Smart Online chief has full plate

He's new to job as fraud case unfolds

Smart Online has turned to a software industry veteran to pull the company from the edge of disaster.

Over the past two years, the Durham company has been downsized, investigated, suspended from trading and largely ignored by shareholders. Then Tuesday, it suffered the worst beating yet when its then-CEO, Michael Nouri, and his brother and office manager Eric Nouri were charged in an alleged securities fraud scheme. Both resigned.

The company's board of directors looked within its ranks and asked independent board member Dave Colburn to take over as interim CEO.

Can he save the company?

"Absolutely," Colburn said Wednesday in a phone interview.

Colburn said the company, despite troubles, has positioned itself well for growth the past two years. Revenue was up in the last four quarters, and the company's strength in designing online business software that it rents to small businesses is a fast-growing market.

Researchers at Yankee Group project that on-demand software will account for half of the software purchases made by small and medium businesses by 2008 and nearly a quarter of the total software market by 2010.

Given the fundamentals, Smart Online could well overcome, industry experts say. But Colburn must first convince customers and shareholders to stay.

That could be difficult, because Tuesday's nationally publicized arrests magnified the company's troubles, said Francisco Benzoni, who teaches business ethics at Duke University's Fuqua School of Business.

Michael and Eric Nouri are accused of bribing four New York brokers to push the company's stock on investors and drive up its price, according to the U.S. Attorney for the Southern District of New York. The Nouris have a 2:30 p.m.detention hearing in Durham today.

"This was not a slip-up but an [suspected] planned criminal scheme," Benzoni said. "The shareholders and employees have been through a lot. Management must have an open discussion about values and how to implement them from the top down. Then it has to be reflected in incentives, performance expectations, reviews and employees' perceptions."

Colburn, an upstate New York- native, is no stranger to business software or the kind of securities fraud case dogging Smart Online. He headed the global manufacturing division of computer-services giant Electronic Data Systems from 2004 to 2006. He led the multibillion-dollar operation through a critical period when the Texas company was roiled by its own securities fraud case that named the chairman, chief executive and chief financial officer.

Colburn left EDS last year when it began downsizing his division in a broader rebalancing that continues. He said he plans to apply lessons learned at EDS in steering Smart Online back on track.

Colburn spent the past two days talking with dozens of employees, customers and shareholders to reassure them of management's commitment to stay in business and continue expanding sales. Once the customer base is stabilized, management will explore expansion options, possibly as soon as the fourth quarter. That could include hiring sales staff if revenue continues to increase, said Tom Furr, Smart Online's chief strategy officer.

Revenue was $1.2 million in the second quarter, 28 percent higher than in the first quarter and a 44 percent rise from the year-earlier period.

Furr reaffirmed earlier statements to the Securities and Exchange Commission, saying the company has little debt and will be able to meet obligations and operational expenses through July.

"We're even developing a strategic approach to go back to the markets to support a major growth initiative," Colburn said.

Referring to customers and shareholders, he said: "We're very pleased with the response we've been getting. They believe in the strategy we have in place, our pos-ition in the market and our upside potential."

Smart Online shares lost three quarters of their value to close at 68 cents Tuesday before rebounding Wednesday and closing at $1.45.