlement of any Award granted under the Plan.
SECTION 16. WITHHOLDING TAXES.
(a) GENERAL. To the extent required by applicable federal, state,
local or foreign law, a Participant or his or her successor
shall make arrangements satisfactory to the Company for the
satisfaction of any withholding tax obligations that arise in
connection with the Plan. The Company shall not be required to
issue any Shares or make any cash payment under the Plan until
such obligations are satisfied.
(b) SHARE WITHHOLDING. The Administrator may permit a Participant
to satisfy all or part of his or her withholding or income tax
obligations by having the Company withhold all or a portion of
any Shares that otherwise would be issued to him or her or by
surrendering all or a portion of any Shares that he or she
previously acquired. Such Shares shall be valued at their Fair
Market Value on the date when taxes otherwise would be
withheld in cash. In no event may a Participant have Shares
withheld that would otherwise be issued to him or her in
excess of the number necessary to satisfy the legally required
minimum tax withholding.
SECTION 17. OTHER PROVISIONS APPLICABLE TO AWARDS.
(a) TRANSFERABILITY. Unless the agreement evidencing an Award (or
an amendment thereto authorized by the Administrator)
expressly provides otherwise, no Award granted under this
Plan, nor any interest in such Award, may be sold, assigned,
conveyed, gifted, pledged, hypothecated or otherwise
transferred in any manner (prior to the vesting and lapse of
any and all restrictions applicable to Shares issued under
such Award), other than by will or the laws of descent and
distribution; provided, however, that an ISO may be
transferred or assigned only to the extent consistent with
Section 422 of the Code. Any purported assignment, transfer or
encumbrance in violation of this Section 17(a) shall be void
and unenforceable against the Company.
(b) QUALIFYING PERFORMANCE CRITERIA. The number of Shares or other
benefits granted, issued, retainable and/or vested under an
Award may be made subject to the attainment of performance
goals for a specified period of time relating to one or more
of the following performance criteria, either individually,
alternatively or in any combination, applied to either the
Company as a whole or to a business unit or Subsidiary, either
individually, alternatively or in any combination, and
measured either annually or cumulatively over a period of
years, on an absolute basis or relative to a pre-established
target, to previous years' results or to a designated
comparison group or index, in each case as specified by the
Administrator in the Award: (a) cash flow, (b) earnings per
share, (c) earnings before interest, taxes and amortization,
(d) return on equity, (e) total stockholder return, (f) share
price performance, (g) return on capital, (h) return on assets
or net assets, (i) revenue, (j) income or net income, (k)
operating income or net operating income, (l) operating profit
or net operating profit, (m) operating margin or profit
margin, (n) return on operating revenue, (o) return on
invested capital, or (p) market segment shares ("Qualifying
Performance Criteria"). The Administrator may appropriately
adjust any evaluation of performance under a Qualifying
Performance Criteria to exclude any of the following events
that occurs during a performance period: (i) asset
write-downs, (ii) litigation or
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claim judgments or settlements, (iii) the effect of changes in
tax law, accounting principles or other such laws or
provisions affecting reported results, (iv) accruals for
reorganization and restructuring programs and (v) any
extraordinary nonrecurring items as described in Accounting
Principles Board Opinion No. 30 and/or in managements'
discussion and analysis of financial condition and results of
operations appearing in the Company's annual report to
stockholders for the applicable year. The Administrator shall
determine the Qualifying Performance Criteria not later than
the 90th day of the performance period, and shall determine
and certify, for each Participant, the extent to which the
Qualifying Performance Criteria have been met. The
Administrator may not in any event increase the amount of
compensation payable under the Plan upon the attainment of a
Qualifying Performance Goal to a Participant who is a "covered
employee" within the meaning of Section 162(m) of the Code.
SECTION 18. NO EMPLOYMENT RIGHTS.
No provision of the Plan, nor any right or Option granted under the
Plan, shall be construed to give any person any right to become, to be treated
as, or to remain an Employee. The Company and its Subsidiaries reserve the right
to terminate any person's Service at any time and for any reason, with or
without notice.
SECTION 19. DURATION AND AMENDMENTS.
(a) TERM OF THE PLAN. The Plan, as set forth herein, shall
terminate automatically on June 21, 2016 and may be terminated
on any earlier date pursuant to Subsection (b) below.
(b) RIGHT TO AMEND OR TERMINATE THE PLAN. The Board of Directors
may amend the Plan at any time and from time to time. Rights
and obligations under any Award granted before amendment of
the Plan shall not be materially impaired by such amendment,
except with consent of the Participant. An amendment of the
Plan shall be subject to the approval of the Company's
stockholders only to the extent required by applicable laws,
regulations or rules.
(c) EFFECT OF TERMINATION. No Awards shall be granted under the
Plan after the termination thereof. The termination of the
Plan shall not affect Awards previously granted under the
Plan.
SECTION 20. EXECUTION.
To record the adoption of the Plan by the Board of Directors, the
Company has caused its authorized officer to execute the same.
PATRON SYSTEMS, INC.
By:
-------------------------------------
Robert Cross
Chief Executive Officer
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APPENDIX B
CERTIFICATE OF AMENDMENT
OF
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
PATRON SYSTEMS, INC.
Patron Systems, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that:
I. Pursuant to the Unanimous Written Consent of the Board of
Directors of the Corporation dated May 10, 2006, resolutions were duly adopted
setting forth a proposed amendment of the Second Amended and Restated
Certificate of Incorporation of the Corporation, declaring said amendment to be
advisable to the Corporation and its stockholders. The resolution setting forth
the proposed amendment is as follows:
RESOLVED FURTHER, that Section (A) of Article IV the Certificate of
Incorporation in its entirety to read as follows:
"Authorized Capital Stock. The total number of shares of capital stock
which the Corporation shall have authority to issue is 225,000,000,
consisting of 150,000,000 shares of common stock, with the par value of
$0.01 per share ("Common Stock"), and 75,000,000 shares of preferred
stock, with the par value of $0.01 per share. Simultaneously with the
effective date of the filing of this amendment to the Second Amended
and Restated Certificate of Incorporation (the "Effective Date"), each
share of Common Stock of the Corporation issued and outstanding or held
as treasury shares immediately prior to the Effective Date (the "Old
Common Stock") shall automatically be reclassified and continued (the
"Reverse Split"), without any action on the part of the holder thereof,
as one-thirtieth of one share (0.033333) of Common Stock. The
Corporation shall not issue fractional shares on account of the Reverse
Split. Holders of Old Common Stock who would otherwise be entitled to a
fraction of a share on account of the Reverse Split shall receive, upon
surrender of all of such holder's stock certificates formerly
representing shares of Old Common Stock, in lieu of such fractional
share, one whole share of Common Stock.
The Corporation's stated capital shall be reduced by an amount equal to
the aggregate par value of the shares of Common Stock issued prior to
the effectiveness of this Certificate of Amendment which, as a result
of the Reverse Split provided for herein, are no longer issued shares
of Common Stock."
II. That thereafter, a majority of the outstanding stock entitled
to vote thereon, acting pursuant to a duly called and held meeting of
stockholders, approved the amendment.
III. That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
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IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by Robert Cross, its Chief Executive Officer, this __ day of June, 2006.
By: /s/ Robert Cross
---------------------------------------
Name: Robert Cross
Title: Chief Executive Officer
B-2
PATRON SYSTEMS, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, a stockholder of PATRON SYSTEMS, INC., a Delaware corporation
(the "Company"), hereby nominates, constitutes and appoints Robert Cross and
Martin T. Johnson, or either one of them, as proxy of the undersigned, each with
full power of substitution, to attend, vote and act for the undersigned at the
Annual Meeting of stockholders of the Company, to be held on June 22, 2006, and
any postponements or adjournments thereof, and in connection therewith, to vote
and represent all of the shares of the Company which the undersigned would be
entitled to vote with the same effect as if the undersigned were present, as
follows:
The Board of Directors recommends a FOR vote on all proposals listed below.
Proposal 1. To elect the following three nominees as directors:
-------------------------- ------------------------ -------------------------
CLASS I CLASS II CLASS III
-------------------------- ------------------------ -------------------------
George Middlemas Robert Cross Braden Waverley
-------------------------- ------------------------ -------------------------
_____ FOR NOMINEES LISTED (except as marked to the contrary below)
_____ WITHHELD
(INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name in the space below:)
--------------------------------------------------------------------------------
The undersigned hereby confer(s) upon the proxies and each of them discretionary
authority with respect to the election of directors in the event that any of the
above nominees is unable or unwilling to serve.
Proposal 2. To adopt the Patron Systems, Inc. 2006 Stock Incentive Plan.
|_| FOR |_| AGAINST |_| ABSTAIN
Proposal 3. To approve an amendment to the Company's Second Amended and
Restated Certificate of Incorporation, as amended, to provide for a 1-for-30
reverse stock split of the Company's issued and outstanding Common Stock.
|_| FOR |_| AGAINST |_| ABSTAIN
The undersigned hereby revokes any other proxy to vote at the Annual
Meeting, and hereby ratifies and confirms all that said attorneys and proxies,
and each of them, may lawfully do by virtue hereof. With respect to matters not
known at the time of the solicitation hereof, said proxies are authorized to
vote in accordance with their best judgment.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE INSTRUCTIONS SET FORTH
ABOVE OR, TO THE EXTENT NO CONTRARY DIRECTION IS INDICATED, WILL BE TREATED AS A
GRANT OF AUTHORITY TO VOTE FOR ALL PROPOSALS. IF ANY OTHER BUSINESS IS PRESENTED
AT THE ANNUAL MEETING, THIS PROXY CONFERS AUTHORITY TO AND SHALL BE VOTED IN
ACCORDANCE WITH THE RECOMMENDATIONS OF THE PROXIES.
The undersigned acknowledges receipt of a copy of the Notice of Annual Meeting
and accompanying Proxy Statement dated May 22, 2006, relating to the Annual
Meeting.
Dated:___________________________, 2006
Signature:_____________________________
Signature:_____________________________
Signature(s) of Stockholder(s)
(See Instructions Below)
The signature(s) hereon should
correspond exactly with the name(s) of
the stockholder(s) appearing on the
Share Certificate. If stock is held
jointly, all joint owners should sign.
When signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such. If
signer is a corporation, please sign
the full corporation name, and give
title of signing officer.
|_| Please indicate by checking this box if you anticipate
attending the Annual Meeting.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE