UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
___________
COMMISSION FILE NUMBER 0-28008
SMARTSERV ONLINE, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 13-3750708
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
One Station Place, Stamford, Connecticut 06902
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (203) 353-5950
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $0.01 Par Value NASDAQ Stock Market
Common Stock Purchase Warrants NASDAQ Stock Market
Indicate by check mark whether the issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the issuer was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [_]
Issuer's revenues for its most recent fiscal year. NONE
The aggregate market value of the voting stock (based on the closing price of
such stock on NASDAQ) held by non-affiliates of the issuer as of September 23,
1996, was approximately $12,614,000. All officers and directors of the issuer
have been deemed, solely for the purpose of the foregoing calculation, to be
"affiliates" of the issuer.
There were 3,695,000 shares of Common Stock outstanding at September 23, 1996.
Certain portions of the issuer's Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on October 31, 1996, are incorporated by
reference in Part III hereof.
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TABLE OF CONTENTS
PART I
Item Page
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1. Description of Business 3
2. Description of Property 10
3. Legal Proceedings 10
4. Submission of Matters to a Vote of Security Holders 10
PART II
5. Market for Common Equity and Related Stockholder Matters 11
6. Management's Discussion and Analysis or Plan of Operation 12
7. Financial Statements 16
8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 32
PART III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 32
10. Executive Compensation 32
11. Security Ownership of Certain Beneficial Owners and Management 32
12. Certain Relationships and Related Transactions 32
13. Exhibits and Reports on Form 8-K 33
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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THE COMPANY
SmartServ Online, Inc. ("SmartServ" or the "Company") was organized in 1993 and
provides online information and transactional services to subscribers through
generally available screen-based phones (i.e. "smart phones"), personal
computers ("PCs"), personal digital assistants ("PDAs") and interactive voice
response systems. The Company has exited the development stage with the
completion of its software architecture and product offering, and is in the
initial stages of implementing its marketing strategies.
SERVICES
The Company offers a range of services designed to meet the varied needs of
clients of strategic marketing partners ("Strategic Partners"), as well as
direct subscribers. These services include: business credit information,
investment newsletters, stock research reports, stock quotes, nationwide
business and residential directory services, business and financial news,
electronic bill payment, research and analysis reports, stock trading by
corporate insiders, online package tracking, electronic mail, and ordering
flowers and gifts. The Company provides such services pursuant to non-exclusive
agreements with the following providers of online information and transactional
services: Checkfree Corporation, Dun & Bradstreet, Inc., Federal Express
Corporation, Global Financial Traders, Ltd., Lottery USA.com., Metromail
Corporation (a subsidiary of RR Donnelley & Sons Co.), Reuters NewMedia Inc.,
S&P ComStock, Inc., Standard & Poor's (a division of McGraw-Hill, Inc.), The
Argus Group, Inc., The Nasdaq Stock Market, Inc., and The New York Stock
Exchange, Inc. In addition, the Company has entered into an exclusive agreement
with PC Gifts, Inc. in connection with the ordering of flowers and gifts.
Of the thirteen agreements with providers of online information and
transactional services, twelve agreements are terminable by either party upon 30
days to six months prior written notice before the end of the initial term or
any renewal term thereof. The remaining agreement is cancelable, pursuant to
written notice, by either party at any time. Of such thirteen agreements, two
contain restrictive provisions with regard to the approval of potential
subscribers of the Company; one agreement gives the provider the option to
restrict access by Company subscribers to certain products offered by the
provider; two agreements restrict the Company to distributing its services in
the United States or North America; and one agreement prohibits the Company from
storing the provided information for more than seven days after it is received
without the prior written consent of the provider. The Company is not dependent
on one or a few information providers as such redistribution agreements are
generally available on a non-exclusive basis.
The Company has invested in the development of proprietary software in an
attempt to make its services easy to use and visually appealing and to attempt
to take advantage of the different virtues and capabilities of screen-based
phones, PCs, PDAs and interactive voice response systems. The Company believes
that its software architecture and capabilities, which recognize multiple
devices, format the information for the particular device and present the
information in a user-friendly manner, will be attractive in the marketplace.
The Company intends to continue to invest in this area and believes its software
architecture and capabilities represent an important competitive advantage.
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Subscribers can connect to the Company's services using standard phone lines,
through an X.25 data communications network. The Company has contracted, on a
non-exclusive basis, with eunetcom, Inc., a provider of an X.25 data
communications network, so that subscribers in 153 domestic and 144
international locations in 39 countries can dial a local number to connect to
the Company's services. Additionally, the Company's services are available
through the Internet. The Company believes that its software architecture and
capabilities, which recognize multiple devices (e.g., screen-based phones, PCs,
PDAs and interactive voice response systems), format the information for the
particular device and present the information in a user-friendly manner, make
the Company's services "device independent". As new technologies emerge, the
Company anticipates that its services may be accessed through these newly
developed devices. The Company therefore believes that in the future it will not
be limited to providing services exclusively through screen-based phones, PCs,
PDAs and interactive voice response systems.
MARKETING STRATEGY
Management believes that the Company's primary source of revenues will
ultimately be derived from end users who purchase the Company's services through
Strategic Partners with mass distribution capabilities. The Company anticipates
that Strategic Partners will brand the Company's "bundled" services, acquired
from the Company's "information platform" (i.e., information bundled from
multiple information providers), with their own private label, promote the
packaged offering, and then distribute the Company's information package on
screen-based phones, PCs, PDAs and interactive voice response systems to their
clients. The Company has the ability to customize the information package to be
offered to each Strategic Partner, and in turn to their end users. The Company
is also in the initial stages of developing a direct subscriber base. Currently,
the Company has approximately two hundred paying subscribers.
The Company's plan of operation includes programs for marketing simultaneously
at two distinct levels. First, the Company is developing strategic relationships
with key partners that provide access to large numbers of potential subscribers
for its monthly services. These partners include regional telephone operating
companies, long distance carriers, telephone equipment manufacturers, and others
who distribute screen telephone equipment, market local screen telephone
services or otherwise benefit from the increased acceptance of these devices in
the marketplace. To these partners, the Company's services are perceived as a
means of increasing interest in and sales of screen telephones, and there is
thus a strong incentive to promote the Company's services.
The Company is also working with businesses which desire to provide new
services, such as those provided by the Company, to an existing base of clients.
Examples include brokerage firms and disseminators of financial information,
whose clients can benefit from the efficiency, convenience and timeliness of the
services provided by the Company. The Company can co-brand with its Strategic
Partner or offer its services solely under its Strategic Partner's name.
Secondly, the Company will be working with the Strategic Partners to assure
consumer awareness of the Company's services. Programs under development with
existing Strategic Partners include direct marketing, cable television
commercials, mailer inserts and in-store promotions.
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The achievement of the Company's goal of establishing itself as a leading
provider of online information and transactional services to subscribers through
screen-based phones, PCs, PDAs and interactive voice response systems is
contingent on management's ability to penetrate the following four markets
targeted by the Company:
* COMPANIES THAT WILL PRIVATE LABEL THE COMPANY'S SERVICES
The Company has entered into agreements, and intends to
continue to do so, with various categories of Strategic
Partners. It is anticipated that a private online information
package will be offered to the Strategic Partner's clients,
and that this package will include proprietary Strategic
Partner information in combination with other information
provided by the Company. It is anticipated that the Strategic
Partner would then brand the combined service with a "private
label." As a result, the Strategic Partner's client would
receive a branded information package that is not available
elsewhere.
* THE TELECOMMUNICATIONS INDUSTRY
The Company believes that it can provide value added services
to the telecommunications market. The Regional Bell Operating
Companies have informed the Company that they are interested
in promoting their CLASS services, examples of which include
enhanced caller ID and enhanced call waiting. Although such
services can generate additional revenue for the telephone
companies, they are presently difficult to use without a
screen-based phone. To promote wider acceptance of such CLASS
services, the Company believes that many of these telephone
companies will be offering screen-based phones as a means to
make these services more user-friendly. Wider distribution of
screen-based phones provides the Company with a broader
potential subscriber base.
* INFORMATION COMPANIES
Companies that can only deliver their information on PCs are
currently in discussions with the Company to offer their
information on relatively inexpensive and user-friendly
devices, such as screen-based phones, PDAs and interactive
voice response systems. It is anticipated that such
information will be provided to the end user, who is a client
of the information company, through the Company. Certain
information will reside on the Company's hardware, in other
instances, the Company's systems are linked to the systems of
its information providers and/or Strategic Partners.
* DIRECT SUBSCRIBERS
The Company intends to offer its services directly to
consumers, in particular to those consumers interested in
financial market information. The Company believes that its
services will be attractive to consumers because it is
anticipated that the information will be presented in a
user-friendly manner on relatively inexpensive devices. The
Company intends to market these services under the name
"SmartServ Online."
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STRATEGIC PARTNER RELATIONSHIPS
Strategic Partners and the related marketing arrangements are as follows:
GLOBAL FINANCIAL TRADERS, LTD which through SmartServ is offering an
information service entitled Global Online. Global Online provides
subscribers with Global's securities industry newsletter, as well as
SmartServ's platform of value-added information. SmartServ has
approximately 180 paying subscribers from this relationship.
DUN & BRADSTREET, INC. began testing a cooperative program with Mail
Boxes ETC, Inc. in September 1996 that uses the Company's software to
access D&B reports. If the test is successful, the services will be
expanded to 2,500 Mail Boxes locations nationwide.
SCHRODER WERTHEIM & CO. announced the availability the Company's
services to its correspondent relationships in late August 1996. The
companies began the implementation of their joint marketing program
with the introduction of SmartServ's services by Rickel & Associates,
Inc., the underwriter for the Company's Initial Public Offering. The
companies anticipate the launch to an additional 10 to 15
correspondent firms during the fourth quarter of 1996.
BEAR STEARNS & CO., INC. introduced the Company's services to its
correspondent relationships in May 1996. Bear Stearns continues to
evaluate and refine its product offering which is being readied for a
fourth quarter 1996 marketing campaign to its correspondent firms.
HERZOG HEINE GEDULD, INC. has agreed to offer the Company's services
to its customers and those of its correspondent relationships. The
introduction of these services is to commence with the correspondent
firm, Addison Financial Services, Inc., during the fourth quarter of
1996.
NORTHERN TELECOM, INC. has begun direct marketing campaigns for the
Company's services to the telecommunications industry through joint
sales promotions which include its PowerTouch 350 telephones, as well
as through catalog advertisements and national retail outlets.
Commencing in September 1996, Northern Telecom and the Company
embarked on a joint advertising campaign focusing on the investment
community via print media such as the Wall Street Journal and Investor
Business Daily.
CIDCO INCORPORATED has entered into an agreement with the Company
whereby CIDCO will market screen-based phones with access to
SmartServ's online information services and assist in the development
of other Analog Display Services Interface based applications.
SPYGLASS, INC. was to promote the Company's services as the first
Internet access capability with a device other than the PC. Advanced
Spyglass technologies are currently under review by the Company.
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY conducted a Fall 1995 trial
offering and planned to launch a commercial offering beginning in the
second quarter of 1996.
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The companies have executed a contract; however, SNET has notified the
Company that it has indefinitely postponed the commercial rollout of
these services.
The Company continues to have discussions about potential marketing
opportunities with AT&T Corp., BellSouth Telecommunications, Inc., Ameritech,
Inc., Sprint Corp., Time Warner, Inc. and Southwestern Bell Telephone Company;
however, there can be no assurance that the Company will enter into agreements
with any such companies.
MARKETING VEHICLES
DIRECT MARKETING -- The Company intends to implement a limited, targeted, direct
marketing program aimed at the small office/home office, business professional,
private investor and retail consumer markets. It is anticipated that these
programs will include advertising in financial related magazines and subscriber
referral programs. The Company also plans to promote SmartServ Online on the
Internet through its Internet home page from which the Company's communications
software can be downloaded.
STRATEGIC PARTNER MARKETING -- The Company intends to work with potential
Strategic Partners to enhance the efficiency of its marketing and distribution
efforts. Each potential Strategic Partner will approach the market differently
depending on its business strategy, consumer mix and competitive situation. It
is expected that a potential Strategic Partner will initially test a variety of
marketing and selling options to determine the most cost effective technique to
obtain the maximum number of customers in the least amount of time. The Company
intends to offer technical and marketing services in support of a potential
Strategic Partner's marketing efforts. For example, it is expected that the
specific product offering, product collateral and promotional materials will be
coordinated with a potential Strategic Partner to reflect the overall
positioning of the product to the consumer.
The Company must demonstrate, with each actual and potential Strategic Partner,
that it has the technological infrastructure and ability to distribute online
information to their customers. This is typically done via a testing program
such as has been completed with each of the Company's existing relationships.
The Company is in the initial stages of implementing its marketing strategies.
COMPETITION
The market for online information and transactional services is highly
competitive and subject to rapid innovation and technological change, shifting
consumer preferences and frequent new service introductions. In addition to
competing with other companies that provide screen-based phones in combination
with online services including, without limitation, Philips Home Services, Inc.,
Online Resources and Communications Corporation, and U.S. Order Inc., the
Company also faces increasing competition from other emerging services delivered
through PCs including, without limitation, developing transactional services
offered by Checkfree Corporation, Microsoft Corp., Intuit Inc., Electronic Data
Systems Corp. and other software and online companies. The Company expects
competition to increase from existing competitors and from new competitors,
possibly including telecommunications companies. Established online information
services including, without limitation, America Online, Inc., CompuServe Inc.
and Prodigy Services Co. offer competing services delivered through home
computers. Most of the Company's competitors and potential competitors have
substantially greater financial, marketing and technical resources than the
Company. The Company believes that potential new competitors, including large
multimedia and information system companies,
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are increasing their focus on transaction processing. Increased competition in
the market for the Company's services could materially and adversely affect the
Company's results of operations through price reductions and loss of market
share.
The information content provided through the Company's software and
communication architecture is generally purchased through non-exclusive
distribution agreements. While the Company is not dependent on any one content
provider, existing and potential competitors may enter into agreements with
these and other such providers and thereby acquire the ability to deliver online
information and transactional services substantially similar to those provided
by the Company.
The principal competitive factors in the online services industry include
content, product features and quality, ease of use, access to distribution
channels, brand recognition, reliability and price. Management believes the
strategy of establishing alliances with potential Strategic Partners, the market
focus and what is believed to be a unique software architecture should enable
the Company to compete effectively.
SOFTWARE
The Company has developed proprietary software which it believes makes its
services easy to use and visually appealing, and which utilize the capabilities
of screen-based phones, PCs, PDAs and interactive voice response systems.
The Company has completed development of front-end communications software
(i.e., a user interface) for screen-based phones, PCs and PDAs. Such display
software creates a user-friendly method allowing the user to communicate with
the Company's information data base. The Company intends to continue to dedicate
its internal resources to developing communication tools to foster interaction
and improved navigation and presentation techniques to make it easier for
subscribers to find and use relevant services.
During the fiscal years ended June 30, 1996 and 1995, the Company incurred
$1,141,441 and $887,303, respectively, for research and development activities
of which $103,500 and $210,000, respectively, was funded by Strategic Partners.
It is estimated that the Company will require approximately $1,035,000 during
the fiscal year ending June 30, 1997 to support the additional programming and
supervisory personnel necessary to integrate the Company's software with the
information systems of each of its Strategic Partners.
PROPRIETARY RIGHTS
The Company has designed and developed its own information platform,
"SmartServ", based on Sun Microsystems, Inc. computers and Oracle Corp.'s
version 7.X relational database manager, to support a variety of end user
devices. The Company relies upon a combination of contract provisions and
copyrights, trade secret laws, and a service mark and trademark to attempt to
protect its proprietary rights. The Company licenses the use of its services to
Strategic Partners and direct subscribers under agreements that contain terms
and conditions prohibiting the unauthorized reproduction of the Company's
software and services. Although the Company intends to protect its rights
vigorously, there can be no assurance that any of the foregoing measures will be
successful.
The Company seeks to protect the source code of its software as a trade secret
and as an unpublished copyrighted work. The Company has obtained an allowance of
its U.S. trademark application for
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the mark "SmartServ" for the computer software used with its platform services,
and expects a U.S. trademark registration for the mark to be granted in the near
future. This registration will have an initial term of 10 years and is renewable
indefinitely for successive 10-year terms upon filing proof of continued use of
the mark. The Company has also filed an intent-to-use application to register
"SmartServ" as a service mark for its platform services and as a trademark for
related computer hardware. Additionally, the Company is giving consideration to
the submission of patent applications for various aspects of its information
delivery systems.
The Company believes that its software, services, service mark and trademark and
other proprietary rights do not infringe on the proprietary rights of third
parties. From time to time, however, the Company may receive communications from
third parties asserting that features or contents of certain of its services may
infringe copyrights or other rights of such parties. To date, the Company has
received one such communication, dated May 23, 1995, from Interactive Gift, but
believes that the assertion contained therein is without merit. Since the
receipt of such letter, the Company has not received further correspondence from
Interactive Gift. There can be no assurance, however, that the infringement
claim asserted in such letter will not ultimately require the Company to enter
into a royalty arrangement or result in litigation. Further, there can be no
assurance that other third parties will not assert infringement claims against
the Company with respect to current or future features or contents of services
or that any such assertion may not require the Company to enter into royalty
arrangements or result in litigation.
GOVERNMENT REGULATION
The Company is not currently subject to direct regulation other than federal and
state regulation generally applicable to businesses. However, changes in the
regulatory environment relating to the telecommunications and media industry
could have an effect on the Company's business, including regulatory changes
which directly or indirectly affect telecommunication costs or increase the
likelihood or scope of competition from regional telephone companies.
Additionally, legislative proposals from international, federal and state
governmental bodies in the areas of content regulation, intellectual property
and privacy rights, as well as federal and state tax issues could impose
additional regulations and obligations upon all online service providers. The
Company cannot predict the likelihood that any such legislation will pass, nor
the financial impact, if any, the resulting regulation or taxation may have.
Moreover, the applicability to online service providers of existing laws
governing issues such as intellectual property ownership, libel and personal
privacy is uncertain. Recent events relating to the use of online services for
illegal activities have increased public focus and could lead to increased
pressure on legislatures to impose regulations on online service providers such
as the Company. The law relating to the liability of online service companies
for information carried on or disseminated through their systems is currently
unsettled and has been the subject of several recent private lawsuits. If
similar actions were to be initiated against the Company, costs incurred as a
result of such actions could have a material adverse effect on the Company's
business.
EMPLOYEES
The Company employs 18 people, all of whom are full-time employees. It is
anticipated that a minimum of 4 to 6 people will be added during the fiscal year
ending June 30, 1997, in response to the computer programming requirements of
Strategic Partners' product offerings and for customer support. None of the
Company's employees are covered by a collective bargaining agreement and the
Company believes that its relationship with its employees is satisfactory.
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ITEM 2. DESCRIPTION OF PROPERTY
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The Company's operations are located in a leased facility in Stamford,
Connecticut. The Company entered into a lease modification agreement on February
6, 1996, whereby the size of such facilities was increased 2,135 square feet to
6,300 square feet. The term of the lease was also extended to August 2002.
ITEM 3. LEGAL PROCEEDINGS
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There are no pending material legal proceedings to which the Company or any of
its properties is a defendant.
In August 1996, the Company commenced an action in the Supreme Court of the
State of New York, New York County, against Strategica Inc. and its affiliated
entities ("Strategica"). The complaint arose out of the proposal entered into in
August 1995 by the Company and Strategica (the "Proposal") whereby Strategica
agreed to act as the Company's agent for the arrangement of a secured revolving
credit facility in the amount of $2,500,000. Additionally, the Company agreed to
retain Strategica as a financial consultant to the Company. The Proposal was
subject to the delivery and execution of definitive documentation. In January
1996, Strategica forwarded to the Company a proposed commitment letter which was
unacceptable to the Company. The complaint alleges breach of the Proposal,
breach of the implied covenants of good faith and fair dealing, and fraud. The
complaint seeks damages of not less than $2,500,000, punitive damages and
rescission of the Proposal and of the issuance by the Company of 116,550 shares
of its Common Stock to Strategica thereunder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
SmartServ's $.01 par value common stock ("Common Stock") commenced trading on
March 21, 1996 on the over-the-counter market and is quoted on the National
Association of Securities Dealers' Automated Quotation System ("NASDAQ") under
the symbol SSOL. The Company's Redeemable Common Stock Purchase Warrants
("Warrants") also commenced trading on March 21, 1996 on the over-the-counter
market and are quoted on the NASDAQ under the symbol SSOLW.
The following table sets forth the high and low prices for the Common Stock and
Warrants during the periods indicated as reported by NASDAQ.
COMMON STOCK WARRANTS
HIGH LOW HIGH LOW
Year Ended June 30, 1996
Third Quarter 7 1/2 6 4 1/8 3
Fourth Quarter 8 1/4 5 1/2 4 1/2 2 3/4
As of September 5, 1996, the Company had 3,695,000 shares of Common Stock
outstanding held by 39 record holders. The Company estimates that the Common
Stock is held by approximately 1,700 beneficial holders. As of such date, the
Company had 2,262,500 Warrants outstanding held by 27 record holders.
The Company has never paid a cash dividend on its Common Stock. It is the
present policy of the Company to retain earnings, if any, to finance the
development and growth of its business. Accordingly, the Company does not
anticipate that cash dividends will be paid until the earnings and financial
condition of the Company warrant such dividends, and there can be no assurance
that the Company can achieve such earnings.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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PLAN OF OPERATION
The Company provides online information and transactional services through
screen-based telephones, personal computers, personal digital assistants and
interactive voice response systems to clients of potential Strategic Partners,
as well as to prospective direct subscribers. The Company has recently emerged
from the development stage with the completion of the SmartServ information
platform and communications software. The Company's product offering is
available to meet the needs of subscribers and the Company is in the initial
stages of implementing its marketing strategies.
On March 21, 1996, the Company completed an Initial Public Offering of 1,695,000
shares of common stock and 1,725,000 common stock purchase warrants which
provided the Company with approximately $7,059,000, net of the costs of issuance
of approximately $1,589,000. The proceeds from this Offering are expected to be
sufficient to allow the Company to implement its marketing plan, and to satisfy
its cash requirements through June 1997.
The Company's plan of operation includes programs for marketing simultaneously
at two separate levels. At the first level, the Company is developing strategic
relationships with key partners that provide access to large numbers of
potential subscribers for its monthly services. These partners include regional
telephone operating companies, long distance carriers, telephone equipment
manufacturers and others who distribute screen telephone equipment, market local
screen telephone services or otherwise benefit from the increased acceptance of
these devices. To these partners, the Company's services are perceived as a
means of increasing interest in and sales of screen telephones, and there is
thus a strong incentive to promote the Company's services.
The Company is also working with businesses which desire to provide new
services, such as those provided by the Company, to an existing base of clients.
Examples include brokerage firms, such as Bear Stearns & Co., Inc. and Schroeder
Wertheim & Co., and other disseminators of financial information, whose clients
can benefit from the efficiency, convenience and timeliness of the services
provided by the Company. The Company will co-brand with its Strategic Partner or
offer its services under its Strategic Partner's name. By providing this
branding flexibility, the Company has been able to expand the number of
businesses interested in forming relationships with it, and has the ability to
market its services under far more recognizable brand names than its own.
At the second level, the Company will be working with Strategic Partners to
assure awareness of the Company's services by consumers. Programs under
development with existing Strategic Partners, such as Northern Telecom and CIDCO
Incorporated, include direct marketing, package inserts, and in-store
promotions.
Management believes that most of the Company's revenues will ultimately be
derived from end users who purchase the Company's services through Strategic
Partners with such mass distribution capabilities. The Company anticipates that
Strategic Partners will brand the Company's information services, acquired from
the Company's "information platform", with their own private label, promote the
packaged offering and then distribute the Company's information package on
screen-based phones, PCs, PDAs, and interactive voice response systems to their
clients for use. The Company has the ability to customize the information
package to be offered to each Strategic Partner, and in turn to their end users.
The Company
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is also in the initial stages of developing a direct subscriber base. It is
anticipated that the monthly base charge will vary, between $7.00 and $29.95 per
month, depending upon the product offering and specific market segment.
Management anticipates that staffing requirements associated with the
implementation of its plan of operation will result in the addition of a minimum
of 4 to 6 personnel during the fiscal year ending June 30, 1997. Such personnel
will be added to assist with the programming requirements of Strategic Partners'
product offerings and for customer support.
RESULTS OF OPERATIONS
Since the Company was in the process of completing its information platform and
communications software, the Company did not generate any significant revenues
from operations during the year ended June 30, 1996. The SmartServ product
offering is now available to meet the needs of subscribers and the Company is in
the initial stages of implementing its marketing strategies; however, there can
be no assurance that the Company's product offering will be accepted in the
marketplace.
FISCAL YEAR ENDED JUNE 30, 1996 VERSUS FISCAL YEAR ENDED JUNE 30, 1995
During the year ended June 30, 1996, the Company incurred product development
expenses of $1,037,941 vs. $677,303 for the year ended June 30, 1995. The bulk
of such costs ($755,218) were incurred in the second half of the Company's 1996
fiscal year as a result of the Company's enhanced efforts to complete the
development of its information platform. These efforts were funded by the
Company's Initial Public Offering of common stock, and the borrowing of
$1,200,000 of short-term debt. Included in, and offset against, product
development costs for the years ended June 30, 1996 and 1995 were $103,500 and
$210,000, respectively, which were received from the Company's Strategic
Partners to assist in the development of computer software applications for use
by both the Company and its Strategic Partners. During the year ended June 30,
1995, the Company wrote-off approximately $182,000 of previously capitalized
software development costs resulting from the delayed commercialization and
availability of its products and services.
During the year ended June 30, 1996, the Company incurred selling, general and
administrative expense of $1,220,340 vs. $769,821 during the year ended June 30,
1995. The increase resulted primarily from the increase in fees ($160,000) paid
to financial and marketing consultants, a non-cash charge ($110,000) relating to
the grant of employee stock options, an increase in professional fees ($50,000),
the hiring of a public relations firm in connection with the Initial Public
Offering ($40,000), and the hiring of financial and marketing personnel during
the fourth quarter ($32,000).
During the year ended June 30, 1996, the Company incurred interest costs of
$242,000 vs. $106,595 during the fiscal year ended June 30, 1995. This increase
was a direct result of the issuance of $1,200,000 in short-term notes during the
year and the increased length of time during which long-term debt was
outstanding during the year. Debt origination costs increased from $300,000 in
the fiscal year ended June 30, 1995 to $517,533 in fiscal year ended June 30,
1996. During 1995, the Company issued Common Stock valued at $300,000 to
InterBank Corporation as additional consideration for the issuance of the
$312,500 of Senior Notes. During 1996, the Company incurred underwriting
($180,000) and legal ($45,000) fees in connection with the issuance of the
$1,200,000 of short-term notes and the related common stock purchase warrants.
In addition, the Company wrote-off deferred financing costs of $260,000 in
connection with the Company's inability to obtain an acceptable loan commitment
from
13
<PAGE>
Stategica Inc., a financial intermediary which had received 116,550 shares of
Common Stock in exchange for a commitment to provide the Company with a
$2,500,000 line of credit facility.
FISCAL YEAR ENDED JUNE 30, 1995 VERSUS FISCAL YEAR ENDED JUNE 30, 1994
During the fiscal year ended June 30, 1994, the Company incurred general and
administrative costs primarily for salaries and facilities to commence
operations in the amount of $503,000. Interest expense of $33,300 was incurred
in respect of total indebtedness of $600,000. Such indebtedness was outstanding
for five months during the year. The Company capitalized $186,700 of direct and
allocated overhead costs associated with the development of software products
which were to be amortized over a five year period.
During the fiscal year ended June 30, 1995, the Company incurred general and
administrative costs of $770,000; however, on a monthly basis, general and
administrative costs remained consistent with the previous fiscal year. Interest
expense increased by $73,300 to $106,600 due to an increase in the total
interest bearing debt outstanding to $1,537,500 at June 30, 1995, which was
outstanding for one-half of the fiscal year. The Company incurred costs of
$300,000 related to the issuance of 177,500 shares of Common Stock associated
with the origination of Senior Notes. Additionally, the Company expensed all net
capitalized software development costs ($182,000) related to the delayed
commercialization of the Company's products and services and incurred additional
development costs of $495,300 for an aggregate of $677,300.
CAPITAL RESOURCES AND LIQUIDITY
Since inception of the Company on August 20, 1993 through March 21, 1996, the
date of the Initial Public Offering, the Company had funded its operations
through a combination of private debt and equity financings totaling $2,900,000
and $300,000, respectively.
The Initial Public Offering of 1,695,000 common shares and 1,725,000 common
stock purchase warrants on March 21,1996, provided the Company with gross
proceeds of $8,647,500. Direct costs associated with the Offering were
approximately $1,589,000. In conjunction with the Offering, the Company
converted one-half of the convertible subordinated debt and accrued interest
thereon into 427,735 shares of Common Stock at a conversion rate of $1.65 per
share. The remainder of the debt and accrued interest thereon, totaling
$705,763, was repaid from the proceeds of the Offering. Additionally, the
Company retired senior notes amounting to $462,502, as well as the short-term
notes amounting to $1,200,000.
The Company estimates that it has sufficient cash resources to fund its
operations for the next twelve months. The Company anticipates that
approximately $1,035,000 will be used to support costs for additional
programming and supervisory personnel necessary to integrate the Company's
software with the information systems of its Strategic Partners, and for
marketing support personnel necessary to fulfill subscriber needs and inquiries.
It is also anticipated that hardware and software purchases of approximately
$50,000 will be required during the year ending June 30, 1997. The Company
expects to augment its capital formation through the realization of revenues
from the sale of its information and transactional services; however, there can
be no assurance that the Company's product offering will be accepted in the
marketplace.
The Company may also have access to additional funding because as part of the
Offering, the Company issued 1,725,000 common stock purchase warrants entitling
the holders thereof to purchase one share of
14
<PAGE>
common stock at an exercise price of $4.00 per share, subject to certain
adjustments, at any time commencing on March 21, 1997 through March 20, 2001.
The warrants are subject to redemption by the Company at $.10 per warrant
commencing March 21, 1997, on thirty days written notice, provided the average
closing bid quotation for the common stock as reported on The NASDAQ Stock
Market or other national securities exchange, if traded thereon, has been at
least $7.50 for a period of 20 consecutive days ending on the third day prior to
the date on which the Company gives notice of redemption. Exercise of these
warrants by the holders or redemption by the Company could provide additional
capital of approximately $6,600,000; however, such exercise or redemption can
not be assured.
Strategica, Inc., a financial intermediary, put forth a proposal, and agreed to
act as an agent in connection with the arrangement of a $2,500,000 credit
facility. The August 1995 Proposal, was subject to execution and delivery of
definitive documentation; however, in January 1996, the Company received a draft
commitment letter which contained terms and conditions inconsistent with those
enumerated in the August 1995 Proposal, and was thus deemed unacceptable to the
Company. Negotiations between the Company and the Strategica to resolve this
matter in a mutually satisfactory manner have been unsuccessful and are
currently unlikely to continue. The Company has written-off all costs,
previously deferred, in connection with the origination of the August 1995
Proposal. In August 1996, the Company brought an action against Strategica and
its related entities for breach of the August 1995 Proposal which is more fully
explained in Item 3, Legal Proceedings.
The Company intends to seek additional sources of capital and liquidity through
collaborative agreements, through the redemption of the outstanding common stock
purchase warrants or through public or private financing; however, there can be
no assurance that additional financing will be available on acceptable terms or
at all.
Management believes that upon full implementation of its business plan,
sufficient revenues will be generated to meet operating requirements. Management
further believes that the Company's plan of operations will, if successful,
generate adequate cash flow from operations to enable the Company to offer its
proposed services on an economically sound basis; however, no assurance can be
given that such goals will be attained.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
- ----------------------------------------------
From time to time, information provided by the Company, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-KSB) may contain statements which
are not historical facts, so-called "forward looking statements". These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. The Company's actual
future results may differ significantly from those stated in any forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties, including, but not limited to, product demand, pricing, market
acceptance, litigation, intellectual property rights, risks in product and
technology development, product competition, limited number of customers, key
personnel, and other risk factors detailed in this Annual Report on Form 10-KSB
and in the Company's other Securities and Exchange Commission filings.
15
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
- ------
PAGE
Report of Independent Auditors 17
Balance Sheets at June 30, 1996 and 1995 18
Statements of Operations for the years ended June 30, 1996
and 1995 and for the period from August 20, 1993 (inception)
to June 30, 1994, and for the period from August 20, 1993
(inception) to June 30, 1996 20
Statement of Stockholders' Equity (Deficiency) for the
period from August 20, 1993 (inception) to June 30, 1996 21
Statements of Cash Flow for the years ended June 30, 1996
and 1995 and for the period from August 20, 1993 (inception)
to June 30, 1994, and for the period from August 20, 1993
(inception) to June 30, 1996 23
Notes to Financial Statements 24
16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
SmartServ Online, Inc.
We have audited the accompanying balance sheets of SmartServ Online, Inc.
(formerly, Smart Phone Communications (Delaware), Inc.), a development stage
enterprise, as of June 30, 1996 and 1995, and the related statements of
operations, stockholders' equity (deficiency), and cash flows for the period
from August 20, 1993 (inception) to June 30, 1994, the years ended June 30, 1995
and 1996, and for the period from August 20, 1993 (inception) to June 30, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SmartServ Online, Inc. at June
30, 1996 and 1995, and the results of its operations and its cash flows for the
period from August 20, 1993 (inception) to June 30, 1994, the years ended June
30, 1995 and 1996, and for the period from August 20, 1993 (inception) to June
30, 1996, in conformity with generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
Stamford, Connecticut
September 10, 1996
17
<PAGE>
SMARTSERV ONLINE, INC.
(A Development Stage Enterprise)
BALANCE SHEETS
JUNE 30
-----------------------------
1996 1995
-----------------------------
Assets
Current assets
Cash $ 3,460,850 $ --
Accounts receivable 57,990 --
Due from officers -- 4,053
Inventory -- 10,440
Prepaid expenses 68,310 8,669
----------- -----------
Total current assets 3,587,150 23,162
----------- -----------
Property and equipment
Data processing equipment 280,814 100,292
Office furniture and equipment 37,051 26,600
Display equipment 9,635 10,495
----------- -----------
327,500 137,387
Accumulated depreciation (68,601) (28,176)
----------- -----------
258,899 109,211
----------- -----------
Other assets
Deferred charges 63,000 --
Security deposit 81,218 81,218
----------- -----------
144,218 81,218
----------- -----------
Total Assets $ 3,990,267 $ 213,591
=========== ===========
See accompanying notes.
18
<PAGE>
JUNE 30
-----------------------------
1996 1995
-----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable $ 406,498 $ 282,481
Accrued liabilities 76,353 22,234
Accrued interest -- 106,595
Payroll taxes payable 14,901 88,183
Salaries payable 44,654 28,192
Notes payable -- 462,502
Loans to officers -- 42,550
----------- -----------
Total current liabilities 542,406 1,032,737
----------- -----------
Long-term debt -- 1,225,000
Stockholders' equity (deficiency)
Common stock - $.01 par value
Authorized - 15,000,000 shares
Issued and outstanding - 3,695,000 shares at
June 30, 1996 and 1,775,000 shares
at June 30, 1995 36,950 17,750
Additional paid-in capital 8,758,299 319,205
Deficit accumulated during the development stage (5,347,388) (2,381,101)
----------- -----------
Total stockholders' equity (deficiency) 3,447,861 (2,044,146)
----------- -----------
Total Liabilities and Stockholders' Equity $ 3,990,267 $ 213,591
=========== ===========
19
<PAGE>
SMARTSERV ONLINE, INC.
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
August 20, 1993 August 20, 1993
YEAR ENDED JUNE 30 (inception) (inception)
------------------------- to June 30, to June 30,
1996 1995 1994 1996
--------------------------------------------------------
<S> <C> <C> <C> <C>
Product development expenses $(1,037,941) $ (677,303) $ -- $(1,715,244)
Selling, general and administrative
expenses (1,220,340) (769,821) (503,032) (2,493,193)
----------- ----------- ----------- -----------
Loss from operations (2,258,281) (1,447,124) (503,032) (4,208,437)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 51,527 7,536 1,459 60,522
Interest expense (242,000) (106,595) (33,345) (381,940)
Debt origination costs (517,533) (300,000) -- (817,533)
----------- ----------- ----------- -----------
(708,006) (399,059) (31,886) (1,138,951)
----------- ----------- ----------- -----------
Net loss $(2,966,287) $(1,846,183) $ (534,918) $(5,347,388)
=========== =========== =========== ===========
Net loss per share (Note 1) $ (1.26) $ (1.12) $ (0.54)
=========== =========== ===========
Weighted average shares outstanding
(Note 1) 2,355,000 1,643,000 982,000
=========== =========== ===========
</TABLE>
See accompanying notes.
20
<PAGE>
SMARTSERV ONLINE, INC.
(A Development Stage Enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD AUGUST 20, 1993 (INCEPTION) TO JUNE 30, 1996
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING
----------------------------- PAID-IN DEVELOPMENT
SHARES PAR VALUE CAPITAL STAGE
----------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of common stock to officers on
August 20, 1993 875,000 $ 9
Contribution of computer equipment by officer on
August 20, 1993 $ 3,609*
Issuance of shares to investors in conjunction with
issuance of $600,000, 8.5% notes on February 1,
1994 84,000 840 136,713
Issuance of shares to investors in exchange for the
$600,000, 8.5% notes, $600,000 in cash, and 36
warrants on June 30, 1994 797,000 7,970 1,087,823
Net loss $ (534,918)
----------------------------------------------------------
Balances at June 30, 1994 1,756,000 8,819 1,228,145 (534,918)
Conversion of equity investment by an investor to
debt (12% notes due December 31, 1999) on
January 1, 1995 (881,000) (8,810) (1,191,190)
Cancellation of Class A (voting) common stock on
March 15, 1995 (875,000) (9)
Issuance of common stock in exchange for Class A
(voting) common stock to officers on March 15,
1995 1,597,500 15,975 (15,975)
Issuance of common stock to investors in
conjunction with issuance of $312,500, 12%
notes on March 15, 1995 177,500 1,775 298,225
Net loss (1,846,183)
----------------------------------------------------------
Balances at June 30, 1995 1,775,000 $ 17,750 $ 319,205 $(2,381,101)
----------------------------------------------------------
</TABLE>
(Continued)
* Basis of contributed capital is the original cost of the asset, net of
obligation related to such asset, at the date of transfer.
See accompanying notes.
21
<PAGE>
SMARTSERV ONLINE, INC.
(A Development Stage Enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD AUGUST 20, 1993 (INCEPTION) TO JUNE 30, 1996
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING
--------------------------------- PAID-IN DEVELOPMENT
SHARES PAR VALUE CAPITAL STAGE
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Balances at June 30, 1995 1,775,000 $ 17,750 $ 319,205 $(2,381,101)
Issuance of common stock and warrants to
investors at $4.00 57,500 575 229,425
Issuance of warrants in conjunction with the
$1,200,000 of Bridge notes 30,000
Cancellation of 395,535 shares previously issued to
officers (393,535) (3,935) 3,935
Issuance of common stock at $5.00 per share and
1,725,000 warrants at $0.10 per warrant, net of
direct costs of the offering of $1,588,852 1,695,000 16,950 7,041,698
Issuance of 427,735 shares of common stock for
redemption of the $612,500, 12% convertible,
subordinated notes and accrued interest thereon 427,735 4,277 701,486
Issuance of common stock to a financing
intermediary for arrangement of a standby
revolving credit proposal 116,550 1,165 231,935
Issuance of common stock to an investor in
accordance with the terms of the $312,500, 12%
notes 16,750 168 33,332
Other issuances of warrants 1,510
Issuance of employee stock options 165,773
Net loss (2,966,287)
-----------------------------------------------------------
Balances at June 30, 1996 3,695,000 $ 36,950 $ 8,758,299 $(5,347,388)
===========================================================
</TABLE>
See accompanying notes.
22
<PAGE>
SMARTSERV ONLINE, INC.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
AUGUST 20, 1993 AUGUST 20, 1993
YEAR ENDED JUNE 30 (INCEPTION) (INCEPTION)
---------------------------- TO JUNE 30, TO JUNE 30,
1996 1995 1994 1996
---------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,966,287) $(1,846,183) $ (534,918) $(5,347,388)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 41,285 23,647 9,281 74,213
Write-off of software development costs 181,956 181,956
Noncash charges for interest expense 94,274 -- 33,345 127,619
Noncash debt origination costs 477,089 300,000 -- 777,089
Compensation expense 165,773 -- -- 165,773
Consulting service (10,002) 125,002 -- 115,000
Other changes that provided (used) cash
Accounts receivable (57,990) -- -- (57,990)
Inventories 10,440 (4,564) (5,876) --
Prepaid expenses (23,641) (1,461) (7,208) (32,310)
Security deposits -- -- (81,218) (81,218)
Accounts payable and accrued liabilities 178,136 121,482 183,233 482,851
Accrued interest (106,595) 106,595 -- --
Payroll taxes payable (73,282) 57,451 30,732 14,901
Salaries payable 16,462 12,068 16,124 44,654
Unearned revenue -- (25,000) 25,000 --
---------------------------------------------------------
Net cash used in operating activities (2,254,338) (949,007) (331,505) (3,534,850)
INVESTING ACTIVITIES
Purchase of equipment (190,973) (43,116) (99,023) (333,112)
Software development costs -- -- (181,956) (181,956)
---------------------------------------------------------
Net cash used in investing activities (190,973) (43,116) (280,979) (515,068)
FINANCING ACTIVITIES
Proceeds from the issuance of common stock 8,705,000 -- 600,010 9,305,010
Proceeds from the issuance of warrants 202,510 -- -- 202,510
Proceeds from issuance of debt -- 25,000 600,000 625,000
Repayment of debt (612,500) -- -- (612,500)
Proceeds from the issuance of notes -- 337,500 -- 337,500
Repayment of notes (452,500) -- -- (452,500)
Proceeds from the issuance of short-term notes 999,000 -- -- 999,000
Repayment of short-term notes (1,200,000) -- -- (1,200,000)
Due from officers, net (38,497) 46,766 (8,269) --
Capital contribution -- (9) 3,609 3,600
Deferred costs (108,000) -- -- (108,000)
Costs of issuing common stock and warrants (1,588,852) -- -- (1,588,852)
---------------------------------------------------------
Net cash provided by financing activities 5,906,161 409,257 1,195,350 7,510,768
Increase (decrease) in cash and cash equivalents 3,460,850 (582,866) 582,866 3,460,850
Cash at beginning of period -- 582,866 -- --
---------------------------------------------------------
Cash at end of period $ 3,460,850 $ -- $ 582,866 $ 3,460,850
=========================================================
</TABLE>
See accompanying notes.
23
<PAGE>
SMARTSERV ONLINE, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
SmartServ Online, Inc., formerly, Smart Phone Communications (Delaware), Inc.
(the "Company"), a development stage company, commenced operations on August 20,
1993. The Company makes available online information and transactional services
to subscribers through screen-based phones, personal computers, personal digital
assistants, and interactive voice response systems. The Company also offers a
range of services designed to meet the varied needs of clients of potential
strategic partners, as well as potential direct subscribers, including: business
credit information, investment newsletters, stock research reports, stock
quotes, nationwide business and residential directory services, business and
financial news, sports information, electronic bill payment, research and
analysis reports, trading activity reports by insiders of corporations, online
package tracking, electronic mail, and ordering flowers and gifts. The Company's
software architecture and capabilities format information for a particular
device and present the information in a user friendly manner. The Company is in
the initial stages of developing a subscriber base.
On March 21, 1996, the Company completed an Initial Public Offering of 1,695,000
shares of $.01 par value common stock at $5.00 per share and 1,725,000 common
stock purchase warrants at $.10 per warrant. The Company received $7,058,648
from the Offering, net of the costs of issuing these securities of $1,588,852.
In connection with the Initial Public Offering, the Board of Directors voted to
increase the aggregate number of shares that the Company is authorized to issue
to 15,000,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements are prepared in conformity with generally accepted
accounting principles applicable to a development stage company. Certain amounts
in the 1994 and 1995 financial statements have been reclassified to conform to
the 1996 presentation.
The Company has completed development of its information platform and
communications software and has recently exited the developmental stage;
however, it has yet to generate significant revenues. The Company has incurred
recurring operating losses and its operations have not produced a positive cash
flow. Additionally, there is no assurance that the Company will generate future
revenues or cash flow from operations.
24
<PAGE>
The market for online information and transactional services is highly
competitive and subject to rapid innovation and technological change, shifting
consumer preferences and frequent new service introductions. The Company
believes that potential new competitors, including large multimedia and
information systems companies, are increasing their focus on transaction
processing. Increased competition in the market for the Company's services could
materially and adversely affect the Company's results of operations through
price reductions and loss of potential market share. The Company's ability to
compete in the future depends on its ability to maintain the technological and
performance advantages of its current distribution platform and to introduce new
applications that achieve market acceptance.
The Company's business plan focuses on the strategy of marketing its services in
partnership with those companies that have an economic incentive to provide the
Company's information platform to their customers. Through the use of this
model, the consumer is a customer of both SmartServ and its Strategic Partner.
The Company also believes that the sale of its information platform through the
cooperative efforts of partners with more recognizable brand names than its own
is important to its success.
The Company is marketing its services to the regional telephone operating
companies, long distance carriers and telephone equipment manufacturers which
have an incentive to increase the number of screen phones in service. The
Company believes its information platform to be a value-added service in
connection with the sale of screen phones to the consumer market. The Company
has a joint-marketing arrangement with Northern Telecom, Inc., the largest
screen phone manufacturer in the United States.
The Company is also working with businesses, such as brokerage firms, that need
to disseminate proprietary information more effectively to their existing client
base. The Company's information platform and communications architecture allows
the bundling of its partners' proprietary information with its own value-added
information, and makes this package available to subscribers 24 hours per day,
365 days per year. The Company is currently working with Bear Stearns & Co.,
Inc. and Schroder Wertheim & Co. in an effort to provide proprietary account
information to the customers of their correspondent relationships.
Management believes that the Company's primary source of revenues will be
derived from consumers who purchase the services through its Strategic Partners.
The Company has also commenced development of a direct subscriber base. The
Company has a subscriber base of approximately 200 users which is projected to
grow to approximately 14,000 users by June 30, 1997; however, there can be no
assurance that the Company's product offering will be accepted in the
marketplace.
In the event that the Company is unable to increase its subscriber base and meet
its current revenue projections, management has estimated that it has sufficient
cash resources to fund its operations for the next twelve months. The Company's
plans for increasing cash resources in the event of limited acceptance of its
product in the marketplace could include cost and expenditure reductions,
additional funding through private or public offerings, and additional credit
facility arrangements.
25
<PAGE>
RECAPITALIZATION
In March 1995, the outstanding shares of Class A (voting) common stock, $.01 par
value, of the Company were exchanged on a one-for-one thousand basis for
1,756,000 shares of common stock. The recapitalization, effected by the
exchange, is reflected for all periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
EARNINGS (LOSS) PER SHARE
Net loss per share is computed based on the weighted average number of common
shares and common equivalents outstanding during the period using the treasury
stock method. Shares from the assumed exercise of options and warrants granted
by the Company have been included in the computations of loss per share for all
periods, unless their inclusion would be antidilutive. However, for purposes of
computing net loss per share, options and warrants granted by the Company during
the 12 months preceding the Initial Public Offering date have been included in
the calculation of common and common equivalent shares outstanding as if they
were outstanding for all periods presented, using the treasury stock method and
the Initial Public Offering price of $5.00 per share.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments approximate fair
value.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk, are cash and cash equivalents. The Company places its
investments in highly rated commercial paper and financial institutions which
are routinely monitored.
INVENTORIES
Inventories, consisting principally of telephony equipment and parts, are stated
at the lower of cost or market. Cost is determined using the first-in, first out
(FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over estimated useful lives of three to ten years.
SOFTWARE DEVELOPMENT COSTS
During 1996, the Company expensed software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to
26
<PAGE>
Be Sold, Leased or Otherwise Marketed," due to the inability to demonstrate
recoverability of such costs from the delayed commercialization of the Company's
products and services. At June 30, 1995, the net realizable value of software
development costs previously capitalized in accordance with Statement of
Financial Accounting Standards No. 86 were written-off. The write down of such
costs, amounting to $181,956, has been included within product development
expenses in the June 30, 1995 and cumulative statements of operations.
The Company had received $103,500 during the year ended June 30, 1996 and
$210,000 during the year ended June 30, 1995 from its Strategic Partners to
assist the Company in developing computer software applications for use by both
the Company and these Strategic Partners. The funds were offset against product
development expenses incurred during the periods.
STOCK BASED COMPENSATION
The Company generally grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at the
date of grant. The Company accounts for these stock option grants in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees" and,
accordingly, where terms are fixed and determinable, recognizes no compensation
expense.
3. DEBT
<TABLE>
<CAPTION>
JUNE 30
-------------------------------
1996 1995
-------------------------------
<S> <C> <C>
Senior notes payable, due June 30, 1995 with interest
at 12% per annum; subject to a 16% default rate
of interest; senior to all other debt; collateralized
by all of the assets of the Company $ -- $ 312,500
Note payable, due on demand with interest at 12% per annum -- 125,002
Note payable due on the earlier of the closing of the initial
public offering or June 23, 1996 with interest at 12% -- 25,000
-------------------------------
$ -- $ 462,502
===============================
</TABLE>
In conjunction with the Company's Initial Public Offering, the Company repaid
the senior notes, due June 30, 1995, and the note payable due June 23, 1996. The
12% demand note was repaid in accordance with a stipulation of settlement
resulting in the payment of $115,000.
At June 30, 1995, long-term debt consisted of 12% convertible, subordinated
notes in the amount of $1,225,000, due December 31, 1999. These notes were
convertible into shares of common stock in accordance with the terms of the
redemption and loan agreement. In connection with the Initial Public Offering,
the Company repaid one-half of the outstanding principal ($612,500) and accrued
interest thereon ($93,263), and converted the remaining portion of the debt and
the accrued interest into 427,735 shares of common stock at a conversion rate of
$1.65 per share of common stock.
27
<PAGE>
In a private placement commencing in September 1995, the Company issued secured
promissory notes and common stock purchase warrants to investors in exchange for
$1,000,000 of interim financing. The notes were repaid with the proceeds of the
Initial Public Offering along with interest at the rate of 2% per thirty (30)
day month. The warrants provide for the purchase of 200,000 common shares at an
exercise price of $4.00 per share, subject to the same terms and conditions as
the common stock purchase warrants issued in conjunction with the Initial Public
Offering.
On January 31, 1996, the Company entered into an agreement to borrow $200,000 at
an interest rate of 10%. Principal and accrued interest were repaid with the
proceeds of the Initial Public Offering. In conjunction with this note, the
Company agreed to issue warrants for the purchase of 100,000 common shares on
March 21, 1996. These warrants are exercisable at $4.00 per share for a five
year period commencing March 21, 1996.
All costs incurred in conjunction with the issuance of these notes have been
charged to debt origination costs in the statement of operations for the year
ended June 30, 1996.
Interest expense paid during the year ended June 30, 1996 was $327,600. The
Company did not pay any interest during the year ended June 30, 1995 or the
period August 20, 1993 (inception) through June 30, 1994.
4. EQUITY TRANSACTIONS
On January 1, 1995, an investor converted its equity investment of 881,000 Class
A (voting) shares of common stock, $.01 par value, into convertible,
subordinated notes payable in the amount of $1,200,000, due on December 31,
1999, bearing interest at a rate of 12% per annum. Subsequent to such
conversion, the investor loaned the Company an additional $25,000. The
convertible, subordinated notes were converted to common stock in accordance
with the redemption and loan agreement on March 21, 1996.
In March 1995, the Company canceled all issued and outstanding shares of Class A
(voting), $.01 par value common stock. In exchange, the Company issued 1,597,500
shares of common stock with a par value of $.01 per share on a one-for-one
thousand basis.
In conjunction with financing provided by an investor ($312,500, 12% senior
notes), the Company issued to such investor, 177,500 shares of common stock,
representing a 10% interest in the Company at June 30, 1995. The Company
recognized debt origination costs in the amount of $300,000 in relation to this
transaction. The investor has received 16,750 additional shares of common stock,
in accordance with the terms and conditions of the loan agreement, as a result
of the issuance of additional shares of common stock to other investors.
In conjunction with an August 1995 stock subscription in the amount of $230,000,
the Company issued 57,500 shares of common stock and 67,500 common stock
purchase warrants to a group of outside investors. The warrants provide for the
purchase of common stock at $4.00 per share
28
<PAGE>
at any time during the five year period ending March 20, 2001. These warrants
can not be redeemed by the Company without the prior written consent of the
Holders.
On March 21, 1996, the Company completed an Initial Public Offering of 1,695,000
shares of common stock at $5.00 per share and 1,725,000 redeemable common stock
purchase warrants for $0.10 per warrant. Each warrant entitles the registered
holder thereof to purchase one share of common stock at an exercise price of
$4.00 per share, subject to adjustments in certain events, at any time during
the period commencing March 21, 1997, and expiring on March 20, 2001. The
warrants are subject to redemption by the Company at $0.10 per warrant at any
time commencing March 21, 1997, on not less than 30 days' prior notice to the
holders of the warrants, provided the average closing bid quotation of the
common stock as reported on The NASDAQ Stock Market or a national securities
exchange, if traded thereon, has been at least 187.5% of the current exercise
price of the warrants (initially $7.50 per share), for 20 consecutive trading
days ending on the third day prior to the date on which the Company gives notice
of the redemption.
Also in connection with the Initial Public Offering, the Company sold warrants
to the Underwriter ("Underwriter's Warrants") for $10.00 for the purchase of
150,000 shares of common stock and 150,000 common stock purchase warrants.
Commencing March 21, 1997, the Underwriter may exercise the Underwriter's
warrants to purchase the common stock at $8.25 per share and the warrants at
$.165 per warrant. The warrants provide for the purchase of common stock at
$6.60 per share. The Underwriter's Warrants expire on March 20, 2001.
On June 30, 1996, the Company has warrants outstanding to purchase 2,262,500
shares of its common stock at prices ranging from $4.00 to $12.00 per share,
expiring in fiscal years 2001 and 2002.
5. INCOME TAXES
At June 30, 1996, the Company has recorded deferred tax assets resulting from
capitalized start-up costs and debt origination costs that were deferred for
income tax purposes, as well as from federal and state net operating tax loss
carryforwards, aggregating $2,125,000. In accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," the Company has
established a valuation allowance to fully reserve the future income tax benefit
of these deferred tax assets due to uncertainty about their future realization.
The valuation allowance increased to $2,125,000 from $806,000 at June 30, 1995.
At June 30, 1996, the Company has net operating loss carryforwards for Federal
income tax purposes of approximately $5,060,000 which expire in the years 2009
through 2011. As a result of the public issuance of stock by the Company on
March 21, 1996, and the resultant change in ownership pursuant to Internal
Revenue Code Section 382, the utilization of net operating losses incurred to
this date of approximately $4,255,000 will be limited to an annual deductible
amount of approximately $425,000.
29
<PAGE>
6. OPERATING LEASES
On February 6, 1996, the Company entered into a lease modification agreement for
additional space at its Stamford, Connecticut headquarters. The lease includes
escalation clauses for items such as real estate taxes, building operation and
maintenance expenses, and electricity usage. Rent expense amounted to
approximately $111,000 and $110,000 for the years ended June 30, 1996 and 1995,
respectively, and $37,000 for the period August 20, 1993 (inception) to June 30,
1994.
Minimum future rental payments at June 30, 1996 are as follows:
FISCAL YEAR ENDING JUNE 30
1997 $ 147,500
1998 174,000
1999 179,700
2000 186,000
2001 192,500
Thereafter 267,900
--------------
$ 1,147,600
==============
7. COMMITMENTS
On August 21, 1995, the Company entered into an agreement with Strategica, Inc.,
a financial intermediary, for the arrangement of a $2,500,000 secured revolving
credit facility. As compensation for this proposed credit facility ("Proposal"),
the Company issued 116,550 shares of common stock to Strategica which had been
valued at $233,100, and previously recorded in the balance sheet as deferred
financing costs. Additionally, the Proposal contemplated that the Company would
enter into a consulting agreement, whereby Strategica would provide consulting
services with regard to operational, management and strategic issues. As
consideration for these ongoing services, the Company would pay $72,000 per
annum over the four year term of the agreement. The Company subsequently
received a commitment letter which differed significantly from the original
Proposal, which management believed to be unacceptable. Negotiations between
management and Strategica to resolve this matter in a mutually satisfactory
manner have been unsuccessful and are currently unlikely to continue.
Accordingly, all costs incurred in connection with the acquisition and
implementation of this revolving credit facility have been charged to operations
during the year ended June 30, 1996.
8. EMPLOYEE STOCK OPTION PLAN
In April 1996, the Board of Directors approved the establishment of an Employee
Stock Option Plan authorizing stock option grants to directors, key employees,
and consultants of the Company. The options are intended to qualify as incentive
stock options within the meaning of
30
<PAGE>
Section 422 of the Internal Revenue Code of 1986, as amended, or as nonqualified
stock options. The Plan provides for the exercise of such options at not less
than the fair value of the stock on the date of grant. The options are generally
exercisable after one year from date of grant and expire no later than April 15,
2006. Pursuant to the terms of the Plan, each nonemployee director of the
Company will receive an initial grant to purchase 5,000 shares of common stock
when such Plan is approved by the stockholders of the Company. In addition, each
nonemployee director will receive an option to purchase 5,000 shares of common
stock immediately following each annual meeting at which directors are elected.
An aggregate of 400,000 shares of common stock has been reserved for issuance
under the Plan which is administered by a committee designated by the Board of
Directors of the Company. The institution of the Employee Stock Option Plan is
contingent upon the approval of the Plan by the stockholders.
In April 1996, the Board approved the grant of stock options to employees and
officers of the Company for the purchase of 311,550 shares of common stock at
prices ranging from $6.44 to $7.08 per share. The Company recorded a non-cash
charge of $165,773 reflecting the compensatory nature of such issuance in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees."
The Plan had not been approved by the Company's stockholders and therefore,
measurement of compensation varies with the changes in market value of the
underlying stock.
9. SUPPLEMENTAL EARNINGS PER SHARE DATA
Supplemental net loss per share of common stock for the year ended June 30, 1996
was $(.70). Supplemental net loss per share of common stock is computed using
the if-converted method based on the weighted average number of shares of common
stock and common stock equivalent shares as defined previously, and the assumed
conversion of $612,500 of convertible subordinated notes and accrued interest
thereon that were converted into common stock upon the closing of the Initial
Public Offering. Net loss per share used in the supplemental earnings per share
calculation was decreased for interest expense on the convertible subordinated
notes assumed converted, as well as interest and other costs associated with the
origination of debt obligations during the year ended June 30, 1996.
31
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- ------- COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information called for by this Item is set forth under the caption
"Directors and Executive Officers of the Company" in the Proxy Statement for the
Annual Meeting of Stockholders to be held on October 31, 1996, and is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
- -------
The information called for by this Item is set forth under the caption
"Executive Compensation" in the Proxy Statement for the Annual Meeting of
Stockholders to be held on October 31, 1996, and is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this Item is set forth under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Proxy Statement
for the Annual Meeting of Stockholders to be held on October 31, 1996, and is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------
The information called for by this Item is set forth under the caption "Certain
Relationships and Related Transactions" in the Proxy Statement for the Annual
Meeting of Stockholders to be held on October 31, 1996, and is incorporated
herein by reference.
32
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- --------
(A) INDEX TO EXHIBITS
Exhibit Description
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation of the
Company**
3.2 By-laws of the Company, as amended**
4.1 Specimen Certificate of the Company's Common Stock**
4.2 Form of Underwriter's Warrant**
4.3 Form of Warrant Agent Agreement**
4.4 Form of Redeemable Warrant**
4.5 Form of Warrant Agreement used by the Company for warrants
issued to John E. Herzog, Emanuel E. Geduld, Andrew DaPonte
and Anchung Sammy Chung and Fong-Chi Alison Tsao**
4.6 Warrant dated February 1, 1994 issued by the Company to Tri
Cap International**
10.1 Program Agreement dated as of June 1994 between the Company
and PC Gifts, Inc.**
10.2 Information Distribution License Agreement dated as of July
18, 1994 between the Company and S&P ComStock, Inc.**
10.3 New York Stock Exchange, Inc. Agreement for Receipt and Use of
Market Data dated as of August 11, 1994 between the Company
and the New York Stock Exchange, Inc.**
10.4 The Nasdaq Stock Market, Inc. Vendor Agreement for Level 1
Service and Last Sale Service dated as of September 12, 1994
between the Company and The Nasdaq Stock Exchange, Inc.
("Nasdaq")**
10.5 Amendment to Vendor Agreement for Level 1 Service and Last
Sale Service dated as of October 11, 1994 between the Company
and Nasdaq**
10.6 Non-Exclusive Agency Agreement dated as of November 1, 1994
between the Company and Dun & Bradstreet, Inc.**
10.7 License Agreement dated as of November 3, 1994 between the
Company and Checkfree Corporation**
10.8 Telecommunications Services Agreement dated as of November 15,
1994 between the Company and eunetcom Inc.**
10.9 Services Agreement dated as of February 1, 1995, between the
Company and Federal Express Corporation**
10.10 Information Provider Agreement dated as of March 13, 1995
between the Company and The Argus Group, Inc.**
10.11 Metromail National Directory Assistance Reseller Agreement For
Electronic Services Providers dated as of March 13, 1995
between the Company and Metromail Corporation**
10.12 Agreement dated as of March 27, 1995 between the Company and
Standard & Poor's, a division of McGraw-Hill**
10.13 Information Provider Agreement dated as of August 8, 1995
between the Company and Global Financial Traders, Ltd. **
10.14 Reuters NewMedia, Inc. On-Line Services Agreement dated as of
November 13, 1995 between the Company and Reuters NewMedia,
Inc.**
10.15 Lease Agreement dated as of March 4, 1994, between the Company
and One Station Place, L.P. regarding the Company's Stamford,
Connecticut, offices**
33
<PAGE>
10.16 Lease Modification and Extension Agreement, dated February 6,
1996, between the Company and One Station Place, L.P.
regarding the Company's Stamford, Connecticut, offices *
10.17 Employment Agreement (the "Cassetta Employment Agreement")
dated of January 31, 1994 by and among the Company and
Sebastian E. Cassetta**
10.18 Amendment No. 1 to the Cassetta Employment Agreement dated as
of June 30, 1994 by and among the Company and Sebastian E.
Cassetta**
10.19 Employment Agreement (the "Francesco Employment Agreement")
dated as of January 31, 1994 by and among the Company and
Steven T. Francesco**
10.20 Amendment No. 1 to the Francesco Employment Agreement dated
June 30, 1994 by and among the Company and Steven T.
Francesco**
10.21 Form of Registration Rights Agreement between the Company and
a Holder**
10.22 Form of Consulting Agreement between the Company and the
Underwriter**
10.23 Agreement dated as of January 31, 1996 between the Company and
Henry Snow**
10.24 Information Provider Agreement dated August 9, 1995 between
the Company and Global Financial Traders, Ltd.**
10.25 Letter of Intent dated December 15, 1995 between the Company
and Bear, Stearns & Co., Inc.**
10.26 Letter Agreement dated January 26, 1996 between Ameritech and
the Company**
10.27 Memorandum of Understanding dated February 7, 1996 between
Northern Telecom Inc. and the Company**
10.28 OEM Source License Agreement dated January 29, 1996 between
the Company and Spyglass, Inc.**
10.29 Subscriber Agreement dated February 16, 1996 between the
Company and the Cunningham Group Inc. dba Lotter USA.com**
10.30 Memorandum of Understanding, dated June 26, 1996, between the
Company and CIDCO Incorporated *
11.1 Statement Regarding Computation of Per Share Earnings*
27 Financial Data Schedule *
- --------------------------------------
* Filed herewith
** Filed as an exhibit to the Company's registration statement on Form
SB-2 (Registration No. 333- 114)
(B) REPORTS OF FORM 8-K
None.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SMARTSERV ONLINE, INC.
Registrant
By: /S/ SEBASTIAN E. CASSETTA
-----------------------------
Sebastian E. Cassetta
Chairman of the Board
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in their capacities and on the
dates indicated.
SIGNATURE TITLE DATE
/S/ SEBASTIAN E. CASSETTA Chairman of the Board, September 23, 1996
- ----------------------------- Chief Executive Officer,
Sebastian E. Cassetta Secretary and Director
/S/ STEVEN T. FRANCESCO President, Chief Operating September 23, 1996
- ----------------------------- Officer and Director
Steven T. Francesco
/S/ THOMAS W. HALLER Vice President, Treasurer September 23, 1996
- ----------------------------- and Chief Financial
Thomas W. Haller Officer
/S/ SIMON A. HERSHON, PH.D Director September 23, 1996
- -----------------------------
Simon A. Hershon, Ph.D
/S/ BERNARD BAUM Director September 23, 1996
- -----------------------------
Bernard Baum
/S/ BETH BRONNER Director September 25, 1996
- -----------------------------
Beth Bronner
/S/ CATHERINE CASSEL TALMADGE Director September 27, 1996
- -----------------------------
Catherine Cassel Talmadge
/S/ HIRO R. HIRANANDANI Director September 25, 1996
- -----------------------------
Hiro R. Hiranandani
EXHIBIT 10.16 LEASE MODIFICATION AND EXTENSION AGREEMENT, DATED FEBRUARY 6,
1996, BETWEEN THE COMPANY AND ONE STATION PLACE, L.P.
REGARDING THE COMPANY'S STAMFORD, CONNECTICUT, OFFICES
LEASE MODIFICATION AND EXTENSION AGREEMENT
AGREEMENT made as of this 6th day of February, 1996 between ONE
STATION PLACE LIMITED PARTNERSHIP, a Connecticut partnership with an office c/o
W & M Properties of Connecticut, Inc., One Station Place, Stamford, Connecticut
06902 (hereinafter called "Landlord"), and SmartServ Online, Inc., (formerly
known as SmartPhone Communications, Inc.) a Delaware corporation., having an
office at One Station Place, Stamford, Connecticut 06902 (hereinafter called
"Tenant").
W I T N E S SE T H:
-------------------
WHEREAS, Landlord and Tenant are the landlord and tenant,
respectively, under a certain lease dated as of March 4, 1994 (the "Lease"),
which Lease covers 4,165 rentable square feet of space (the "Existing Space") on
the fifth (5TH) floor in the building known as Metro Center, One Station Place,
Stamford, Connecticut, (the "Building"); and
WHEREAS, the Lease is currently scheduled to expire on February 28,
2001; and
WHEREAS, the parties hereto wish to extend the term of the Lease and
modify and amend the Lease so as to add to the Existing Space under the Lease
approximately 2,141 rentable square feet of space located on the fifth (5th)
floor of the Building directly contiguous to the Existing Space, as more
particularly shown on the floor plan attached as Schedule I hereto and made a
part hereof (the "Additional Space"), and to make various other modifications to
the Lease, in accordance with the terms and conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the mutual premises herein
contained, and for other good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto agree that the Lease be, and that the
same hereby is, modified and amended as follows:
1. In modification of the "WITNESSETH" section of the Lease, the term of the
Lease is hereby extended through a date which is the last day of the
calendar month in which occurs the sixth (6th) year anniversary of the
Additional Space Commencement Date (as hereinafter defined), or until such
term shall sooner cease and terminate as elsewhere provided in the Lease as
modified by this Lease Modification and Extension Agreement (the "Extended
Term").
2. In modification of Exhibit A-2 and Section 1.06 of the Lease, commencing
effective as of the Additional Space Commencement Date, the Additional Space
is to be added to the Existing Space such that the demised premises shall
consist of an aggregate of 6,306 rentable square feet as more particularly
shown on Schedule II annexed hereto and made a part hereof. The "Additional
Space Commencement Date" is hereby defined as the earlier of (a) November 1,
1996 (the day following the scheduled expiration date of Drake Beam Morin's
existing lease of the Additional Space), provided that Drake Beam Morin
shall have surrendered actual possession of the Additional Space to Landlord
by such date as required pursuant to its lease, and (b) the date upon
<PAGE>
which Drake Beam Morin vacates and surrenders to Landlord actual and legal
possession of the Additional Space.
Landlord shall, in accordance with the foregoing, fix the Additional Space
Commencement Date and notify Tenant of the date so fixed. When the
Additional Space Commencement Date has so been determined, the parties
hereto shall, within thirty (30) days thereafter, at Landlord's request,
execute a written agreement confirming such date as the Additional Space
Commencement Date. Any failure of the parties to execute such written
agreement shall not affect the validity of the Additional Space Commencement
Date as fixed and determined by Landlord, as aforesaid.
3. In modification of Sections 1.01 and 1.07 of the Lease, from and after the
Additional Space Commencement Date, the fixed annual rent (excluding
electricity) for the demised premises shall be:
(i) year of the Extended Term; lease year of the Extended Term;
(ii)the sum of $141,885.00 for the first (1st) lease the sum of $148,191.00
for the second (2nd)
(iii) year of the Extended Term; lease year of the Extended Term; year of
the Extended Term; and year of the Extended Term. the sum of $154,497.00
for the third (3rd) lease
(iv) the sum of $160,803.00 for the fourth (4th)
(v) the sum of $167,109.00 for the fifth (5th) lease
(vi) the sum of $ 173,415.00 for the sixth (6th) lease
4. In modification of Section 1.02 of the Lease, from and after the Additional
Space Commencement Date, the portion of the fixed annual rent for the
demised premises attributable to real estate taxes shall be $13,500.00, and
the semi-annual installments thereof referred to in said Section shall be
$6,750.00.
5. In modification of Section 4.03 of the Lease, from and after the Additional
Space Commencement Date, so long as Tenant is not in default beyond any
grace period under the terms, covenants and conditions of the Lease, as
hereby amended, Landlord will provide Tenant with access to the parking area
for the parking of sixteen (16) automobiles at no charge. Two (2) of said
parking spaces shall be marked reserved for Tenant's exclusive use.
6. In modification of Section 5.01 (a) (ii) of the Lease, from and after the
Additional Space Commencement Date, the term "The Percentage", for purposes
of computing tax escalation, shall be deemed to mean two and twenty-seven
one hundredths percent (2.27%).
7. In modification of Section 6.01(a)(iii) of the Lease, from and after the
Additional Space Commencement Date, the term "The Percentage", for purposes
of computing expense escalation, shall be deemed to mean two and
twenty-seven one hundredths percent (2.27%).
8. In modification of Article 7 of the Lease (Electricity), effective as of the
Additional Space Commencement Date, ERIF (which the parties acknowledge is
currently $2.19 per rentable square foot) shall also be charged with respect
to the Additional Space.
2
<PAGE>
9. Tenant agrees to accept possession of the Additional Space in its current
"as is" condition with the exception of the following work to be performed
by Landlord within two (2) weeks after occurrence of the Additional Space
Commencement Date: removal OF A PORTION OF the existing demising wall
currently separating the Existing Space from the Additional Space;
application of one coat of paint to the Additional Space only; steam
cleaning of the carpet in the Additional Space only; such patching and
painting as is necessary to make Existing Space and
Additional Space appear as one integrated unit. At the expiration of the
Extended Term, Tenant shall not be obligated to restore the demising wall
which now separates the Existing Space from the Additional Space.
10. Article 33 shall have no applicability to the Additional Space.
11. There shall be no "free rent" or other rental ca with respect to the
Additional Space.
12. Tenant represents and warrants that it neither consulted nor negotiated with
any broker or finder with regard to the Extended Term of the leasing of the
Additional Space as set forth in this Agreement other than Cushman &
Wakefield of CT. and W & M Properties of Connecticut, Inc. Tenant agrees to
indemnify, defend and save Landlord harmless from and against any claims for
fees or commissions by anyone with whom Tenant has dealt in connection with
the Extended Term and/or the leasing of the Additional Space or otherwise in
connection with this Agreement other than Cushman & Wakefield of CT. and W
&M Properties of Connecticut Inc. Landlord agrees to pay any commission or
fee due to Cushman & Wakefield of CT. and W & M Properties of Connecticut
Inc. for the leasing of the Additional Space and for the extension of the
term of the Lease pursuant to separate agreement.
13. Each party hereby represents that, to the best of its knowledge, the other
party is in full compliance with the Lease and is not in default of any of
its respective obligations under the Lease.
14. In modification of the second paragraph of Article 35 of the Lease (and the
asterisked provision thereof) as appearing on page 42 of the Lease, so long
as Tenant is not in default under any provision of the Lease, as amended by
this Agreement, then the Credit shall be reduced to $70,942.50 (rather than
to $40,608.00) on March 9, 1997 (Commencement of the 4th lease year of the
initial term of the lease).
15. Articles 50 and 51 of the Lease are hereby deleted are no longer of any
force and effect.
16. Except as herein modified, all of the terms, covenants and conditions of the
Lease are and shall remain in full force and effect and are hereby ratified
and confirmed.
17. All terms used but not defined herein shall have the meanings set forth in
the Lease.
18. This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective legal representatives, successors and permitted
assigns.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
ONE STATION PLACE, LIMITED PARTNERSHIP,
Landlord
WITNESS:
/S/ HOLLY E. ROBINSON By: W & M Properties of Connecticut, Inc.,
- --------------------------- Agent
BY: /S/ JEFFREY H. NEWMAN
-----------------------------
Jeffrey H. Newman
Vice President
SMARTSERV ONLINE, INC.,
/S/ JOANN B. MCGRATH Tenant
- ---------------------------
BY: /S/ SEBASTIAN E. CASSETTA
-----------------------------
Sebastian E. Cassetta
Title: Chairman, CEO & Secretary
STATE OF
CONNECTICUT
COUNTY OF FAIRFIELD ss: Greenwich
On this 6th day of February, 1996, before me, personally appeared
Jeffrey H. Newman, who acknowledged himself to be a Vice President of W&M
Properties of Connecticut, Inc., a CONNECTICUT corporation, Agent for ONE
STATION PLACE, LIMITED PARTNERSHIP, a Connecticut Partnership, and that he being
authorized to do so, executed the foregoing instrument for the purposes therein
contained by signing as such officer of W&M Properties of Connecticut, Inc., as
agent for and on behalf of said Partnership.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/S/JENNIFER L. MULLEN
-----------------------------
Notary Public
JENNIFER L.
MULLEN
NOTARY PUBLIC
MY
COMMISSION
EXPIRES FEB.
28, 1999
EXHIBIT 10.30 MEMORANDUM OF UNDERSTANDING, DATED JUNE 26, 1996, BETWEEN THE
COMPANY AND CIDCO INCORPORATED
MEMORANDUM OF UNDERSTANDING
---------------------------
CIDCO Incorporated, a DELAWARE Corporation, (hereinafter "CIDCO") and SmartServ
Online, Inc. (a Delaware Corporation) Inc., (hereinafter "The Company") are
interested in entering a relationship, known as the CIDCO Business Affiliate
Program (hereinafter "Program") for the purpose of exchanging technical
information and participating in other activities as hereinafter described.
It is understood that CIDCO, together with its subsidiaries, designs, develops
and markets telecommunications products that support intelligent network
services being developed and implemented by the regional Bell operating
companies and other telephone operating companies. It is CIDCO's mission to
envision, produce and distribute the range of products that will become the
primary telephony and communications utilized by customers of telephone
companies operating companies.
DEFINITIONS
The following definitions shall apply whenever the following capitalized terms
are used in this Agreement:
"CIDCO PRODUCT" shall mean those products which may include all
products/services provided by CIDCO including but not limited to the CST-2000.
"COMPANY PRODUCT" shall mean the Company's product(s) which interface with, or
operate in conjunction with, CIDCO Products or products of a Strategic Alliance
Partner which interface with or operate in conjunction with CIDCO Products.
"Strategic Alliance Partner" shall mean the companies with whom CIDCO has a
business relationship which includes licensing and development of interfaces
between certain CIDCO Products and products of such companies. CIDCO may, from
time to time, enter into similar business relationships with additional
companies who may thereafter be designated as Strategic Alliance Partners.
CONFIDENTIAL INFORMATION
The term "Confidential Information" as used herein is defined in the
Confidentiality and Non-Disclosure Agreement dated JUNE 26, 1996.
RELATIONSHIP BETWEEN THE PARTIES It is understood that participation in this
relationship shall not prohibit either party from entering into similar programs
or agreements with other parties or from itself developing, or otherwise
acquiring, products similar to those provided by the Company. The Company is
acting as a co-marketer with CIDCO and nothing in this Agreement shall be
construed to create or imply any other relationship. including without
limitation. a joint venture partnership. principal-agent, strategic alliance or
employment relationship between the two parties. The Company has no authority
from this relationship to act on behalf of CIDCO and shall not take any action
or permit any action to be taken on its behalf which purports to be done in the
name of or on behalf of CIDCO.
<PAGE>
Neither the Company nor any of its employees or agents shall, in any sense, be
considered employees or agents of CIDCO, nor shall the Company, its employees or
agents, be eligible or entitled to any benefits, prerequisites or privileges
given or extended to CIDCO employees. The Company assumes full responsibility
for actions of its personnel while performing services pursuant to this
Agreement, and shall be solely responsible for their supervision, daily
direction and control, payment of salary and/or commissions (including
withholding of income taxes and social security), workers compensation,
disability benefits and the like. Neither the Company NOR CIDCO intend that this
agreement be construed as constituting a "franchise" or appointing the Company
as a "franchisee" for the purpose of any Federal or State law regulating the
rights and obligations of "franchisers" and "franchisees".
EXPENSES
Each party shall bear its own expenses in all performances under this Agreement.
RESPONSIBILITIES OF CIDCO
CIDCO, agrees to use all commercially reasonable efforts to perform the
following activities:
(a) allow the Company to participate in any forum, conference or
symposium relating to the Company Products or CIDCO Products
which CIDCO in its sole discretion may sponsor,
(b) provide ancillary CIDCO marketing information, collateral
and materials as CIDCO may deem appropriate for sales
support and marketing purposes,
(c) assist the Company, as CIDCO may deem appropriate in
identifying customer prospects,
(d) provide access to technical information relating to CIDCO
Products, services and applications,
(e) provide technical training relating to the CIDCO Products to
the Company.
RESPONSIBILITIES OF THE COMPANY
The Company agrees to use all commercially reasonable efforts to perform the
following activities:
(a) as mutually agreed, make independent, or when CIDCO or CIDCO
distributors request, joint sales calls upon prospects.
(b) identify existing mutual customers who may be prospects to
purchase the CIDCO Products.
(c) identify and analyze target vertical markets for possible
future co-development of applications for the Product.
(d) provide installation and support services for Company
Products, including training of end user customers, under
terms, conditions and charges established by a separate
agreement directly between The Company and the customer,
CIDCO or CIDCO distributor.
(e) provide telephone support service for consultations relating
to technical information and support concerning Company
Products which will be and are made available to prospects,
end users and CIDCO and CIDCO distributors.
2
<PAGE>
(f) as mutually agreed, upon CIDCO's request, provide marketing
and/or technical support of trade shows, industry seminars
and business conferences.
(g) provide product demonstration materials on CIDCO specified
Product media with associated manuals and documentation, as
available, for Company Products, for the purpose of
conducting demonstrations of the Company Products to
prospects, CIDCO and CIDCO distributors.
(h) provide technical Company Products training to end user
customers, CIDCO distributors and CIDCO marketing and sales
support personnel as both parties deem reasonable, necessary
and appropriate.
(i) promote CIDCO Products and Company Products in appropriate
advertising, demonstrations, presentations and seminars in
accordance with CIDCO marketing standards and guidelines.
FEES
There is no fee to participate as a CIDCO Business Affiliate. There may be
independent fees associated with various services provided by CIDCO.
AMENDMENTS
Amendments may be made to this Agreement from time to time by mutual written
consent of the parties.
PUBLICITY
Except as may be required by law or legal process, neither party shall issue a
press release or otherwise make any public announcement concerning this
Agreement, without prior written consent of the other party.
TERM AND TERMINATION
This Agreement shall become effective on the date the Company is accepted as a
CIDCO Business Affiliate (Effective Date) and shall remain in effect until
terminated by either party.
Either party may terminate this Agreement with thirty (30) days' notice, without
cause, upon receipt of written notice. In the event of such a termination, all
rights, privileges, support and assistance due a CIDCO Business Affiliate shall
cease.
TRADEMARKS
During the term of this Agreement, CIDCO authorizes the Company to use the CIDCO
Business Affiliate title in advertising and promotional material as CIDCO
determines and provides to the Company in writing. Such material and its use
must comply with the instructions set forth in published CIDCO guidelines. The
CIDCO name may only be used as part of the Business Affiliate program. The
Company agrees to change, at its expense, any material which CIDCO, in its sole
judgment, determines to be inaccurate, objectionable, misleading, or a misuse of
CIDCO trademarks or trade names. The
3
<PAGE>
Company, on CIDCO's written demand, will immediately cease the use of any
materials CIDCO deems to be in violation of this Section.
The authorization CIDCO grants in this Section ends without notice or other
action necessary by CIDCO when this Agreement expires or is terminated. In
either such event, Company will immediately cease using the CIDCO Business
Affiliate title and cease referring to itself as a participant in the CIDCO
Business Affiliate program.
INDEMNIFICATION
Each party shall indemnify the other party for direct losses incurred by the
injured party due to personal injury, death or damage to tangible property
resulting from the negligence of each party's respective employees,
subcontractors or agents.
With respect to any claim against CIDCO, a CIDCO authorized distributor or an
end-user customer (1) that the Company Product(s) infringes any patent,
copyright, trademark, or other intellectual property right, or violates any
trade secret of any third party, or (2) which results from any breach of Company
warranties, or (3) which is based on failure of the Company to perform its
support obligations, the Company shall indemnify CIDCO, (:IDCO's authorized
distributors and any end-user customers, as appropriate against:
(a) all legal expenses incurred in investigating and defending
such claim;
(b) all payments made in compliance with an award of damages or
order of costs made by a court in respect or such claim; and
(c) any payment made in respect of any out of court settlement
of such claim, provided that Company has consented to such
settlement.
CIDCO shall promptly notify Company of any claims and Company shall at its own
expense cooperate fully in the defense and/or settlement of any such claim,
provided that Company has consented to such settlement.
WARRANTIES
Company represents and warrants that Company is under no obligation or
restriction which would in any way interfere with, or be inconsistent with the
terms and purpose of this Agreement, or present a conflict of interest
concerning the Company Product(s) and Company warrants that it will not enter
into any such obligation or restriction during the term of this Agreement.
Company warrants that the Company Product(s) shall not infringe any patent,
copyright, trademark or other intellectual property right, nor violate any trade
secret of any third party.
Company warrants that the Company Product(s) conforms to the statements and
representations made in the contents of any manuals, documentation or other
Company Product materials provided to CIDCO, CIDCO's distributors or end-user
customers pursuant to this Agreement.
CIDCO MAKES NO OTHER WARRANTIES EXPRESS OR IMPLIED INCLUDING THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR PARTICULAR PURPOSE.
4
<PAGE>
LIMITATION OF LIABILITIES AND REMEDIES
- --------------------------------------
THE PARTIES' EXCLUSIVE REMEDY FOR BREACH OF THIS AGREEMENT SHALL BE THE
TERMINATION OF THE AGREEMENT. IN NO EVENT WILL EITHER PARTY BE LIABLE FOR ANY
INCIDENTAL, CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES OF ANY NATURE WHATSOEVER
FOR ANY BREACH OF THIS AGREEMENT OR ANY ACTION ARISING OUT OF OR RELATED TO THIS
AGREEMENT. NEITHER PARTY SHALL BE LIABLE FOR ANY DAMAGES CLAIMED BY THE OTHER
BASED ON ANY THIRD PARTY CLAIM.
CIDCO DISCLAIMS ALL LIABILITY WHETHER IN CONTRACT TORT, WARRANTY, OR OTHERWISE,
TO ANY PARTY OR THIRD PARTY.
FORCE MAJEURE
Neither party shall be liable for failure to fulfill its obligations hereunder
due to causes beyond its control; provided, however, that unless agreed to in
writing by the non-defaulting party, any delay caused by a force majeure
exceeding thirty (30) days shall be grounds for termination by the
non-defaulting party.
ASSIGNMENT AND DELEGATION OF RESPONSIBILITIES
Company agrees to perform this Agreement through its employees. Company may not,
without CIDCO's prior written consent, assign or delegate its rights or
obligations to any third party. Any attempted delegation or assignment without
such prior written consent will be void as against CIDCO.
Any status change described below, unless CIDCO agrees in writing, may result in
the termination of the Agreement by CIDCO:
(a) sale of Company business;
(b) transfer of equity ownership;
(c) merger or acquisition of the Company with or by any other
entity; or
(d) bankruptcy, insolvency, liquidation or receivership.
GOVERNING LAW
The validity, construction and performance of this Agreement will be governed by
the laws of the State of Connecticut, without regard to the conflict of laws
principles thereof.
SEVERABILITY
If any provision of this Agreement is held by a court of competent jurisdiction
to be contrary to law, the remaining provisions of the Agreement will remain in
full force and effect.
COMPLIANCE WITH LAWS AND REGULATIONS
Each party hereto shall at its own expense comply with all laws, rules and
regulations of competent public authorities relating to the duties, obligations
and performance under this Agreement and shall procure all licenses and pay all
fees and other charges required thereby.
5
<PAGE>
BUSINESS AFFILIATE APPOINTMENT
Subject to the Memoranda of Understanding and other applicable contracts and
agreements, CIDCO hereby designates and appoints SmartServ Online, Inc. as a
"CIDCO Business Affiliate" for the limited marketing of specified CIDCO Products
and Services and Company Products and Services, and certain of SmartServ Online,
Inc. hereby accepts such designation and appointment.
NOTICES
All notices to give hereunder shall be in writing and personally delivered or
sent certified mail, return receipt requested. Notices to be given to the
Company shall be sent to One Station Place, Stamford CT 06902 to the attention
of Mr. Steven T Francesco. Notice to be given to CIDCO shall be sent to 220
Cochrane Circle, Morgan Hill, CA 95037 to the attention of Edward Forker, with a
copy of such notice being sent to Carter, Ledyard & Milburn, Two Wall Street,
New York, New York 10005, Attention: James E. Abbott. Esq. Notices of any
changes in the above addresses shall be given to the other party in writing.
ENTIRE UNDERSTANDING
The provisions of this Memorandum of Understanding constitute the whole
understanding and agreement, separate contract excluded, between the parties and
supersede all prior agreements, oral or written, and all other communication
relating to the subject matter hereof. No amendment or modification of any
provision of this Agreement will be effective unless in a document which refers
to this Agreement and is signed by both parties.
ACTIONS
No action, regardless of form, arising out of or related to the transactions
covered by this Agreement may be brought by either party more than two (2) years
after the cause thereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed be low
by their duly authorized representative:
CIDCO Incorporated SmartServ Online, Inc,
By: /s/Edward J. Parker By: /s/Sebastian E. Cassetta
Print: Edward J. Parker Print: Sebastian E. Cassetta
Title: Vice President Marketing Title: Chairman, CEO
Date: June 26, 1996 Date: June 26, 1996
6
<PAGE>
EXHIBIT A
Joint Marketing Activities
- --------------------------
a: Identify existing mutual customers who may be prospects to purchase
the Product.
b: Develop joint marketing proposals to prospective customers who may
purchase the Product.
c Participate (when appropriate) in joint sales calls to prospective
customers who may purchase the Product.
d: Identify and analyze target vertical markets for possible future
co-development of applications for the Product.
e: Develop a joint marketing plan for the Product, including target
markets and marketing messages; and develop a turnkey sales model and
distribution process.
f: Develop a cooperative sales plan for the CST-2000 including target
accounts and industries and a "starter kit" that includes devices,
software and hardware.
g: Perform joint market assessments and research on a per project basis
where appropriate whose purpose it would be to further understand,
identify and market to existing and emerging vertical market segments
for applications and "screenphone" solutions.
<PAGE>
EXHIBIT B
Other Cooperative CIDCO Activities
a: Provide technical training relating to the CST-2000 and ongoing access
to a technical resource on a resource-available basis.
b Secure regulatory certification for the CST-2000 in those countries in
which the CST-2000 is to be sold, and keep SmartServ apprised of these
certification efforts. These certifications will be considered on a
country-by country basis. The decision to obtain such certifications
will be based on the business opportunity such markets will afford in
CIDCO's sole opinion and this decision will be exclusive right of
CIDCO.
c: Include SmartServ in any promotional or marketing materials related to
the CST-2000 on a par with similar co-marketing partners with a
similar co marketing arrangement.
d: Provide technical support, maintenance and repairs for the CST-2000,
as provided for in CIDCO's standard terms and conditions, which will
be shared with SmartServ.
<PAGE>
EXHIBIT C
OTHER COOPERATIVE SMARTSERV ACTIVITIES
- --------------------------------------
a: Provide marketing and technical assistance for the development of
demonstration applications for the CST-2000 for CIDCO
Sales/Distribution Agents.
b: Develop promotional collateral, sales presentations, and marketing
announcements that include the CST-2000 on a par with other devices.
c: Work with CIDCO on a quarterly basis to develop a forecast to ensure
delivery of the CST-2000.
d: Invite CIDCO to multi-vendor "Screen phone" meetings.
e: Allow CIDCO reasonable access to ADSI-based applications developed by
SmartServ for training sales support and/or demonstration purposes.
EXHIBIT 11.1 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Period From
August 20, 1994
JUNE 30 (inception) to
-------------------------- June 30,
1996 1995 1994
-----------------------------------------
PRIMARY:
<S> <C> <C> <C>
Average shares outstanding 2,355,000 1,578,000 917,000
Net effect of stock and warrant issuances with exercise
prices below the initial public offering price based
on the treasury stock method 65,000 65,000
-----------------------------------------
Total 2,355,000 1,643,000 982,000
=========================================
Net Loss $(2,966,287) $(1,846,183) $ (534,918)
=========================================
Per share amount $ (1.26) $ (1.12) $ (0.54)
=========================================
SUPPLEMENTAL:
Average shares outstanding 3,553,500
===========
Net loss as stated $(2,966,287)
Interest expense and debt origination costs
associated with senior notes, short-term
notes, and subordinated debt 495,812
-----------
Net loss as adjusted $(2,470,475)
===========
Per share amount $ (0.70)
===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE JUNE 30,
1996 FINANCIAL STATEMENTS OF SMARTSERV ONLINE, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001005698
<NAME> SMARTSERV ONLINE, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 3,460,850
<SECURITIES> 0
<RECEIVABLES> 57,990
<ALLOWANCES> 0
<INVENTORY> 68,310
<CURRENT-ASSETS> 3,587,150
<PP&E> 327,500
<DEPRECIATION> 68,601
<TOTAL-ASSETS> 3,990,267
<CURRENT-LIABILITIES> 542,406
<BONDS> 0
0
0
<COMMON> 36,950
<OTHER-SE> 3,410,911
<TOTAL-LIABILITY-AND-EQUITY> 3,990,267
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 1,037,941
<TOTAL-COSTS> 1,037,941
<OTHER-EXPENSES> 1,220,340
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 759,533
<INCOME-PRETAX> (2,966,287)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,966,287)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,966,287)
<EPS-PRIMARY> (1.26)
<EPS-DILUTED> (1.26)
</TABLE>
