UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO.2 ON
FORM 10-KSB/A
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, 1997
[_] 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
incorporation or organization) identification no.)
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 Exchange Act: NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
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. $688,610
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 October 9,
1997, was approximately $6,126,000. 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 October 9, 1997.
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TABLE OF CONTENTS
PART I
ITEM PAGE
1. Description of Business 3
2. Description of Property 11
3. Legal Proceedings 11
4. Submission of Matters to a Vote of Security Holders 11
PART II
5. Market for Common Equity and Related Stockholder Matters 12
6. Management's Discussion and Analysis or Plan of Operation 14
7. Financial Statements 19
8. Changes in and Disagreements with Accountants on Accounting 38
and Financial Disclosure
PART III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 38
10. Executive Compensation 40
11. Security Ownership of Certain Beneficial Owners and Management 43
12. Certain Relationships and Related Transactions 44
13. Exhibits and Reports on Form 8-K 46
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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"), the Internet,
interactive voice response systems, alpha numeric paging devices and other
wireless Personal Communications Systems ("PCSs"). The Company has exited the
development stage with the completion of its software architecture and product
offering, and has commenced 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 Marketing 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,
research and analysis reports, stock trading reports by corporate insiders,
online FedEx package tracking, electronic mail, sports information, national
weather reports, and other business and entertainment information. The Company
provides such services pursuant to non-exclusive agreements with providers of
online information and transactional services such as: Dun & Bradstreet, Inc.,
Federal Express Corporation, The Weather Channel, The Options Price Reporting
Authority, Metromail Corporation (a subsidiary of RR Donnelley & Sons Co.),
Reuters NewMedia Inc., S&P ComStock, Inc., The Argus Group, Inc., The Nasdaq
Stock Market, Inc., and The New York Stock Exchange, Inc.
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. Two of such agreements contain
restrictive provisions with regard to the approval of potential subscribers of
the Company; and one agreement restricts the Company to distributing its
services in North America. 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 , the Internet, interactive voice response systems, alpha
numeric pagers and PCS devices. 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.
Subscribers can connect to the Company's services using standard phone lines or
through the Internet. The Company had previously contracted with eunetcom, Inc.,
a provider of an X.25 data communications network, to be the delivery medium for
its information services. The operational capacity of eunetcom was inadequate to
support the Company's volume requirements and the relationship was terminated
after the Company successfully modified its communication software to provide
for the delivery of the information
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platform over the Internet. The Company believes that its software architecture
and capabilities, which recognize multiple devices (e.g., screen-based phones,
PCs, PDAs, interactive voice response systems and alpha numeric pagers), 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, interactive voice response systems and
alpha-numeric pagers.
MARKETING STRATEGY
Management believes that the Company's primary source of revenues will
ultimately be derived from end users that purchase the Company's services
through Strategic Marketing Partners with mass distribution capabilities. The
Company anticipates that Strategic Marketing 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 to their clients on screen-based phones, PCs, PDAs,
interactive voice response systems, alpha-numeric pagers and other PCS devices.
The Company has the ability to customize the information package to be offered
to each Strategic Marketing Partner, and in turn to their end users. The Company
has also commenced the development of a direct subscriber base. At September 30,
1997, the Company had approximately 3,400 users online.
The Company's plan of operation includes programs for marketing simultaneously
at two distinct levels. First, the Company is developing strategic marketing
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 that 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
information services provided by the Company. The Company can co-brand with its
Strategic Marketing Partner or offer its services solely under its Strategic
Marketing Partner's name.
The Company is working with these Strategic Marketing Partners to assure
consumer awareness of the Company's services. Programs under development with
existing Strategic Marketing Partners include direct marketing, cable television
commercials, mailer inserts and in-store promotions.
Secondly, the Company has initiated a direct marketing program for its SmartServ
"Pro" stock quote services. The response from advertisements in Investors'
Business Daily and television commercials run on cable station CNBC have
demonstrated that a strong and active market exists for this information.
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, the Internet, PDAs, interactive voice response
systems, and other devices is contingent on management's ability to penetrate
the following four markets targeted by the Company:
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* 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 Marketing Partners. It is
anticipated that a "private labeled" online information package will
be offered to the Strategic Marketing Partner's clients, and that this
package will include proprietary Strategic Marketing Partner
information in combination with other information provided by the
Company. As a result, the Strategic Marketing 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. Several Regional Bell Operating Companies
have informed the Company that they are interested in promoting their
CLASS services, examples of which include caller ID and enhanced call
waiting with ID. 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 information to their users on PCs are
currently in discussions with the Company to provide 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 through the
Company. Certain information will reside on the Company's information
platform, in other instances, the Company's systems are linked to the
systems of its information providers and/or Strategic Marketing
Partners.
* DIRECT SUBSCRIBERS
The Company intends to continue to offer its services under the name
"SmartServ Online" directly to consumers, in particular to those
consumers interested in real time financial market information. The
Company believes that its services are attractive to consumers because
the information is presented in a user-friendly manner on relatively
inexpensive devices such as personal computers and screen-based
phones.
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STRATEGIC MARKETING PARTNER RELATIONSHIPS
Strategic Marketing Partners and the related marketing arrangements are as
follows:
SCHRODER & CO., INC. has announced the availability of the Company's
services to its correspondent relationships. The Company has also been
selected by Schroder to provide new innovative financial online services to
its correspondent firms. Andrew Peck & Associates, Inc. has deployed the
Company's information services to its customers, providing such customers
with the ability to receive real-time stock quotes and to execute
securities transactions online through a PC. Additionally, First Montauk
Securities, Inc. has announced the availability of the Company's
"BrokerNet" product to its 400 retail stock brokers. During the year ended
June 30, 1997, the Schroder relationship accounted for approximately 46.4%
of the Company's revenues.
HERZOG, HEINE, GEDULD, INC. has agreed to offer the Company's services to
its customers and those of its correspondent relationships. The Company has
been restricted from furtherance of this relationship as a result of its
limited personnel availability and working capital constraints.
SPRINT COMMUNICATIONS CORP. entered into an agreement with the Company for
the marketing and distribution of the Company's suite of information and
entertainment services to Sprint's Las Vegas telephone customers commencing
March 1997. The launch of the "Sprint Information Services" program
included a comprehensive direct marketing program to its embedded base of
existing screen phone customers, and a 500,000 piece insertion in monthly
customer statements. Of particular significance as regards customer
retention is the fact that Sprint has incorporated the Company's billing
information on page 3 of its monthly customer statements. In September
1997, the companies entered into a 3 year contract with respect to the
expansion of the Company's services into markets nationwide. The Company
anticipates that this will result in the deployment of the Company's
information services in Florida, New York, North Carolina and other
designated markets as part of a national campaign. Although the Company
believes that several thousand customers will receive online information
services in the first year of this alliance and that ultimately the
customer base will exceed 60,000 users, no assurance can be given that the
Company's information services will be accepted on such a wide-spread
basis.
WINK COMMUNICATIONS has entered into an agreement with the Company to
provide the Company's financial and entertainment information via
interactive cable TV to potentially millions of viewers. Wink has been
selected as the technology of choice by the major cable box manufacturers,
including Pioneer Digital Technologies, Scientific Atlanta and General
Instrument. The Company has been restricted from furtherance of this
relationship as a result of its limited personnel availability and working
capital constraints.
AT&T WORLDNET has entered into an agreement with the Company for the
co-branding and marketing of the Company's online information and AT&T's
internet product, "WorldNet". This alliance represents a potential source
of revenues to the Company and provides the Company's customers with the
assurance of high quality service and connectivity through AT&T's worldwide
network.
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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. 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 Investors Business Daily. The Company has been
restricted from furtherance of this relationship as a result of its limited
personnel availability and working capital constraints.
CIDCO INCORPORATED has entered into an agreement with the Company whereby
CIDCO will market screen-based phones with access to the Company's online
information services and assist in the development of other Analog Display
Services Interface based applications. The Company has been restricted from
furtherance of this relationship as a result of its limited personnel
availability and working capital constraints.
The Company continues to have discussions about potential marketing
opportunities with other major telecommunications and stock brokerage companies;
however, there can be no assurance that the Company will enter into agreements
with any such companies.
MARKETING VEHICLES
DIRECT MARKETING -- The Company has implemented a targeted, direct marketing
program aimed at the small office/home office, business professional, private
investor and retail consumer markets. These programs have included and will
continue to include advertising in financial related magazines and newspapers,
cable television commercials, and subscriber referral programs. The Company also
plans to promote SmartServ Online on the Internet, through its Internet home
page (smartserv.com), from which the Company's communications software can be
downloaded, as well as through other reciprocal marketing arrangements with
Zacks Investment Research, Inc., Bell South.net, and Q-Up Systems.
STRATEGIC PARTNER MARKETING -- The Company's intent is to continue to work with
its current and potential Strategic Marketing Partners to enhance the efficiency
and effectiveness of their marketing and distribution efforts. Each Strategic
Marketing Partner approaches the market differently depending on its business
strategy, consumer mix and competitive situation. It is expected that a
potential Strategic Marketing 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 support to enhance the effectiveness of a
potential Strategic Marketing Partner's marketing efforts. For example, the
design and preparation of the specific product offering, collateral and other
promotional materials will be coordinated with a potential Strategic Marketing
Partner to reflect the best overall positioning of the product to the consumer.
The Company has demonstrated and intends to continue to demonstrate that it has
the technological infrastructure and ability to distribute online information to
the customers of actual and potential Strategic Marketing Partners. This is
typically done via a testing program with design input from the Strategic
Marketing Partner.
The Company's services are priced, as determined by the Company and the
Strategic Marketing Partner, based on a pre-negotiated monthly base charge and
transaction fees derived from specific value-added
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services purchased by end users. The monthly base charge varies, between $7.95
and $300.00 per month, depending on the product offered and market segment
served. Certain services include a specific amount of access time providing that
additional usage beyond the specified amount is billed based upon a negotiated
rate. In the case of direct subscribers, subscriptions are automatically renewed
each month and fees are generally charged to credit cards until a subscriber
requests cancellation.
To attract direct subscribers and Strategic Marketing Partners, the Company
provides free trial periods of its custom communications software to potential
direct subscribers and Strategic Marketing Partners to allow them to sample the
Company's services.
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, such as Online Resources and Communications Corporation,
and InteliData Technologies, the Company also faces increasing competition from
other emerging services delivered through PCs, such as developing transactional
services offered by Checkfree Corporation, Microsoft Corp., PC Quote, Inc.,
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 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, 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 Marketing Partners,
and its ability to provide what is believed to be a unique software architecture
should enable the Company to compete effectively.
SOFTWARE
The Company has developed proprietary software that it believes makes its
services easy to use and visually appealing, and which utilize the capabilities
of screen-based phones, PCs, PDAs, the Internet, interactive voice response
systems, alpha-numeric pagers and PCS devices.
The Company has completed development of front-end communications software
(i.e., a user interface) for screen-based phones, PCs and PDAs, the Internet,
interactive voice response systems and alpha-numeric pagers. Such display
software creates a user-friendly method allowing the user to communicate with
the
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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, 1997 and 1996, the Company incurred
$1,150,224 and $1,037,941, respectively, for research and project development
activities. It is estimated that the Company will require between $150,000 and
$200,000 to support the additional programming and supervisory personnel
necessary to integrate the Company's software with the information systems of
each of its Strategic Marketing Partners.
PROPRIETARY RIGHTS
The Company has designed and developed its own "device independent" 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. This platform formats information for a particular device and
presents it in a user friendly manner. 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 Marketing 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 the mark "SmartServ Online" 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 be 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
Online" as a service mark for its platform services and as a trademark for
related computer hardware. Additionally, the Company is considering 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 upon copyrights or other rights of such parties. To date, the Company
has received one such communication, dated May 23, 1995, but believes that the
assertion contained therein is without merit. Since the receipt of such letter,
the Company has not received further correspondence. 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 features,
content or services or that any such assertion may not require the Company to
enter into royalty arrangements or result in litigation.
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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, or
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 22 people, of whom 19 are full-time employees. It is
anticipated that a minimum of 3 to 6 people will be added during the period
ending December 31, 1997, in response to the computer programming requirements
of Strategic Marketing 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 occupies approximately 6,300 square feet in a leased facility
located in Stamford, Connecticut. The lease expires in October 2002.
ITEM 3. LEGAL PROCEEDINGS
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As previously reported, 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"). Strategica asserted a counterclaim
against the Company for breach of contract. The Company and Strategica entered
into a settlement agreement providing for the payment of $100,000 by the
Company.
There are no other pending or threatened material legal proceedings against the
Company or any of its properties.
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
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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"). 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.
On May 22, 1997, the Company received notification from The Nasdaq Stock Market
that with the filing of Form 10-QSB for the quarter ended March 31, 1997, the
Company no longer met the total asset and net capital requirements of $2,000,000
and $1,000,000, respectively, for continued listing of the Company's securities
on The Nasdaq Stock Market. Commencing September 17, 1997, NASDAQ changed the
trading symbol for the Company's Common Stock and Warrants from SSOL and SSOLW
to SSOLC and SSOWC, respectively, subject to compliance with its total asset and
net capital requirements on or prior to September 30, 1997.
The Company completed a private placement of $4 million of Prepaid Common Stock
Purchase Warrants on September 30, 1997 and has submitted various information to
NASDAQ to demonstrate the Company's compliance with NASDAQ's listing
requirements. The Company's Common Stock and Warrants will continue to trade
under SSOLC and SSOWC pending approval of the financing transaction by NASDAQ.
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, 1997
First Quarter $ 7.500 $ 4.750 $ 3.8750 $ 2.5000
Second Quarter 6.375 4.250 3.2500 1.2500
Third Quarter 5.375 4.375 2.0625 1.3125
Fourth Quarter 4.625 1.875 1.5000 0.5312
YEAR ENDED JUNE 30, 1996
Third Quarter 7.500 6.000 4.125 3.000
Fourth Quarter 8.250 5.500 4.500 2.750
As of October 9, 1997 the Company had 3,695,000 shares of Common Stock
outstanding held by 53 record holders. The Company estimates that the Common
Stock is held by approximately 1,500 beneficial holders. As of such date, the
Company had 2,762,000 Warrants outstanding held by 20 record holders.
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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, the
Internet, interactive voice response systems, alpha-numeric paging devices and
other personal communications systems to clients of potential Strategic
Marketing Partners, as well as to prospective direct subscribers. The Company
has exited from the development stage with the completion of its software
architecture and product offering and has commenced the implementation its
marketing strategies.
The Company's plan of operation includes programs for marketing simultaneously
at two distinct levels. At the first level, the Company is developing strategic
marketing 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. Screen phones were developed to facilitate the use
of caller ID, call waiting and other services offered at a premium by the
telephone companies. 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 as a value-added
benefit.
The Company is also working with businesses that desire to provide new services,
such as those provided by the Company, to an existing base of clients. Examples
include brokerage firms, such as Andrew Peck & Associates, Inc., First Montauk
Securities, Inc., and other correspondents of Schroder & Co., Inc. whose clients
can benefit from the efficiency, convenience and timeliness of the information
services provided by the Company. The Company will co-brand with its Strategic
Marketing Partner or offer its services under its Strategic Marketing 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.
The Company is working with Strategic Marketing Partners to assure awareness of
the Company's services by consumers. Programs under development with existing
Strategic Marketing Partners, such as Northern Telecom and CIDCO Incorporated,
include direct marketing, package inserts, and in-store promotions.
At the second level, the Company has initiated a direct marketing program for
its SmartServ "Pro" stock quote services. The response to advertisements in
Investors' Business Daily and television commercials run on cable station CNBC
have demonstrated that a strong and active market exists for this information.
Management believes that most of the Company's revenues will ultimately be
derived from end users who purchase the Company's services through Strategic
Marketing Partners with mass distribution capabilities. The Company anticipates
that Strategic Marketing Partners will brand the Company's "bundled" information
services with their own private label, promote the packaged offering and then
distribute the Company's information package on screen-based phones, PCs, PDAs,
the Internet, interactive voice response systems, alpha-numeric pagers and other
PCS devices to their clients. The Company has the ability to customize the
information package to be offered to each Strategic Marketing Partner, and in
turn to their end users. The Company is also developing a direct subscriber
base.
14
<PAGE>
Management anticipates that staffing requirements associated with the
implementation of its plan of operation will result in the addition of a minimum
of 3 to 6 personnel during the period ending December 31, 1997. Such personnel
will be added to assist with the programming requirements of Strategic Marketing
Partners' product offerings and for customer support.
RESULTS OF OPERATIONS
During the fiscal year ended June 30, 1997, the Company commenced the
implementation of its marketing strategies. Sales of the Company's retail stock
quote product and related screen-based telephones were approximately $323,586
and sales to Sprint customers were approximately $22,775. Additionally, revenues
from the enhancement, implementation and marketing of services to Strategic
Marketing Partners were $342,249. At September 30, 1997, the Company has
approximately 3,400 customers. Of such number, 2,200 have been generated through
the Company's relationship with Sprint, 1,100 result from the SmartServ "Pro"
advertising and marketing program aimed at the PC based real-time stock quote
user, and 100 are related to the Company's arrangement with Schroder & Co., Inc.
There can however, be no assurance that the Company's product offering will
continue to be accepted in the marketplace.
FISCAL YEAR ENDED JUNE 30, 1997 VERSUS FISCAL YEAR ENDED JUNE 30, 1996
During the year ended June 30, 1997, the Company commenced the implementation of
its marketing plan and recorded revenues of $346,361 from the sale of its
information services and related screen-based telephones. Additionally, the
Company recorded revenues of $342,249 related to enhancement, implementation,
and marketing of services associated with its arrangement with Schroder & Co.,
Inc.
During the year ended June 30, 1997, with the Company's departure from the
development stage, it incurred costs of revenues of $1,133,884. Such costs
consisted primarily of information and communication costs ($390,000), personnel
costs ($417,500), computer hardware leases and maintenance ($201,800) and
screenphone purchases ($95,300). Product development costs were $1,150,224 vs.
$1,037,941 for the year ended June 30, 1996. Such costs consisted primarily of
personnel costs ($686,100) and computer system consultants ($454,000). Included
in personnel costs is a non-cash charge of approximately $73,000 for the change
in market value of employee stock options. During the year ended June 30, 1996,
such product development expenses consisted primarily of personnel costs.
Included therein were fees of $103,500 that were received from Strategic
Marketing Partners for the design and development of software applications.
15
<PAGE>
During the year ended June 30, 1997, the Company incurred selling, general and
administrative expenses of $2,861,845 vs. $1,220,340 for the year ended June 30,
1996. Such costs were incurred primarily for personnel costs ($893,650),
facilities ($148,000), marketing costs ($275,350), advertising costs ($540,000),
professional fees ($456,600), and telecommunications costs ($85,900). Included
in personnel costs is a non-cash charge of approximately $115,000 related to the
change in value of employee stock options. Selling, general and administrative
costs increased $1,641,505 over the prior year as a result of the Company's
efforts to build an infrastructure capable of supporting its operations and the
marketing and advertising of its information product offering. Such cost
increases were primarily for advertising ($382,000), marketing and customer
support personnel ($231,000), marketing consultants ($125,000), professional
fees ($235,000), investor and public relations consulting ($102,300) and
financial consulting fees ($115,000), and for additional managerial personnel
and salaries ($125,000). The necessary funds to support these efforts were
provided by the Company's Initial Public Offering ("IPO") in March 1996 and
revenues from information sales and services.
Interest income for the year ended June 30, 1997 amounted to $74,507 vs. $51,527
for the year ended June 30, 1996. Such amounts were earned primarily from the
Company's investments in highly liquid commercial paper. Interest and financing
costs for the year ended June 30, 1997 were $51,646. Such amounts were incurred
in connection with the issuance of short-term notes payable and associated
common stock purchase warrants. Interest and financing costs for the year ended
June 30, 1996 were incurred in connection with the senior and subordinated
notes, as well as the bridge financing outstanding during the period and
amounted to $759,533.
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 IPO 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 Marketing Partners to assist in the development of computer
software applications for use by both the Company and its Strategic Marketing
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 expenses 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 IPO
($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 the 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 $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 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 Stategica, 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.
16
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
Since inception of the Company on August 20, 1993 through March 21, 1996, the
date of the IPO, the Company had funded its operations through a combination of
private debt and equity financings totaling $2,900,000 and $300,000,
respectively.
The IPO 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 IPO were approximately $1,589,000. In conjunction with
the IPO, 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 IPO. Additionally, the
Company retired senior notes amounting to $462,502, as well as the short-term
notes amounting to $1,200,000.
During the first half of the year ended June 30, 1997, the Company's operations
were funded through the proceeds of the March 1996 IPO and revenues generated
from the Company's marketing and advertising programs. Commencing with the
second half of 1997, the Company experienced both equity and working capital
constraints resulting from the information delivery system's inability to
support and retain the volume of users generated by the Company's marketing and
advertising programs. In May 1997, the Company arranged a line of credit
facility with a financial institution. Such line of credit was originated for a
maximum borrowing amount of $550,000. In July and September 1997 the facility
was amended to allow for additional borrowings of up to $222,222. In conjunction
with the origination of the line of credit facility, the Company issued 250,000
common stock purchase warrants to the financial institution. Similarly, the
Company issued 50,500 warrants for each of the July and September amendments. As
a result of the Company's default on the note in August, the Company was
required to issue 300,500 "default" warrants to such institution. These 651,500
warrants have been issued at exercise prices ranging from $1.125 to $2.825 and
expire in September 2002. The exercise price of these warrants was adjusted in
September 1997 to a maximum of $1.40. The Company will record a charge for the
issuance of the default and amendment warrants in the quarter ended September
30, 1997.
In May 1997, the Company entered into a 3 year noncancelable capital lease for
certain computer equipment used to provide information services. The cost of
this equipment ($246,211) is being financed through the manufacturer's finance
division.
On September 30, 1997, The Zanett Securities Company ("Zanett"), acting as
placement agent for the Company, completed a private placement ("Placement") of
$4 million of the Company's Prepaid Common Stock Purchase Warrants ("Prepaid
Warrants"). The sale of these Prepaid Warrants was exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Regulation
D. Each Prepaid Warrant entitles the holder to purchase that number of shares of
Common Stock that is equal to $1,000 divided by the applicable exercise price.
Such exercise price is determined initially as 70% of the average closing bid
price of the Common Stock for the 10 trading days ending on the day prior to
exercise of the Prepaid Warrants. Additionally, the exercise discount shall by
increased by 1% for each subsequent 60 day period that the Prepaid Warrants
remain unexercised. The exercise price, however, shall never exceed $1.40. The
Prepaid Warrants may be exercised on the earlier of the date upon which a
registration statement is declared effective by the SEC or December 29, 1997.
The sale of Common Stock issued upon exercise of the Prepaid Warrants is
restricted to one-third for the first 60, 90 and 120 days subsequent to the
registration statement becoming effective. The Prepaid Warrants expire on
September 30, 2000.
17
<PAGE>
As compensation for the successful completion of the Placement, Zanett received
a placement fee and an unaccountable expense allowance of 10% and 3%,
respectively, of the gross proceeds of the Placement. Additionally, the Company
issued 600,000 Common Stock Purchase Warrants to Zanett that are exercisable at
$1.125 per share of Common Stock.
Also in conjunction with the Placement, the Company entered into an agreement
with a financial consultant who is an affiliate of Zanett Lombardier, Ltd, an
investor in the Prepaid Warrants. During the five-year term of the agreement
this consultant will provide the Company with advisory services relating to
financial and strategic ventures and alliances, investment banking and general
financial advisory services, and advice and assistance with the Company's market
development activities. As compensation for these services, the Company issued
3,555,555 Common Stock Purchase Warrants to this financial consultant that are
exercisable at $1.125 per share of Common Stock. The Company has valued these
warrants using the Black-Scholes pricing methodology at approximately
$4,400,000. Such amount will be recorded in stockholders' equity as unearned
compensation and amortized to income over the five-year term of the agreement.
As part of the Placement, Zanett converted a note payable of $772,222, issued
pursuant to a Line of Credit Agreement dated May 29, 1997, as amended, and
accrued interest thereon of $63,837 into Prepaid Warrants. The net proceeds of
the Placement of $2,643,941 will be used for general working capital
requirements.
The Company has entered into a 3 year contract with Sprint/United Management
Corp. and is currently negotiating agreements with several major stock brokerage
firms. The Company's management believes that upon the successful implementation
of its marketing plan, sufficient revenues will be generated to meet operating
requirements. Management also believes that the successful execution of its
proposed plan of operations will generate sufficient cash flow from operations
to enable the Company to offer its services on an economically sound basis and
thereby eliminate, within a reasonable time period, the concerns expressed in
the "going concern" paragraph appearing in the Report of Independent Auditors on
page 20 herein. No assurance can be given that such goals will be obtained or
that any expected revenues or cash flows will be forthcoming.
Management estimates that, without a significant increase in revenues, net
proceeds from the Placement will be sufficient to support the Company's
operations through April 1998. 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.
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/A and in the Company's other Securities and Exchange Commission filings.
18
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
PAGE
Report of Independent Auditors 20
Balance Sheets as of June 30, 1997 and 1996 21
Statements of Operations for the years
ended June 30, 1997, 1996 and 1995 23
Statement of Stockholders' Equity (Deficiency)
for the years ended June 30, 1997, 1996 and 1995 24
Statements of Cash Flow for the years
ended June 30, 1997, 1996 and 1995 26
Notes to Financial Statements 27
19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
SmartServ Online, Inc.
We have audited the accompanying balance sheets of SmartServ Online, Inc. as of
June 30, 1997 and 1996, and the related statements of operations, stockholders'
equity (deficiency), and cash flows for each of the three years in the period
ended June 30, 1997. 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, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 1997, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that SmartServ
Online, Inc. will continue as a going concern. As more fully described in Note
1, the Company has incurred recurring operating losses and has both working
capital and net asset deficiencies. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
/S/ ERNST & YOUNG LLP
Stamford, Connecticut
October 6, 1997
20
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
JUNE 30
--------------------------
1997 1996
----------- -----------
ASSETS
Current assets
Cash $ 93,345 $ 3,460,850
Accounts receivable, net of an allowance
for losses of $6,000 in 1997 and $0 in 1996 149,782 57,990
Prepaid expenses 90,725 68,310
----------- -----------
Total current assets 333,852 3,587,150
----------- -----------
Property and equipment
Data processing equipment 564,098 280,814
Data processing equipment purchased
under a capital lease 246,211 --
Office furniture and equipment 69,196 37,051
Leasehold improvements 36,357 --
Display equipment 9,635 9,635
----------- -----------
925,497 327,500
Accumulated depreciation, including $8,207 for
equipment purchased under a capital lease (181,783) (68,601)
----------- -----------
743,714 258,899
----------- -----------
Other assets
Deferred charges 87,905 63,000
Security deposit 81,218 81,218
----------- -----------
169,123 144,218
----------- -----------
Total Assets $ 1,246,689 $ 3,990,267
=========== ===========
See accompanying notes.
21
<PAGE>
<TABLE>
<CAPTION>
JUNE 30
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable $ 829,355 $ 406,498
Accrued liabilities 211,813 76,353
Accrued interest 16,323 --
Payroll taxes payable 20,383 14,901
Salaries payable 46,018 44,654
Current portion of capital lease obligation 86,072 --
Deferred revenues 24,914 --
----------- -----------
Total current liabilities 1,234,878 542,406
----------- -----------
Long-term portion of capital lease obligation 160,139 --
Notes payable 550,000 --
Stockholders' equity (deficiency)
Common stock - $.01 par value
Authorized - 15,000,000 shares
Issued and outstanding - 3,695,000 shares at
June 30, 1997 and 1996 36,950 36,950
Additional paid-in capital 9,046,592 8,758,299
Accumulated deficit (9,781,870) (5,347,388)
----------- -----------
Total stockholders' equity (deficiency) (698,328) 3,447,861
----------- -----------
Total Liabilities and Stockholders' Equity (Deficiency) $ 1,246,689 $ 3,990,267
=========== ===========
</TABLE>
22
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-----------------------------------------
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Revenues $ 688,610 $ -- $ --
----------- ----------- -----------
Costs and expenses
Cost of services (1,133,884) -- --
Product development expenses (1,150,224) (1,037,941) (677,303)
Selling, general and administrative
expenses (2,861,845) (1,220,340) (769,821)
----------- ----------- -----------
Total costs and expenses (5,145,953) (2,258,281) (1,447,124)
----------- ----------- -----------
Loss from operations (4,457,343) (2,258,281) (1,447,124)
----------- ----------- -----------
Other income (expense):
Interest income 74,507 51,527 7,536
Interest expense (20,194) (242,000) (106,595)
Debt origination costs (31,452) (517,533) (300,000)
----------- ----------- -----------
22,861 (708,006) (399,059)
----------- ----------- -----------
Net loss $(4,434,482) $(2,966,287) $(1,846,183)
=========== =========== ===========
Net loss per share (Note 2) $ (1.20) $ (1.26) $ (1.12)
=========== =========== ===========
Weighted average shares outstanding
(Note 2) 3,695,000 2,355,000 1,643,000
=========== =========== ===========
</TABLE>
See accompanying notes.
23
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------------- PAID-IN ACCUMULATED
SHARES PAR VALUE CAPITAL DEFICIT
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balances at July 1, 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)
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>
(Continued)
See accompanying notes.
24
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(continued)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------------- PAID-IN ACCUMULATED
SHARES PAR VALUE CAPITAL DEFICIT
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balances at June 30, 1996 3,695,000 $ 36,950 $ 8,758,299 $(5,347,388)
Change in market value of employee options -- -- 188,293 --
Issuance of warrants in connection with
investment advisory services -- -- 75,000 --
Issuance of warrants in connection with
short-term line of credit -- -- 25,000 --
Net loss -- -- -- (4,434,482)
----------- ----------- ----------- -----------
Balance at June 30, 1997 3,695,000 $ 36,950 $ 9,046,592 $(9,781,870)
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
25
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(4,434,482) $(2,966,287) $(1,846,183)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 149,182 41,285 23,647
Write-off of software development costs -- -- 181,956
Provision for losses on and write-off of receivables 29,248 -- --
Noncash charges for interest expense -- 94,274 --
Noncash debt origination costs 30,449 477,089 300,000
Compensation expense 188,293 165,773 --
Consulting services 75,000 (10,002) 125,002
Other changes that provided (used) cash
Accounts receivable (121,040) (57,990) --
Inventories -- 10,440 (4,564)
Prepaid expenses (22,415) (23,641) (1,461)
Accounts payable and accrued liabilities 558,317 178,136 121,482
Accrued interest 16,323 (106,595) 106,595
Payroll taxes payable 5,482 (73,282) 57,451
Salaries payable 1,364 16,462 12,068
Unearned revenue 24,914 -- (25,000)
----------- ----------- -----------
Net cash used in operating activities (3,499,365) (2,254,338) (949,007)
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of equipment (351,786) (190,973) (43,116)
----------- ----------- -----------
Net cash used in investing activities (351,786) (190,973) (43,116)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from the issuance of common stock -- 8,705,000 --
Proceeds from the issuance of warrants -- 202,510 --
Proceeds from issuance of debt -- -- 25,000
Repayment of debt -- (612,500) --
Proceeds from the issuance of notes -- -- 337,500
Repayment of notes -- (452,500) --
Proceeds from the issuance of short-term notes 493,646 999,000 --
Repayment of short-term notes -- (1,200,000) --
Due from officers, net -- (38,497) 46,766
Capital contribution -- -- (9)
Deferred charges (10,000) (108,000) --
Costs of issuing common stock and warrants -- (1,588,852) --
----------- ----------- -----------
Net cash provided by financing activities 483,646 5,906,161 409,257
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents (3,367,505) 3,460,850 (582,866)
Cash at beginning of year 3,460,850 -- 582,866
=========== =========== ===========
Cash at end of year $ 93,345 $ 3,460,850 $ --
=========== =========== ===========
</TABLE>
See accompanying notes.
26
<PAGE>
SMARTSERV ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND LIQUIDITY
SmartServ Online, Inc. (the "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, the Internet, interactive voice response systems, alpha-numeric
pagers and other personal communications systems. The Company also offers a
range of services designed to meet the varied needs of clients of potential
Strategic Marketing 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, research and analysis reports,
trading activity reports by insiders of corporations, online FedEx package
tracking, electronic mail, national weather reports and other business and
entertainment information. The Company's software architecture and capabilities
format information for a particular device and present the information in a
user-friendly manner.
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.
The Company has completed development of its information platform and
communications software and exited the developmental stage; however, it has yet
to generate significant revenues. The Company's financial statements for the
year ended June 30, 1997 have been prepared on a going concern basis which
contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The Company incurred a net loss of
$4,434,482 for the year ended June 30, 1997 and as of such date had an
accumulated deficit of $9,781,870. In addition, the Company has a working
capital deficiency of approximately $901,000 and a deficiency of net assets of
approximately $698,000. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
On September 30, 1997, the Company completed a private placement ("Placement")
of $4 million of Prepaid Common Stock Purchase Warrants ("Prepaid Warrants") as
more fully disclosed in Note 11. An integral part of this Placement was the
conversion of notes payable and accrued interest thereon, aggregating $836,059,
into such Prepaid Warrants. The net proceeds to the Company of $2,643,941 will
provide it with working capital and allow it to continue its marketing efforts.
However, the Company's ability to generate fee revenue and working capital may
not be sufficient to meet management's objectives as presently structured.
Management recognizes that the Company must generate additional revenues or
consider modifications to its sales and marketing program or institute cost
reductions to allow it to continue to operate with available cash resources.
There is no assurance that the Company will generate future revenues or cash
flow from operations. Accordingly, without a significant increase in revenues,
management estimates that the Placement's net proceeds will be sufficient to
support the Company's operations through April 1998. The Company's plans for
increasing cash resources in the event of limited acceptance of its product in
the marketplace could include additional funding through private or public
offerings and additional credit facility arrangements.
27
<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 Marketing
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. In September
1997, the Company signed a 3 year contract with a major telecommunications
company for the delivery of the Company's information services into additional
markets beyond an initial trial city. The Company anticipates that this will
result in the deployment of the Company's information services in Florida, New
York, North Carolina, Chicago, Los Angeles and other designated markets as part
of a national campaign.
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 a stock brokerage
company in an effort to provide proprietary account information to the customers
of its correspondent relationships. As a direct result of this relationship, the
Company is providing its stock quote product and online trading services to the
customers of a correspondent relationship. Additionally, the Company has an
agreement with another correspondent firm to make the Company's "BrokerNet"
program available to its 400 independent stockbrokers.
Management believes that the Company's primary source of revenues will be
derived from consumers who purchase the services through its Strategic Marketing
Partners. This strategy provides for the distribution of information services to
a potentially large audience. In an effort to diversify its revenue base, the
Company has commenced development of a direct subscriber base. Through
advertisements in business periodicals such as Investors' Business Daily and
television commercials run on cable station CNBC, the Company has had success in
marketing its SmartServ "Pro" stock quote service. At September 30, 1997, the
Company had a subscriber base of approximately 3,400.
28
<PAGE>
Notwithstanding the execution of a contract with a telecommunications company
and the continual discussions with potential Strategic Marketing Partners about
potential marketing relationships, there can be no assurance that the Company's
products and services will continue to be accepted in the marketplace by the
ultimate consumers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
- ---------------------
The financial statements are prepared in conformity with generally accepted
accounting principles. During the year ended June 30, 1997, the Company exited
the development stage.
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.
REVENUE RECOGNITION
- -------------------
Revenues are recognized as services are provided. Deferred subscription fees,
resulting from customer prepayments, are recognized over the term of the
subscription period.
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 prior to the Initial Public Offering,
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 consist primarily of accounts receivable. There is no single
geographic concentration of sales or related accounts receivable in the United
States. At June 30, 1997 accounts receivable consist principally of amounts due
from a major credit card company ($26,250), a stock brokerage firm ($83,400),
and a telecommunications company ($25,000). The Company performs periodic credit
evaluations of its customers and provides for credit losses in the financial
statements.
PROPERTY AND EQUIPMENT
- ----------------------
Property and equipment are stated at cost and include equipment purchased under
a capital lease. Depreciation is computed using the straight-line method over
estimated useful lives of three to ten years.
ADVERTISING COSTS
- -----------------
Advertising costs are expensed as incurred and were approximately $540,000 in
1997. No such costs were incurred in 1996 or 1995.
29
<PAGE>
STOCK BASED COMPENSATION
- ------------------------
The Company maintains a stock option plan for employees and non-employee
directors that provides for the granting of stock options for a fixed number of
shares with an exercise price equal to the fair value of the shares at the date
of grant. The Company accounts for this stock compensation plan in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees".
Accordingly, compensation expense is recognized to the extent that the fair
value of the stock exceeds the exercise price of the option at the measurement
date. In 1997, the Company adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-based
Compensation".
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement 128, Earnings Per Share. Statement 128 establishes standards for
computing and presenting earnings per share. This Statement simplifies the
standards for computing earnings per share previously required by APB Opinion
No. 15, and makes them comparable to international EPS standards. Also in
February 1997, the FASB issued Statement No. 129, Disclosure of Information
about Capital Structure. This Statement established standards for disclosing
information about an entity's capital structure. Both of these statements are
effective for fiscal years ending on or after December 15, 1997. The Company
plans to adopt and apply the provisions of these statements for the fiscal year
ending June 30, 1998. The resulting effect of the application of these
statements is not expected to have a material impact on the financial
statements.
3. NOTES PAYABLE
On May 29, 1997, the Company entered into a line of credit facility with a
financial institution for a maximum borrowing thereunder of $550,000. Borrowings
under this facility were to be repaid on August 27, 1997 along with interest at
the rate of 24% per annum. On July 21, 1997 and September 16, 1997, the facility
was amended to provide for additional borrowings of up to $222,222. On September
30, 1997, notes payable of $772,222 and accrued interest thereon of $63,837 were
converted into the Company's Prepaid Warrants as more fully described in Note
11.
In conjunction with the origination of the line of credit facility, the Company
issued 250,000 common stock purchase warrants to the financial institution.
Similarly, the Company issued 50,500 warrants for each of the July and September
amendments. As a result of the Company's default on the note in August, the
Company was required to issue 300,500 "default" warrants to such institution.
These 651,500 warrants have been issued at exercise prices ranging from $1.125
to $2.825 and expire in September 2002. The exercise price of these warrants was
adjusted in September 1997 to a maximum of $1.40. The Company will record a
charge for the issuance of the default and amendment warrants in the quarter
ended September 30, 1997.
The value ($25,000) ascribed to the 250,000 warrants is being amortized over the
life of the debt as additional interest expense.
30
<PAGE>
4. DEBT
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 years ended June 30, 1997, 1996 and 1995 was
$9,194, $327,600, and $0, respectively.
During the year ended June 30, 1997, the Company leased computer equipment with
a capitalized cost of $246,211. The recording of such costs and the related
capitalized lease obligation are non-cash transactions for the purposes of the
Statement of Cash Flows.
5. EQUITY TRANSACTIONS
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 at any time during the five year
period ending March 20, 2001. These warrants cannot 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.
31
<PAGE>
Also in connection with the Initial Public Offering, the Company sold to the
Underwriter for $10.00 warrants ("Underwriter's Warrants") for the purchase of
150,000 shares of common stock and 150,000 common stock purchase warrants. 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.
During the year ended June 30, 1997, the Company issued warrants for the
purchase of 200,000 shares of common stock in connection with certain investment
advisory agreements. Such warrants are exercisable at prices ranging from $2.00
to $4.00 per share through May 2002.
On June 30, 1997, the Company had warrants outstanding to purchase 2,762,500
shares of its common stock at prices ranging from $2.00 to $12.00 per share,
expiring in fiscal years 2001 and 2002.
6. INCOME TAXES
At June 30, 1997 and 1996, the Company has recorded deferred tax assets
aggregating $4,023,000 and $2,125,000, respectively. The composition of the
deferred tax asset is as follows:
1997 1996
---- ----
Capitalized Start-up Costs $ 1,486,000 $ 1,858,000
Net Operating Loss Carryforwards 2,537,000 267,000
-------------- -------------
$ 4,023,000 $ 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 $4,066,000 from $2,125,000 at June 30, 1996 and from $806,000 at June 30,
1995.
At June 30, 1997, the Company has net operating loss carryforwards for Federal
income tax purposes of approximately $6,075,000 which expire in the years 2009
through 2012. 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.
7. LEASES
The Company leases office space at its Stamford, Connecticut headquarters under
a noncancelable lease. The lease includes escalation clauses for items such as
real estate taxes, building operation and maintenance expenses and electricity
usage.
On May 1, 1997, the Company entered into a 3 year noncancelable capital lease
for certain computer equipment used to provide information services.
Rent expense amounted to approximately $148,000, $111,000 and $110,000 for the
years ended June 30, 1997, 1996 and 1995, respectively.
32
<PAGE>
Minimum future rental payments at June 30, 1997 are as follows:
OPERATING CAPITAL
LEASE LEASE
-------------- -------------
FISCAL YEAR ENDING JUNE 30
1998 $ 167,100 $ 117,200
1999 173,400 100,500
2000 179,700 83,700
2001 186,000 --
2002 192,300 --
Thereafter 67,000 --
-------------- -------------
$ 965,500 301,400
==============
Less amounts representing interest 55,189
-------------
$ 246,211
=============
8. COMMITMENTS
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"). Strategica asserted a counterclaim against the Company
for breach of contract. The Company and Strategica entered into a settlement
agreement providing for the payment of $100,000 by the Company.
9. SIGNIFICANT RELATIONSHIPS
During the year ended June 30, 1997, one Strategic Marketing Partner
relationship accounted for approximately 46.4% of the Company's revenues.
10. 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 Section 422 of the Internal Revenue Code of
1986, as amended, or as nonqualified stock options. The Plan provides for the
exercise of 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 on the tenth anniversary of the date of grant. Pursuant to the terms
of the Plan, each nonemployee director of the Company receives an initial grant
to purchase 5,000 shares of common stock upon joining the Board, as well as 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.
33
<PAGE>
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 varied with the changes in market value of the
underlying stock. On July 16, 1996, the Board of Directors voted to cancel the
outstanding employee options and reissue options covering a like number of
shares to employees at an exercise price not less than the fair value ($5.06) at
that date.
On September 24, 1997, the Board of Directors voted to cancel the outstanding
employee and non-employee director options and reissue options covering a like
number of shares to employees and non-employee directors at an exercise price
not less than the fair value at that date.
Information concerning stock options for the Company's stock option plan is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------
1997 1996
------------------------ --------------------------
Average Average
Exercise Exercise
Options Price Options Price
----------- --------- ----------- ---------
<S> <C> <C>
Outstanding, beginning of year 311,550 $ 6.47 -- --
Granted 424,975 5.23 311,550 $ 6.47
Exercised -- -- -- --
Cancelled 398,175 6.22 -- --
----------- --------- ----------- -------------
Outstanding, end of year 338,350 5.21 311,550 6.47
=========== ========= =========== =============
Exercisable, end of year 25,000 6.11 -- --
=========== ========= =========== =============
Available for grant, end of year 61,650 88,450
=========== ===========
</TABLE>
The following table summarizes information about the Company's stock options
outstanding as of June 30, 1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Average
Average Remaining Average
Range of Numbers of Exercise Contractual Numbers of Exercise
Exercise Prices Options Prices Life (Years) Options Price
- -------------------------- ---------- --------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
$5.06 to $6.25 338,350 $ 5.21 7.0 25,000 $ 6.11
========== ========= =============== =========== ==========
</TABLE>
34
<PAGE>
Supplemental and Pro Forma Disclosure
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." This Statement requires companies to recognize compensation
expense based on the respective fair values of the options at the date of grant.
Companies that choose not to adopt the new rules will continue to apply the
existing accounting rules contained in APB No. 25, but are required to disclose
the pro forma effects on net income and earnings per share, as if the fair value
based method of accounting had been applied.
The pro forma information regarding net income and earnings per share required
by Statement 123 has been determined as if the Company had accounted for its
employee stock option plan under the fair value methods described in that
Statement. The fair value of options granted under the Company's employee stock
option plan were estimated at the date of grant using the Black-Scholes option
pricing model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected dividend yield,
the expected life of the options, the expected stock price volatility and the
risk-free interest rate.
Pertinent assumptions with regard to the determination of fair value of the
options and the their impact on earnings per shares are as follows:
1997 1996
------ ------
Weighted average dividend yield for options granted 0.0% 0.0%
Weighted average expected life in years 5.0 5.0
Weighted average volatility 70.8% 70.8%
Risk-free interest rate 6.5% 6.28%
Weighted average grant date fair value of options $3.30 $4.07
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. As such, the pro forma
net loss and loss per share are not indicative of future years.
The Company's pro forma information is as follows:
Year ended June 30,
-------------------------------------------------
1997 1996
-------------------- --------------------
Reported Pro Forma Reported Pro Forma
-------- --------- -------- ---------
Loss per share: $ 1.20 $ 1.41 $ 1.26 $ 1.37
======== ========= ======== =========
35
<PAGE>
11. SUBSEQUENT EVENTS
On September 30, 1997, The Zanett Securities Company ("Zanett"), acting as
placement agent for the Company, completed the private placement ("Placement")
of $4 million of the Company's Prepaid Common Stock Purchase Warrants ("Prepaid
Warrants"). The sale of these Prepaid Warrants was exempt from the registration
requirements of the Securities Exchange Act pursuant to Regulation D thereof.
Each Prepaid Warrant entitles the holder to purchase that number of shares of
Common Stock that is equal to $1,000 divided by the applicable exercise price.
Such exercise price is determined initially as 70% of the average closing bid
price of the Common Stock for the 10 trading days ending on the day prior to
exercise of the Prepaid Warrants. Additionally, the exercise discount shall be
increaseed by 1% for each subsequent 60 day period that the Prepaid Warrants
remain unexercised. The exercise price, however, shall never exceed $1.40. The
Prepaid Warrants may be exercised on the earlier of the date upon which a
registration statement is declared effective by the SEC or December 29, 1997.
The sale of Common Stock issued upon exercise of such Warrants is restricted to
one-third for the first 60, 90 and 120 days subsequent to the registration
statement becoming effective. The Prepaid Warrants expire on September 30, 2002.
Terms of the Placement, included the conversion by Zanett, of a note payable in
the amount of $772,222 and accrued interest thereon of $63,837 into Prepaid
Warrants. The net proceeds of the Placement of $2,643,941 will be used for
general working capital requirements.
As compensation for its services, Zanett received a placement fee and an
unaccountable expense allowance of 10% and 3%, respectively, of the gross
proceeds of the Placement. Additionally, the Company issued 600,000 Common Stock
Purchase Warrants to Zanett that are exercisable at $1.125 per share of Common
Stock. These warrants expire on September 30, 2002.
Also in conjunction with the Placement, the Company entered into an agreement
with a financial consultant who is an affiliate of Zanett Lombardier, Ltd, an
investor in the Prepaid Warrants. During the five-year term of the agreement
such consultant will provide the Company with advisory services relating to
financial and strategic ventures and alliances, investment banking and general
financial advisory services, and advice and assistance with the Company's market
development activities. As compensation for these services, the Company issued
3,555,555 Common Stock Purchase Warrants to this consultant that are exercisable
at $1.125 per share of Common Stock. The Company has valued these warrants using
the Black-Scholes pricing methodology at approximately 4,400,000. Such amount
will be recorded in stockholders' equity as unearned compensation and amortized
to income over the five-year term of the agreement. These warrants expire on
September 30, 2002.
36
<PAGE>
The pro forma balance sheet reflecting this transaction, is as follows:
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
----------- -----------
<S> <C> <C>
Current Assets $ 333,852 $ 3,174,293
=========== ===========
Total Assets 1,246,689 4,087,130
=========== ===========
Current Liabilities 1,234,878 1,248,878
=========== ===========
Long-term Obligations 710,139 160,139
=========== ===========
Stockholders' Equity (Deficiency) (698,328) 2,678,113
=========== ===========
Total Liabilities and Stockholders' Equity (Deficiency) 1,246,689 4,087,130
=========== ===========
</TABLE>
In September 1997, the Company signed a 3 year contract with a major
telecommunications company for the delivery of the Company's information
services into additional markets beyond an initial trial city. The Company
anticipates that this will result in the deployment of the Company's information
services in Florida, New York, North Carolina, Chicago, Los Angeles and
other designated markets as part of a national campaign.
37
<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 following table sets forth information with respect to the
executive officers and directors of SmartServ Online, Inc. (the "Company").
NAME AGE POSITION
Sebastian E. Cassetta...............49 Chief Executive Officer, Chairman of
the Board, Secretary and Class III
Director
Steven T. Francesco.................40 President, Chief Operating Officer
and Class III Director
Thomas W. Haller, CPA...............43 Vice President, Treasurer and Chief
Financial Officer
Donald J. Marino....................37 Vice President and Chief Technology
Officer
Mario F. Rossi......................59 Vice President of Operations
Bernard Baum........................48 Class II Director
Beth Bronner........................46 Class I Director
Catherine Cassel Talmadge...........45 Class I Director
Hiro R. Hiranandani................ 59 Class II Director
L. Scott Perry .....................52 Class I Director
SEBASTIAN E. CASSETTA has been Chief Executive Officer, Chairman of the
Board, Secretary and a director of the Company since inception. Mr. Cassetta was
also the Company's Treasurer from its inception until March 1996. From June 1987
to August 1992, Mr. Cassetta was the President of Burns and Roe Securacom Inc.,
an engineering and large-scale systems integration firm. From August 1992 to
January 1994, Mr. Cassetta was a consultant to Smart Phone Services, Inc. He is
also a former Vice President of Brinks, Incorporated.
STEVEN T. FRANCESCO has been President and Chief Operating Officer of
the Company since inception and a director of the Company since January 1994.
From May 1990 to October 1992, Mr. Francesco was a Senior Vice President of
Darien Development Corporation, a technology consulting firm. Mr. Francesco was
also President of Smart Phone Services, Inc. from October 1991 to December 1993.
Mr. Francesco is also a former Senior Vice President of Cantor Fitzgerald
Securities, Inc.
THOMAS W. HALLER, CPA joined the Company as Vice President, Treasurer
and Chief Financial Officer in March 1996. From December 1992 to February 1996,
Mr. Haller was a Senior Manager at Kaufman Greenhut Forman, LLP a public
accounting firm in New York City where he was responsible for technical advisory
services and the firm's quality assurance program. From June 1991 to December
1992, Mr. Haller was engaged in the practice of public accounting as a
consultant to certain entrepreneurial companies. From December 1982 to May 1991
he was a Senior Manager with Ernst & Young LLP, an international public
accounting and consulting firm, where he had responsibility for client services
and new business development in the firm's financial services practice.
DONALD J. MARINO, an information systems executive specializing in the
securities industry, joined the Company in February 1997 as Chief Technology
Officer. Prior to joining the Company he served as Vice President of Systems
Development at Deutsche Bank's New York headquarters from June 1996 to December
-38-
<PAGE>
1996. Prior thereto he was Director of MIS/EDP at Refco Capital Holdings from
March 1988 to May 1996 and a Vice President responsible for Systems Development
and Advanced Technologies at L.F. Rothschild & Co. Inc., an investment banking
firm, from March 1985 to March 1988.
MARIO F. ROSSI has been Vice President of Operations of the Company
since December 1994. From January 1989 to December 1994, Mr. Rossi was Vice
President of Operations of MVS Inc., a fiber optic systems company.
BERNARD BAUM has been a director of the Company since March 1996. Since
May 1997, Mr. Baum has been Executive Vice President and Chief Information
Officer of Signet Bank. From March 1996 to May 1997, Mr. Baum had been Executive
Vice President and Chief Operating Officer of Southeast Switch Inc., engaged in
the ATM/POS/debit card switch and settlement business. From January 1995 to
March 1996, Mr. Baum had been Executive Vice President and Chief Information and
Operations Officer of Bank South Corporation, a bank holding company. From
January 1978 to January 1995, Mr. Baum held various positions with Citibank
N.A., including Vice President, Senior Business Manager -- Consumer Bank, Chief
Technology Officer-The Citicorp Private Bank and Executive Director -- Global
Finance.
BETH BRONNER has been a director of the Company since March 1996. Since
September 1996, Ms. Bronner has been Vice President and Director of Marketing --
United States and Europe of Citibank, engaged in the global banking business.
From July 1994 to September 1996, Ms. Bronner was Vice President --Emerging
Markets with AT&T Domestic Communications Services, the consumer service
division of AT&T Corp. From February 1992 to June 1994, she held various
executive positions with Revlon, Inc., including President of the Revlon
Professional (Salon Products) division and Executive Vice President of the
Beauty Care and Professional Products division. From October 1990 to January
1992, Ms. Bronner was President of the Sweet Goods & Dairy division of the
Slim-Fast Foods Co. She is also director of The Hain Food Group, Inc.
CATHERINE CASSEL TALMADGE has been a director of the Company since
March 1996. Since January 1994, Ms. Talmadge has been Vice President, Time
Warner Cable Programming of Time Warner Cable, a division of Time Warner
Entertainment Company, L.P. ("Time Warner"). From September 1984 to January
1994, she held various positions with Time Warner, including Director,
Programming Development; Operations Director, Financial Analyses; and Manager,
Budget Department.
HIRO R. HIRANANDANI has been a director of the Company since March
1996. Since June 1996, Mr. Hiranandani has been the President and Chief
Executive Officer of Computer Power Inc., a public company which provides
back-up power for the lighting industry. From January 1977 to December 1994, Mr.
Hiranandani held various positions with Pitney Bowes, Inc., including President,
Business Systems-International from July 1987 to May 1990 and President of
Mailing Systems from May 1990 to October 1994.
L. SCOTT PERRY has been a director of the Company since November 1996.
Since December 1995, Mr. Perry has been Vice President, Advanced Platform
Services of AT&T Corp. From January 1989 to December 1995, Mr. Perry held
various positions with AT&T including Vice President - Business Multimedia
Services, Vice President (East) - Business Communications Services and Vice
President - Marketing, Strategy and Technical Support for AT&T Data Systems
Group. Since February 1996, Mr. Perry has also been the Chief Executive Officer
of GeoSphere Communications, a networking software company. Mr. Perry serves on
the Board of Directors of Junior Achievement of New York, is a member of the
Cornell University Engineering College Advisory Council and serves on the Board
of INEA, a private financial planning software company based in Toronto, Canada.
-39-
<PAGE>
The Board of Directors consists of seven directors divided into three
classes of directors: Class I Directors, Class II Directors and Class III
Directors. The Company's Class I Directors, Class II Directors and Class III
Directors will serve until the annual meeting of the Company's stockholders to
be held in 1999, 1997 and 1998, respectively, and until their respective
successors are duly elected and qualified or until their earlier resignation or
removal. Directors of each Class are elected for a full term of three years (or
any lesser period representing the balance of the previous term of such Class)
and until their respective successors are duly elected and qualified or until
their earlier resignation or removal. Officers are appointed annually and serve
at the discretion of the Board for one year. Mr. Cassetta serves as Chief
Executive Officer, Chairman of the Board and Secretary of the Company and Mr.
Francesco serves as President and Chief Operating Officer of the Company
pursuant to employment agreements.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), officers, directors and holders of more than 10%
of the outstanding shares of the Company's Common Stock ("Reporting Persons")
are required to file periodic reports of their ownership of, and transactions
involving, the Company's Common Stock with the Securities and Exchange
Commission (the "SEC"). Based solely upon a review of Forms 3, 4 and 5 and
amendments thereto furnished to the Company during and with respect to fiscal
year ended June 30, 1997, the Company believes that its Reporting Persons
complied with all Section 16 filing requirements applicable to them with respect
to the Company's fiscal year ended June 30, 1997.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning annual and
long-term compensation, paid or accrued, for the Chief Executive Officer and for
each other executive officer of the Company whose compensation exceeded $100,000
in fiscal 1997 (the "Named Executive Officers") for services in all capacities
to the Company during the last three fiscal years:
SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- ------------
OTHER
ANNUAL SECURITIES
NAME AND FISCAL COMPEN- UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS SATION(2)(3) OPTIONS COMPENSATION
------------------ ---- ------ ----- ------------ ------- ------------
<S> <C> <C> <C> <C>
Sebastian E. Cassetta 1997 $125,000 -- $ 9,750 100,000 --
Chief Executive Officer 1996 $125,000 -- $ 9,750 100,000(5) --
1995 $125,000 -- $ 9,750 -- --
Steven T. Francesco 1997 $125,000 -- $ 9,750 100,000 --
President and Chief 1996 $125,000 $22,000 $11,750 100,000(5) $20,000(4)
Operating Officer 1995 $125,000 -- $ 9,750 -- --
</TABLE>
-40-
<PAGE>
- --------------------
(1) None of the Named Executive Officers received any Restricted Stock Awards
or LTIP Payouts in 1995, 1996 or 1997.
(2) As to each Named Executive Officer, the aggregate amount of personal
benefits not included in the Summary Compensation Table does not exceed
the lesser of either $50,000 or 10% of the total annual salary and bonus
paid to such Named Executive Officer.
(3) Amounts shown consist of a non-accountable expense allowance.
(4) Represents a payment by the Company to Mr. Francesco of an aggregate
amount equal to the additional income taxes and penalties resulting from
the early withdrawal by him from an IRA of $35,000 which he loaned to the
Company.
(5) On July 16, 1996 the Compensation Committee of the Board of Directors
canceled the stock options representing these underlying shares and
granted new options to Messrs. Cassetta and Francesco.
STOCK OPTIONS
The following table sets forth information with respect to stock
options granted to the Named Executive Officers during fiscal year 1997:
OPTION GRANTS IN FISCAL 1997
(INDIVIDUAL GRANTS)(1)
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES EXERCISE EXPIRATION
NAME GRANTED IN FISCAL 1997 PRICE DATE (2)
---- --------- -------------- ------- ------------
Sebastian E. Cassetta 100,000 23.6% $5.0625 July 15, 2006
Steven T. Francesco 19,753 4.7% $5.56875 July 15, 2001
80,247 18.9% $5.0625 July 15, 2006
- --------------
(1) No stock appreciation rights ("SARs") were granted to any of the Named
Executive Officers during fiscal 1997. On September 24, 1997, the
Compensation Committee granted new stock options to employees conditional
upon cancellation of all of their existing stock options. As a consequence
of this action and upon cancellation of the options described above, Mr.
Cassetta received an option to purchase 100,000 shares of the Company's
Common Stock exercisable at a price of $2.00 per share expiring on
September 23, 2007 and Mr. Francesco received an option to purchase 45,454
shares of the Company's Common Stock exercisable at a price of $2.20 per
share expiring on September 23, 2002 and an option to purchase 54,546
shares of the Company's Common Stock exercisable at a price of $2.00 per
share expiring on September 23, 2007. The options become exercisable in
full on the first anniversary of the grant date.
-41-
<PAGE>
(2) The options become exercisable in full on the first anniversary of the
grant date.
The following table sets forth information as to the number of
unexercised shares of Common Stock underlying stock options at fiscal year end
and the value of unexercised in-the-money stock options at fiscal year
end:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUE (1)
<TABLE>
<CAPTION>
NUMBER OF
UNEXERCISED
SECURITIES VALUE OF
SHARES UNDERLYING OPTIONS UNEXERCISED IN-THE-
ACQUIRED AT FISCAL YEAR END MONEY YEAR END
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE (2)
---- -------- -------- --------------- -----------------
<S> <C> <C> <C>
Sebastian E. Casetta..... -- -- 0/100,000 $0/$0
Steven T. Francesco...... -- -- 0/100,000 $0/$0
</TABLE>
- ---------------
(1) No SARs were granted to, or exercised by, any of the Named Executive
Officers during fiscal 1997.
(2) Value is based on the closing price of the Company's Common Stock as
reported by the National Association of Securities Dealers' Automated
Quotation System ("NASDAQ") on June 30, 1997 ($2.00) less the exercise
price of the option.
EMPLOYMENT AGREEMENTS
The Company and Sebastian E. Cassetta are parties to an Employment
Agreement (the "Cassetta Agreement"), effective January 31, 1994, which expires
on January 31, 1999. The Cassetta Agreement provides for (i) an annual base
salary of $125,000, (ii) a performance bonus for each fiscal year between June
30, 1995 and June 30, 1998, payable in cash and Common Stock of the Company, in
the event the Company achieves the levels of earnings before interest, income
taxes, depreciation and amortization ("EBITDA") provided therein and (iii) any
additional amount as determined by the Board or an outside compensation board.
The EBITDA goals are $7,000,000 and $10,500,000 for 1997 and 1998, respectively.
If any goal is achieved, Mr. Cassetta will receive a cash bonus of one-half of
one percent of the goal and approximately 22,000 shares of Common Stock.
Pursuant to the Cassetta Agreement, Mr. Cassetta is also entitled to participate
in any present or future insurance, pension, retirement, profit sharing or bonus
plan or other compensation or incentive plan adopted by the Company for the
general and overall benefit of full-time principal executives of the Company,
such participation to be upon the same terms and conditions as generally relate
to such full-time principal executives. Pursuant to the Cassetta Agreement, in
the event that Mr. Cassetta's employment is terminated without cause, the
Company is obligated to make a severance payment to Mr. Cassetta in the amount
of $250,000 within 30 days following the date of such termination.
The Company and Steven T. Francesco are parties to an Employment
Agreement (the "Francesco Agreement"), effective January 31, 1994, which expires
on January 31, 1999. The Francesco Agreement provides for (i) an annual base
salary of $125,000, (ii) a performance bonus for each fiscal year between June
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<PAGE>
30, 1995 and June 30, 1998, payable in cash and Common Stock of the Company, in
the event the Company achieves the levels of EBITDA provided therein and (iii)
any additional amount as determined by the Board or an outside compensation
board. The EBITDA goals and bonuses are the same as those in the Cassetta
Agreement. Pursuant to the Francesco Agreement, Mr. Francesco is also entitled
to participate in any present or future insurance, pension, retirement, profit
sharing or bonus plan or other compensation or incentive plan adopted by the
Company for the general and overall benefit of full-time principal executives of
the Company, such participation to be upon the same terms and conditions as
generally relate to such full-time principal executives. Pursuant to the
Francesco Agreement, in the event that Mr. Francesco's employment is terminated
without cause, the Company is obligated to make a severance payment to Mr.
Francesco in the amount of $250,000 within 30 days following the date of such
termination.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of October 24, 1997, certain
information with respect to the beneficial ownership of the Common Stock by (i)
each person known by the Company to beneficially own more than 5% of the
outstanding shares, (ii) each director of the Company, (iii) each Named
Executive Officer and (iv) all executive officers and directors of the Company
as a group. Except as otherwise indicated, each person listed below has sole
voting and investment power with respect to the shares of Common Stock set forth
opposite such person's name.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP (2) OUTSTANDING SHARES (3)
-------------------- ------------------------ ----------------------
<S> <C> <C>
Steven T. Francesco
c/o SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902 .................. 839,445 22.7%
Sebastian E. Cassetta
c/o SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902 .................. 376,250 10.2%
InterBank Communications, Inc.
1733 Connecticut Avenue, N.W.
Washington, DC 20009 ................ 204,250(4) 5.5%
Bernard Baum......................... 5,000(5) *
Beth Bronner......................... 10,000(5) *
Catherine Cassel Talmadge............ 7,500(5) *
Hiro R. Hiranandani.................. 20,000(5)(6) *
L. Scott Perry....................... 10,000(5) *
All executive officers and directors
as a group (10 persons).............. 1,280,695(7) 34.3%
</TABLE>
- --------------------
* Less than 1%
-43-
<PAGE>
(1) Under the rules of the SEC, addresses are only given for holders of 5% or
more of the outstanding Common Stock of the Company.
(2) Under the rules of the SEC, a person is deemed to be the beneficial owner
of a security if such person has or shares the power to vote or direct the
voting of such security or the power to dispose or direct the disposition
of such security. A person is also deemed to be a beneficial owner of any
securities if that person has the right to acquire beneficial ownership
within 60 days of the date hereof. Unless otherwise indicated by footnote,
the named entities or individuals have sole voting and investment power
with respect to the shares of Common Stock beneficially owned.
(3) Represents the number of shares of Common Stock beneficially owned as of
October 24, 1997, by each named person or group, expressed as a percentage
of the sum of all of the shares of such class outstanding as of such date
and the number of shares not outstanding but beneficially owned by such
named person or group.
(4) Includes 10,000 shares subject to currently exercisable warrants.
(5) Includes 5,000 shares subject to currently exercisable options.
(6) Includes 10,000 shares subject to currently exercisable warrants.
(7) Includes 36,000 shares subject to currently exercisable options and
warrants.
CHANGES IN CONTROL
The Company and each of Messrs. Cassetta and Francesco have entered
into an agreement with Zanett Capital, Inc. ("Zanett") dated September 29, 1997
which provides, among other things, that for a period of 5 years, at the request
of Zanett the Company will appoint such number of designees of Zanett to its
Board of Directors so that the designees of Zanett will constitute a majority of
the members of the Board of Directors of the Company. Further, Messrs. Cassetta
and Francesco have agreed to vote their shares of Common Stock, representing
approximately 32.5% of the outstanding stock of the Company, and any shares they
may acquire in the future, in favor of the designees of Zanett at each Annual
Meeting of Stockholders of the Company at which Directors are elected.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In March 1996, upon the consummation of the Company's Initial Public
Offering, the Company and InterBank Communications, Inc. ("InterBank") agreed to
terminate a Consulting Agreement entered into on June 1, 1995 and, in
consideration therefor, the Company issued 10,000 warrants to InterBank and paid
InterBank $50,000. The Company also paid InterBank $36,000 in full settlement of
all amounts past due under the Consulting Agreement. On the date of the
execution and delivery of the Consulting Agreement, InterBank beneficially owned
more than 5% of the Company's Common Stock and Simon A. Hershon, Ph.D.,
President of InterBank, was a director of the Company. Mr. Hershon was a
director of the Company until November 1996.
In March 1996, upon the consummation of the Company's Initial Public
Offering, the Company repaid $707,780 principal amount of certain convertible
subordinated notes (and accrued interest thereon), and the
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<PAGE>
balance of the notes and accrued interest thereon was converted into 427,735
shares of Common Stock or more than 5% of the then outstanding shares of Common
Stock. Holders of such notes were present or former investment advisory clients
of Laifer Capital Management, Inc.
In connection with a private placement of securities made by the
Company in 1995, Sebastian E. Cassetta and Steven T. Francesco, each an officer,
director and beneficial owner of more than 5% of the Common Stock of the
Company, entered into a Non-Recourse Guaranty and Pledge Agreement, dated
October 2, 1995 (the "Pledge Agreement"), with the placement agent for such
securities as agent for the subscribers named therein, pursuant to which Messrs.
Cassetta and Francesco each pledged 250,000 shares of Common Stock, which shares
secured the repayment of the $1,200,000 principal amount of promissory notes
sold by the Company to such subscribers. The notes were repaid in March 1996
upon the consummation of the Company's Initial Public Offering, whereupon the
Pledge Agreement was terminated.
The Company believes that the terms of the transactions described above
between the Company and its officers, directors or other affiliates were no less
favorable to the Company than would have been obtained from a non-affiliated
third party for similar transactions at the time of entering into such
transactions. In addition, the Company has adopted a policy whereby all future
transactions and/or loans between the Company and its officers or directors will
be on terms that the Company believes are no less favorable than could be
obtained from unaffiliated third parties (at the time such transactions and/or
loans are entered into) and will be approved by a majority of the independent
disinterested directors of the Company.
-45-
<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**
4.7 Form of Prepaid Common Stock Purchase Warrant****
4.8 Warrant issued to The Zanett Securities Corporation****
4.9 Warrant issued to Bruno Guazzoni****
10.1 Information Distribution License Agreement dated as of July 18,
1994 between the Company and S&P ComStock, Inc.**
10.2 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.**
10.3 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")**
10.4 Amendment to Vendor Agreement for Level 1 Service and Last Sale
Service dated as of October 11, 1994 between the Company and
Nasdaq**
10.5 Non-Exclusive Agency Agreement dated as of November 1, 1994
between the Company and Dun & Bradstreet, Inc.**
10.6 Services Agreement dated as of February 1, 1995, between the
Company and Federal Express Corporation**
10.7 Information Provider Agreement dated as of March 13, 1995 between
the Company and The Argus Group, Inc.**
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<PAGE>
10.8 Metromail National Directory Assistance Reseller Agreement For
Electronic Services Providers dated as of March 13, 1995 between
the Company and Metromail Corporation**
10.9 Reuters NewMedia, Inc. On-Line Services Agreement dated as of
November 13, 1995 between the Company and Reuters NewMedia,
Inc.**
10.10 Lease Agreement dated as of March 4, 1994, between the Company
and One Station Place, L.P. regarding the Company's Stamford,
Connecticut, offices**
10.11 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***
10.12 Employment Agreement (the "Cassetta Employment Agreement") dated
of January 31, 1994 by and among the Company and Sebastian E.
Cassetta**
10.13 Amendment No. 1 to the Cassetta Employment Agreement dated as of
June 30, 1994 by and among the Company and Sebastian E.
Cassetta**
10.14 Employment Agreement (the "Francesco Employment Agreement") dated
as of January 31, 1994 by and among the Company and Steven T.
Francesco**
10.15 Amendment No. 1 to the Francesco Employment Agreement dated June
30, 1994 by and among the Company and Steven T. Francesco**
10.16 Form of Registration Rights Agreement between the Company and
certain investors**
10.17 Form of Consulting Agreement between the Company and Rickel &
Associates**
10.18 Agreement dated as of January 31, 1996 between the Company and
Henry Snow**
10.19 Memorandum of Understanding dated February 7, 1996 between
Northern Telecom Inc. and the Company**
10.20 Subscriber Agreement dated February 16, 1996 between the Company
and the Cunningham Group Inc. dba Lotter USA.com**
10.21 Memorandum of Understanding, dated June 26, 1996, between the
Company and CIDCO Incorporated***
10.22 Form of 1996 Stock Option Plan*****
10.23 Form of Registration Rights Agreement issued to purchasers of
Prepaid Common Stock Purchase Warrants****
10.24 Consulting Agreement with Bruno Guazzoni****
10.25 Agreement between Sprint/United Management Company and SmartServ
Online, Inc. dated September 26, 1997+
11.1 Statement Regarding Computation of Per Share Earnings*
27 Financial Data Schedule+
_________________
* Filed as an exhibit to the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1997
** Filed as an exhibit to the Company's registration statement on Form
SB-2 (Registration No. 333-114)
*** Filed as an exhibit to the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1996
**** Filed as an exhibit to the Company's Current Report on Form 8-K/A for
an event dated September 30, 1997
***** Filed as an exhibit to the Company's Proxy Statement dated October 10,
1996
+ Filed herewith
(B) REPORTS OF FORM 8-K
Since the end of the fiscal quarter ended March 31, 1997, the Company filed a
Current Report on Form 8-K dated September 30, 1997 and a Form 8-K/A reporting
Item 5 and containing a pro forma balance sheet as at August 31, 1997.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
November 3, 1997 SMARTSERV ONLINE, INC.
Registrant
By: /S/SEBASTIAN E. CASSETTA
------------------------------
Sebastian E. Cassetta
Chairman of the Board
Chief Executive Officer
-48-
TABLE OF CONTENTS
1. Agreement Overview 1
2. Term 2
3. Terms of Sale 2
4. Duties of Sprint 3
5. Quality Control 3
6. Maintenance Services 4
7. Support Service 4
8. Training and Sales Support 5
9. Licensed Use of Services 6
10. Intellectual Property Rights 6
11. Warranty 7
12. Limitation of Liability 7
13. Indemnification 8
14. Proprietary or Restricted Information 8
15. Independence of Parties 9
16. Arbitration 9
17. Governing Law 10
18. Interpretation 10
19. Force Majeure 10
20. Modification 10
21. Assignment 10
22. Notice 11
23. Waiver 11
24. Survival 11
25. Severability 12
26. Entire Agreement 12
Schedule A - Description of SmartServ Services
(SmartServ Online Applications) 13
Schedule B - Monthly Service End-User and
Revenue Sharing Schedule 15
Schedule B-2 - Ancillary Charges 17
Schedule C - Sprint Companies 18
<PAGE>
AGREEMENT
This Agreement, effective as of the 26th day of September, 1997 and supersedes
any prior Agreement.
BETWEEN:
SPRINT/UNITED MANAGEMENT COMPANY, a corporation incorporated under the laws
of the State of Kansas ("SUMC") on behalf of the "Sprint Companies" in
Schedule 5 (together SUMC and Sprint Companies shall be referred to as
"Sprint".)
- and -
SmartServ Online, Inc., a corporation incorporated under the laws of the
State of Delaware (hereinafter referred to as "SmartServ").
WHEREAS, SmartServ provides device independent online information and
transactional services to users through personal computers, the world wide web,
screen-based telephones, and interactive voice response systems.
WHEREAS, Sprint recognizes that the information and services provided by
SmartServ, will add value to products and services provided by Sprint to its
customers, and desires to make such SmartServ information and services available
to its customers on a national basis; and
WHEREAS, SmartServ and Sprint desire to set forth the terms and conditions under
which such information and services will be provided by SmartServ to Company;
and
NOW THEREFORE, in consideration of the premises and mutual terms and conditions
herein provided, Sprint and SmartServ covenant and agree as follows:
1. Agreement Overview
a) This Agreement is entered into by SUMC on its own behalf and for the
benefit of the Sprint Companies. All reference to Sprint in this
Agreement shall be deemed to refer equally to Sprint Companies
executing service orders in any form under this Agreement ("Service
Orders") as to such Service Order. No commitment is made by Sprint or
any Sprint Company, and none shall be inferred from this Agreement,
except as may be set forth in a properly executed Service Order to
this Agreement. All invoices and statements shall reference the
particular Service Order by number and must be directed to the Sprint
Company executing such Service Order pursuant to instructions issued
in the Service Order. No work performed on behalf of, nor product nor
services delivered to, any Sprint Company will be billed to or
collected from any other Sprint Company.
b) Sprint is not required to place any minimum Service Order quantity
during the term of this Agreement. Any forecast(s) supplied to
SmartServ by Sprint is to be used for planning purposes only and shall
not constitute a commitment on Sprint's part in any way to purchase
the said quantities. Only a signed Service Order from Sprint shall
constitute a valid order hereunder.
c) The SmartServ Services are those set forth in Schedule A, attached
hereto (the "Services"), and such other Services as may be agreed upon
between the parties in writing from time to time, as shown on an
Amended Schedule A. SmartServ agrees to notify Sprint and offer to
Sprint, any new or additional informational and transactional
services, not on Schedule A, that SmartServ obtains, develops, or
provides to others upon such additional terms and conditions as the
parties agree upon.
<PAGE>
2. Term
a) This Agreement shall commence on the date first written above and
shall remain in full force for a term of three (3) years. Sprint may
extend the term of this Agreement for successive one (1) year terms,
three (3) months prior to termination by providing written notice of
the extension.
b) Either party may terminate this Agreement upon thirty (30) days' prior
written notice to the other party if such other party materially
breaches any obligation of this Agreement and fails to cure such
breach within thirty (30) days of written notice of the same.
c) Either party may terminate this Agreement upon written notice to the
other party, if the other party becomes insolvent. Without limiting
the generality of the foregoing, a party shall be considered insolvent
if it is placed in liquidation or receivership, if a petition of
voluntary or involuntary bankruptcy is filed against it and if such
petition is not dismissed within thirty (30) days, or if it fails to
satisfy a judgment for payment of money awarded by a court of
competent jurisdiction after the time of appeal from such judgment has
expired.
3. Terms of Sale
a) Subject to availability, SmartServ hereby agrees to provide to Sprint
the information and services set forth and described on Schedule A
attached hereto and made a part hereof (the "Services"). SmartServ
hereby appoints Sprint as SmartServ's non-exclusive marketer of the
Services and grants to Sprint a non-exclusive, non-transferable
license to distribute the Services to Sprint's customers. It is
understood that Schedule A may be modified as additional Services
become available or existing Services become unavailable.
b) The Services will be provided to Sprint for distribution to Sprint
customers via screen based telephones, and potentially via PC's, PCS,
pagers, or other devices. SmartServ will use its best efforts to make
the Services available 7 days per week, 24 hours per day.
c) The current list of fees to Sprint's customers for the SmartServ
service is set forth in Schedule B, attached hereto. Any adjustments,
modifications, or amendments to the list of fees must be agreed upon
by the parties.
d) SmartServ warrants that the terms, conditions, and prices in this
Agreement are no less favorable than the terms, conditions, and prices
given to any third party that purchased or licensed the Services from
SmartServ in the same quantities under similar conditions.
2
<PAGE>
4. Duties of Sprint
a) Revenues and costs shall be split, paid and received as set forth in
Schedule B.
b) Sprint recognizes that the information and data included in the
Services provided by SmartServ may be protected by copyrights,
trademarks, service marks, trade names and other property rights owned
by third persons and Sprint agrees not to knowingly infringe upon or
knowingly violate any such rights and will use such information or
data only for the purposes intended. Sprint shall develop an
introductory terms and conditions manual to inform its customers in
writing of the proprietary nature of the Services provided that
SmartServ notified Sprint in writing of such proprietary nature.
Sprint shall use commercially reasonable efforts to ensure that
Sprint's customers do not violate or otherwise infringe upon any such
proprietary rights, license obligations or other right or property
included within the Services provided hereunder. Sprint shall
indemnify and hold SmartServ harmless from any knowing violation or
claim of knowing violation of the terms of this Section 4 b. In
addition, Sprint agrees to indemnify and hold SmartServ harmless
against any claim, actions or demands by a third party against
SmartServ arising out of Sprint's activities under this Agreement.
c) The information and data contained in the Services are for the express
retail use of Sprint's end-user customers. Sprint and its end-user
customers shall not distribute or redistribute the information or data
contained in the Services except as contemplated by this Agreement. In
addition, Sprint will not transfer, assign or subcontract its rights
under this Agreement unless expressly authorized in writing by
SmartServ.
d) The customers subscribing with Sprint for the SmartServ Services shall
be the customers of Sprint and Sprint shall solely be responsible for
all billing and collection.
5. QUALITY CONTROL
a) SmartServ shall notify Sprint immediately if the SmartServ server or
SmartServ Service is down, the number of hours it Will be down, and
when it will again be available. SmartServ should contact:
(i) Steve Burke - Product Manager
Sprint (913) 323~822
(ii) Sprint Repair Centers
(iii) HELP Desk
All parties should be contacted at the time of service interruption to
confirm when system or SmartServ Service is again operational.
b) The parties agree to meet quarterly for a quality review of the
performance of SmartServ Services delivered to Sprint under this
Agreement. The time, date and agenda of such meetings shall be
mutually agreed upon; however, it is anticipated topics will include
failure rates of individual SmartServ Services, the server, trouble
ticket and related quality control issues. Additionally, SmartServ
shall provide Sprint with regular biweekly data and the format
regarding a) application usage, b) call length, and c) call
distribution by time and day of week.
c) The parties shall cooperate and consult with each other regarding the
information content of the SmartServ Services, however SmartServ is
solely responsible for obtaining and maintaining all information
content and rights of use thereto. SmartServ agrees to work with
Sprint to eliminate any information content that Sprint believes is
objectionable.
3
<PAGE>
6. Maintenance Services
a) SmartServ shall include a set of the Documentation m camera ready
format and/or via electronic media. Said Documentation includes:
Start-up kits, Brokerage services guide and welcome letter. If Sprint
chooses to use the Documentation in the current state or in an altered
state, it shall be Sprint's responsibility to make copies.
b) SmartServ shall provide Sprint with one Master Copy of the
Documentation, as set forth above, within two (2) weeks of the
Effective Date. Sprint may copy the Master Copy for distribution as
needed. In the event SmartServ modifies any Documentation, SmartServ
shall notify Sprint of the changes and provide Sprint with a copy of
the modified Documentation. (Sprint shall provide SmartServ with the
names of the people to whom the Documentation and any modifications
thereto shall be sent.)
c) SmartServ shall provide Sprint with list detailing the term for which
SmartServ has the right to provide each of the SmartServ Services
listed on Schedule A and with the termination notice period for each
SmartServ Service. SmartServ shall provide Sprint with written notice
of termination of any SmartServ Service no later than forty-eight
hours of SmartServ learning of such termination. Following the
discontinuance of a SmartServ Service or this Agreement, SmartServ
shall, for a period of up to twelve (12) months from said
discontinuance make available to Sprint the SmartServ Services or
reasonably equivalent services upon the conditions set forth herein so
that Sprint may, at its option, meet existing obligations relating to
the SmartServ Services. SmartServ and Sprint agree that during this
period, the cost and revenues arrangements and payment terms specified
in Schedule B shall continue.
7. Support Service
a) During the term of this Agreement, SmartServ shall provide Support
Service to Sprint Support Service includes technical assistance in the
form of a second level help desk, remote diagnostics and network
emergency assistance to Sprint with respect to the use, and
maintenance of the SmartServ Service. SmartServ shall answer the phone
"Sprint Customer Service." This service shall be available twenty-four
(24) hours per day, every day of the year. SmartServ shall respond
within one (1) hour to any request for assistance made between the
hours of 8:00 a.m. and 12:00 am. (Midnight) SmartServ's local time,
Monday through Friday, inclusive. In addition, SmartServ shall respond
within one (1) hour to any request for emergency support received
between the hours of 8:00 a.m. and 12:00 a.m. (Midnight) SmartServ's
local time, Monday through Friday, inclusive, and shall respond within
two (2) hours to any request for emergency support received outside of
those hours. SmartServ shall maintain a system that records and tracks
each of Sprint's requests for support.
In addition to the Support Services set forth above, SmartServ shall
provide telephone support to Sprint with respect to all other issues
affecting the Product, such as training. This support shall be
provided between the hours of 8:00 a.m. and 5:00 p.m., SmartServ's
local time, Monday through Friday, exclusive of holidays celebrated by
SmartServ.
b) SmartServ shall appoint an account liaison to handle all issues that
arise under this Agreement that are not covered by Support Services.
(Such account liaison shall not be a salesperson.) SmartServ shall
notify Sprint of the name of such person within ten (10) days of the
Effective Date, along with the mailing address, phone number, and fax
number of such person. The issues directed to this person include, but
are not limited to questions on warranty, maintenance, homologation,
installation, training and demonstration Products.
c) From time to time, Sprint may elect to conduct customer demonstration
or presentations at trade shows which include the Product. During the
term of this Agreement, SmartServ shall provide Sprint with support
with respect to trade shows, as Sprint shall reasonably request, at no
charge to Sprint. However, SmartServ shall not be required to provide
Sprint with more than forty (40) Service Accounts at any one time.
4
<PAGE>
8. Training and Sales Support
a) SmartServ shall from time to time train representatives of Sprint with
respect to the sales, operation, configuration, installation, service,
maintenance, and support of the Products, as well as new Products,
("Sales and Technical Training"). The Sales and Technical Training
will take place at a mutually agreeable facility at mutually agreeable
time(s). Sprint may have not more than thirty (30) persons in each
session. There shall be no cost to Sprint for this training and the
documentation associated with such training.
b) Sprint may copy and use, (and with the consent of SmartServ may
modify) internally the materials provided to it by SmartServ during
any training session, provided that Sprint reproduces any copyright
notice or other proprietary notice contained in the original document
in the copies it makes. Sprint may use these materials to train Sprint
employees and third parties with respect to the Products.
c) SmartServ shall designate a primary salesperson to assist Sprint in
the marketing and selling of Products. The salesperson shall provide
Sprint with the appropriate SmartServ personnel or resource to make
joint sales calls to existing or potential customers, assisting with
the preparation of proposals for such Customers and such other
activities as the parties agree upon subject to the availability of
SmartServ personnel and resources. There shall be no charge to Sprint
by SmartServ for such support.
5
<PAGE>
9. Licensed Use of Services
a) The Services Provided under this Agreement may either be used by
Sprint or Sprint may sell, lease, sublicense or distribute in any
manner the Services directly to customers. SmartServ hereby licenses
to Sprint and authorizes Sprint to sublicense to such Customers of
Sprint, the right to use the SmartServ services set forth on Schedule
B, and as may be subsequently modified.
b) Sprint may make copies and distribute the Service documentation
provided that Sprint reproduces SmartServ's copyright and/or
proprietary notice on each copy and the legend: "Reprinted with
permission of SmartServ Online, All Rights Reserved." SmartServ will
have the right to approve all brochures and promotional material that
references SmartServ or its trademarks.
10. Intellectual Property Rights
SmartServ:
i) warrants that the SmartServ Services covered by this Agreement are and
shall be free and clear of infringement of any patent or copyright,
trademark, or trade secret which may relate to such SmartServ
Services, associated apparatus or devices, and to any processes which
are practiced in the normal use thereof, or related in any way to the
SmartServ Services or their use;
ii) agrees at its own expense to indemnify and defend any and a]l claims,
actions and suits alleging such infringement to which Sprint or
Sprint's Customers may be a made a party;
iii) agrees to pay all costs, expenses and attorney's fees incurred by and
to satisfy all judgments and decrees entered against Sprint or
Sprint's Customers as a result of such infringement;
iv) agrees to save Sprint and Sprint's Customers harmless from any loss,
damage, expense and liability on account of any such infringement; and
v) if Sprint's license to use and sublicense or the use of the SmartServ
Services or an individual SmartServ Service by Sprint or Sprint's
Customers, SmartServ's technical support services (if any), as
permitted under this Agreement, is enjoined, SmartServ must, at
SmartServ's expense, perform the following in the order presented:
a. procure for Sprint and its Customers the continued right to use
the SmartServ Service(s) or technical support services as
permitted herein; or
b. replace the SmartServ Service(s) or technical support services
with equivalent non-infringing service(s) or technical support
services; or
c. modify the SmartServ Service(s) or technical support services so
they become non-infringing.
Sprint:
i) agrees that in the event any cause of action, claims, suit or other
legal proceeding is brought against Sprint in connection with any of
SmartServ's Services, or the sale or use thereof, Sprint shall
promptly notify SmartServ thereof.
ii)agrees that SmartServ will have sole control of its defense relating to
any cause of action, claims, suit or other legal proceeding brought
against it in connection with any SmartServ's Services, or the sale or
use thereof, provided that SmartServ promptly acknowledges its
obligation to defend, provide assurances to Sprint of its financial
ability to hold Sprint harmless, and informs Sprint of its activities
relating to its defense of Sprint.
6
<PAGE>
11. Warranty
a) SmartServ warrants all Services against defects in material and
workmanship and shall conform in strict accordance with SmartServ's
written specification for a period of twelve (12) months from date of
the Service Order for services
b) SmartServ warrants all new Software versions and updates against
latent defects for a period of twelve (12) months from date of
shipment by SmartServ. SmartServ shall, at its option, correct or
replace the Software version or update which proves to be defective,
providing such Software was installed properly and used in accordance
with SmartServ's specification and that it has been promptly notified
by the Customer of such defects. If Software is modified by anyone not
authorized to do so by SmartServ, the warranty shall immediately be of
no further force and effect.
c) The foregoing warranties are made solely to, and are solely for the
benefit of Sprint and its Customer.
12. Limitation of Liability
a) In the event of any claim made or action brought against Sprint, based
on an allegation of personal injury or property damage caused by a
SmartServ Service or by the negligence of SmartServ, or part thereof,
Sprint shall promptly notify SmartServ in writing of the claim or
action. SmartServ shall defend or settle such action and shall
indemnify and hold Sprint harmless for any costs or damages including
reasonable attorneys' fees, which Sprint may be required to pay as a
result of the SmartServ Service or the negligence of SmartServ, its
agents or its employees, provided Sprint shall have given SmartServ
the information it reasonably requests in defending and/or settling
such claims or actions, which assistance shall be provided at
SmartServ's expense. However, SmartServ shall have no obligation under
this Section, if the SmartServ Services has been modified by Sprint
and the personal injury or property damage was caused by the
modifications. In addition, if the personal injury or property damage
was also due to the negligence of Sprint, its agents, or employees,
the parties agree that the law of comparative negligence will apply in
determining the amount to be paid by SmartServ
b) In no event will either party be liable for the other party's
indirect, incidental or consequential loss even if it has been advised
of the possibility of such loss including, but not limited to, lost
business revenue, failure to realize expected savings or other
commercial or economic loss of any kind.
c) THE WARRANTIES CONTAINED 1N THIS AGREEMENT ARE IN LIEU OF ANY OTHER
WARRANTIES EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED
WARRANTIES OF MERCHANTABILITY QUALITY OR FITNESS FOR A PARTICULAR
PURPOSE AND THOSE ARISING BY STATUTE OR OTHERWISE IN LAW OR FROM A
COURSE OF DEALING OR USAGE OF TRADE.
7
<PAGE>
13. INDEMNIFICATION
Either party will indemnify and hold harmless the other from any loss,
claim or damage to persons or property where such loss, claim or
damage was caused by the fault or negligence of the indemnifying party
or any of its employees, representatives or agents.
14. Proprietary or Restricted Information
a) In this Agreement, "Proprietary or Restricted Information" means
information concerning the affairs of either party of which the other
party may gain knowledge in connection with or in the course of
performing its obligations under this Agreement.
b) Each party agrees to hold all Proprietary or Restricted Information in
trust and confidence for the other and not to use such Proprietary or
Restricted Information other than for the benefit of the other except
as may be authorized by the disclosing party in writing. Each party
agrees not to disclose such Proprietary or Restricted Information
without the prior written consent of the other, by publication or
otherwise to any person other than those persons whose services the
receiving party requires who have a need to know such Proprietary or
Restricted Information for the purpose of carrying out the terms of
this Agreement and who agree in writing with the receiving party to be
bound by and comply with the provisions of this Section 14.
c) At the request of either party or upon termination or expiration of
this Agreement, each party will return to the other all written or
descriptive matter including, but not limited to, drawings,
descriptions or other papers, documents, tapes or any other media
which may contain any such Proprietary or Restricted Information. In
the event of a loss at any time of such Proprietary or Restricted
Information, the receiving party shall promptly notify the other party
in writing.
d) The provision of Paragraphs (b) and (c) hereof shall not apply to any
data, information, or Proprietary or Restricted Information which can
be reasonably demonstrated (i) to have been lawfully known by the
receiving party, prior to being disclosed to it by the other, or (ii)
to be publicly available, or (iii) to have been lawfully received from
a third party unless such third party obtained the same either
directly or indirectly from the disclosing party, or (iv) to have been
independently developed by the receiving party; or which is required
to be disclosed by judicial order after all available legal remedies
to maintain the secrecy of the Proprietary or Restricted Information
have been exhausted.
e) The contents and substance of this Agreement shall in no event be
disclosed by either party or their employees to third parties except
with the prior written consent of the other party hereto, or as may
otherwise be required by law. Except as may be required by law or as
set forth elsewhere in this Agreement, neither party shall, without
the other party's prior written consent, which shall not be
unreasonably withheld:
(i) Make any news release, public announcement, denial or
confirmation of this Agreement or its subject matter, or
(ii) In any manner advertise or publish the fact that they have
contracted hereunder.
8
<PAGE>
15. Independence of Parties
Neither party is or shall be deemed to be a joint venture with, or
partner or agent of, the other. Neither party shall have the authority
or power to bind the other in any way and, without limiting the
generality of the foregoing, both parties agree that they will not
make any Agreement, contract or other commitment in the name of or
which purports to be binding on the other.
Each party is an independent contractor and not an agent of the other
for any purpose whatsoever. Each party agrees that it will not make
any warranties or representations or assume or create any other
obligations on the other party's behalf.
16. Arbitration
a) Any dispute arising out of or relating to this Agreement, including
any issues relating to arbitrability or the scope of this
arbitrability clause, Will be finally settled by arbitration in
accordance with the rules of the American Arbitration Association
applying the substantive law of Kansas without regard to any conflict
of laws provision. The arbitration will be governed by the United
States Arbitration Act, 9 U.S.C. Section 1, ET seq., and judgment upon
the award rendered by the arbitrators may be entered by any court of
competent jurisdiction. The arbitration will be held in the Kansas
City metropolitan area. The arbitrators are not empowered to award
damages in excess of compensatory damages, and each party waives any
damages in excess of compensatory damages.
b) Notwithstanding the foregoing, either party may bring a claim for
injunctive relief in any court of competent jurisdiction without first
submitting the claim to arbitration.
c) The parties agree to continue performance during the pendency of any
dispute.
d) No claim may be brought by SmartServ after Sprint has made final
payment to SmartServ of all undisputed amounts due hereunder, which
payment has been accepted by SmartServ. Claims made by SmartServ may
only be brought against the Sprint Company that issued the Schedule
giving rise to the claim.
9
<PAGE>
17. Governing Law
Except to the extent preempted by federal law, this Agreement shall be
construed according to Kansas law (excluding its conflicts of law
rules).
18. Interpretation
In the event of any conflict or inconsistency between the provisions
of this Agreement and the provisions of any other document, including
but not limited to any of SmartServ's and Sprint's standard forms, the
provisions of this Agreement shall prevail and govern the
interpretation thereof, unless otherwise agreed to by both parties in
writing.
Headings to articles and paragraphs of this Agreement are to
facilitate reference only, do not form a part of this Agreement, and
shall not in any way affect the interpretation hereof.
19. Force Majeure
Neither party shall be responsible for any delay or failure in
performance (except for the payment of money) of any part of this
Agreement to the extent that such delay or failure is caused by fire,
flood, explosion, war, strike, embargo, government requirement, civil
or military authority, act of God, errors or omissions of
transportation carriers, or other such causes beyond its reasonable
control. If any such condition occurs, the party delayed or unable to
perform shall give notice to the other party as soon as practicable
and the party affected by the other's delay or inability to perform
may elect to: (1) terminate the Purchase Order not shipped, or (2)
resume performance of the Purchase Order once the condition ceases
with an option to extend the term of this Agreement up to the length
of time the condition endured.
20. Modifications
No addition or modification of this Agreement shall be effective or
binding on either of the parties hereto unless reduced to writing and
executed by duly authorized representatives of SmartServ and Sprint.
In the event of any conflict or other inconsistency between this
Agreement and any Purchase Order, this Agreement shall govern in all
respects.
21. Assignment
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns,
Neither party shall assign this Agreement without first obtaining the
written consent of the other which shall not be unreasonably withheld,
except that Sprint may assign this Agreement to any subsidiary or
affiliated entity without SmartServ's approval.
10
<PAGE>
22. Notice
Any notice, request, demand, consent or other communication provided
or permitted hereunder shall be in writing and given by personal
delivery, transmitted by telecommunications facility or sent by
registered mail, postage prepaid, addressed to the party for which it
is intended at its address as set out below or as may be designated by
notice pursuant hereto:
Sprint: Sprint/United Management Company
2330 Shawnee Mission Parkway
Westwood, KS 66205
Attn: LTD Consumer Marketing
Steve Burke
Product Manager - Interactive Telephony
Telephone: 913-323-4822
FAX: 913-3234627
SmartServ:
Any party may change its address for purposes of transmittal or
receipt of any such communication by giving ten (10) days' prior
written notice of such change to the other party in the manner
prescribed above. Any notice so given shall be deemed to have been
received on the date it was delivered or transmitted by the
telecommunication service, if a business day, or if not a business
day, on the business day next following the date of receipt.
23. Waiver
Except as otherwise provided herein, no term or provision hereof shall
be deemed waived and no breach excused unless such waiver or consent
shall be in writing and signed by the party claimed to have waived or
consented. Any consent by any party to, or waiver of, a breach by the
other, whether express or implied, shall not constitute a consent to,
waiver of, or excuse for any other different or subsequent breach.
24. Survival
Termination of this Agreement for any cause shall not release either
party hereto from any liability which, at the time of termination, has
already accrued to the other party hereto, or which thereafter may
accrue in respect to any act or omission prior to the termination or
from any obligation which is expressly stated herein to survive
termination.
11
<PAGE>
25. Severability
If any term, provision, covenant, or condition of this Agreement is
held by a court of competent jurisdiction to be invalid or
unenforceable, the remainder of the provisions shall remain in full
force and effect and shall not be affected, impaired or invalidated
thereby.
26. Entire Agreement
This Agreement including all schedules contains the entire agreement
between the parties with respect to the subject matter as of its date
and supersedes all other prior arrangements, negotiations,
representations and proposals, written or oral, relating to its
subject matter.
The Schedules contained in this Agreement are as follows and are
incorporated herein by this reference.
Schedule A - Description of Services
Schedule B - Monthly Service End-Users Revenue Sharing Schedule
Schedule C - Sprint Companies
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above.
SPRINT/UNITED MANAGEMENT COMPANY SMARTSERV ONLINE INC.
By: /S/ A. LAMONT EANES By: /S/ SEBASTIAN E. CASSETTA
----------------------------- -----------------------------
Title: Vice President Title: Chief Executive Officer
12
<PAGE>
Schedule A - Description of SmartServ Services (SmartServ Online Applications)
REUTERS NEW MEDIA INC. BUSINESS NEWS - North American Securities News Service
features business news from corporate and financial markets in the United
States. It includes market news, economic news, industry-specific reports, and
active stocks. Reuters Online News Service provides hourly updates of top
general news and periodic updates of top companies business news stories
throughout the day.
S&P COMSTOCK MARKET DATA - View NYSE, AMEX and NASDAQ delayed stock quotations.
Organize stock symbols into watch lists for convenient retrieval and review.
THE SPORTS NETWORK - Year round coverage for a variety of sports distributed by
the Sports Network, Access News, Final Scores, and Delayed Gaming Odds.
WEATHER CHANNEL - National weather accessed via zip code, city-state, or weather
station. Local and five (5) day forecasts.
13
<PAGE>
E-MAIL - Compose, save, review, transmit, forward, reply and receive E-mail
messages via the Internet. Use the Address Book to store and readily retrieve
most commonly used E-mail addresses.
LOTTERY RESULTS - 36 states and Powerball drawings
HOROSCOPES - Updated Daily
ODDS - POINT SPREADS, OVER/UNDER FOR NATIONAL SPORTING EVENTS.
Local Content - Will be developed on a market by market basis and shall be
procured and developed by SmartServ for the exclusive use by Sprint under this
Agreement. Such local content may include, among other items, the following
* Daily local news stories;
* Convention schedules;
* Local movie listings;
* Schedule of top events and sporting activities
* Concert schedules;
* Schedules and agendas for local School Board Meetings;
* Schedules of additional community events and sporting
activities; and
* Special promotions offered by local retailers.
* Beach reports (where applicable)
14
<PAGE>
SCHEDULE B - MONTHLY SERVICE END-USER AND REVENUE SHARING SCHEDULE
================================================================================
SERVICES SCREEN PHONE
- --------------------------------------------------------------------------------
DELAYED STOCK QUOTES WITH PERSONAL LISTS
AND NEWS STORIES
- --------------------------------------------------------------------------------
E-mail via the Internet
- --------------------------------------------------------------------------------
Sports Scores
- --------------------------------------------------------------------------------
In-depth Sports News
- --------------------------------------------------------------------------------
Delayed Gaming Odds
- --------------------------------------------------------------------------------
Reuters News
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Paging (may be added at Sprint's option)
- --------------------------------------------------------------------------------
Daily Horoscopes
- --------------------------------------------------------------------------------
Lottery Results
- --------------------------------------------------------------------------------
Weather Channel
- --------------------------------------------------------------------------------
Local Content (as previously defined) See Schedule A
- --------------------------------------------------------------------------------
Price to Sprint's customers: $7.95 to $9.95 (as ultimately
determined by Sprint; the range may be adjusted by Sprint
following consultation with SmartServ.)
- --------------------------------------------------------------------------------
Sprint shall bill and collect the monthly end-user fees. SmartServ shall
REIMBURSE SPRINT FOR one half the reasonable expenses associated with the
telecommunications traffic "whether it be T-1, frame relay, IP network or
another solution and associated hardware; e.g., all field equipment), including
the initial cost of such hardware and ongoing hardware costs and expenses for
maintenance, upkeep, and depreciation. SmartServ may review any proposed field
equipment configuration changes. Such field equipment is and shall remain the
sole and exclusive property of Sprint and need only be required to support
SmartServ authorized services, inclusive of operating system, utilities and
application code. Any addition of other foreign products or services may not
result in stable performance or worse case prove not to work at all.
All SmartServ proprietary application code developed by SmartServ is the sole
and exclusive property of SmartServ and cannot be duplicated, reverse engineered
or tampered with. Sprint shall pay for the T-1 installation to the local loop
rotary inclusive of local phone numbers. SmartServ shall pay for installation of
local equipment in Stamford. SmartServ shall initially pay for development of
information services and computer software and the monthly recurring cost for
obtaining the Local Content. - SPRINT SHALL REIMBURSE SMARTSERV FOR ONE-HALF THE
MONTHLY COST OF THE LOCAL CONTENT.
Additional costs shall be paid, initially, with SmartServ having responsibility
for content, software, and infrastructure and Sprint having responsibility for
marketing, customer acquisition, and customer support. It is the intent of the
Parties that all of these costs and collected end-user revenues be split between
the Parties on a fifty'-fifty basis. Within thirty (30) days of the end of a
calendar month Sprint shall report to SmartServ the amount of end-user revenue
collected in the prior month and Sprint and SmartServ shall report to each other
the costs incurred by each of them in the prior month. It is the intent
15
<PAGE>
of the Parties that each Party should recover fifty percent (50%) of its
legitimate, documented costs from the end user revenue and that any end user
revenue remaining shall be split fifty-fifty by the Parties through Sprint
forwarded SmartServ's share to SmartServ within thirty (30) days of the Parties
making the aforesaid reports available to each other. If collected revenues are
insufficient in any month to reimburse the Parties for their costs and the Local
Content, then said reimbursement shall carry over to the next month (without
interest or finance charge) and any such carry-over reimbursement shall be paid
first from subsequent month's revenues (e.g., the parties acknowledge that each
new Sprint customer shall receive their first month free or risk free, depending
on target segments, and thus the parties acknowledge that they have no revenue
expectations for the first month of the new Market and that collected revenue
from the first month of the Market introduction shall be insufficient to
reimburse SmartServ. Accordingly, the parties acknowledge that SmartServ's first
month's reimbursement shall be carried over.)
Upon request of SmartServ, and with the written consent of Sprint, SmartServ may
use the exclusive Local Content in a business application that does not compete
with Sprint's provision of SmartServ services to end users as contemplated
herein. In the event that SmartServ does so use the exclusive Local Content in
such a non-competing business application, Sprint shall be relieved of the
herein above imposed obligation to reimburse SmartServ for the cost of the Local
Content.
If the parties determine that an 800 number is necessary for after hours or for
emergency failover (as defined in Section 7(a)) Support Services, Sprint shall
bear the cost of obtaining and maintaining such 800 number.
16
<PAGE>
Schedule B-2 Ancillary Charges
Help Desk - customer service calls No Charge
Administrative Software No Charge
17
<PAGE>
Schedule C - Sprint Companies
The following Sprint Companies are included in the definition of Sprint and are
subject to the terms of this Agreement. This Agreement does not restrict the
ability of the companies to realign their management as long as they remain
affiliates. All references to Sprint in this Agreement shall be deemed to refer
to the specific Sprint Company ordering services under this Agreement. No
commitments made by SUMC or a Sprint Company, and none shall be inferred from
this Agreement, except as it indicated by an order with the Sprint Company. All
invoices and statements shall reference the particular order and must be
directed to the specific Sprint Company placing the order under this Agreement.
No work performed on behalf of, nor product nor services delivered to, any
Sprint Company will be billed to or collected from any other Sprint Company.
i Carolina Telephone & Telegraph Co.
i Central Telephone Company - Nevada Division
i Central Telephone Company - North Carolina Division
i Central Telephone Company of Florida
i Central Telephone Company of Illinois
i Central Telephone Company of Texas
i Central Telephone Company of Virginia
i Sprint Communications Company, L.P.
i The United Telephone Company of Pennsylvania
i United Telephone Company of Eastern Kansas
i United Telephone Company of Florida
i United Telephone Company of Indiana, Inc.
i United Telephone Company of Kansas
i United Telephone Company of Minnesota
i United Telephone Company of Missouri
i United Telephone Company of New Jersey, Inc.
i United Telephone Company of Ohio
i United Telephone Company of South-central Kansas
i United Telephone Company of Texas, Inc.
i United Telephone Company of the Carolinas
i United Telephone Company of the Northwest
i United Telephone Company of the West
i United Telephone-Southeast, Inc.
18
EXHIBIT 11.1 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
JUNE 30
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
PRIMARY:
Average shares outstanding 3,695,000 2,355,000 1,578,000
Net effect of stock and warrant
issuances with exercise prices
below the initial public
offering price based on
the treasury stock method -- -- 65,000
----------- ----------- -----------
Total 3,695,000 2,355,000 1,643,000
=========== =========== ===========
Net Loss $(4,434,482) $(2,966,287) $(1,846,183)
=========== =========== ===========
Per share amount $ (1.20) $ (1.26) $ (1.12)
=========== =========== ===========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE JUNE 30, 1997
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> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 93,345
<SECURITIES> 0
<RECEIVABLES> 155,782
<ALLOWANCES> 6,000
<INVENTORY> 90,725
<CURRENT-ASSETS> 333,852
<PP&E> 925,497
<DEPRECIATION> 181,783
<TOTAL-ASSETS> 1,246,689
<CURRENT-LIABILITIES> 1,234,878
<BONDS> 710,139
0
0
<COMMON> 36,950
<OTHER-SE> (735,278)
<TOTAL-LIABILITY-AND-EQUITY> 1,246,689
<SALES> 688,610
<TOTAL-REVENUES> 688,610
<CGS> 2,284,108
<TOTAL-COSTS> 2,284,108
<OTHER-EXPENSES> 2,861,845
<LOSS-PROVISION> 29,248
<INTEREST-EXPENSE> 51,646
<INCOME-PRETAX> (4,434,482)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,434,482)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,434,482)
<EPS-PRIMARY> (1.20)
<EPS-DILUTED> (1.20)
</TABLE>
