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FORM 10-QSB
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
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
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
METRO CENTER, ONE STATION PLACE, STAMFORD, CONNECTICUT 06902
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(Address of principal executive offices) (Zip code)
(203) 353-5950
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (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 registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Transitional Small Business Disclosure Format (check one)
YES [_] NO [X]
The number of shares of common stock, $.01 par value, outstanding as of May 15,
1998 was 4,699,531.
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<PAGE>
SMARTSERV ONLINE, INC.
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - June 30, 1997 and March 31, 1998 (unaudited)........2
Statements of Operations - three months ended March 31, 1998 and
1997 and nine months ended March 31, 1998 and 1997 (unaudited).......3
Statement of Changes in Stockholders' Equity (Deficiency) - nine
months ended March 31, 1998 (unaudited)..............................4
Statements of Cash Flows - three months ended March 31, 1998 and
1997 and nine months ended March 31, 1998 and 1997 (unaudited).......5
Notes to Unaudited Financial Statements..............................6
Item 2. Management's Discussion and Analysis or Plan of Operation...........11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................17
Item 4. Submission of Matters to a Vote of Security Holders.................17
Item 6. Exhibits and Reports on Form 8-K....................................19
Signatures..........................................................20
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
------------ ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 394,088 $ 93,345
Accounts receivable, net of an allowance for losses
of $6,000 at March 31, 1998 and June 30, 1997 178,100 149,782
Prepaid expenses and other receivables 137,988 90,725
------------ ------------
Total current assets 710,176 333,852
Property and equipment - net 652,694 743,714
Other assets 70,437 169,123
------------ ------------
Total Assets $ 1,433,307 $ 1,246,689
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 972,293 $ 829,355
Accrued liabilities 344,588 211,813
Accrued interest -- 16,323
Payroll taxes payable 2,869 20,383
Salaries payable 36,297 46,018
Current portion of capital lease obligation 73,600 86,072
Deferred revenues 24,562 24,914
------------ ------------
Total current liabilities 1,454,209 1,234,878
------------ ------------
Long-term portion of capital lease obligation 99,254 160,139
Notes payable -- 550,000
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock - $.01 par value
Authorized - 15,000,000 shares
Issued and outstanding - 3,958,339 shares at
March 31, 1998 and 3,695,000 shares at June 30, 1997 39,583 36,950
Additional paid-in capital 17,801,659 9,046,592
Unearned compensation (4,366,545) --
Accumulated deficit (13,594,853) (9,781,870)
------------ ------------
Total stockholders' equity (deficiency) (120,156) (698,328)
------------ ------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 1,433,307 $ 1,246,689
============ ============
</TABLE>
See accompanying notes.
2
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED MARCH 31 ENDED MARCH 31
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 231,309 $ 170,674 $ 613,096 $ 467,783
----------- ----------- ----------- -----------
Costs and expenses:
Costs of revenues 323,579 310,374 1,042,264 837,734
Product development expenses 218,727 427,955 646,432 920,662
Selling, general and administrative
expenses 753,501 806,797 1,913,728 2,247,696
----------- ----------- ----------- -----------
Total costs and expenses 1,295,807 1,545,126 3,602,424 4,006,092
----------- ----------- ----------- -----------
Loss from operations (1,064,498) (1,374,452) (2,989,328) (3,538,309)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 10,883 8,086 33,514 73,271
Interest expense and other
financing costs (182,088) (2,452) (857,169) (8,160)
----------- ----------- ----------- -----------
(171,205) 5,634 (823,655) 65,111
----------- ----------- ----------- -----------
Net loss $(1,235,703) $(1,368,818) $(3,812,983) $(3,473,198)
=========== =========== =========== ===========
Basic and diluted earnings per common
share (Note 2) $ (0.30) $ (0.37) $ (0.95) $ (0.94)
=========== =========== =========== ===========
Weighted average shares outstanding
(Note 2) 4,173,609 3,695,000 4,033,521 3,695,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
3
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
NINE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN UNEARNED ACCUMULATED
SHARES PAR VALUE CAPITAL COMPENSATION DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 3,695,000 $ 36,950 $ 9,046,592 $ -- $ (9,781,870) $ (698,328)
Issuance of 4,000 Prepaid
Common Stock Purchase
Warrants, net of direct
costs of $545,000 -- -- 3,455,000 -- -- 3,455,000
Conversion of 175 Prepaid
Common Stock Purchase
Warrants into Common Stock
263,339 2,633 (2,633) -- -- --
Issuance of Common Stock
Purchase Warrants to a
financial consultant in
connection with the issuance
of 4,000 Prepaid Common
Stock Purchase Warrants -- -- 4,528,500 (4,528,500) -- --
Issuance of Common Stock
Purchase Warrants in
connection with the
issuance of notes -- -- 654,200 -- -- 654,200
Issuance of Common Stock
Purchase Warrants in
connection with investment
advisory contracts
-- -- 120,000 -- -- 120,000
Amortization of unearned
compensation over the term
of the agreement -- -- -- 161,955 -- 161,955
Net loss for the period -- -- -- -- (3,812,983) (3,812,983)
------------ ------------ ------------ ------------ ------------ ------------
Balance at March 31, 1998 3,958,339 $ 39,583 $ 17,801,659 $ (4,366,545) $(13,594,853) $ (120,156)
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED MARCH 31 ENDED MARCH 31
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,235,703) $(1,368,818) $(3,812,983) $(3,473,198)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization of property
and equipment 47,984 27,578 141,321 65,904
Non-cash interest expense and other
financing costs 123,100 -- 804,664 --
Changes in market value of employee options -- -- -- 188,293
Amortization of unearned revenues (13,562) -- (18,229) --
Amortization and write-off of deferred charges -- 9,000 63,000 27,000
Amortization of unearned compensation 80,980 -- 161,955 --
Other changes that provided (used) cash
Accounts receivable (50,938) 32,188 (28,318) (117,156)
Inventories -- -- -- (30,000)
Prepaid expenses and other receivables 3,655 (16,135) 16,737 (66,319)
Accounts payable and accrued liabilities 179,434 429,892 286,713 478,361
Accrued interest -- -- (16,323) --
Payroll taxes payable (4,713) 6,611 (28,514) 13,199
Salaries payable (49,587) (11,493) (9,721) (1,517)
Unearned revenues 22,022 -- 37,877 20,000
Security deposit reduction (3,472) -- 10,781 --
----------- ----------- ----------- -----------
Net cash used in operating activities (900,800) (891,177) (2,391,040) (2,895,433)
----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of equipment (7,425) (119,332) (50,301) (338,075)
----------- ----------- ----------- -----------
Net cash used in investing activities (7,425) (119,332) (50,301) (338,075)
----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Repayment of capital lease obligation (18,546) -- (73,357) --
Proceeds from the issuance of short-term notes -- -- 196,500 --
Proceeds from the issuance of warrants, net -- -- 2,643,941 --
Costs of the issuance of warrants -- -- (25,000) --
Proceeds from officers' loans -- -- 37,500 --
Repayment of officers' loans -- -- (37,500) --
----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities (18,546) -- 2,742,084 --
----------- ----------- ----------- -----------
Increase (decrease) in cash and cash equivalents (926,771) (1,010,509) 300,743 (3,233,508)
Cash and cash equivalents - beginning of period 1,320,859 1,237,851 93,345 3,460,850
----------- ----------- ----------- -----------
Cash and cash equivalents - end of period $ 394,088 $ 227,342 $ 394,088 $ 227,342
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
SMARTSERV ONLINE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 1998
1. ORGANIZATION
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 Strategic
Marketing Partners, as well as direct subscribers, including: stock quotes,
charting, nationwide business and residential directory services, business and
financial news, sports information, research and analysis reports, online FedEx
package tracking, e-mail, local information, 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.
On September 30, 1997, the Company completed a private placement ("Placement")
of $4 million of Prepaid Common Stock Purchase Warrants ("Prepaid Warrants") as
more fully disclosed in Note 6. An integral part of this Placement was the
conversion of notes payable and accrued interest thereon, aggregating $836,059,
into such Prepaid Warrants. The net proceeds to the Company of $2,643,941
provided it with working capital to allow it to continue its marketing efforts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
- ---------------------
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information,
the instructions of Form 10-QSB and Rule 310 of Regulation SB and, therefore, do
not include all information and notes necessary for a presentation of results of
operations, financial position and cash flows in conformity with generally
accepted accounting principles. The balance sheet at June 30, 1997 has been
derived from the audited financial statements at that date, but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial statements should be
read in conjunction with the Company's Annual Report on Form 10-KSB/A for the
year ended June 30, 1997. In the opinion of the Company, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation have
been made. Results of operations for the nine months ended March 31, 1998 are
not necessarily indicative of those expected for the year ending June 30, 1998.
The Company has completed development of its information platform and
communications software and exited the developmental stage. The Company has
incurred recurring operating losses and its operations have not produced a
positive cash flow. Additionally, there is no assurance that the Company will
generate future revenues or cash flow from operations.
6
<PAGE>
RECLASSIFICATIONS
- -----------------
Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
BASIC AND DILUTED EARNINGS PER SHARE
- ------------------------------------
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 128, Earnings per Share ("Statement 128").
Statement 128 replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants, and convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
necessary, restated to conform to the Statement 128 requirements. The
weighted-average shares outstanding are determined as the mean average of the
shares outstanding and assumed to be outstanding during the period.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
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. This statement is effective for
fiscal years ending on or after December 15, 1997. The Company plans to adopt
and apply the provisions of this statement for the fiscal year ending June 30,
1998. The resulting effect of the application of this statement is not expected
to have a material impact on the financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
--------- ---------
<S> <C> <C>
Data processing equipment $ 613,444 $ 564,098
Data processing equipment purchased under a capital lease 246,211 246,211
Office furniture and equipment 69,830 69,196
Display equipment 9,635 9,635
Leasehold improvements 36,678 36,357
--------- ---------
975,798 925,497
Accumulated depreciation, including $45,139 and
$8,207 at March 31, 1998 and June 30, 1997, respectively,
for equipment purchased under a capital lease (323,104) (181,783)
--------- ---------
$ 652,694 $ 743,714
========= =========
</TABLE>
4. 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
7
<PAGE>
Company's Prepaid Warrants (`Prepaid Warrants") as more fully described in Note
6.
In conjunction with the origination of the line of credit facility, the Company
issued 250,000 Common Stock Purchase Warrants ("Warrants") to the financial
institution. Similarly, the Company issued 50,500 Warrants for each of the July
and September amendments. As a result of the Company's default on the note in
August, the Company was required to issue 300,500 "default" Warrants to such
institution. At March 31, 1998, these 651,500 Warrants have exercise prices
ranging from $0.75 to $1.375 and expire in September 2002. Pursuant to Statement
of Financial Accounting Standard No. 123, Accounting for Stock Based
Compensation, the Company valued these warrants in accordance with the
Black-Scholes pricing methodology at the time of issuance and recorded such
valuation in the statement of operations as financing costs. Certain of the
Warrants contain variable exercise provisions predicated on the price of the
Company's Common Stock upon the conclusion of certain future events or at the
time of exercise. These Warrants have been revalued at March 31, 1998 in
accordance with the Black-Scholes pricing methodology giving consideration to
facts and circumstances as they existed at that date. The Company has recorded
financing costs associated with these Warrants of $123,100 and $654,200 for the
quarter and nine month period ended March 31, 1998, respectively.
5. LOANS PAYABLE TO OFFICERS
Loans payable to officers of the Company were non-interest bearing and due on
demand. The last of such loans was repaid on October 2, 1997.
6. EQUITY TRANSACTIONS
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 Act of 1933, as amended, pursuant to Regulation D
thereof. Each Prepaid Warrant entitles the holder to purchase that number of
shares of Common Stock that is equal to $1,000 divided by the applicable
exercise price. Such exercise price is determined initially as 70% of the
average closing bid price of the Common Stock for the 10 trading days ending on
the day prior to exercise of the Prepaid Warrants. Additionally, the exercise
discount shall be 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 became exercisable on 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 February 27, 1998, the
date the registration statement became effective. The Prepaid Warrants expire on
September 30, 2000.
Terms of the Placement included the conversion by Zanett of notes 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 have been used for
general working capital requirements.
As compensation for its services, Zanett received a placement fee and an
unaccountable expense allowance of 10% ($400,000) and 3% ($120,000),
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
8
<PAGE>
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 authorized the issuance of 3,555,555 Common Stock Purchase Warrants
("Consulting Warrants") to this consultant that are exercisable at $1.125 per
share of Common Stock. The issuance of 3,055,555 of such Consulting Warrants was
contingent upon the approval of the Company's shareholders which was received on
April 24, 1998. At September 30, 1997, the Company valued these warrants using
the Black-Scholes pricing methodology at approximately $4,400,000. However,
since the issuance of 3,055,555 of such Consulting Warrants was uncertain until
April 24, 1998, the Company has revalued these Consulting Warrants in accordance
with Statement of Financial Accounting Standard No. 123, Accounting for
Stock-Based Compensation, and the Black-Scholes pricing methodology at March 31,
1998, giving consideration to the facts and circumstances as they existed at
that date. Accordingly, unearned compensation has been adjusted to $4,528,500 at
March 31, 1998. Such amount has been recorded in stockholders' equity as
unearned compensation and will be amortized to income over the five-year term of
the agreement. These warrants expire on September 30, 2002. The Company has
recorded consulting expense of $80,975 and $161,955 for the quarter and nine
month period ended March 31, 1998, respectively.
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 NINE MONTHS ENDED DECEMBER 31
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net loss $(1,235,703) $(1,368,818) $(3,812,983) $(3,473,198)
=========== =========== =========== ===========
Denominator:
Weighted-average shares 4,173,609 3,695,000 4,033,521 3,695,000
=========== =========== =========== ===========
Basic and diluted earnings per
common share $ (0.30) $ (0.37) $ (0.95) $ (0.94)
=========== =========== =========== ===========
</TABLE>
At March 31, 1998 there were, exclusive of the Common Stock Purchase Warrants
issued in connection with the issuance of notes payable (Note 4) and the Prepaid
Warrants (Note 6), 2,687,500 Common Stock Purchase Warrants outstanding. Such
warrants have exercise prices ranging from $0.625 to $12.00 per share and expire
from March 2001 through March 2003. None of these warrant issuances have been
included in the computation of diluted loss per share because their inclusion
would be antidilutive. Additionally, the Company has established an employee
stock option plan for the benefit of directors, employees and consultants to the
Company. These options are intended to qualify as incentive stock options within
the meaning of Section 422 of the Internal Revenue Code, as amended, or as
nonqualified stock options. The options are partially exercisable after one year
from date of grant and no options may be granted after April 15, 2006. At the
Annual Meeting on April 24, 1998, the shareholders approved an amendment to the
Plan authorizing the issuance of up to 1,500,000 options to employees and
non-employee directors. At March 31, 1998, there are options outstanding for the
purchase of 1,070,475 shares of the Company's Common Stock.
9
<PAGE>
SUBSEQUENT EVENTS
Subsequent to March 31, 1998, investors in the Company's Prepaid Warrants
converted 1,037.5 of such warrants into 741,192 shares of Common Stock at an
exercise price of $1.40 per share.
At the Annual Meeting on April 24, 1998, the shareholders approved the amendment
of the Company's Certificate of Incorporation to increase the number of
authorized shares of the Company's Common Stock, par value $0.01 per share, from
15,000,000 to 40,000,000 shares. Additionally, the shareholders approved the
amendment of the Company's Certificate of Incorporation to create a class of
1,000,000 shares of Preferred Stock, par value $0.01 per share.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 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 of its marketing
strategies.
The Company's business plan focuses on the strategy of marketing its services in
partnership with those companies that have an economic incentive to provide the
Company's information platform to their customers. Through the use of this
model, the consumer is a customer of both SmartServ and its Strategic Marketing
Partner. The Company also believes that the sale of its information platform
through the cooperative efforts of partners with more recognizable brand names
than its own is important to its success.
The Company is developing strategic marketing relationships with key partners
that provide access to large numbers of potential subscribers for its monthly
services. Toward that end, on May 1, 1998, the Company consummated an agreement
with Data Transmission Network Corp. ("DTN") whereby DTN obtained the exclusive
right to market the Company's three financial services information products to
the finance and investment communities. These products include: SmartServ Pro, a
real-time, tick-by-tick stock quote service; and TradeNet and BrokerNet,
real-time trading and account information products for the stock brokerage
industry. Additionally, DTN has acquired SmartServ's Internet based retail
customers.
DTN is an innovative information and communications provider for the
agricultural, automotive, energy, farm implement, financial, mortgage, golf turf
management, construction, aviation, emergency management and weather related
industries. DTN provides commodities and financial information to farmers and
others via satellite transmission and leased telecommunications lines. The
SmartServ/DTN partnership provides DTN with quality financial products
engineered for low cost delivery through the Internet while allowing SmartServ
the opportunity to reduce its costs and substantially increase revenues. DTN has
a sales force of more than 200 sales personnel which when coupled with DTN's
subscriber base and marketing and advertising capabilities represents a
significant opportunity for the Company. Effective May 1, 1998, with the
licensing to DTN of the SmartServ Pro product, the Company has exited the retail
market for a more cost effective business-to-business arrangement. Thus the
significant marketing, advertising and infrastructure costs associated with a
direct marketing program will be borne by DTN.
Other potential partners include regional telephone operating companies, long
distance carriers, telephone equipment manufacturers and companies that
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. In September 1997, the Company
signed a three year contract with Sprint/United Management Company ("Sprint")
for the delivery of the Company's information services into additional markets
beyond the initial trial city--Las Vegas. In December 1997, Sprint commenced the
deployment of the Company's services in three Florida markets. The Company
anticipates that this will result in the deployment of the Company's information
services in
11
<PAGE>
New York, North Carolina, Chicago, Los Angeles and other designated markets as
part of a national campaign.
The Company has also signed an agreement with CIDCO Incorporated, a leading
marketer of screen-based phones and other Caller ID devices, whereby CIDCO will
offer the Company's suite of online financial and entertainment information to
buyers of the CIDCO CST 2100 screen phone. These services are to be marketed as
"CIDCO Personal Information Services". CIDCO's clients include Southwestern Bell
and Bell Atlantic.
Management continues to believe that substantially all of the Company's revenues
will be derived from customers 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"
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 customers. The Company has the ability to
customize the information package to be offered to each Strategic Marketing
Partner, and in turn to their customers.
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.
Notwithstanding the execution of contracts with both DTN and Sprint 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.
Management anticipates that staffing requirements associated with the
implementation of its plan of operation will result in the addition of a minimum
of three to six personnel during the period ending September 30, 1998. Such
personnel will be added to assist with the programming requirements of Strategic
Marketing Partners' product offerings and for customer support.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1998 VS. QUARTER ENDED MARCH 31, 1997
During the quarter ended March 31, 1998, total revenues amounted to $231,309,
consisting primarily of subscription fees for the SmartServ Online "Pro"
real-time stock quote service ($136,600) and sales generated from the Company's
relationships with Sprint ($22,500) and Schroder ($72,000). The Company
commenced the implementation of its marketing plan with a national advertising
campaign in September 1996. Total revenues during the quarter ended March 1997
were $170,674, consisting primarily of subscription fees from the sale of the
Company's information services of $75,800 and fees for the enhancement,
implementation, and marketing of services associated with the Company's
arrangement with Schroder of $94,800.
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During the quarter ended March 31, 1998, the Company incurred costs of revenues
of $323,579. Such costs consisted primarily of information and communication
costs ($161,400), personnel costs ($83,700), and computer hardware leases,
depreciation and maintenance ($77,300). During the quarter ended March 31, 1997,
the costs of revenues were $310,374. Such costs consisted primarily of
information and communication costs ($142,500), personnel costs ($111,500), and
computer hardware leases, depreciation and maintenance ($45,100).
Product development expenses were $218,727 vs. $427,955 for the quarter ended
March 31, 1997. Such costs consisted primarily of personnel costs ($125,500) and
computer systems consultants ($93,200). During the quarter ended March 31, 1997,
such product development expenses consisted primarily of personnel costs
($166,700) and systems consultants ($259,500).
During the quarter ended March 31, 1998, the Company incurred selling, general
and administrative expenses of $753,501 vs. $806,797 for the quarter ended March
31, 1997. Such costs were incurred primarily for personnel costs ($252,000),
facilities ($49,000), marketing and advertising costs ($33,000) and professional
fees ($310,000). Included in professional fees is an $80,980 non-cash charge for
the amortization of unearned compensation associated with the issuance of Common
Stock Purchase Warrants to a financial consultant. During the quarter ended
March 31, 1997, selling, general and administrative expenses were incurred
primarily for advertising and marketing ($187,000), personnel costs ($274,000)
and professional fees ($229,200).
Interest income for the quarter ended March 31, 1998 amounted to $10,883 vs.
$8,086 for the quarter ended March 31, 1997. During the quarter ended March 31,
1998 such amounts were earned from the Company's investments in highly rated
bank certificates of deposit while during the quarter ended March 31, 1997 such
amounts were earned primarily from the Company's investments in highly liquid
commercial paper. During the quarter ended March 31, 1998 interest and financing
costs included a non-cash charge of $123,100 for the revaluation of certain
Common Stock Purchase Warrants issued in connection with the Company's May 1997
line of credit facility.
NINE MONTHS ENDED MARCH 31, 1998 VS. NINE MONTHS ENDED MARCH 31, 1997
During the nine months ended March 31, 1998, the Company recorded revenues of
$613,096, consisting primarily of $407,000 from the sale of subscriptions to its
information services, $127,000 from enhancement, implementation, and marketing
services associated with its arrangement with Schroder, and $76,000 from the
Company's relationship with Sprint. During the nine months ended March 31, 1997,
the Company recorded revenues of $228,035 from the sale of its information
services and the related screen-based telephones. Additionally, the Company
recorded revenues of $239,748 related to the enhancement, implementation and
marketing of services associated with its arrangement with Schroder.
During the nine months ended March 31, 1998, the Company incurred costs of
revenues of $1,042,264. Such costs consisted primarily of information and
communication costs ($484,600), personnel costs ($267,500), and computer
hardware leases, depreciation and maintenance ($259,800). During the nine months
ended March 31, 1997, the costs of revenues were $837,734. Such costs consisted
primarily of information and communication costs ($199,100), personnel costs
($340,100), and computer hardware leases, depreciation and maintenance
($121,600), and purchases of screen-based phones for resale ($95,500). Included
in personnel costs in 1997 is a non-cash charge of $29,200 for the change in the
market value of employee stock options.
Product development expenses were $646,432 during the nine months ended March
31, 1998 vs. $920,662 for the nine months ended March 31, 1997. Such costs
consisted primarily of personnel costs ($400,500) and computer systems
consultants ($226,000). During the nine months ended March 31,
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<PAGE>
1997, such product development expenses consisted primarily of personnel costs
($509,100) and systems consultants ($395,900). Included in personnel costs in
1997 is a non-cash charge of $43,800 for the change in the market value of
employee stock options.
During the nine months ended March 31, 1998, the Company incurred selling,
general and administrative expenses of $1,913,728, primarily for personnel costs
($730,100), facilities ($147,800), marketing and advertising costs ($120,200),
and professional fees ($646,300). Included in professional fees is a non-cash
charge of $63,000 for the write-off of prepaid consulting fees incurred in
connection with the Company's Initial Public Offering of Securities and a
$161,955 non-cash charge for the amortization of unearned compensation
associated with the issuance of Common Stock Purchase Warrants to a financial
consultant. Selling, general and administrative expenses for the nine months
ended March 31, 1997 were $2,247,696. Such costs consisted primarily of
personnel costs ($765,300), facilities ($123,700), marketing and advertising
costs ($580,100), and professional fees ($486,600). Included in personnel costs
for 1997 was a non-cash charge of approximately $115,000 related to the change
in value of employee stock options.
Interest income for the nine months ended March 31, 1998 amounted to $33,514 vs.
$73,271 for the nine months ended March 31, 1997. During the nine months ended
March 31, 1998, such amounts were earned from the Company's investments in
highly rated bank certificates of deposit while during the nine months ended
March 31, 1997, such amounts were earned primarily from the Company's
investments in highly liquid commercial paper. Interest and financing costs for
the nine months ended March 31, 1998 were $857,169. Such amounts were incurred
primarily in connection with the issuance of short-term notes payable and
associated Common Stock Purchase Warrants. The Common Stock Purchase Warrants
have been recorded in the financial statements in accordance with the
Black-Scholes pricing methodology as prescribed by Statement of Financial
Accounting Standard, No. 123, Accounting for Stock-Based Compensation. Interest
costs for the nine months ended March 31, 1997 were incurred in connection with
an insurance financing agreement and amounted to $8,160.
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.
During the first half of the year ended June 30, 1997, the Company's operations
were funded through the proceeds of the March 1996 IPO and revenues generated
from the Company's marketing and advertising programs. Commencing with the
second half of 1997, the Company experienced both equity and working capital
constraints resulting from the information delivery system's inability to
support and retain the volume of users generated by the Company's marketing and
advertising programs. In May 1997, the Company arranged a line of credit
facility with a financial institution. Such line of credit was originated for a
maximum borrowing amount of $550,000. In July and September 1997, the facility
was amended to allow for additional borrowings of up to $222,222. In conjunction
with the origination of the line of credit facility, the Company issued 250,000
Common Stock Purchase Warrants ("Warrants") to the financial institution.
Similarly, the Company issued 50,500 Warrants for each of the July and September
amendments. As a result of the Company's default on the note in August, the
Company was required to issue 300,500 "default" Warrants to such institution. At
March 31, 1998, these 651,500 Warrants have exercise prices ranging from $0.75
to $1.375 and expire in September 2002. Pursuant to
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Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based
Compensation, the Company valued these warrants in accordance with the
Black-Scholes pricing methodology at the time of issuance and recorded such
valuation in the statement of operations as financing costs. At March 31, 1998,
certain of the Warrants contain variable exercise provisions predicated on the
price of the Company's Common Stock upon the conclusion of certain events or at
the time of exercise. The Warrants have been revalued at March 31, 1998 in
accordance with the Black-Scholes pricing methodology giving consideration to
facts and circumstances as they existed at that date.
In May 1997, the Company entered into a three year noncancelable capital lease
for certain computer equipment used to provide information services. The cost of
this equipment ($246,211) is being financed through the manufacturer's finance
division.
On September 30, 1997, The Zanett Securities Company ("Zanett"), acting as
placement agent for the Company, completed a private placement ("Placement") of
$4 million of the Company's Prepaid Common Stock Purchase Warrants ("Prepaid
Warrants"). The sale of these Prepaid Warrants was exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Regulation
D. Each Prepaid Warrant entitles the holder to purchase that number of shares of
Common Stock that is equal to $1,000 divided by the applicable exercise price.
Such exercise price is determined initially as 70% of the average closing bid
price of the Common Stock for the 10 trading days ending on the day prior to
exercise of the Prepaid Warrants. Additionally, the exercise discount shall by
increased by 1% for each subsequent 60 day period that the Prepaid Warrants
remain unexercised. The exercise price, however, shall never exceed $1.40. The
Prepaid Warrants became exercisable on 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 February 27, 1998, the date the
registration statement became 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
authorized the issuance of 3,555,555 Common Stock Purchase Warrants ("Consulting
Warrants") to this consultant that are exercisable at $1.125 per share of Common
Stock. Of such amount, the issuance of 3,055,555 Consulting Warrants was
contingent upon the approval of the Company's shareholders which was received on
April 24, 1998. At September 30, 1997, the Company valued these warrants using
the Black-Scholes pricing methodology at approximately $4,400,000. However,
since the issuance of 3,055,555 of such Consulting Warrants was uncertain until
April 24, 1998, the Company has revalued these Consulting Warrants in accordance
with the Black-Scholes pricing methodology at March 31, 1998, giving
consideration to the facts and circumstances as they existed at that date.
Accordingly, unearned compensation has been adjusted to $4,528,500 at March 31,
1998. Such amount has been recorded in stockholders' equity as unearned
compensation and will be amortized to income over the five-year term of the
agreement. These warrants expire on September 30, 2002.
As part of the Placement, Zanett converted notes 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
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Warrants. The net proceeds of the Placement of $2,643,941 have been used for
general working capital requirements.
The licensing agreement with DTN provides that the Company will receive a
minimum of $2 million during the twelve month period ended April 30, 1999, and
up to 40% of revenues generated from the subscriber base after the attainment of
a 1,000 customer threshold. Additionally, DTN will assume the Company's
telecommunications and information costs, as well as the system's hardware costs
associated with expansion of the subscriber base. This will result in a
significant reduction in the Company's infrastructure and overhead costs.
The Company has also entered into a three year contract with Sprint and is
currently negotiating an agreement, in partnership with Sprint, with a major
stock brokerage firm. Additionally, the Company is in negotiations with several
major telecommunications companies. Management continues to believe that upon
the successful implementation of its marketing plan, sufficient revenues will be
generated to meet operating requirements. Management also believes that the
successful execution of its proposed plan of operations will generate sufficient
cash flow from operations to enable the Company to offer its services on an
economically sound basis; however, no assurance can be given that such goals
will be obtained or that any expected revenues or cash flows will be
forthcoming, except for those previously described in connection with the DTN
licensing agreement.
The Company has been notified by Nasdaq that it is not in compliance with the
net tangible assets requirement as set forth in NASD Marketplace Rule
4310(c)(2). Such rule requires the maintenance of a minimum of $2 million of net
tangible assets for continued listing on The Nasdaq Small Cap Market. If the
Company were to be delisted from The Nasdaq Small Cap Market the Company would
be subject to financial penalties resulting from its default pursuant to Article
V of the Prepaid Warrants. Additionally, such event would allow Zanett Capital,
Inc. the right to name a majority of the directors of the Company.
The Company is currently seeking additional sources of capital through a private
placement; however, there can be no assurance that additional financing will be
available on acceptable terms or at all.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
- ----------------------------------------------
From time to time, information provided by the Company, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-QSB) 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 Quarterly Report on Form
10-QSB and in the Company's other Securities and Exchange Commission filings.
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PART II. OTHER INFORMATION
SMARTSERV ONLINE, INC.
ITEM 1. LEGAL PROCEEDINGS
On or about December 15, 1997, Steven T. Francesco, then President and Chief
Operating Officer of the Company, filed a complaint against the Company,
Sebastian E. Cassetta (its Chairman of the Board and Chief Executive Officer),
Bruno Guazzoni, Claudio Guazzoni, Zanett Securities, Inc. and Zanett Capital,
Inc. in the Supreme Court of the State of New York, County of New York. In the
amended complaint, which was served on or about December 29, 1997, Mr. Francesco
alleged, among other things, that the Company breached the terms of its
employment agreement with him. The amended complaint seeks damages against the
Company in an unspecified amount and injunctive relief. On February 6, 1998 the
Board of Directors terminated Mr. Francesco's employment with the Company as its
President and Chief Operating Officer. The Company has moved the Court to
dismiss certain of the claims against it. That motion is currently pending. No
disclosure in this action has yet been noticed or taken. The Company will
vigorously defend this action.
By letter dated April 10, 1998, Michael Fishman, then a Vice President of Sales
for the Company, resigned his position. On or about April 24, 1998, Mr. Fishman
filed a complaint against the Company, Sebastian E. Cassetta, Claudio Guazzoni,
Zanett Securities Co., Zanett Capital Corp. and Zanett Lombardier Ltd. in the
United States District Court for the District of Connecticut. In the complaint,
Mr. Fishman alleges, among other things, that the Company constructively
discharged him by breaching of the terms of its employment agreement with him.
The complaint seeks to assert claims for (i) fraud under the federal securities
laws, (ii) breach of various terms of the Company's employment agreement with
Mr. Fishman, (iii) breach of the implied duty of good faith and fair dealing,
(iv) fraudulent misrepresentation, (v) negligent misrepresentation, (vi)
intentional misrepresentation, (vii) failure to pay wages and (viii) promissory
estoppel. The complaint seeks damages against the Company in an unspecified
amount. The Company has not yet answered or moved against the complaint and the
time for it to do so has not yet expired. No discovery in this action has yet
been noticed or taken. The Company will vigorously defend this action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Date of Annual Meeting of Stockholders - April 24, 1998
(b) Directors Elected at Annual Meeting
Mario F. Rossi
Robert H. Steele
Continuing Directors
Sebastian E. Cassetta
Steven T. Francesco
L. Scott Perry
Claudio Guazzoni
Catherine Cassel Talmadge
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(c) Election of Mario F. Rossi as Director
SHAREHOLDER VOTES
-----------------
For: 3,014,734
Withheld: 860,395
Election of Robert H. Steele as Director
SHAREHOLDER VOTES
-----------------
For: 3,014,734
Withheld: 860,395
Amendment of the Company's 1996 Stock Option Plan to increase the
number of shares available for grant from 400,000 to 1,500,000
shares, eliminate mandatory grants of options to non-employee
directors and grant the compensation committee discretionary
authority to grant options to both employee and non-employee
directors.
SHAREHOLDER VOTES
-----------------
For: 1,129,954
Against: 1,023,501
Abstentions: 4,150
Broker non-votes: 1,717,524
Amendment of the Company's Certificate of Incorporation to increase
the number of authorized shares of the Company's Common Stock, par
value $0.01 per share, from 15,000,000 shares to 40,000,000 shares.
SHAREHOLDER VOTES
-----------------
For: 3,684,328
Against: 184,096
Abstentions: 6,705
Broker non-votes: --
Amendment of the Company's Certificate of Incorporation to create a
class of 1,000,000 shares of Preferred Stock, par value $0.01 per
share.
SHAREHOLDER VOTES
-----------------
For: 1,129,699
Against: 1,021,001
Abstentions: 6,905
Broker non-votes: 1,717,524
Approval of the issuance of Consultant Warrants to purchase 3,055,555
shares of the Company's Common Stock to Mr. Bruno Guazzoni, a
consultant to the Company.
SHAREHOLDER VOTES
-----------------
For: 1,750,854
Against: 402,146
Abstentions: 4,605
Broker non-votes: 1,717,524
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<PAGE>
Ratification of the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending June 30, 1998.
SHAREHOLDER VOTES
-----------------
For: 3,858,329
Against: 11,850
Abstentions: 4,950
Broker non-votes: --
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 - K
(a) The following exhibits are included herein:
Exhibit 10.26 Asset Purchase Agreement between SmartServ Online,
Inc. and Data Transmission Network Corporation,
dated April 23, 1998
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
During the quarter ended March 31, 1998 the Company filed a Current
Report on Form 8-K, dated February 11, 1998, reporting Item 5. Such
report did not contain any financial information.
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SMARTSERV ONLINE, INC.
SIGNATURES
Pursuant to the requirements 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)
Date: MAY 19, 1998 By: /S/ SEBASTIAN E. CASSETTA
------------ --------------------------
Sebastian E. Cassetta
Chairman of the Board, Chief
Executive Officer
Date: MAY 19, 1998 /S/ THOMAS W. HALLER
------------ --------------------------
Thomas W. Haller
Chief Financial Officer, Treasurer
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is made and entered into this 23rd day
of April, 1998, by and among SmartServ Online, Inc., a Delaware corporation
("Seller"), and Data Transmission Network Corporation, a Delaware corporation
("Buyer").
RECITALS:
A. Seller is engaged in the business of providing products and
services on the internet referred to as "SmartServ Pro", "TradeNet", and
"BrokerNet" (the "Business"). The Business shall not include any other portion
of Seller's operations including but not limited to (i) its telephone screen
services, (ii) its internet products and services not identified above,
including order routing services referred to as "Night Trade" or its
derivatives, or (iii) its wireless or PCS services.
B. Seller desires to sell certain of the assets used by it in the
conduct of the Business, and Buyer desires to acquire such assets.
C. To facilitate Buyer's future conduct of the Business, Seller
agrees to license to Buyer and maintain certain computer software programs as
provided for in this Agreement
In consideration of the mutual covenants and agreements set forth
herein, and for other good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged, Seller and Buyer, intending to be
legally bound, agree as follows:
1. PURCHASE AND SALE. Buyer agrees to purchase from Seller, and
Seller agrees to sell to Buyer, the following assets of the Business (the
"Acquired Assets"), to-wit:
(a) The three client servers listed on Schedule 1 attached hereto
and incorporated herein by this reference;
(b) The trade names "TradeNet" and "BrokerNet" and those
maintenance agreements and other contracts, if any, listed on
Schedule 7(k); and
(c) All of Seller's contracts with customers to provide services
of the Business and the assignable agreements with suppliers
pertaining to or used in the Business (including, without
limitation all contracts listed on Schedule 7(j));
(d) All of Seller's goodwill pertaining to or arising out of the
Business.
Notwithstanding the foregoing, the Acquired Assets shall not include any assets
of the Seller not enumerated above, including but not limited to (i) Seller's
cash and cash equivalents and all securities of Seller, (ii) Seller's computer
software to be licensed to Buyer pursuant to Paragraph 5 of this Agreement,
(iii) Seller's furniture, leasehold interests or real property interests, (iv)
any records not relating to the Business and all corporate, accounting and tax
records relating to the Business, (v) Seller's rights under this Agreement, (vi)
the name "SmartServ Pro" and (vii) any of Seller's assets not used in the
Business.
2. PURCHASE PRICE. Buyer agrees to pay, and Seller agrees to
accept, as the entire aggregate purchase price for the Acquired Assets, the sum
of Eight Hundred Fifty Thousand Dollars ($850,000) less a credit for prepaid
revenue and unpaid accounts receivable of Seller for services of the Business to
be performed after the Closing as reflected on Seller's books and records
(hereinafter referred to as the "Purchase Price"). The Purchase Price shall be
paid by Buyer to Seller by wire transfer upon the Closing.
<PAGE>
3. ASSUMPTION OF LIABILITIES. Buyer shall assume, agree to
perform, and discharge when due only those obligations of Seller arising out of
the contracts and agreements listed on Schedules 7(j) and 7(k) with respect to
the period from and after the Closing (the Assumed Liabilities"). Seller and
Buyer agree that, other than the Assumed Liabilities, Buyer does not agree to
assume and shall have no responsibility for any of the debts, obligations or
liabilities of Seller (the "Excluded Liabilities"), all of which shall remain
the sole responsibility of Seller. The Excluded Liabilities include without
limitation all of the following:
(a) Any tax liability or tax obligation of Seller, which has been
or may be asserted by any taxing authority, including without
limitation any such liability or obligation arising out of or
in connection with this Agreement or the transactions
contemplated hereby.
(b) Any liability or obligation of Seller whether incurred prior
to, at or subsequent to the Closing for any amounts due or
which may become due to any person or entity solely by reason
of the fact that such person or entity is or has been a holder
of any debt or equity security of Seller.
(c) Any trade account payable or note payable of Seller or any
contract obligation of Seller (other than the Assumed
Liabilities) whether incurred prior to, at or subsequent to
the Closing.
(d) Any liability or obligation arising out of any litigation,
suit, proceeding, action, claim or investigation, at law or in
equity or in arbitration, related to Seller's operation of the
Business prior to the Closing.
(e) Any claim, liability or obligation, known or unknown,
contingent or otherwise, the existence of which is a breach
of, or inconsistent with, any representation, warranty or
covenant of Seller set forth in this Agreement.
(f) Any liability or obligation specifically stated in this
Agreement or the Schedules hereto as not to be assumed by
Buyer.
4. TRANSFER DOCUMENTS; ADDITIONAL DOCUMENTS. Upon the Closing,
Seller shall sell, transfer, assign, convey, and deliver to Buyer the Acquired
Assets by duly executed titles, warranty bill of sale and assignment, and other
good and sufficient instruments of sale, assignment, conveyance and transfer as
shall be required to effectively vest in Buyer all of Seller's right, title, and
interest in and to such Assets, free and clear of all liens, encumbrances,
security interests, actions, claims and equities of any kind whatsoever and
Buyer shall assume by duly executed assumption of liability the Assumed
Liabilities. Buyer shall be entitled to possession of the Acquired Assets upon
the Closing and payment of the Purchase Price. Upon the Closing, Seller and
Buyer shall enter into the Software License and Maintenance Agreement in the
form of Exhibit "A" hereto and the Source Code Escrow Agreement in the form of
Exhibit "B" hereto with an escrow agent mutually acceptable to Seller and Buyer.
5. CLOSING. The consummation of the transactions contemplated by
this Agreement (the "Closing") shall occur on May 1, 1998, at a time and place
mutually acceptable to Seller and Buyer.
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<PAGE>
6. OBLIGATIONS TO EMPLOYEES. Seller agrees that it shall be
responsible for any obligations to any of its employees which heretofore may
have arisen or hereafter may arise by reason of any services rendered by such
employees prior to the Closing, including but not limited to salaries, bonuses,
vacation pay, retirement benefits, and other fringe benefits; and Seller hereby
agrees to pay all of such obligations directly to the employees involved when
due. Seller agrees timely to pay all payroll tax, withholding, and unemployment
compensation payments required to be made with respect to the compensation of
such employees and to hold Buyer harmless therefrom. Seller shall furnish to
Buyer such evidence of Seller's compliance with the provisions of this paragraph
as Buyer reasonably may request from time to time.
7. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller warrants,
represents, and covenants to and with Buyer, now and as of the Closing:
(a) That Seller has full right and lawful authority to enter into
this Agreement and to sell the items of personal property to
be acquired by Buyer pursuant to this Agreement; that Seller's
performance of its obligations under this Agreement will not
violate any agreement, document, trust (constructive or
otherwise), order, judgment or decree to which Seller is a
party or by which it is bound; and that, upon the transfer and
assignment of such property to Buyer as hereinbefore
mentioned, Buyer will acquire good and merchantable title
thereto, free and clear of any liens, encumbrances, security
interests, actions, claims, and equities of any kind
whatsoever.
(b) That Seller is the sole and lawful owner of and has good and
marketable title to all of the items of personal property to
be acquired by Buyer pursuant to this Agreement, free and
clear of any liens, encumbrances, security interests, actions,
claims, and equities of any kind whatsoever.
(c) All material items of tangible personal property to be
acquired by Buyer pursuant to this Agreement are in good
operating condition, subject to normal wear.
(d) That there are no suits, arbitrations or other legal or
governmental proceedings pending or threatened against Seller
which might conceivably affect the title to the items of
personal property to be acquired by Buyer pursuant to this
Agreement.
(e) That Seller has duly filed all federal, state, and local tax
returns of every kind whatsoever required to be filed on or
before the Closing and has paid in full the tax liability
shown on such returns; that no unpaid deficiencies are in
existence which have been asserted against Seller by any
official or agency as a result of the filing of such returns;
and that, to the knowledge of Seller, there is not now pending
any examination with respect to any such returns nor does
Seller know of any impending examination with respect to any
such returns.
(f) Seller shall timely pay all sales and use taxes imposed on or
collectible by Seller and shall furnish to Buyer evidence that
all of Seller's sales and use taxes have been paid.
(g) The property to be acquired by Buyer pursuant to this
Agreement, together with the rights, property and services to
be rendered or furnished to Buyer pursuant to the Software
License and Maintenance Agreement attached as Exhibit "A"
hereto, will include at Closing all material rights and
property necessary to the conduct of the Business by Buyer in
the manner it is conducted by Seller on the date of this
Agreement.
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(h) There is no fact, development, or threatened development with
respect to the markets, products, customers, vendors,
suppliers, operations, assets or prospects of the Business
which are known to Seller which would materially adversely
affect the business, operations or prospects of the Business
considered as a whole, other than such conditions as may
affect as a whole the economy generally.
(i) The financial statements of Seller for the year ended June 30,
1997 and for the six month period ended December 31, 1997,
furnished to Buyer fairly and accurately represent the
financial operations of Seller for such periods.
(j) That Seller has listed on Schedule 7(j) all of Seller's
contracts (oral or written) with customers and suppliers of
the Business; Seller has no other contracts (oral or written)
with customers and suppliers of the Business. Seller has
delivered to Buyer true, correct and complete copies of all
written contracts relating to the Business, and written
summaries of the terms of all oral contracts relating to the
Business, and all of such contracts are presently in full
force and effect and are assignable to Buyer unless otherwise
indicated. Seller has not received any notices from any
customers or suppliers of the Business that indicate that they
intend to terminate any of such contracts and, except as
reflected in the copies delivered to Buyer or on Schedule
7(j), such contracts have not been amended and Seller and the
other parties to such contracts are not in default in any
material respect under such contracts. Seller has not been
apprised and does not currently believe or have reason to
believe that any of the customers of the Business plan to
cancel or reduce the volume under any customer contracts.
(k) That Schedule 7(k) contains a complete list of all of Seller's
contracts (oral and written) relating to the Business, if any,
other than the contracts with customers and suppliers listed
on Schedule 7(j). Seller has delivered to Buyer true, correct
and complete copies of all such other written contracts
relating to the Business and written summaries of the terms of
all such other oral contracts relating to the Business, and
all of such contracts are presently in full force and effect
and are assignable unless otherwise indicated, and, except as
reflected in the copies delivered to Buyer or on Schedule
7(k), such contracts have not been amended and Seller and the
other parties to such contracts are not in default in any
material respect under such contracts.
(l) That Seller is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware.
Seller has the corporate power and authority required to
conduct the Business and to own and use the properties
currently owned and used by it. Seller has the corporate power
and authority to execute and deliver this Agreement and to
perform its respective obligations thereunder. The execution
and delivery of this Agreement by Seller and the performance
of its obligations thereunder have been duly and validly
authorized by all necessary corporate action. This Agreement
has been duly and validly executed and delivered by Seller and
constitutes a legal, valid and binding obligation of Seller,
enforceable in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization,
arrangement, moratorium, fraudulent conveyance, and other
similar laws or judicial decisions affecting the validity and
enforcement of creditors' rights generally.
(m) That neither the execution and delivery of this Agreement, nor
the consummation of the transactions contemplated thereby, (i)
conflicts with or violates any provision of the Certificate of
Incorporation or bylaws of Seller, (ii) requires on the part
of Seller any
4
<PAGE>
filing with, or permit, authorization, consent or approval of,
any federal or state governmental agency or entity, (iii)
conflicts with, results in a breach of, constitutes (with or
without notice or lapse of time or both) a default under, or
requires any notice, consent or waiver under any contract,
lease, license, franchise, permit, indenture, agreement or
mortgage for borrowed money or other agreement to which Seller
is a party or by which Seller is bound or to which any of its
assets is subject, or (iv) violates any statute, rule or
regulation, or any order, writ, injunction or decree
applicable to Seller or any properties or assets of Seller.
(n) Unless otherwise approved by Buyer, Seller shall maintain and
operate the Business between the date of this Agreement and
the Closing in the ordinary course consistent with past
practices.
8. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer warrants,
represents, and covenants to and with Seller, now and as of the Closing:
(i) That Buyer is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware.
Buyer has the corporate power and authority to execute and
deliver this Agreement and to perform its respective
obligations thereunder. The execution and delivery of this
Agreement by Buyer and the performance of its obligations
thereunder have been duly and validly authorized by all
necessary corporate action. This Agreement has been duly and
validly executed and delivered by Buyer and constitutes a
legal, valid and binding obligation of Buyer, enforceable in
accordance with its terms, subject to applicable bankruptcy,
insolvency, reorganization, arrangement, moratorium,
fraudulent conveyance, and other similar laws or judicial
decisions affecting the validity and enforcement of creditors'
rights generally.
(ii) That neither the execution and delivery of this Agreement, nor
the consummation of the transactions contemplated thereby, (i)
conflicts with or violates any provision of the Certificate of
Incorporation or bylaws of Buyer, (ii) requires on the part of
Buyer any filing with, or permit, authorization, consent or
approval of, any federal or state governmental agency or
entity, (iii) conflicts with, results in a breach of,
constitutes (with or without notice or lapse of time or both)
a default under, or requires any notice, consent or waiver
under any contract, lease, license, franchise, permit,
indenture, agreement or mortgage for borrowed money or other
agreement to which Buyer is a party or by which Buyer is bound
or to which any of its assets is subject, or (iv) violates any
statute, rule or regulation, or any order, writ, injunction or
decree applicable to Buyer or any properties or assets of
Buyer.
9. INDEMNIFICATION. Seller agrees to indemnify Buyer and to hold
Buyer harmless from any and all loss, damage, cost, or expense incurred or
sustained by Buyer by reason of the failure of any warranty or representation
contained in this Agreement to be true or as a result of Seller's failure to
abide by any covenant or agreement on its part contained in this Agreement or
arising out of any claim by a stockholder of Seller alleging that Seller
improperly failed to obtain stockholders approval of the transactions
contemplated by this Agreement or arising out of any claim made against Buyer
alleging that Seller failed to comply with the bulk sales laws of the State of
Connecticut.
10. SURVIVAL. The representations, warranties, and covenants on
the part of Seller and Buyer contained in this Agreement shall survive the
Closing and shall be binding upon each party and their respective successors and
assigns.
5
<PAGE>
11. PAYMENT OF LIABILITIES. Seller agrees that it is responsible
for all liabilities of Seller existing on the Closing and to hold Buyer harmless
therefrom. Buyer and Seller agree that Buyer is not assuming and shall have no
responsibility for any of the debts, obligations, or liabilities of Seller,
including but not limited to any liabilities or obligations of Seller (whether
fixed, absolute, contingent, known, unknown, direct, indirect, or otherwise)
whether incurred or accrued before or after the Closing, which in any way relate
to the performance or non-performance of, or any other liability or obligation
relating to any service or product furnished or sold by Seller prior to or after
the Closing, and Seller hereby agrees to hold Buyer harmless from any cost or
expense arising out of or relating to any such debts, obligations, or
liabilities; provided, however, such indemnification by Seller does not extend
to any Assumed Liabilities. Buyer agrees to be responsible for any and all
liabilities of Buyer existing at the Closing or assumed by Buyer as a result of
this Agreement and to hold Seller harmless therefrom. Seller and Buyer agree
that if either receives any payment under a contract which is included among the
Acquired Assets which payment belongs to the other, it will promptly forward
such payment to the other.
12. TRANSFER TAXES. Seller shall pay all sales and other similar
taxes imposed on or collectible by Seller or Buyer by reason of the transfer of
the property being acquired by Buyer pursuant to this Agreement.
13. NONCOMPETE. During the term of the Software License and
Maintenance Agreement to be entered into at the Closing, Seller shall not,
directly or indirectly, whether as a shareholder, partner or investor possessing
any ownership interest, or as principal, agent, employee, proprietor,
independent contractor, consultant or in any other capacity, solicit for itself
or others, or advise or recommend to any other person that such person solicit,
any current customer of the Business, for the purpose of competing with Buyer in
the Business. If any court having jurisdiction at any time hereafter shall hold
any of such restrictive covenants to be unenforceable or unreasonable as to its
scope, territory, or period of time, and such court in its judgment or decree
shall declare or determine the scope, territory, or period of time which such
court deems to be reasonable, then such scope, territory or period of time, as
the case may be, shall be deemed automatically to have been reduced to that
declared or determined to be reasonable by such court. Notwithstanding the
foregoing, if any clause or provision of this paragraph shall be unenforceable,
then such clause or provision shall be deemed to be deleted from this paragraph,
but every other clause and provision shall continue in full force and effect.
These covenants are an integral part of the asset purchase transaction
contemplated by this Agreement and Buyer would not have entered into this
Agreement in the absence of such covenants. Seller acknowledges that the
agreements contained in this paragraph are reasonable and necessary to protect
the Business being purchased by Buyer and that any breach thereof will result in
irreparable injury to Buyer for which Buyer has no adequate remedy at law.
Seller therefore agrees that, in the event either of them breaches any of the
agreements contained in this paragraph, Buyer shall be authorized and entitled
to seek from any court of competent jurisdiction (i) a temporary restraining
order, (ii) preliminary and permanent injunctive relief, (iii) an equitable
accounting of all profits or benefits arising out of such breach, and (iv)
direct, incidental, and consequential damages resulting from such breach. Such
rights or remedies shall be cumulative and in addition to all other rights or
remedies to which Buyer may be entitled.
14. ENTIRE AGREEMENT. This document constitutes the entire
agreement of the parties with respect to the subject matter hereof and may not
be modified, amended, or terminated except by a written agreement specifically
referring to this Agreement and signed by all of the parties hereto.
15. BINDING AGREEMENT. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs, legal
representatives, successors and assigns.
6
<PAGE>
16. FURTHER INSTRUMENTS. After the Closing, the parties hereto
shall execute and deliver such additional instruments and documents as may be
reasonably requested by any of them in order to carry out the purposes and
intent of this Agreement and to fulfill their respective obligations.
17. FURTHER ACTIONS. Seller agrees to take after the Closing such
actions from time to time as may in the reasonable judgment of Buyer or its
counsel be necessary or advisable to confirm the title of Buyer to any of the
items of property acquired by Buyer from Seller pursuant to this Agreement.
18. GOVERNING LAW. This agreement shall be construed in accordance
with the laws of the State of Nebraska.
19. SEVERABILITY. In the event that one or more of the provisions
contained in this Agreement shall for any reason be held invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any of the other provisions contained in this Agreement, which
provisions shall remain in full force and effect.
20. COUNTERPARTS. This Agreement may be executed in one or more
counterparts and by the different parties hereto in separate counterparts, each
of which shall be deemed an original but all of which together shall constitute
one and the same instrument.
21. SCHEDULES AND EXHIBITS. All references to Schedules and
Exhibits herein, unless otherwise stated, means the schedules and exhibits
attached to this Agreement which are hereby incorporated by reference.
22. NOTIFICATION. All notices which either party may be required
or desire to give to the other party shall be in writing and shall be given by
personal service, telecopy, registered air mail or certified air mail (or its
equivalent) to the other party at its respective address or telecopy telephone
number set forth below. Notices shall be deemed to be given upon actual receipt
by the party to be notified. Notices delivered by telecopy shall be confirmed in
writing by overnight courier.
If to Seller: SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902
Attn: Mario F. Rossi
Telecopy No. (203) 353-5962
If to Buyer: Data Transmission Network
Corporation
9110 West Dodge Road, #200
Omaha, NE 68114
Attn: Eric Stokes
Telecopy No.: (402) 255-8088
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first above written.
DATA TRANSMISSION NETWORK
CORPORATION, a Delaware corporation
By: /S/ CHARLES R. WOOD
--------------------------------
Charles R. Wood, Sr. Vice President
SMARTSERV ONLINE, INC., a
Delaware corporation
By: /S/ SEBASTIAN E. CASSETTA
--------------------------------
Chief Executive Officer
8
<PAGE>
SCHEDULE 1
List of Smartserv Equipment
---------------------------
Server One
Ultra 2 Sun MicroSystems Computer
Dual CPU 300 MHz
1 GB RAM
4.2 G Hard Drive
100 Mbs Ethernet Card
Solaris 2.5
Serial number 742FC47
Server Two
Ultra 2 Sun MicroSystems Computer
Dual CPU 300 MHz
1 GB RAM
2 4.2 G Hard Drives
100 Mbs Ethernet Card
Solaris 2.5
Serial number
Server Three
Ultra 2 Sun MicroSystems Computer
Dual CPU 200 MHz
500 MG RAM
2 G Hard Drive
100 Mbs Ethernet Card
Solaris 2.5
Serial number 638FOF57
<PAGE>
SCHEDULE 7(j)
Customer and Supplier Contracts
-------------------------------
Reality On Line - Reuters News Agreement
Standard & Poors - Distribution Agreement
Agreement between AT&T Corp. and SmartServ Online, Inc. for AT&T WorldNet
Services
Terms and Conditions for Subscribers to SmartServ Services
<PAGE>
SCHEDULE 7(k)
List of Other Contracts
-----------------------
None
<PAGE>
EXHIBIT "A"
SOFTWARE LICENSE AND
SERVICE AGREEMENT
-----------------
THIS AGREEMENT (the "Agreement") is made and entered into as of
____________________, 1998 (the "Effective Date") by and between SmartServ
Online, Inc., a Delaware corporation having an office at Metro Center, One
Station Place, Stamford, CT 06902 ("SmartServ") and Data Transmission Network
Corporation, a Delaware corporation, having an office at 9110 West Dodge Road,
Suite 200, Omaha, Nebraska 68114 ("DTN").
RECITALS
A. SmartServ is the owner of certain computer software as
described in Schedule "A" attached hereto and the documentation and related
materials therefore listed in Schedule "A" (as modified and enhanced in
accordance with this Agreement, the "Internet Software") and SmartServ desires
to license the Internet Software to DTN.
B. Pursuant to that certain Asset Purchase Agreement dated April
23, 1998 between SmartServ and DTN (the "Purchase Agreement"), DTN acquired from
SmartServ three client servers. Such servers will remain located at the premises
of SmartServ as provided herein. When used with such servers and additional
hardware and equipment owned exclusively by SmartServ (the use of which will be
provided by SmartServ as set forth in this Agreement), the Internet Software
will allow DTN's subscribers internet access to continuous market quotations and
other financial and news information services offered from time to time by DTN
(the "Internet Services").
C. SmartServ agrees to service, support, maintain and enhance the
Internet Software and the related computer hardware as more fully described
herein so as to allow DTN's subscribers to access the Internet Services at any
time during the term of this Agreement.
D. DTN desires to acquire such licenses and services from
SmartServ as described in this Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises contained herein, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
-----------
1.1 DEFINED TERMS. The following defined terms when used in this
Agreement shall have the meanings designated below:
BUSINESS HOURS means the time period commencing one hour prior
to and ending one hour after the trading hours of the New York Stock
Exchange.
CONFIDENTIAL INFORMATION has the meaning given to such term in
Paragraph 5.2 of this Agreement.
DOCUMENTATION has the meaning given to such term in Paragraph
4.2 of this Agreement.
<PAGE>
ESCROW AGENT means the Escrow Agent under that certain Source
Code Escrow Agreement with SmartServ and DTN executed concurrently
with this Agreement.
ESCROW RELEASE EVENTS has the meaning given to such term in
Paragraph 2.3(e) of this Agreement.
HARDWARE means the servers acquired by DTN pursuant to the
Purchase Agreement and Paragraph 4.7 of this Agreement and all
replacements and additions thereto which will be manipulated by the
Internet Software to allow DTN's subscribers to obtain the Internet
Services.
INTERNET SOFTWARE has the meaning given to such term in
Recital A to this Agreement.
LICENSE has the meaning given to such term in Paragraph 2.1 of
this Agreement.
LICENSE FEE has the meaning given to such term in Paragraph
3.1 of this Agreement.
LICENSE TERM has the meaning given to such term in Paragraph
7.1 of this Agreement.
MAINTENANCE SERVICES has the meaning given to such term in
Paragraph 4.1 of this Agreement.
SMARTSERV EQUIPMENT means the computer hardware and equipment
owned by SmartServ and described in Schedule "B" and all
replacements and additions thereto (except as provided in Paragraph
4.7) which when used with the Hardware and Internet Software will
allow DTN's subscribers to obtain the Internet Services.
SOURCE CODE ESCROW PACKAGE has the meaning given to such term
in Paragraph 2.3(a) of this Agreement.
UPDATES has the meaning given to such term in Paragraph 4.5 of
this Agreement.
ARTICLE 2
THE LICENSE
-----------
2.1 THE LICENSED SOFTWARE. SmartServ hereby grants to DTN, its
subsidiaries and affiliates, a license (the "License") to use the Internet
Software as part of DTN's, and its subsidiaries' and affiliates', business
operations and to allow DTN's subscribers to use the Internet Software to access
the Internet Services. The License shall be a limited exclusive license as
follows: SmartServ agrees not to license, sell, convey or otherwise transfer
(collectively, "Transfer") to anyone other than DTN any rights in the Internet
Software during the term of this Agreement without DTN's prior written consent,
which consent will not be unreasonably withheld or delayed by DTN, provided that
the agreement under which SmartServ shall Transfer any rights in the Internet
Software to a third party shall provide that the transferee's use of the
Internet Software would not constitute a breach of Section 13 of the Purchase
Agreement, if such other party were SmartServ. In addition, SmartServ shall not
use or allow anyone other than DTN to use the Internet Software to compete with
the Internet Services. If during any calendar quarter ending after the first
twelve months of the License Term, DTN does not obtain at least 600 subscribers
to the Internet Services (exclusive of renewing subscribers, but not net of
terminating subscribers) and pay License Fees of $100,000, then the exclusivity
with respect to the License shall cease and the License shall become
nonexclusive.
2
<PAGE>
2.2 OBJECT CODE. SmartServ shall deliver the Internet Software to
DTN in object code form. DTN may reproduce the Internet Software as necessary to
include (a) a production version for DTN's use in accordance with this
Agreement; (b) a test version which may be run for testing and development
purposes; and (c) copies for archival and backup purposes. DTN shall also have
the right to maintain and modify or retain third party entities to maintain and
modify the Internet Software in the event of an Escrow Release Event or if
SmartServ fails to or is no longer obligated to maintain the Internet Software
under this Agreement or any future maintenance agreements between DTN and
SmartServ.
2.3 SOURCE CODE ESCROW.
a. The term "Source Code Escrow Package" means the following:
i. a complete copy in machine-readable form of the source
code and object code of the Internet Software;
ii. a complete copy of any existing design documentation and
user documentation; and
iii. complete instructions for compiling and linking every
part of the source code into executable code, for purposes of
enabling verification of the completeness of the source code
as provided below. Such instructions shall include precise
identification of all compilers, library packages, and linkers
used to generate executable code.
b. Within five (5) days after the Closing, SmartServ shall
deliver a Source Code Escrow Package to Escrow Agent.
c. When and if SmartServ provides DTN with a maintenance release
or upgrade version of any part of the Internet Software, SmartServ shall within
ten (10) business days thereafter deposit with Escrow Agent, in accordance with
Section 2.3, a Source Code Escrow Package for the maintenance release or upgrade
version.
d. DTN, at its option and expense, may at any time verify the
completeness and accuracy of any Source Code Escrow Package. Unless otherwise
agreed at the time by SmartServ and DTN, verification will be performed onsite
at Escrow Agent's or SmartServ's premises at a time specified by DTN. SmartServ
shall make technical and support personnel available as reasonably necessary for
the verification. SmartServ may in its discretion designate a representative to
be present at the verification.
e. The Source Code Escrow Package shall, upon request of DTN, be
released from escrow to DTN for use by DTN in accordance with this Agreement
upon the occurrence of one or more of the following "Escrow Release Events"
defined below:
i. SmartServ is in breach of its obligations under the Source
Code Escrow Agreement with DTN and Escrow Agent;
ii. if SmartServ files a petition for liquidation and
dissolution under Chapter 7 of the Bankruptcy Code of the United
States, or an involuntary petition in bankruptcy is filed against
SmartServ and is not dismissed or converted for reorganization under
Chapter 11 of the Bankruptcy Code of the United States within sixty
(60) days thereafter, or this Agreement is rejected in a proceeding
under Chapter 11 of the Bankruptcy Code of the United States; or
3
<PAGE>
iii. if SmartServ proves unable or otherwise fails to cure a
breach of this Agreement within the applicable cure period set forth
in this Agreement;
f. Within ten (10) days after the execution and delivery of this
Agreement, SmartServ shall deliver to DTN two (2) keys which shall operate to
open the (i) front door and (ii) door to the computer room, respectively, of
SmartServ's principal offices located at One Station Place, Stamford, CT 06902.
These keys may be used by a limited number of employees of DTN for the purpose
of accessing, operating and maintaining the Internet Software and Hardware in
the event that SmartServ is unable to do so in accordance with the terms and
conditions set forth in this Agreement.
2.4 COMPETITION. Nothing in this Agreement shall impair DTN's
rights to use or distribute similar ideas or programs which have been
independently developed by DTN or submitted by others to DTN, provided that
SmartServ' patents, copyrights and trade secrets are not infringed.
ARTICLE 3
FEES AND PAYMENT
----------------
3.1 LICENSE AND MAINTENANCE FEE. Except as provided below, during
the License Term DTN shall pay to SmartServ a monthly license and maintenance
fee (the "License Fee") equal to the sum of the amounts determined by
multiplying the applicable percentages set forth below by the revenues earned
and received for such month by DTN from the corresponding number of subscribers
to the Internet Services at each level, in excess of the first 1,000
subscribers.
Percentage of
Subscribers Subscriber Revenue
----------- ------------------
1,001 - 2,000 20%
2,001 - 4000 25%
4,001 - 8,000 30%
Over 8,000 40%
DTN shall guaranty a minimum monthly payment of $100,000 during the first twelve
months of the License Term. The minimum monthly payments during the first twelve
months of the License Term shall be paid in advance on the first day of such
month. Otherwise, the License Fee shall be paid within twenty (20) days after
the end of the month to which it relates. The License Fee shall be determined
using the average revenue per subscriber for such month. As an example, if the
revenues earned and received by DTN during a month are $800,000 from 4,000
subscribers, then the monthly payment to SSOL will be $140,000 computed as the
sum of (i) 20% of the product of $200 (the average revenue per subscriber for
such month) multiplied by 1,000 subscribers and (ii) 25% of the product of $200
multiplied by 2,000 subscribers. For purposes of such computation, the number of
subscribers in a month shall be the weighted average of the number of
subscribers for such month. Notwithstanding the foregoing, if SmartServ breaches
any of its obligations under Article 4 of this Agreement and fails to cure such
breach within thirty (30) days after written notice thereof, DTN may at its sole
cost elect to provide its own maintenance of the Internet Software and the
Hardware, in which case DTN shall have no further obligation to pay the License
Fee and SmartServ shall have no further obligations under Article 4 of this
Agreement.
3.2 AUDIT RIGHTS. SmartServ and/or a SmartServ representative
shall have the right, exercisable not more than once per year, at any reasonable
time to inspect, audit and make copies of the books and records of DTN which
relate to the calculation of the License Fee. Except as set forth below, such
audit shall be at the expense of SmartServ. In the event any such inspection and
audit reveals that DTN underpaid
4
<PAGE>
the License Fee owing for any month, then DTN shall promptly pay to SmartServ
the amount of such underpayment together with interest thereon from its due date
at the rate of eight percent (8%) per annum. In the event that DTN underpaid by
more than five percent (5%) the License Fee owing for any month, then DTN also
shall promptly pay to SmartServ the reasonable out-of-pocket costs and expenses
actually incurred by SmartServ in conducting such audit, up to an amount not in
excess of such underpayment.
ARTICLE 4
MAINTENANCE SERVICES
--------------------
4.1 SERVICES OF SMARTSERV. During the License Term, SmartServ
agrees to service, support, maintain and enhance the Internet Software and the
Hardware as provided in this Article 4 (the "Maintenance Services"). SmartServ
agrees to use its best efforts in performing the Maintenance Services so as to
allow DTN's subscribers prompt access to the Internet Services at any time
during the License Term. It is agreed by the parties that SmartServ will have
during the first twelve months of the License Term a minimum of six (6)
programming resources trained in the Internet Software available at all
reasonable times to provide the Maintenance Services; provided, however, that
SmartServ may be required to have additional programming resources available to
perform the Maintenance Services during critical times as needed. DTN and
SmartServ agree that during the remainder of the License Term SmartServ will
have a minimum of three (3) programming resources trained in the Internet
Software available at all reasonable times to provide the Maintenance Services;
provided, however, that SmartServ may be required to have additional programming
resources available to perform the Maintenance Services during critical times as
needed.
4.2 CORRECTION OF INTERNET SOFTWARE. The Maintenance Services
shall include, without limitation, SmartServ correcting any failure of the
Internet Software to operate in accordance with the documentation for the
Internet Software (as modified pursuant to this Agreement, the "Documentation").
The Documentation shall provide for the Internet Software to operate in an
efficient and responsive manner in accordance with the highest of industry
standards.
4.3 OUTAGES. SmartServ understands the need for DTN's subscribers
to have continuous access to the Internet Services. SmartServ warrants that it
will use its best efforts to maintain the Internet Software and the Hardware in
a condition which will allow DTN's subscribers to access the Internet Services
24 hours per day, 365 days per year. Notwithstanding the force majeure
provisions of Section 8.5, should outages occur during Business Hours due to the
failure of the Internet Software or the Hardware that exceed 1% in the aggregate
during any calendar month, SmartServ shall forfeit the entire License Fee for
such month as liquidated damages. Should outages occur during Business Hours due
to the failure of the Internet Software or the Hardware that exceed 2% in the
aggregate during any calendar month or 3% in the aggregate during each of two
consecutive calendar months, DTN may elect (without granting SmartServ a cure
period) to provide at its sole cost its own maintenance of the Internet Software
and the Hardware, in which case DTN shall have no further obligation to pay the
License Fee during the remainder of the License Term and SmartServ shall have no
further obligations under Article 4 of this Agreement.
4.4 REQUIRED UPGRADES. DTN receives its market quotations and
other news and financial information from various third-party providers. DTN
shall have the right anytime during the License Term, in its sole discretion, to
change the third-party providers of information for the Internet Services. As
part of Maintenance Services, at no additional cost to DTN, but subject to the
limitations set forth in Paragraph 4.6, SmartServ shall provide all
modifications required to enable the Internet Software to operate in accordance
with any new or modified system requirements specified by such third-party
providers within the time periods specified in the contracts with such
third-party providers, which shall not be less than thirty (30) days after
receipt of notice from DTN of the new or modified system requirements.
5
<PAGE>
4.5 UPDATES. As part of Maintenance Services, at no additional
cost to DTN, SmartServ shall provide during the License Term (other than the
first twelve months thereof) all revisions, improvements, modifications,
corrections, releases and enhancements (the "Updates") to any portion of the
Internet Software. SmartServ shall use its best efforts to provide the Updates
as necessary to maintain the quality and competitive position of the Internet
Services in the industry. Such Updates shall not degrade the performance,
functioning or operation of the Internet Software. If any such Updates are not
acceptable to DTN, DTN may refuse to accept such Updates, and, in such event,
SmartServ agrees to maintain the Internet Software without such Updates. Once an
Update is incorporated in the Internet Software, it shall be considered part of
the Internet Software for all purposes hereunder.
4.6 LIMITATION ON EXPENDITURES. Excluding the first twelve months
of the License Term, SmartServ reserves the right to limit the expenditure of
its resources for performing the upgrades and Updates referred to in Sections
4.4 and 4.5 to twenty percent (20%) of its revenues earned hereunder (excluding
such initial twelve months) on a cumulative basis. Accordingly, if SmartServ
uses 10% of its revenues during one year, then it has 30% of its revenues
available for the next year.
4.7 HARDWARE MAINTENANCE. So long as SmartServ is to provide the
Maintenance Services as provided herein, the Hardware shall be located at
SmartServ's premises at no additional cost to DTN, except for property taxes on
the Hardware which shall be the sole responsibility of DTN. As part of
Maintenance Services, at no additional cost to DTN, SmartServ shall make all
necessary adjustments and minor repairs to keep the Hardware in good operating
condition and functioning properly at the premises of SmartServ. SmartServ will
use its best efforts to advise DTN sufficiently in advance of any needed major
repairs or replacements to the Hardware and DTN will, at its cost, provide new
or equivalent used replacement parts for the Hardware. In addition, DTN will, at
its cost, furnish an additional client server for each additional 500
subscribers to the Internet Service in excess of the first 1,500 subscribers.
The SmartServ Equipment will accommodate three more servers, in addition to the
ones owned by DTN. Each server is capable of serving 500 additional subscribers
for a total of 3,000 subscribers. Adding additional subscribers, beyond 3,000
may require additional computer hardware to be added to the system, which DTN
will furnish at its cost and which will become Hardware for purposes of this
Agreement. The Hardware and all additions and replacements shall at all times
remain the property of DTN. Parts or replacements required for the Hardware as a
result of the negligence or fault of SmartServ shall be furnished by SmartServ
at its cost. During the License Term, SmartServ shall use its best efforts to
provide adequate facilities, including without limitation work space, heat,
light, ventilation, electric current and outlets, for operation of the Hardware.
SmartServ agrees that it shall not move, or permit to be moved, the Hardware
during the License Term without DTN's prior written consent. Notwithstanding any
contrary provision contained herein, DTN shall be responsible for all
telecommunication costs incurred in the operation of the Hardware and Internet
Software as contemplated in this Agreement. SmartServ agrees, at no additional
cost to DTN, to maintain casualty insurance on the Hardware with the same
coverage as it has for its own computer equipment and shall replace any loss to
the Hardware as a result of events covered by such insurance. Such policies of
insurance shall name DTN as an additional insured and may not be canceled
without at least ten days prior written notice to DTN.
4.8 TELEPHONE SUPPORT. As part of Maintenance Services, at no
additional cost to DTN, SmartServ shall provide reasonable technical assistance
and consultation in the use of the Internet Software and the Hardware by
telephone, during DTN's normal working hours.
4.9 TRAINING. As part of Maintenance Services, at no additional
cost to DTN, SmartServ shall provide such training as may reasonably be
requested by DTN to enable it to use the Internet Software and the Hardware for
providing the Internet Services.
6
<PAGE>
4.10 SMARTSERV EQUIPMENT. The system to be used to provide the
Internet Services includes the SmartServ Equipment in addition to the Hardware
and Internet Software. During the License Term, SmartServ agrees to furnish the
use of the SmartServ Equipment so as to allow DTN's subscribers prompt access to
the Internet Services. In addition, SmartServ agrees to service, support, and
maintain the SmartServ Equipment, subject to the obligations of DTN set forth in
this Article 4.
ARTICLE 5
PROPRIETARY RIGHTS AND CONFIDENTIALITY
--------------------------------------
5.1 OWNERSHIP OF THE INTERNET SOFTWARE. Subject to the rights
granted to DTN herein, all right, title and interest to the Internet Software
shall at all times remain in SmartServ, including but not limited to all
applicable copyrights, trade secrets and patents. DTN shall safeguard the
Internet Software with reasonable efforts using not less than the same degree of
care that is exercised by DTN for its own confidential and proprietary software.
5.2 CONFIDENTIAL INFORMATION. DTN and SmartServ acknowledge that
in the course of dealings between the parties, each party will acquire
information about the other party, its business activities and operations, its
technical information and trade secrets, of a highly confidential and
proprietary nature ("Confidential Information"). The Confidential Information of
each party shall be safeguarded by the other at least to the same extent that it
safeguards its own confidential materials or data relating to its own business.
5.3 CONFIDENTIAL COMPUTER PROGRAMS. Except as set forth herein,
neither party shall make copies of the computer programs and related materials
of the other party nor permit them to be used by or for any person or entity
except as set forth herein and all such computer programs and related materials
shall be considered Confidential Information hereunder.
5.4 CONFIDENTIALITY EXCLUSIONS. Nothing in this Article 5 shall
restrict either party with respect to information or data identical or similar
to that contained in the Confidential Information but which (a) that party
rightfully possessed before it received such information from the other as
evidenced by written documentation; (b) subsequently becomes publicly available
through no fault of that party; (c) is subsequently furnished rightfully to that
party by a third party without restrictions on use or disclosure; or (d) is
required to be disclosed by law, provided that the disclosing party will
exercise reasonable efforts to allow the other party to obtain a protective
order or other reliable assurance that confidential treatment will be accorded
to the Confidential Information.
5.5 REMEDY. SmartServ and DTN agree that if either of them, their
officers, employees or anyone obtaining access to the Confidential Information
of the other party by, through or under them, breaches any provision of this
Article 5, the non-breaching party would suffer irreparable harm and the total
amount of monetary damages for any injury to the non-breaching party from any
violation of this Article 5 would be impossible to calculate and would therefore
be an inadequate remedy. Accordingly, the parties agree that the non-breaching
party shall be entitled to temporary and permanent injunctive relief against the
breaching party, its officers or employees, and such other rights and remedies
to which the non-breaching party may be entitled to at law, in equity and under
this Agreement for any violation of this Article 5.
ARTICLE 6
WARRANTIES AND INDEMNIFICATION
------------------------------
6.1 QUIET ENJOYMENT. SmartServ warrants to DTN that: (i) SmartServ
has the right to furnish to DTN the Internet Software and other materials
covered hereunder free of all liens, claims, encumbrances and
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other restrictions, except as stated to the contrary herein; (ii) DTN shall
quietly and peacefully possess the Internet Software and other materials
furnished hereunder subject to and in accordance with the provisions of this
Agreement; and (iii) DTN's permitted use and possession of the Internet Software
and other materials will not be interrupted or otherwise disturbed by any entity
asserting a claim under or through SmartServ.
6.2 INTERNET SOFTWARE. SmartServ warrants that the Documentation
faithfully and accurately reflects the functionality provided by the Internet
Software. SmartServ warrants that the Internet Software (i) is free from known
material defects and (ii) materially performs in accordance with the
Documentation. SmartServ further warrants and represents that the occurrence in
or use by the Internet Software of dates on or after January 1, 2000
("millennial dates") will not adversely affect the performance of the Internet
Software with respect to data dependent data, compilations, output, or other
functions (including but not limited to calculating, comparing and sequencing)
and that the Internet Software will create, store, process and output
information related to or including millennial dates without error or omissions
and at no additional cost to DTN.
6.3 DEFECT CORRECTION. In the event that the Internet Software
does not perform as warranted in paragraph 6.2 hereof, SmartServ agrees to use
its best efforts to promptly make the Internet Software perform as so warranted.
If SmartServ is unable to make the Internet Software perform as so warranted,
DTN may, at its sole option, terminate this Agreement.
6.4 SERVICES. SmartServ warrants that all services performed by
SmartServ hereunder, including but not limited to Maintenance Services,
installing the Internet Software, training, programming and consulting, will be
performed in a professional manner by qualified personnel.
6.5 WARRANTY PERIOD. Commencing upon the Effective Date and
continuing at all times during the License Term, subject to termination as
provided in Section 3.1, SmartServ shall perform Maintenance Services, at no
additional charge to DTN, in accordance with Article 4 hereof.
6.6 INTELLECTUAL PROPERTY INDEMNIFICATION. (a) SmartServ shall
indemnify, defend and hold DTN, its subsidiaries, affiliates and sublicensees
harmless from any claims, damages or judgments including all reasonable
attorney's fees, directly or indirectly resulting from any claimed infringement
or violation of any patent, copyright, trademark, trade secret or other
intellectual property right of a third party with respect to the Internet
Software. Following notice of a claim or threat thereof, SmartServ shall use its
best efforts to either (i) procure for DTN the right to continue to modify and
use the Internet Software as provided herein, at no additional costs to DTN, or
(ii) provide DTN with a noninfringing version of the Internet Software, provided
that such new version does not degrade the performance, functionality or
operation of the Internet Software in any material respect. If SmartServ is
unable to perform either (i) or (ii) above, DTN may upon reasonable notice
terminate this Agreement and the License. DTN agrees to give SmartServ
reasonable notice of any such claim or threat and reasonable cooperation with
SmartServ in any defense or settlement of any such claim or threat.
(b) DTN shall indemnify, defend and hold SmartServ, its subsidiaries
and affiliates harmless from any claims, damages or judgments including all
reasonable attorney's fees, directly or indirectly resulting from any claimed
infringement or violation of any patent, copyright, trademark, trade secret or
other intellectual property right of a third party with respect to the Internet
Services (other than with respect to the Internet Software). SmartServ agrees to
give DTN reasonable notice of any such claim or threat and reasonable
cooperation with DTN in any defense or settlement of any such claim or threat.
8
<PAGE>
ARTICLE 7
TERM AND TERMINATION
--------------------
7.1 TERM. The term of this Agreement shall commence upon the
Effective Date and, unless terminated earlier pursuant to Article 7, shall
continue until either party terminates this Agreement by written notice to the
other party given at least one year in advance of such termination, provided
such termination may not occur earlier than three years after the Effective
Date. Such term is referred to in this Agreement as the "License Term".
7.2 TERMINATION FOR CAUSE. Either party shall have the right to
terminate this Agreement and/or the License upon: (a) violation, breach or
default of the other party, its officers or employees of any material provision
of this Agreement, including but not limited to proprietary rights and
confidentiality obligations; or (b) the other party becoming insolvent,
commencing or becoming subject to any proceedings under any bankruptcy or
insolvency law or making any assignment for the benefit of creditors, suffering
or permitting the appointment of a receiver for its business or assets or
commencing the winding up or liquidating its business or affairs, voluntarily or
otherwise. In addition, DTN may terminate this Agreement in accordance with
paragraphs 6.3, 6.6 and 7.1 hereof.
7.3 RIGHT TO CURE. Notwithstanding the foregoing paragraph 7.2
hereof, neither party may terminate this Agreement and/or the License pursuant
thereto, unless and until the party seeking to terminate has specified the cause
for the termination in writing, notifying the other party that it intends to
terminate this Agreement and/or the License, and such cause for the termination
has not been cured by the other party within thirty (30) days after receipt of
such written notice, except with respect to the breach of a confidentiality
obligation, in which case such cause must be cured within five (5) days after
receipt of such written notice.
7.4 OBLIGATIONS UPON TERMINATION. Upon termination of this
Agreement and the License, all rights and obligations granted herein shall
cease, except as otherwise provided, and each party shall forthwith return to
the other party all papers, materials, documentation, and any other properties
of the other party received pursuant to this Agreement, including but not
limited to the Source Code Escrow Package.
7.5 SURVIVAL OF CERTAIN PROVISIONS. The terms and conditions in
the following paragraphs shall survive the termination of this Agreement:
5.1-5.5, 6.6, 7.4, 7.5, 8.1-8.4, 8.8-8.10.
ARTICLE 8
GENERAL
-------
8.1 AGREEMENT INTERPRETATION AND CONSTRUCTION. If any provision of
this Agreement is held invalid or unenforceable for any reason, such invalidity
shall not affect the validity of the remaining provisions of this Agreement, and
the parties shall substitute for the invalid provisions a valid provision which
most closely approximates the intent and economic effect of the invalid
provision. The recitals set forth on the first page of this Agreement are an
integral part of this Agreement and are incorporated by reference into the body
of this Agreement. The section headings in this Agreement are solely for
convenience and shall not be considered in its interpretation. The language of
this Agreement has been approved by the counsel for both parties and shall be
construed as a whole according to its fair meaning and neither of the parties
hereto shall be deemed to be the draftsman of this Agreement in any action which
may hereafter arise between the parties.
8.2 NON-WAIVER. The failure of either party at any time to require
performance by the other party of any provision of the Agreement shall not
affect in any way the full right to require such performance at any
9
<PAGE>
subsequent time, nor shall the waiver by either party of a breach of any
provision of this Agreement be taken or held to be a waiver of the provision
itself.
8.3 ATTORNEYS' FEES. In any action between the parties to enforce
any of the terms of this Agreement, the prevailing party shall be entitled to
recover expenses, including reasonable attorneys' fees.
8.4 NOTIFICATION. All notices which either party may be required
or desire to give to the other party shall be in writing and shall be given by
personal service, telecopy, registered air mail or certified air mail (or its
equivalent) to the other party at its respective address or telecopy telephone
number set forth below. Notices shall be deemed to be given upon actual receipt
by the party to be notified. Notices delivered by telecopy shall be confirmed in
writing by overnight courier.
If to SmartServ: Metro Center
One Station Place
Stamford, CT 06902
Attn: Mario F. Rossi
Telecopy No. (203) 353-5962
If to DTN: Data Transmission Network
Corporation
9110 West Dodge Road, #200
Omaha, NE 68114
Attn: Eric Stokes
Telecopy No.: (402) 255-8088
8.5 FORCE MAJEURE. Neither party shall be liable or deemed to be
in default for any delay or failure in performance under this Agreement
resulting directly or indirectly from acts of God or any causes beyond the
reasonable control of such party, provided that such party shall be without
fault or negligence. Performance time under this Agreement shall be extended for
a period of time equivalent to the time lost because of any delay which is
excusable under this paragraph. If any such excusable delay shall last for a
period of more than thirty (30) consecutive calendar days, the party not relying
on the excusable delay, at its option, may terminate this Agreement.
8.6 INDEPENDENT CONTRACTORS. It is expressly agreed that SmartServ
and DTN are acting hereunder as independent contractors and under no
circumstances shall any of the employees of one party be deemed the employees of
the other for any purpose. This Agreement shall not be construed as authority
for either party to act for the other party in any agency or other capacity, or
to make commitments of any kind on the account of or on the behalf of the other
except to the extent and for the purposes provided for herein. All persons
furnished by SmartServ shall be considered solely SmartServ's employees or
agents and SmartServ shall be responsible for compliance with all laws, rules
and regulations including, but not limited to employment of labor, hours of
labor, working conditions, workers' compensation, payment of wages, and payment
of taxes, such as unemployment, social security and other payroll taxes,
including applicable contributions from such persons when required by law.
SmartServ's employees and agents shall have no right to any benefits that DTN
grants its employees. SmartServ shall indemnify and hold harmless, and, if
required, defend DTN against any claims or lawsuits arising out of SmartServ's
failure to comply with any such laws, rules or regulations.
8.7 COMPLIANCE WITH LAWS. SmartServ, its employees and agents
shall comply with the applicable EEO, Fair Labor Standards Act and The
Occupational Safety and Health Act and all other federal, state, and local laws,
ordinances, regulations and codes including identification and procurement or
required permits,
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certificates, approvals and inspections, in performance under this Agreement.
SmartServ agrees to indemnify DTN for any loss or damage that may be sustained
by reason of any failure to do so.
8.8 GOVERNING LAW. This Agreement shall be governed by and
interpreted in accordance with the internal laws of the State of Nebraska,
without regard to principles of conflicts of laws.
8.9 JURISDICTION. The parties hereby submit to the exclusive
jurisdiction of Nebraska in any legal action or proceeding arising out of or
relating to this Agreement or the legal relationship established by such
Agreement, and the parties hereby agree that all claims with respect to any such
action or proceeding shall be heard and determined in such courts. The parties
hereby waive any objection they may have to the existence of personal
jurisdiction or the laying of venue, and waive any defense of an inconvenient
forum, with respect to the maintenance of any such action or proceeding.
8.10 PUBLICITY. Except as otherwise set forth herein, neither party
shall use the name of the other in advertising or publicity releases without
securing the prior written consent of the other party. Without the prior written
consent of the other party, neither party shall disclose, advertise or publish
the existence of this Agreement or any terms of this Agreement, except as is
required by law or regulation or for compliance with the requirements of NASDAQ.
8.11 ASSIGNMENT. SmartServ's rights and obligations under this
Agreement are personal and SmartServ may not assign (either voluntarily or by
operation of law) or subcontract, its rights, duties or obligations under this
Agreement without the prior written consent of DTN; provided, however, SmartServ
may assign its rights under this Agreement in connection with a merger or sale
of all or substantially all of its assets so long as (i) SmartServ shall first
give DTN the right to acquire SmartServ or substantially all of its assets upon
the same terms as the proposed merger or sale (DTN shall have thirty days after
receipt of all material terms of the offer within which to accept the proposal)
and (ii) the proposed transferee is not listed on Schedule C attached hereto.
Subject to the foregoing, this Agreement shall inure to the benefit of and be
binding upon the parties and their successors and assigns.
8.12 ENTIRE AGREEMENT. This Agreement, including the Schedules
hereto, and the Purchase Agreement constitute the entire agreement between the
parties with respect to the subject matter hereof and supersedes all previous
proposals, both oral and written, negotiations, representations, commitments,
writings and all other communications between the parties. This Agreement may
not be released, discharged, modified or amended except by an instrument in
writing signed by a duly authorized representative of each of the parties.
IN WITNESS WHEREOF, the parties to this Agreement have caused it to
be executed by their duly authorized officers as of the Effective Date. This
Agreement may be executed in counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
DATA TRANSMISSION NETWORK SMARTSERV ONLINE, INC.
CORPORATION
By: /S/ CHARLES R. WOOD By: /S/ SEBASTIAN E. CASSETTA
-------------------------------- --------------------------------
Title: Senior Vice President Title: Chief Executive Officer
<PAGE>
SCHEDULE A
Internet Software Description,
Documentation and Related Materials
-----------------------------------
<PAGE>
SCHEDULE B
List of SmartServ Equipment
---------------------------
<PAGE>
SCHEDULE C
List of Prohibited Transferees
------------------------------
PC Quote
Data Broadcast Corp.
Bridge/Telerate
Quote.com
S&P Comstock
Telescan
Telemet America Inc.
A-T Financial
Hoovers, Inc.
Media General Financial Services Inc.
Zannett Securities Corp.
Thompson Financial
Bloomberg L.P.
Reuters
North American Quotes
ADP
Track Data
<PAGE>
EXHIBIT "B"
SOURCE CODE ESCROW AGREEMENT
THIS AGREEMENT, made and entered into this _____ day of
________________, 1997, by and between DATA TRANSMISSION NETWORK CORPORATION, a
Delaware corporation (hereinafter "DTN"), SMARTSERV ONLINE, INC., a Delaware
corporation (hereinafter "SSOL"), and __________________________, a
____________________ (hereinafter "Escrow Agent").
W I T N E S S E T H:
WHEREAS, SSOL and DTN have entered into a Software License and
Service Agreement (the "Service Agreement") pursuant to which SSOL has agreed to
(i) license to DTN certain proprietary software programs (the "Internet
Software") utilized to provide Internet Services (as such term is defined in the
Service Agreement) to DTN's customers and (ii) provide other services to DTN
(the "SSOL Services");
WHEREAS, SSOL and DTN have agreed to place the source code for the
Internet Software in escrow to be released to DTN upon breach of SSOL's
obligations set forth in the Service Agreement or this Agreement;
NOW, THEREFORE, in consideration of the above recitals which are
made a contractual part of this Agreement, and in consideration of the mutual
agreements, provisions and covenants set forth in this Agreement, the parties do
hereby agree as follows:
SECTION 1
DEFINITIONS
-----------
For the purposes of this Agreement, in addition to definitions set
forth elsewhere in this Agreement, the definitions set forth in this Section 1
shall apply to the respective capitalized terms immediately preceding each
definition.
1.1 "AGREEMENT". This Source Code Escrow Agreement, including any
exhibits, addenda, amendments, and modifications hereto.
1.2 "SOURCE CODE". Human-readable computer programming code,
associated procedural code, commentary and related and supporting documentation,
corresponding to the Internet Software and all subsequent versions thereof to be
provided to DTN during the term of the Service Agreement. The Source Code in
present form is more fully described in Exhibit "A" to this Agreement.
<PAGE>
SECTION 2
REPRESENTATIONS AND WARRANTIES OF SSOL
--------------------------------------
2.1 OWNERSHIP OF SOURCE CODE. SSOL warrants and represents to DTN
that it is the owner of and holder of all rights in the Source Code and that
SSOL has the right to grant to DTN the license rights to the Source Code
pursuant to Section 7.1 of this Agreement and to deposit the Source Code with
Escrow Agent pursuant to the terms of this Agreement.
2.2 LICENSED PROGRAMS CORRESPOND WITH SOURCE CODE. SSOL warrants
and represents to DTN that the Source Code to be deposited with Escrow Agent is
the most current version of the source code of the Internet Software and
conforms to the description set forth in Exhibit "A" to this Agreement.
SECTION 3
PURPOSE OF AGREEMENT; DEPOSIT OF SOURCE CODE
--------------------------------------------
3.1 DEPOSIT OF SOURCE CODE. The deposit of the Source Code and the
license of the Source Code to DTN pursuant to Section 7.1 of this Agreement is
intended to provide assurance to DTN of full and unrestricted access and right
of use of the Source Code in the event that SSOL fails to provide SSOL Services
under the Service Agreement, ceases to do business or is otherwise in breach of
its obligations under the Service Agreement or this Agreement. Escrow Agent
agrees to accept from SSOL and SSOL agrees to deposit with Escrow Agent, within
five (5) days of the date of this Agreement, a copy of the Source Code. SSOL
will furnish to Escrow Agent a list describing all Source Code so deposited. The
Source Code to be initially deposited with Escrow Agent is described in Exhibit
"A" to this Agreement, and such descriptions will be supplemented and updated by
SSOL with each subsequent deposit of Source Code by SSOL with Escrow Agent.
3.2 UPDATE AND MAINTENANCE OF SOURCE CODE. During the term of this
Agreement, SSOL shall keep the Source Code in escrow fully current by depositing
with Escrow Agent the listings and all supporting documentation and related
materials for each and every update, correction, or new release of the Internet
Software. Such deposits will be completed no later than ten (10) days after the
date that SSOL provides such update, correction or new release to DTN for the
performance of the Internet Services.
3.3 VERIFICATION AND TESTING OF SOURCE CODE. DTN, its agents,
designees, or representatives, shall, upon written notice to SSOL, have the
right to inspect, test, and review the Source Code (under obligations of
confidentiality) at the time of the initial deposit and at the time of each
subsequent deposit of the Source Code in escrow to verify that it corresponds to
the Internet Software. Such verification and testing shall be done under the
supervision of SSOL or its designee.
SECTION 4
TITLE TO SOURCE CODE
--------------------
4.1 Title to the Source Code shall remain in SSOL, but in the
event the Source Code shall be delivered to DTN pursuant to this Agreement, DTN
shall be entitled to use the Source Code pursuant to the terms of the license
granted in Section 7.1. Upon the expiration of the License Term defined in the
Service
2
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Agreement, the Escrow Agent or DTN, as the case may be, shall return the Source
Code to SSOL.
SECTION 5
RELEASE OF SOURCE CODE TO DTN
-----------------------------
5.1 RELEASE OF CODE. The copy of the Source Code to be deposited
in escrow pursuant to this Agreement shall be released to DTN only upon the
occurrence of one or more of the Escrow Release Events as defined in the Service
Agreement.
5.2 NOTICE OF ESCROW RELEASE EVENT. If DTN shall conclude in good
faith that an Escrow Release Event has occurred, DTN shall so notify SSOL in
writing, specifying in reasonable detail the occurrence of such event and a copy
of such notice will be served simultaneously upon Escrow Agent. Escrow Agent
shall immediately deliver the Source Code to DTN pursuant to the terms of this
Agreement.
5.3 INJUNCTIVE RELIEF. SSOL and DTN acknowledge and agree that DTN
will suffer irreparable harm to its business and operations in the event that
release of the Source Code to DTN pursuant to the terms of this Agreement is
wrongfully delayed by SSOL. DTN may petition any court of competent jurisdiction
in Nebraska for injunctive or other equitable relief to prevent SSOL from
seeking to delay such release or to otherwise enforce the provisions of this
Agreement, and SSOL hereby waives the claim or defense that DTN has or may have
an adequate remedy at law. SSOL hereby consents to personal jurisdiction in any
action brought in any court within the State of Nebraska having subject matter
jurisdiction arising under this Agreement.
SECTION 6
CONFLICTING PROVISIONS
----------------------
6.1 In the event of any conflict between the provisions of the
Service Agreement and the provisions of this Agreement regarding the release of
the Source Code to DTN upon the occurrence of an Escrow Release Event, the
provisions of the Service Agreement shall control.
SECTION 7
LICENSE OF SOURCE CODE
----------------------
7.1 In the event that the Source Code shall be delivered out of
escrow to DTN pursuant to the terms of this Agreement, SSOL does hereby grant a
license to DTN for the License Term defined in the Service Agreement, to use,
modify, maintain, and update the Source Code in all such respects as may be
necessary for DTN to maintain and update the Internet Software to perform the
Internet Services in accordance with the description of such services in the
Service Agreement and the object code resulting from such use shall be owned by
DTN.
3
<PAGE>
SECTION 8
RIGHT OF ESCROW AGENT TO FILE INTERPLEADER ACTION
-------------------------------------------------
8.1 Despite any other provision of this Agreement, in the event
Escrow Agent shall receive conflicting demands from SSOL and DTN respecting the
release of the Source Code to DTN under this Agreement, Escrow Agent may, in its
sole discretion, file an interpleader action in any court of competent
jurisdiction in Nebraska and deposit the Source Code with the clerk of the court
or withhold release of the Source Code until instructed otherwise by court
order.
SECTION 9
LIMITATION ON OBLIGATION OF ESCROW AGENT
----------------------------------------
9.1 Escrow Agent shall not be required to inquire into the truth
of any statements or representations contained in any notices, certificates, or
other documents required or otherwise provided under this Agreement, and Escrow
Agent shall be entitled to assume that the signatures on such documents are
genuine, that the persons signing on behalf of any party thereto are duly
authorized to execute the same, and that all actions necessary to render any
such documents binding on the party purporting to be executing the same have
been duly undertaken. Without limiting the foregoing, Escrow Agent may in its
discretion require from SSOL or DTN additional documents that it deems to be
necessary or desirable to aid it in the course of performing its obligations
under this Agreement.
SECTION 10
RELEASE AND INDEMNIFICATION OF ESCROW AGENT
-------------------------------------------
10.1 SSOL and DTN, severally, hereby do release Escrow Agent from
any and all liability for losses, damages, and expenses (including attorney
fees) that may be incurred on account of any action taken by Escrow Agent in
good faith pursuant to this Agreement, and SSOL and DTN do hereby severally
indemnify Escrow Agent and undertake to hold harmless Escrow Agent from and
against any and all claims, demands, or actions arising out of or resulting from
such performance by Escrow Agent under this Agreement.
SECTION 11
CONFIDENTIALITY AND USE OF SOURCE CODE
--------------------------------------
11.1 CONFIDENTIALITY UNDERTAKING. The Source Code released to DTN
pursuant to this Agreement shall be used by DTN solely for the purposes
permitted by the Service Agreement. DTN shall treat and preserve the Source Code
as a trade secret of SSOL in accordance with the same practices employed by DTN
to safeguard its own trade secrets against unauthorized use and disclosure.
4
<PAGE>
SECTION 12
INDEPENDENT CONTRACTOR STATUS
-----------------------------
12.1 The parties to this Agreement are and shall be independent
contractors under this Agreement, and nothing herein shall be construed to
create a partnership, joint venture, or agency relationship between the parties
to this Agreement. No party to this Agreement shall have the authority to enter
into agreements of any kind on behalf of the other parties to this Agreement in
any manner.
SECTION 13
CONTINUED ABILITY TO PERFORM OBLIGATIONS
----------------------------------------
13.1 The parties to this Agreement represent and warrant that they
have full power and authority to undertake the obligations set forth in this
Agreement and that they have not entered into any other agreements nor will they
enter into any other agreements that would render them incapable of
satisfactorily performing their respective obligations under this Agreement.
SECTION 14
TERM OF AGREEMENT
-----------------
14.1 The term of this Agreement shall commence as of the date first
above written and shall continue until the Source Code shall be transferred to
DTN pursuant to the terms of this Agreement, or, if such transfer shall not have
so occurred, the Agreement shall terminate and the Source Code shall be returned
to SSOL at the end of the License Term as defined in the Service Agreement.
SECTION 15
MISCELLANEOUS
-------------
15.1 COMPLIANCE WITH LAWS. The parties agree that they shall comply
with all applicable laws and regulations of governmental bodies or agencies in
their respective performance of obligations under this Agreement.
15.2 NO UNDISCLOSED AGENCY; NO ASSIGNMENT. Each party represents
that it is acting on its own behalf and is not acting as an agent for or on
behalf of any third party and agrees that it may not assign its rights or
obligations under this Agreement without the prior written consent of the other
parties to this Agreement.
15.3 NOTICES. All notices or other communications required or
permitted to be given pursuant to this Agreement shall be given in writing by
telecopier, personal messenger, overnight courier who shall obtain a written
receipt therefor or by deposit thereof in the United States mail, registered or
certified, return receipt requested, to the following addresses:
If to DTN: Data Transmission Network Corporation
9110 W. Dodge Rd.
Omaha, Nebraska 68114
Attention: Eric Stokes
5
<PAGE>
If to SSOL: SmartServ Online, Inc.
Metro Center
One Station Place
Stanford, CT 06902
Attention: Mario F. Rossi
If to Escrow Agent: ________________________________
________________________________
________________________________
All notices and other communications shall be deemed delivered on the date the
receipt acknowledges that they were personally delivered to the other party, or,
for all notices and communications sent by mail, at the time reflected on the
return receipt. Either party may change the address to which notices are to be
delivered and may specify a copy address to which copy of all notices must be
sent by giving notice to the other party in the manner herein provided.
15.4 GOVERNING LAW. All questions concerning the validity,
operation, interpretation, and construction of this Agreement shall be governed
by and determined in accordance with the laws of the State of Nebraska.
15.5 NO WAIVER. No party shall, by mere lapse of time, without
giving notice or taking other action hereunder, be deemed to have waived any
breach by the other parties of any of the provisions of this Agreement. Further,
the waiver by any party of a particular breach of this Agreement by any other
party shall not be construed as or constitute a continuing waiver of such breach
or of other breaches of the same or other provisions of this Agreement.
15.6 PARTIAL INVALIDITY. If any part, term, or provision of this
Agreement shall be held illegal, unenforceable, or in conflict with any law of a
federal, state, or local government having jurisdiction over this Agreement, the
validity of the remaining portions or provisions of this Agreement shall not be
affected thereby.
15.7 BINDING AGREEMENT. The parties acknowledge that each has read
this Agreement, understands it, and agrees to be bound by its terms.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the day and year first above written.
DATA TRANSMISSION NETWORK SMARTSERV ONLINE, INC.,
CORPORATION, a Delaware a Delaware corporation
corporation
By: CHARLES R. WOOD By: SEBASTIAN E. CASSETTA
---------------------------- ----------------------------
Title: Senior Vice President Title: Chief Executive Officer
6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1998 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> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 394,088
<SECURITIES> 0
<RECEIVABLES> 184,100
<ALLOWANCES> 6,000
<INVENTORY> 0
<CURRENT-ASSETS> 710,176
<PP&E> 975,798
<DEPRECIATION> 323,104
<TOTAL-ASSETS> 1,433,307
<CURRENT-LIABILITIES> 1,454,209
<BONDS> 99,254
0
0
<COMMON> 39,583
<OTHER-SE> (159,739)
<TOTAL-LIABILITY-AND-EQUITY> 1,433,307
<SALES> 613,096
<TOTAL-REVENUES> 613,096
<CGS> 1,688,696
<TOTAL-COSTS> 1,688,696
<OTHER-EXPENSES> 1,913,728
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 857,169
<INCOME-PRETAX> (3,812,983)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,812,983)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,812,983)
<EPS-PRIMARY> (0.95)
<EPS-DILUTED> (0.95)
</TABLE>
