Smart Balance Provides Frequently Asked Questions Document for Special Stockholders Meeting

PARAMUS, N.J., Jan. 25, 2011 /PRNewswire/ -- Smart Balance, Inc. (Nasdaq: SMBL) is providing a Frequently Asked Questions (FAQ) document to assist stockholders in advance of the special stockholders meeting on February 15, 2011. The FAQ (which is supplemental to the Company's Definitive Proxy Statement filed with the SEC on December 27, 2010) was filed with the Securities and Exchange Commission on January 24, 2011 and can be viewed in the Investor Center of the Smart Balance website, www.smartbalance.com.

The special stockholders meeting, to be held on February 15, 2011, is to approve a limited value-for-value exchange of certain options held by employees as well as a similar exchange of certain options held by executives. The Company believes that these Option Exchange Programs, designed to add no incremental cost to the income statement, align the interests of employees with that of stockholders. Under the proposed program, eligible employees and executives will have the ability to forfeit certain of their existing vested and unvested options in exchange for a fewer number of replacement options that carry new four-year vesting schedules. Details of the proxy proposals are provided in the proxy as well as the FAQ.    

The following updated question and answer document ("FAQ") regarding the proposed Option Exchange Program has been prepared by Smart Balance, Inc. ("the Company") to serve as a supplement to the information provided in the Company's Definitive Proxy Statement, filed with the Securities & Exchange Commission on December 27, 2010, and supersedes the FAQ filed by the Company with the Securities & Exchange Commission on January 14, 2011.  

The Company encourages stockholders to review this FAQ document in conjunction with the Proxy Statement and recommends that stockholders vote to approve both proposals of the Option Exchange Program.

Any additional questions regarding the Proxy Statement or how to vote should be directed to Morrow & Co., LLC (1-800-607-0088), who is serving as Proxy Solicitor for this event.

Q - What is the Option Exchange Program and why is it important to stockholders?

The Option Exchange Program is a value-for-value exchange of stock options, which involves the forfeiture by employees of certain existing time and performance-vesting options in exchange for a fewer number of time-vesting replacement options with an overall equivalent value.  Importantly, the exchange also requires employees to forfeit the existing vesting schedules and vested status, as applicable, of all options exchanged and receive replacement options with a new four-year vesting period.

The Company and the Smart Balance Board of Directors ("the Board") believe the Option Exchange Program better aligns stockholder and employee interests in building the long-term value of the Company, by providing employees an opportunity to participate in the potential equity growth that their actions are designed to create.  

As more fully described below, the exchange program is designed to add no additional compensation expense to the Company.  The Board believes the Option Exchange Program addresses stockholder concerns regarding program limits, vesting and compensation expense, while also enabling the Company to incentivize employees in a manner consistent with long-term value creation.

Q - Why are there two proposals instead of one for the Option Exchange Program in the Proxy; one for employees and one for executive officers and employee directors?

The Board recommends approval of both proposals.  By separating employees and executives, the board has given stockholders the opportunity to consider each separately. The Option Exchange Program for employees was designed to be consistent with the guidelines recommended by Institutional Shareholders Services (ISS), a recognized proxy advisory firm. The Option Exchange Program for executives and employees directors was also designed to be consistent with these guidelines but for the fact that the program would include executive officers and employee directors.  The Board believes the Option Exchange Programs are both well-designed (e.g., expense neutral, fewer outstanding options and new four-year vesting periods) and an important retention tool for talent.  Therefore, the Board strongly recommends approval of both Proxy proposals.  

Q - When will the program be implemented, what is the grant date and what will be the exercise price?

Assuming that the program is approved by stockholders on February 15, 2011, the Company can implement the program anytime within the twelve months following approval.  Once commenced, all eligible employees and executives will have 20 business days to decide whether to participate in the program.  The closing price of the stock on the 20th business day will become the new exercise price and start the new vesting schedule.  Assuming approval, the Company expects to implement the program as soon as practicable following the February 15, 2011 stockholders meeting.

Q – How many of the total outstanding options are included in the Option Exchange Program?

The program is designed to address options that were granted prior to 12/31/2008 and with strike prices significantly out of the money based on the current market price.  Of the 11.5 million total outstanding options as of 12/31/2010, only 6.6 million will be eligible for the exchange.

Q - What is the impact of the Option Exchange Program to the Company's compensation expense and, therefore, the Income Statement?  

Because the program is structured as a value for value exchange it will generate no incremental compensation expense and, therefore, will have no impact on cumulative net income over the total vesting period.    As shown in the table below, the impact of the exchange program on stock option expense (i.e., 123r non-cash expense) compared to the current program expense (without the exchange) nets out to a zero overall impact over the new four year vesting period, as a favorable impact in 2011 will be offset by modestly unfavorable impacts in the years following.  

As is customary, we will fix the exchange ratios for the programs at the commencement of the exchange period.  If there is a change in the stock price or other variables between the start and the end of the 20-day exchange period, it is possible that there may be an increase (or decrease) to the option-related expenses the Company will incur.  

Q - How many options are outstanding now and how many options will there be if the Option Exchange Program is implemented?

The Option Exchange Program will reduce the number of options currently outstanding.  If both proxy proposals are approved, the Company's 11.5 million outstanding options as of 12/31/10 will be reduced to 8.3 million options, using the $3.70 exercise price example in our Proxy Statement.  If only the employee exchange program is approved, there will be 10.3 million options outstanding.  If only the executive exchange program is approved, there will be 9.5 million options outstanding.  Generally speaking, there will be more options in the program if the new exercise price is higher than $3.70 and less if the price is lower.  The outstanding option numbers referred to above assume all eligible options in the approved program(s) are tendered.

Q - What will be the average exercise price for all outstanding options after the exchange takes place?

As of 12/27/2010, the average exercise price for all outstanding options was $8.90.  The exercise price for the replacement options will not be known until the end of the exchange period.  Using the $3.70 exercise price example in our Proxy Statement for the replacement options, the average exercise price for all outstanding options would be lowered to $6.13, assuming both programs are approved and all eligible options are tendered.

Q - What is the total impact of the Option Exchange Program to EPS?

The Option Exchange program impacts the calculation of EPS in a number of ways.  First, as discussed above, there is no incremental impact to compensation expense over the total new four-year vesting period, although there is benefit in 2011, followed by modestly higher expense in the remaining years of the vesting period.  Second, the Option Exchange Program will reduce the number of options outstanding, as well as the exercise price on the options exchanged.  While a lower number of options outstanding is generally a benefit to calculating diluted EPS, a lower exercise price would generally result in increasing the number of shares that get included in the diluted EPS calculation, depending upon the trading price of Smart Balance stock during a given period.  Therefore, given the volatile nature of the financial markets and the Company's inability to predict Smart Balance stock price in the future, there is no responsible way to estimate today what, if any, dilutive impact there might be to EPS going forward.

For additional perspective, there were 11.5 million options outstanding as of 12/31/2010 under the current program.  If both proposals are approved, using the $3.70 exercise price example in our Proxy Statement, there will be 8.3 million options outstanding after the program is implemented, assuming all eligible options are tendered.  Since the exercise price for replacement options will be less than the exercise price applicable to the currently outstanding options, the replacement options are more likely to  be "in the money" (i.e., the Company's share price exceeds the option exercise price).  The Company calculates dilution for financial reporting using the Treasury Stock Method.  Generally speaking, options that are in the money for a given quarter or period can be partially or wholly included in the calculation of diluted EPS, regardless of vesting.

Q - What are the options available to be granted now and what will they be after the program is implemented.

The Option Exchange Program does not change the number of options available to be granted.  As of 12/27/10, the Company had 1.9 million options available to be granted.  Options available to be granted can change over time due to employee terminations, new hires, promotions, and other events.  

Q - What is the new vesting schedule?

Under the Option Exchange Program, eligible employees and executives will forfeit all vesting credit accumulated on vested and unvested options tendered into the program and are required to start a new vesting period for the replacement options received.  The replacement options will vest 25% every year starting on the first anniversary of the grant date.  See table.

Q - Why was $3.70 used as the new exercise price in the Proxy?

The price of Smart Balance stock was $3.70, at the time the preliminary Proxy filing to the SEC was prepared.  Because the program is a value-for-value exchange, changes in the price of the stock and other factors will change the number of replacement options.  For example, at $3.70 the number of

replacement options is 3.5 million, including both eligible employees and eligible executives.  As an illustration, if the price at the time of the exchange is $4.46, the number of replacement options would total approximately 4 million.

Important Information

The Company has not initiated the Option Exchange Program and will not do so unless we submit the Option Exchange Program for approval by the Company's stockholders and we obtain approval from the Company's stockholders at our Special Meeting of Stockholders scheduled for February 15, 2011.  Even if stockholder approval is obtained, the Company may still decide to not implement the program or to delay its implementation.  The Company has filed with the Securities and Exchange Commission (SEC) a definitive proxy statement for a special meeting of stockholders to be held to vote on the Option Exchange Program.  Stockholders of the Company should read the proxy statement and other related materials when they become available because they will contain important information about the Option Exchange Program, including information relating to the Company's participants in the Company's solicitation of proxies and their interests in the Option Exchange Program.   In addition, if the program is commenced, the Company will file a Tender Offer Statement on Schedule TO with the SEC.  If you are eligible to participate in the program, you should read the Tender Offer Statement and other related materials when they become available because they will contain important information about the Option Exchange Program.  Company stockholders and option holders will be able to obtain these written materials and other documents filed by the Company with the SEC free of charge from the SEC's website at www.sec.gov.

Forward-looking Statements

Statements made in these questions and answers that are not historical facts, including statements about the Company's plans, strategies, beliefs and expectations, are forward-looking and should be evaluated as such.  These statements may include use of the words "expect", "anticipate", "plan", "intend", "project", "may", "believe" and similar expressions.  Forward-looking statements speak only as of the date they are made, and, except for the Company's ongoing obligations under the U.S. federal securities laws, the Company undertakes no obligation to publicly update any forward-looking statement, whether to reflect actual results of operations, changes in financial condition, changes in general economic or business conditions, changes in estimates, expectations or assumptions, or circumstances or events arising after the issuance of this press release.  Actual results may differ materially from such forward-looking statements for a number of reasons, including those risks and uncertainties set forth in the Company's filings with the SEC and the Company's ability to:

• maintain margins during periods of commodity cost fluctuations;
• introduce and expand distribution of new products;
• meet marketing and infrastructure needs;
• respond to changes in consumer demand;
• respond to adverse publicity affecting the Company or industry;
• comply with regulatory requirements;
• maintain existing relationships with and secure new customers;
• continue to rely on third party distributors, manufacturers and suppliers;
• sell our products in a competitive environment and with increasingly price sensitive consumers;
• continue to rely on the estimates or judgments related to our impairment analysis, which if changed could have a significant impact on recoverability of the Company's goodwill and could have a material impact on its consolidated financial statements; and
• improve future operations in connection with our realignment program.

About Smart Balance, Inc.

Smart Balance, Inc. (Nasdaq: SMBL) is committed to providing superior tasting heart healthier alternatives in every category it enters by avoiding trans fats naturally, balancing fats and/or reducing saturated fats, total fat and cholesterol, and/or by incorporating ingredients that consumers may be missing in their diets.  The company markets the Smart Balance® line of products, which include Smart Balance® Buttery Spreads, Milks, Butter Blend Sticks, Sour Creams, Peanut Butter, Microwave Popcorn, Cooking Oil, Mayonnaise, Non-Stick Cooking Spray and Cheese, and also markets natural food products under the Earth Balance® brand and healthier lifestyle products under the Bestlife™ brand. 

For more information about Smart Balance, Inc., Smart Balance® products and the Smart Balance™ Food Plan, please visit www.smartbalance.com.

SOURCE Smart Balance, Inc.

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