UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 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.
Certain portions of the issuer's Proxy Statement for the Annual Meeting of
Stockholders, scheduled to be held on December 15, 1997, are incorporated by
reference in Part III hereof.
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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
and Financial Disclosure
PART III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 37
10. Executive Compensation 37
11. Security Ownership of Certain Beneficial Owners and Management 37
12. Certain Relationships and Related Transactions 37
13. Exhibits and Reports on Form 8-K 38
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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
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 the Florida, New York, North Carolina and other
designated markets before Sprint embarks on 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 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 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 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, 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, 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
$1,133,884 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
14
<PAGE>
Partner, and in turn to their end users. The Company is also developing a direct
subscriber base. It is anticipated that the monthly base charge will vary,
between $7.95 and $300.00 per month, depending upon the product offering and
specific market segment.
Management anticipates that staffing requirements associated with the
implementation of its plan of operation will result in the addition of a minimum
of 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 design and implementation of services to Strategic Marketing Partners
were $342,249. 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 design, development and
implementation services associated with its arrangement with Schroder & Co.,
Inc. During the comparable 1996 period, the Company received design and
development fees of $103,500 which were offset against product development
expenses because the Company was considered a development stage enterprise.
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.
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 cost ($275,350), advertising costs ($540,000),
professional fees ($456,600), and telecommunications costs ($85,900). Selling,
general and administrative costs increased 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. Included in personnel costs is a non-cash charge of approximately
$115,000 related to the change in value of employee stock options. 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.
15
<PAGE>
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 the issuance of short-term notes payable and with an insurance
financing arrangement. 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.
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 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 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.
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.
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. While the Company believes that significant revenues will be earned from
these contracts, there is no assurance that such revenues will be forthcoming.
17
<PAGE>
Management estimates that the 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.
Management believes that upon full implementation of its business plan,
sufficient revenues will be generated to meet operating requirements. Management
further believes that the Company's plan of operations will, if successful,
generate adequate cash flow from operations to enable the Company to offer its
proposed services on an economically sound basis; however, no assurance can be
given that such goals will be attained.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
- ----------------------------------------------
From time to time, information provided by the Company, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-KSB) may contain statements which
are not historical facts, so-called "forward looking statements". These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. The Company's actual
future results may differ significantly from those stated in any forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties, including, but not limited to, product demand, pricing, market
acceptance, litigation, intellectual property rights, risks in product and
technology development, product competition, limited number of customers, key
personnel, and other risk factors detailed in this Annual Report on Form 10-KSB
and in the Company's other Securities and Exchange Commission filings.
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 a working capital
deficiency. 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 purchase 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)
<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. 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.
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
27
<PAGE>
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 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.
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.
The Company's plans for increasing cash resources in the event of limited
acceptance of its product in the marketplace could include cost and expenditure
reductions, additional funding through private or public offerings, and
additional credit facility arrangements.
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.
28
<PAGE>
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.
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, $0,
and $0 in the fiscal year ended June 30, 1997, 1996 and 1995, respectively.
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".
29
<PAGE>
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 found in 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 at
prices ranging from $1.00 to $1.40. These warrants expire in September 2002.
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.
30
<PAGE>
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.
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. These deferred tax assets
result from capitalized start-up costs that were deferred for income tax
purposes, as well as from federal and state net operating tax loss
carryforwards. At June 30, 1997 and 1996, the composition of the deferred tax
asset was 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
============== =============
31
<PAGE>
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 $4,023,000 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 $5,975,000 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.
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
=============
32
<PAGE>
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 such options at not less than the fair value of the stock on the
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.
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.
33
<PAGE>
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
Number of Remaining Number of
Range of Options Average Contractual Options Average
Exercise Prices (000's) Prices Life (Years) (000's) Price
- -------------------------- ---------- --------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
$5.06 to $6.25 338,350 $ 5.21 7.0 25,000 $ 6.11
========== ========= =============== =========== ==========
</TABLE>
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.
34
<PAGE>
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
======== ========= ======== =========
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 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.
35
<PAGE>
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. These warrants expire on September 30,
2002.
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 the Florida, New York, North Carolina, Chicago, Los Angeles and
other designated markets before embarking on a national campaign.
36
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information called for by this Item is set forth under the caption
"Directors and Executive Officers of the Company" in the Proxy Statement for the
Annual Meeting of Stockholders to be held on December 15, 1997, and is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information called for by this Item is set forth under the caption
"Executive Compensation" in the Proxy Statement for the Annual Meeting of
Stockholders to be held on December 15, 1997, and is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this Item is set forth under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Proxy Statement
for the Annual Meeting of Stockholders to be held on December 15, 1997, and is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item is set forth under the caption "Certain
Relationships and Related Transactions" in the Proxy Statement for the Annual
Meeting of Stockholders to be held on December 15, 1997, and is incorporated
herein by reference.
37
<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.**
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**
38
<PAGE>
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 SamrtServ
Online, Inc. dated September 26, 1997+
11.1 Statement Regarding Computation of Per Share Earnings*
27 Financial Data Schedule*
_________________
* Filed herewith
** Filed as an exhibit to the Company's registration statement on Form
SB-2 (Registration No. 333-114)
*** Filed as an exhibit to the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1996
**** Filed as exhibit to the Company's Current Report on Form 8-K/A for an
event dated September 30, 1997
***** Filed as exhibit to the Company's Proxy Statement dated October 10,
1996
+ To be filed by amendment
(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.
39
<PAGE>
SIGNATURES
In accordance with 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.
SMARTSERV ONLINE, INC.
Registrant
By: /S/SEBASTIAN E. CASSETTA
------------------------------
Sebastian E. Cassetta
Chairman of the Board
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/S/ SEBASTIAN E. CASSETTA Chairman of the Board, October 14, 1997
- ------------------------------ Chief Executive Officer,
Sebastian E. Cassetta Secretary and Director
/S/ STEVEN T. FRANCESCO President, Chief Operating October 14, 1997
- ------------------------------ Officer and Director
Steven T. Francesco
/S/ THOMAS W. HALLER Vice President, Treasurer October 14, 1997
- ------------------------------ and Chief Financial Officer
Thomas W. Haller
Director October 14, 1997
- ------------------------------
Bernard Baum
Director October 14, 1997
- ------------------------------
Beth Bronner
Director October 14, 1997
- ------------------------------
Hiro R. Hiranandani
/S/ L. SCOTT PERRY Director October 14, 1997
- ------------------------------
L. Scott Perry
/S/ CATHERINE CASSEL TALMADGE Director October 14, 1997
- ------------------------------
Catherine Cassel Talmadge
40
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> 1,784,878
<BONDS> 160,139
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>
