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Check the appropriate box:

 

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x	Definitive Proxy Statement
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o	Soliciting Material Pursuant to §240.14a-12

 

AKEENA SOLAR, INC.

(Name of Registrant as Specified in Its Charter)

 

Payment of Filing Fee (Check the appropriate box):

 

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o	Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

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o	Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

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Akeena Solar 888-253-3628 fax: 408-395-7979 www.akeena.net

Corporate Headquarters: 16005 Los Gatos Blvd., Los Gatos, CA 95032

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

September 23, 2008

9:30 a.m. (Pacific Standard Time)

 

To the Stockholders of Akeena Solar, Inc.:

 

Notice is hereby given that the Annual Meeting of Stockholders of Akeena Solar, Inc. (the “Company” or “Akeena”) will be held at our principal corporate offices located 16005 Los Gatos Blvd., Los Gatos, California 95032 on September 23, 2008 at 9:30 a.m. (Pacific Standard Time) for the following purposes:

 

1.

To elect four (4) directors to the Board of Directors to a one year term;

 

2.

To approve the Third Modification to the 2006 Incentive Stock Plan (the “Stock Plan”), which will increase the total number of shares of stock that Akeena will have the authority to issue from 4,000,000, of which all are restricted common stock (par value $.001 per share) to 5,000,000, of which all will be restricted common stock (par value $.001 per share)—we refer to this proposal as the Third Modification to the 2006 Incentive Stock Plan;

 

3.

To ratify the appointment of Burr, Pilger and Mayer LLP as the Company's independent certified public accountants for the fiscal year ending December 31, 2008; and

 

4.

To consider and act upon such other business as may properly come before the Annual Meeting or any adjournment(s) thereof.

 

The Board of Directors has fixed the close of business on September 5, 2008 as the record date for the Annual Meeting. Only stockholders of record of our common stock at the close of business on that date are entitled to notice of, and to vote at, that Annual Meeting or any adjournment thereof.

 

Whether or not you plan to attend the Annual Meeting, please mark, sign, date and promptly return the accompanying Proxy in the enclosed envelope. You may revoke your Proxy at any time before it is voted.

 

Stockholders are cordially invited to attend the meeting in person. Please indicate on the enclosed Proxy whether you plan to attend the meeting. Stockholders may vote in person if they attend the meeting even though they have executed and returned a Proxy.

 

By Order of the Board of Directors,

Barry Cinnamon

President, Chief Executive Officer and Secretary

 

Dated: September 9, 2008

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TABLE OF CONTENTS

		Page
PROXY STATEMENT			1
ANNUAL MEETING OF STOCKHOLDERS ON SEPTEMBER 23, 2008			1
PROXIES AND VOTING RIGHTS			1
VOTING SECURITIES AND PRINCIPAL HOLDERS			3
DIRECTORS AND EXECUTIVE OFFICERS			4
ELECTION OF DIRECTORS (Proposal 1)			6
EXECUTIVE COMPENSATION			10
APPROVAL OF THE THIRD MODIFICATION TO THE 2006 INCENTIVE STOCK PLAN (Proposal 2)			13
RATIFICATION OF APPOINTMENT OF THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Proposal 3)			17
BOARD OF DIRECTORS AUDIT REPORT			18
OTHER MATTERS			19

 

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AKEENA SOLAR, INC.

 

16005 Los Gatos Blvd.

Los Gatos, CA 95032

Telephone: (408) 395-7774

Fax: (408) 395-7979

 

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PROXY STATEMENT

 

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ANNUAL MEETING OF STOCKHOLDERS ON SEPTEMBER 23, 2008

 

This Proxy Statement and the accompanying Notice of Annual Meeting of Stockholders and proxy card are furnished to stockholders of Akeena Solar, Inc., a Delaware corporation (“Akeena” or the “Company”), in connection with the solicitation by order of the Board of Directors of the Company of proxies for use at the annual meeting of stockholders (the “Annual Meeting”) to be held on Tuesday, September 23, 2008 at the Company’s corporate offices located at 16005 Los Gatos Blvd., Los Gatos, CA 95032 at 9:30 a.m. local time, and at any adjournment thereof, for the purposes set forth in the accompanying Notice of Annual Meeting of Stockholders. These proxy materials and the accompanying Annual Report on Form 10-KSB for the year ended December 31, 2007, are being mailed on or about September 9, 2008 to stockholders of the Company entitled to vote at the Annual Meeting.

 

As indicated in the Notice of Annual Meeting of Stockholders, the Annual Meeting has been called to (i) elect four (4) directors to the Board of Directors for the ensuing year, (ii) approve the Third Modification to the 2006 Incentive Stock Plan (“Stock Plan”), which will increase the total number of shares of common stock that Akeena has reserved and has authority to issue under the Stock Plan from 4,000,000 to 5,000,000—we refer to this proposal as the “Third Modification to the 2006 Incentive Stock Plan,” (iii) ratify the Board’s appointment of Burr, Pilger and Mayer LLP as the Company’s independent auditors for the fiscal year ending December 31, 2008, and (iv) consider and act upon such other business as may properly come before the Annual Meeting or any adjournment thereof.

 

PROXIES AND VOTING RIGHTS

 

Only stockholders of record at the close of business on September 5, 2008 (the “Record Date”) are entitled to notice of and to vote at the Annual Meeting. The voting securities of the Company issued and outstanding on the Record Date consisted of 28,983,666 shares (the “Shares”) of common stock, par value $0.001 per share (the "Common Stock"), entitling the holders thereof to one vote per Share. There was no other class of voting securities of the Company outstanding on such date. The presence at the Annual Meeting in person or by proxy of holders of a majority of the Shares entitled to vote is required for a quorum.

 

The election of directors will be determined based upon the affirmative vote of a plurality of the Shares present at the Annual Meeting. Approval for each of the other proposals being submitted to the stockholders requires the affirmative vote of a majority of the votes cast at the Annual Meeting by the holders of Shares entitled to vote on such proposals. Shares which are voted to abstain on any proposal are counted as votes cast, and therefore have the same effect as a vote against the proposal.

 

Broker “non-votes” are included for purposes of determining whether a quorum of Shares is present at the Annual Meeting. A broker “non-vote” occurs when a nominee holding Shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that item and has not received instructions from the beneficial owner. Broker “non-votes” are not included in the tabulation of the voting results on the election of directors or on proposals requiring approval of a majority of the votes cast and, therefore, do not have the effect of votes in opposition in such tabulations.

 

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Votes cast by proxy or in person at the Annual Meeting will be tabulated by persons appointed by our Board of Directors to act as Inspectors of Election for the Annual Meeting, as provided by the Company’s By-laws. The Inspectors of Election will count the total number of votes cast for approval of each proposal for purposes of determining whether sufficient affirmative votes have been cast.

 

All proxies delivered pursuant to this solicitation may be revoked by the person executing the same at any time prior to the time they are voted. A proxy may be revoked by notice in writing received at the office of the Company, Attention: In-House Counsel, by execution of a subsequent proxy or by attendance and voting in person at the Annual Meeting. Attendance at the Annual Meeting will not automatically revoke the proxy. If not revoked, the Shares represented by a proxy will be voted at the Annual Meeting or at any adjournment thereof. All proxies will be voted in accordance with the instructions specified thereon. If no specification is indicated on the proxy, the Shares represented thereby will be voted (i) FOR the election of each person nominated for election as a Director, (ii) FOR the approval of the Third Modification to the 2006 Incentive Stock Plan and (iii) FOR ratification of the Board’s appointment of Burr, Pilger and Mayer LLP as the Company’s independent auditors for the fiscal year ending December 31, 2008, and (iv) at the discretion of the proxy holders on any other matters that may properly come before the Meeting.

 

All expenses in connection with the solicitation of proxies will be borne by the Company. The Company expects that the solicitation will be made primarily by mail, but regular employees or representatives of the Company may also solicit proxies by telephone, facsimile, e-mail or in person, without additional compensation. The Company will, upon request, reimburse brokerage houses and persons holding Shares in the names of their nominees for their reasonable expenses in sending proxy material to their principals.

Akeena has been in business since February 23, 2001. The company’s corporate headquarters are located at 16005 Los Gatos Boulevard, Los Gatos, California 95032. In addition, the Company maintains installation offices at its Los Gatos facility and at Fresno (Clovis), Lake Forest, Bakersfield, Manteca, Santa Rosa, Palm Springs, San Diego and Thousand Oaks (Westlake Village), California offices, as well as at its Fairfield, New Jersey, Milford, Connecticut and Littleton, Colorado offices. The Company’s telephone number is (408) 395-7774.

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VOTING SECURITIES AND PRINCIPAL HOLDERS

 

The following table sets forth information concerning ownership of the Company's Shares, as of the Record Date, by (i) each person known by the Company to be the beneficial owner of more than five percent of the outstanding Shares, (ii) each director and nominee for election as a director, (iii) each of the Named Executive Officers listed in the Summary Compensation Table included in this Proxy Statement and (iv) all directors and executive officers of the Company as a group. Unless otherwise indicated, the Company believes that each stockholder has sole voting power and sole dispositive power with respect to the Shares beneficially owned by him.

Name and Address of Beneficial Owner(1)		Amount and Nature of Beneficial Ownership (2)			Percent of Class (2)
Barry Cinnamon			7,654,333	(3)		26.4	%
Ed Roffman			58,000	(4)		*
George Lauro			2,500			*
Jon Witkin			10,000			*
Gary Effren			201,667	(5)		*
James Curran			35,000			*
Steve Daniel			191,167	(6)		*
All directors and executive officers as a group (7 persons)						28.1	%
5% holders:
Angeleno Group, LLC 2029 Century Park East, Suite 2980, Los Angeles, California 90067			1,527,272	(7)		5.3	%
			9,679,939			33.4	%

*	Less than 1%

 

(1)	Unless otherwise indicated, the address for each of the stockholders is c/o Akeena Solar, Inc. 16005 Los Gatos Blvd., Los Gatos, CA 95032.

 

(2)

The applicable percentage of ownership for each beneficial owner is based on 28,983,666 shares of Common Stock outstanding as of September 5, 2008. In calculating the number of Shares beneficially owned by a stockholder and the percentage of ownership of that stockholder, shares of Common Stock issuable upon the exercise of options or warrants, or the conversion of other securities held by that stockholder, that are exercisable within 60 days, are deemed outstanding for that holder; however, such shares are not deemed outstanding for computing the percentage ownership of any other stockholder.

 

(3)	Includes shares of restricted common stock and 104,333 shares of nonqualified stock options which are exercisable for shares of Akeena’s common stock within 60 days of September 5, 2008.

(4)	Includes shares of restricted common stock.

 

(5)	Includes shares of restricted common stock and 116,667 shares of nonqualified stock options which are exercisable within 60 days of September 5, 2008.

 

(6)	Includes shares of restricted common stock and 93,667 shares nonqualified stock options which are exercisable within 60 days of September 5, 2008.

(7)

Includes currently exercisable warrants to purchase 254,545 shares of common stock. Voting and dispositive power is shared by Angeleno Group LLC, Angeleno Group Management II, LLC and Angeleno Investors II, LP. Yaniv Tepper, a managing member, has voting and dispositive power over these securities. Mr. Tepper disclaims beneficial ownership of such securities.

    

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DIRECTORS AND EXECUTIVE OFFICERS

The current directors and executive officers of the Company are as follows:

 

Name		Age		Position
Barry Cinnamon		50		Chairman, President, Chief Executive Officer, Secretary, Treasurer and Director
Gary Effren		52		Chief Financial Officer
Steve Daniel		50		EVP, Sales and Marketing
Ed Roffman		58		Director
George Lauro		49		Director
Jon Witkin		54		Director

Barry Cinnamon, Chairman, President, Chief Executive Officer, Secretary, Treasurer and Director. Our founder, Barry Cinnamon, has served as director since the Company began. Mr. Cinnamon is a long-time advocate of solar energy and widely recognized solar energy expert. He started his career in solar energy in the late 1970s as a researcher into new flat plate and concentrating collector designs at the Massachusetts Institute of Technology (MIT). During the late 1970s and early 1980s, Mr. Cinnamon designed and installed active solar, passive solar and ground coupled heat pump systems. Mr. Cinnamon’s work in solar energy computer modeling led him into the software industry, where he served as Chief Executive Officer of Software Publishing Corporation, and founded Allegro New Media, a multimedia software publisher, which he led to an IPO in 1995. Mr. Cinnamon earned a BS Degree in Mechanical Engineering from MIT and a MBA degree in Marketing from Wharton School of the University of Pennsylvania. Mr. Cinnamon is a NABCEP-Certified Solar Installer, a licensed California C-46 Solar Contractor and an active member of the Silicon Valley Leadership Group.

 

Gary Effren, Chief Financial Officer. Mr. Effren joined Akeena Solar as Chief Financial Officer in September, 2007. Prior to his current role with Akeena, from 1980 to 2006, Mr. Effren held various executive financial positions at Knight Ridder, Inc., a Fortune 500 media company. Mr. Effren served as the Vice President/Finance of Knight Ridder since January 2005. Prior to that, Mr. Effren served as Senior Vice President/Finance and Chief Financial Officer of Knight Ridder from 2001 to 2004, and as Vice President/Controller of Knight Ridder from 1995 to 2001. During his tenure at Knight Ridder, Mr. Effren’s overall responsibilities included corporate accounting and financial reporting, strategic business development, tax, treasury, risk management and investor relations. Prior to joining Knight Ridder, Mr. Effren worked as an auditor at Peat Marwick Mitchell. Mr. Effren is a CPA with 30 years of experience in accounting and finance. Mr. Effren earned his MBA from the University of Miami and earned his Bachelors degree in Commerce from Rider College in New Jersey.

 

Steve Daniel, Executive Vice-President – Sales and Marketing. Mr. Daniel joined Akeena Solar as Vice President of Sales in November of 2006. Mr. Daniel has over 25 years of experience in high-tech sales and business development management. Most recently, he was at BEA Systems, Inc. managing sales in the western U.S. with global systems integrators such as Accenture and Deloitte. Mr. Daniel also worked at MarketFirst as Vice President of Western Sales and as Senior Sales Director at Exodus Communications. Mr. Daniel holds a B.S. in Industrial Engineering and Operations Research from the University of Massachusetts at Amherst.

Option Grants

Options granted pursuant to the Stock Plan to our Named Executive Officers as of December 31, 2007 are set forth in the table below.

Name and Principal Position		Date Granted			Number of Vested, Unexercised Options			Number of Options Not Vested			Option Exercise Price			Option Expiration Date
Barry Cinnamon - Chief Executive Officer, President, Treasurer, Secretary and Director			September 7, 2007			—			313,000	(1)	$	4.94			September 7, 2012
James Curran - Chief Operating Officer			September 7, 2007			—			406,000	(1)	$	4.94			September 7, 2012
Gary Effren - Chief Financial Officer			September 21, 2007			—			350,000	(2)	$	6.30			September 21, 2012
Steve Daniel - Executive Vice President of Sales and Marketing			September 7, 2007			—			281,000	(1)	$	4.94			September 7, 2012

 

(1) Options were granted on September 7, 2007 and vest over a three-year vesting period on each one-year anniversary of the date of grant commencing on September 7, 2008.

(2) Options were granted on September 21, 2007 and vest over a three-year vesting period on each one-year anniversary of the date of grant commencing on September 21, 2008.

Employment Agreements

 

We currently do not have employment agreements with any of our executive officers, other than at-will employment offer letters.

 

Incentive Stock Plan

 

On August 8, 2006, our board of directors and stockholders adopted the 2006 Incentive Stock Plan (the “Stock Plan”). On December 20, 2006, we amended the Stock Plan to increase the number of shares of common stock reserved for issuance under the Stock Plan from 450,000 shares to 1,000,000 shares. On August 24, 2007 our shareholders approved the Second Modification to the Stock Plan to increase the number of common shares reserved for issuance under the Stock Plan from 1,000,000 to 4,000,000. The purpose of the Stock Plan is to provide an incentive to retain and attract as directors, officers, consultants, advisors and employees of our company, persons with appropriate training, experience and ability, to encourage the sense of proprietorship and to stimulate the active interest of such persons in our development and financial success. Under the Stock Plan, we are authorized to issue incentive stock options intended to qualify under Section 422 of the Code, non-qualified stock options and restricted stock. The Stock Plan is administered by the Compensation Committee of our Board of Directors. As of December 31, 2007, options to purchase an aggregate of 2,065,000 shares of common stock and an aggregate of 1,011,150 shares of restricted common stock have been granted under the Stock Plan, of which restrictions have lapsed on 381,984 shares. As of September 5, 2008, there have been an aggregate of 1,480,597 grants of stock options net of forfeitures, of which 6,664 are exercisable, and an aggregate of 1,400,726 shares of restricted stock have been issued under the Stock Plan, of which restrictions have lapsed on 581,280 shares.  

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Executive Compensation Philosophy

 

The Company operates in an extremely competitive and rapidly changing high technology industry. When creating policies and making decisions concerning executive compensation, the Compensation Committee seeks to:

 

·

ensure that the executive team has clear goals and accountability with respect to financial and non-financial corporate performance;

 

·

establish pay opportunities that are competitive based on prevailing practices for the industry, the stage of growth of the Company, and the dynamic and challenging high technology labor markets in which the Company operates;

 

·

independently assess operating results on a regular basis in light of its expected performance; and

 

·

align pay incentives with the long-term interests of our stockholders.

 

Executive Compensation Program

 

The Company’s executive compensation program has three major components, all of which are intended to attract, retain and motivate highly effective executives:

 

1. Base salary - Base salary for executive officers is set annually by reviewing the competitive pay practices of comparable high technology companies. Local and national compensation data are examined and taken into account, along with the skills and performance of each officer and the needs of the Company.

 

2. Cash incentive compensation - Cash incentive compensation is designed to motivate executives to attain short-term and longer-term corporate, business unit and individual management goals. The actual annual cash bonuses received by an executive depend upon attainment of these specified business goals, together with discretionary analysis of individual contribution. Payment of incentive bonuses for fiscal year 2007 depended upon the achievement of corporate financial goals. In setting goals and measuring performance against those goals, the Compensation Committee considers compensation practices among companies competing for a common employee pool, as well as general economic and market conditions. It is the intention of the Compensation Committee in 2008 to continue this linkage between the achievement of specific financial targets, corporate and individual goals and the payment of incentive cash compensation to the Company’s officers and other executives.

  

3. Equity-based incentive compensation - Equity based incentive compensation has been provided to employees and management through the Company’s 2006 Incentive Stock Plan. Under the 2006 Incentive Stock Plan, officers and employees are eligible to be granted stock options and shares of restricted stock; grants are made based on competitive market data, as well as their responsibilities and position at the Company. Stock options allow participants to purchase shares of the Company’s Common Stock at the market price on the date of the grant, subject to vesting during the participant’s employment with the Company. Grants of restricted stock give executive officers and employees a proprietary interest in the Company’s success and aligns their interests with the interest of the Company’s stockholders. The 2006 Incentive Stock Plan utilizes vesting periods to encourage employees and executives to remain with the Company and to focus on longer-term results.

 

The Company believes that its executive compensation program falls within the typical range of compensation programs offered by comparable technology companies.

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Chief Executive Officer Compensation

 

In determining compensation of our Chief Executive Officer, Barry Cinnamon, for 2007, the Company reviewed industry surveys of compensation paid to chief executive officers of comparable companies, and evaluated achievement of corporate and individual objectives for the fiscal year. Mr. Cinnamon received $203,750 in annual base compensation for 2007, and was granted stock options to purchase 313,000 shares of common stock.

 

Other Executive Compensation

 

The Company provides certain compensation programs to executives that are also available to our other employees, including pre-tax savings plans and medical/dental/vision benefits. There are no pension programs. The Company does not provide executive perquisites such as club memberships.

 

APPROVAL OF THE THIRD MODIFICATION

TO THE 2006 INCENTIVE STOCK PLAN

(Proposal 2)

The 2006 Incentive Stock Plan (the “Stock Plan”) was adopted by the Board of Directors on August 8, 2006. On December 20, 2006, and August 24, 2007, we amended the Stock Plan to increase the number of shares of common stock reserved for issuance under the Stock Plan, either as grants of restricted stock or upon exercise of stock options, to Akeena Solar’s employees, directors and consultants, from 450,000 shares to 1,000,000 shares, and from 1,000,000 to 4,000,000 shares, respectively. The purpose of the Stock Plan is to provide an incentive to retain and attract talented directors, officers, consultants, advisors and employees to our company, and to encourage the sense of proprietorship and stimulate the active interest of such persons in our development and financial success. Under the Stock Plan, we are authorized to issue incentive stock options intended to qualify under Section 422 of the Internal Revenue Service Code of 1986, as amended (the “Code”), non-qualified stock options and grants of restricted stock. The Stock Plan is administered by the Compensation Committee of our Board of Directors. As of September 5, 2008, there have been an aggregate of 1,480,597 grants of stock options, of which 6,664 are exercisable, and an aggregate of 1,400,726 shares of restricted stock have been issued under the Stock Plan, of which restrictions have lapsed on 581,280 shares.

A summary of the Stock Plan is set forth below, and its full text is available on the investor relations section of our website at www.akeena.net. The following discussion is qualified in its entirety by reference to the Stock Plan.

 

Administration of the Stock Plan

 

Our Board of Directors appointed and maintains as administrator of the Stock Plan a Compensation Committee consisting of Independent Directors (as defined by Marketplace Rule 4200(a)(15) of the NASDAQ Stock Market), “Non-Employee Directors” (as defined in Rule 16b-3 of the Securities Exchange Act of 1934, as amended) and “Outside Directors” (as defined in Section 162(m) of the Internal Revenue Code), which serves at the pleasure of the Board of Directors. The Compensation Committee, subject to certain restrictive provisions of the Stock Plan, has full power and authority to designate recipients of options and restricted stock grants and to interpret provisions and supervise the administration of the Stock Plan.

 

The Board of Directors is authorized to amend, suspend, or terminate the Stock Plan, except that no amendment shall be effective, which, without the approval of the Company’s stockholders would: (a) materially increase the number of shares issuable under the Stock Plan; (b) materially increase the benefits accruing to option holders under the Stock Plan; (c) materially modify Stock Plan eligibility requirements; (d) decrease the exercise price of an option to less than 100% of the underlying stock’s fair market value on the grant date; (e) extend the term of any option granted under the Stock Plan beyond five years from its date of issuance; or (f) reduce the exercise price of outstanding Options or effect repricing through cancellations and re-grants of new Options.

 

No Option and no shares of Restricted Stock shall be granted pursuant to the Stock Plan on or after the date that is ten years from the effective date of the Stock Plan, but Options or shares of Restricted Stock theretofore granted may extend beyond that date.

  

Common Stock Subject to the Stock Plan

 

The Stock Plan provides that options and restricted stock may be granted with respect to 4,000,000 shares (or, subject to shareholder approval of the Third Modification to the Stock Plan, 5,000,000 shares) of the Company’s Common Stock. The shares of Common Stock subject to the Stock Plan consist of unissued shares, treasury shares or previously issued shares held by any subsidiary of the Company. Should any option or grant of restricted stock expire or be canceled prior to its exercise or vesting in full, or should the number of shares of Common Stock to be delivered upon the exercise or vesting in full of an option or grant of restricted stock be reduced for any reason, the shares of Common Stock subject to such option or grant of restricted stock may be subject to future options or grants of restricted stock, except where such reissuance is inconsistent with the provisions of Section 162(m) of the Internal Revenue Code.

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Participation

 

Any director, officer, employee or consultant to the Company or any of its subsidiaries are eligible to receive options or restricted stock under the Stock Plan. However, only employees of the Company or its subsidiaries can receive incentive stock options.

 

In selecting participants, and in determining the number of shares to be covered by each option or grant of restricted stock awarded to participants, the Compensation Committee may consider any factor it deems relevant, including without limitation, the office or position held by the participant, the participant’s relationship to the Company, the participant’s degree of responsibility for and contribution to the growth and success of the Company’s business, the participant’s length or service, promotions and potential.

 

Option Price

 

The purchase price of each share of the Company’s Common Stock purchasable under an incentive option or a nonqualified option shall be determined by the Compensation Committee at the time that the option is granted, but will be no less than 100% of the Fair Market Value (as defined in the Stock Plan) of the underlying Common Stock. If an incentive stock option is granted to an employee who owns more than 10% of the total combined voting power of all classes of stock of the Company or of any subsidiary, the purchase price per share of Common Stock will be at least 110% of the Fair Market Value per share of Common Stock on the date of grant. The closing price of the Company’s Common Stock as reported on the over the counter bulletin board on September 5, 2008 was $3.90 per share.

 

Option Term

 

The term of each option shall be fixed by the Committee, but no option shall be exercisable more than five years after the date such option is granted.

 

Exercisability

 

Options are exercisable at such time or times and subject to such terms and conditions as determined by the Compensation Committee at the time of grant. In the absence of any option vesting periods designated by the Committee at the time of grant, options vest and become exercisable as to one-third of the total amount of shares subject to the option on each of the first, second and third anniversaries of the date of grant. In addition, the Stock Plan provides that no options are exercisable until such time as any vesting limitation required by Section 16 of the Exchange Act and related rules, shall be satisfied if such limitation shall be required for continued validity of the exemption provided under Rule 16b-3(d)(3).

 

In the event of a Change of Control (as defined in the Stock Plan), the Stock Plan provides for complete acceleration of the vesting of outstanding options by the Company and held by the participant at the time of the Change of Control, whether or not vested. Alternatively, in the event of a Change of Control, the Company can elect to pay to the participant an amount in cash per stock option (whether vested or unvested) then held, equal to the difference between the full exercise price of each option and the greater of (i) the average price per share paid in connection with the acquisition of control of the Company or the then fair market value of the non-cash consideration paid for such shares, (ii) the price per share paid in connection with any tender offer for shares of the Company’s common stock leading to control, or (iii) the mean between the high and low selling price of such stock on the NASDAQ Stock Market, OTC Bulletin Board or other market on which the Company’s common stock is then traded or listed for quotation on the date of the Change of Control.

 

Options are not transferable and may be exercised solely by the participant during her or his lifetime of after her or his death by the person or persons entitled to such option under her or his will or laws of descent and distribution.

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 Tax Treatment of Incentive Stock Options

 

In general, no taxable income for federal income tax purposes will be recognized by an option holder upon receipt or exercise of an incentive stock option, and the Company will not then be entitled to any tax deduction for compensation expense. Assuming that the option holder does not dispose of the option shares before the later of (i) two years after the date of grant or (ii) one year after the exercise of the option, upon any such disposition, the option holder will recognize capital gain equal to the difference between the sale price on disposition and the exercise price.

 

If, however, the option holder disposes of option shares prior to the expiration of the required holding periods, such option holder will recognize ordinary income for federal income tax purposes in the year of disposition equal to the lesser of (i) the difference between the fair market value of the shares at the date of exercise and the exercise price, or (ii) the difference between the sale price upon disposition and the exercise price. Any additional gain on such disqualifying disposition will be treated as capital gain. In addition, if such a disqualifying disposition is made by the option holder, the Company will be entitled to a deduction equal to the amount of ordinary income recognized by the option holder provided that such amount constitutes an ordinary and reasonable expense of ours.

 

Tax Treatment of Nonqualified Stock Options

 

In general, no taxable income will be recognized by an option holder upon receipt of a nonqualified stock option, and the Company will not be entitled to a tax deduction for such grant.

 

Upon the exercise of a nonqualified stock option, the option holder will generally include in ordinary taxable income, for federal income tax purposes, the excess in value on the date of exercise of the shares acquired pursuant to the nonqualified stock option over the exercise price. Upon a subsequent sale of the shares, the option holder will derive short-term or long-term gain or loss, depending upon the option holder’s holding period for the shares, commencing upon the exercise of the option, and upon the subsequent appreciation or depreciation in the value of the shares.

 

The Company generally will be entitled to a corresponding tax deduction at the time of exercise of the stock option, equal to the amount of ordinary income recognized by the participant.

 

Withholding of Tax

 

The Company is permitted to deduct and withhold amounts required to satisfy the Company’s withholding tax liabilities with respect to the Company’s employees.

 

Stock Options & Restricted Stock Grants

 

As of December 31, 2007, the Company had granted stock options to purchase 2,065,000 shares of common stock under the 2006 Incentive Stock Plan to 11 employees, of which no restrictions have lapsed through December 31, 2007. Restricted stock was issued to 108 employees and 15 non-employee service providers, for a total of 1,011,150 shares of restricted stock, of which restrictions have lapsed as to 381,984 shares and represents net of actual forfeitures through December 31, 2007. Generally, these grants of restricted stock are subject to vesting in four equal annual installments from the date of grant or hire. Of these amounts and during fiscal year ended December 31, 2007, no shares of restricted common stock but stock options to purchase 313,000 shares of common stock were granted to our President and Chief Executive Officer, no shares of restricted common stock but stock options to purchase 350,000 shares of common stock were granted to our Chief Financial Officer, 35,000 shares of restricted common stock and stock options to purchase 406,000 shares of common stock were granted to our Chief Operations Officer, 35,000 shares of restricted common stock and stock options to purchase 281,000 shares of common stock were granted to our Executive Vice President of Sales & Marketing, and stock options to purchase 1,350,000 shares of common stock and 70,000 shares of restricted common stock were granted to all executive officers as a group and 64,848 shares of restricted common stock and stock options to purchase 501,000 shares of common stock were granted to all vice presidents who were not executive officers, as a group.

Restricted stock may be granted under this Stock Plan aside from, or in association with, any other award. A participant shall have no rights to an award of restricted stock unless and until the participant accepts the award, and if the Committee shall deem it desirable, makes payments to the Company of cash, or by check. After acceptance and the issuance of a stock certificate, the participant shall have all the rights of a stockholder with respect to the restricted stock.

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The Company shall issue in the participant’s name the amount of shares of Common Stock associated with the award of restricted stock; however, unless otherwise provided, the shares shall not be delivered to the participant until such shares are free of any restrictions specified by the Committee at the time of grant. Shares of restricted stock are forfeitable until the terms of the restricted stock grant have been satisfied, and shares of restricted stock may not be transferred until all restrictions have lapsed. Upon a Change of Control, the Committee may accelerate the vesting of outstanding restricted stock, in whole or in part, in its sole discretion.

  

Tax Treatment of Restricted Stock Grants

 

Except as discussed below, upon the grant of restricted stock, no income is realized by a participant, and the Company is not allowed a deduction at that time. When the restricted stock vests and is no longer subject to a substantial risk of forfeiture for income tax purposes, the participant realizes taxable ordinary income in an amount equal to the Fair Market Value at the time of vesting of the shares of Restricted Stock which have vested (less the purchase price therefor, if any), and, subject to the limitations of Section 162(m) of the Internal Revenue Code, the Company is entitled to a corresponding deduction at such time.

 

If a participant makes a timely election under Section 83(b) of the Internal Revenue Code, the participant recognizes taxable ordinary income in an amount equal to the Fair Market Value at the time of grant of the restricted stock (less the purchase price therefor, if any), and, subject to the limitations of Section 162(m) of the Internal Revenue Code, the Company is entitled to a corresponding deduction at such time.

 

Options and Restricted Stock To Be Granted to Certain Persons

 

The aggregate numbers of shares of Common Stock subject to options or restricted stock grants that can be issued in the future are subject to discretion of the Compensation Committee and are not determinable.

 

Equity Compensation Plan Information

 

The following table sets forth a summary of stock option activity for the twelve months ended December 31, 2007:

		Number of Shares Subject To Option
Outstanding at January 1, 2007			—
Granted during 2007			2,065,000
Forfeited/cancelled during 2007			—
Exercised during 2007			—
Outstanding at December 31, 2007			2,065,000
Exercisable at December 31, 2007			—

The following table sets forth a summary of restricted stock activity for the years ended December 31, 2007 and 2006:

		Number of Restricted Shares 2007			Number of Restricted Shares 2006
Outstanding and not vested beginning balance			354,622			—
Granted during the year			761,488			407,305
Forfeited/cancelled during the year			(114,745	)		(48,898	)
Released/vested during the year			(378,199	)		(3,785	)
Outstanding and not vested at December 31, 2007 and 2006			623,166			354,622

 

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		Number of securities to be issued upon exercise of outstanding options			Weighted-average exercise price of outstanding options			Number of securities remaining available for issuance under equity compensation plans (excluding securities reflected in column (a) and excluding restricted stock awards)
		(a)			(b)			(c)
Equity compensation plans approved by stock holders:
2006 Stock Incentive Plan and			2,065,000		$	5.31			923,850
2001 Stock Option Plan			—			—			4,000,000
Equity compensation plans not approved by stock holders			—			—			—

 

Vote Required and the Board of Director’s Recommendation

 

The Board of Directors recommends a vote “FOR” the approval of the Third Modification to the 2006 Incentive Stock Plan. The affirmative vote of a majority of the votes cast at the Annual Meeting with respect to this matter is required to approve the Third Modification to the 2006 Incentive Stock Plan. Broker non-votes will have no effect on the outcome of the vote. Abstentions will have the same effect as a vote against the proposal.

 

RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

(Proposal 3)

On December 19, 2006, the Board of Directors retained Burr, Pilger and Mayer LLP (“BPM”), as the Company’s independent registered public accounting firm. Prior to December 19, 2006, Marcum & Kliegman LLP acted as the Company’s independent registered public accounting firm.

Burr, Pilger and Mayer LLP has audited the Company’s financial statements for each of our two most recent fiscal years. The reports of Burr, Pilger and Mayer LLP, on the Company’s financial statements for the fiscal years ended December 31, 2007 and December 31, 2006 did not contain an adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles.

 

Through December 19, 2006, there were no disagreements with Marcum & Kliegman LLP on any matter of accounting principals or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of Marcum & Kliegman LLP would have caused Marcum & Kliegman LLP to make reference to the subject matter of the disagreement in connection with its reports.

 

The Audit Committee selected Burr, Pilger and Mayer LLP to continue in its capacity for the fiscal year ending December 31, 2008. Accordingly, the Company is asking the stockholders to ratify the engagement of Burr, Pilger and Mayer LLP as its independent registered public accounting firm.

Although the engagement of Burr, Pilger and Mayer LLP is not required to be submitted to a vote of the stockholders, the Board of Directors believes that it is appropriate as a matter of policy to request that the stockholders ratify the selection of its independent registered public accounting firm for the fiscal year ending December 31, 2008. If the stockholders fail to ratify the appointment, the Audit Committee of the Board of Directors will consider it as a direction to select other auditors for the subsequent year. Even if the selection is ratified, the Audit Committee, in its discretion, may direct the appointment of a different independent registered public accounting firm at any time during the year if the Audit Committee feels that such a change would be in the best interests of the Company and our stockholders.

A representative of Burr, Pilger and Mayer LLP is expected to be present at the annual meeting, with the opportunity to make a statement if the representative desires to do so, and is expected to be available to respond to appropriate questions.

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