+As filed with the Securities and Exchange Commission on December 10, 1999.
Registration No. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
SMARTSERV ONLINE, INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 7375 13-3750708
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
One Station Place
Stamford, CT 06902
(203) 353-5950
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Sebastian E. Cassetta
Chief Executive Officer and Chairman of the Board
Smartserv Online, Inc.
One Station Place
Stamford, CT 06902
(203) 353-5950
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies of communications to:
Michael J. Shef, Esq.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Telephone No.: (212) 704-6000
Facsimile No.: (212) 704-6288
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
------------------------------------------ ---------------------------------------------------------------------------------
Title of Each Class of Amount to be Proposed Maximum Amount of
Securities to be Registered Registered(1) Aggregate Offering Price (2) Registration Fee
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock, par value $.01 per share 1,453,970 $24,285,661 $6,411
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) All of the shares of common stock being registered hereby are being
offered by selling stockholders who acquired such shares in private
transactions. No other shares of the registrant's common stock are
being registered in this offering.
(2) Estimated pursuant to Rule 457(c) under the Securities Act of 1933
solely for the purpose of computing the amount of the registration fee.
The fee for the common stock was based on the average of the bid and
asked price of the common stock reported on the Over-the-Counter (OTC)
Bulletin Board on December 9, 1999.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
===============================================================================
<PAGE>
The information in this prospectus is not complete and may be changed. The
selling stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
Prospectus
SmartServ Online, Inc.
1,453,970 shares of common stock
. The selling stockholders are offering to sell 1,453,970
shares of common stock.
. We will not receive any proceeds from the offering of common
stock. We will receive approximately $1,281,500 if all of
the warrants are exercised. These proceeds will be used for
our general corporate purposes.
. Our common stock is traded and quoted on the
Over-the-Counter (OTC) Bulletin Board under the symbol
"SSOL". On December 3, 1999, the last reported bid price of
our common stock was $18.00 and the last reported asked
price was $18.50.
The securities offered in this prospectus involve a high degree of risk. You
should carefully consider the factors described under the heading "Risk Factors"
beginning on page 3.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
-----------------------
The date of this prospectus is ________________, 1999
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY...........................................................3
ABOUT OUR Company............................................................3
SUMMARYFINANCIAL DATA........................................................3
RISK FACTORS.................................................................4
SPECIAL INFORMATION REGARDING FORWARD LOOKING STATEMENTS.....................8
USE OF PROCEEDS..............................................................8
MARKET PRICE OF OUR COMMON STOCK AND PUBLIC WARRANTS.........................9
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...................10
BUSINESS....................................................................16
MANAGEMENT..................................................................21
PRINCIPAL STOCKHOLDERS......................................................27
SELLING STOCKHOLDERS........................................................29
PLAN OF DISTRIBUTION........................................................31
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................32
DESCRIPTION OF CAPITAL STOCK................................................32
DELAWARE BUSINESS COMBINATION PROVISIONS....................................34
INDEMNIFICATION OF DIRECTORS AND OFFICERS...................................34
WHERE YOU CAN FIND MORE INFORMATION.........................................35
TRANSFER AGENT..............................................................36
LEGAL MATTERS...............................................................36
EXPERTS.....................................................................36
INDEX TO FINANCIAL STATEMENTS..............................................F-1
-2-
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information included elsewhere in this
document. You should carefully review the more detailed information and
financial statements included in this document. The summary is not complete and
may not contain all of the information you may need to consider before investing
in our common stock. We urge you to carefully read this document, including the
"Risk Factors" section beginning on page 4 and the Financial Statements and
notes to those statements beginning on page F-1 of this document.
ABOUT OUR COMPANY
Please note that throughout this prospectus, the words "we", "our" or
"us" refer to SmartServ Online, Inc. and not to the selling stockholders.
SmartServ Online, Inc. was organized in 1993. We offer a range of
services designed to facilitate e-commerce by providing transactional and
information services to our alliance partners. We have developed online
financial, transactional and media applications using a unique "device
independent" delivery solution and make these services available to wireless
telephones and personal digital assistants, personal computers and the Internet
through our application software and communications architecture. Our services
facilitate stock trading and disseminate real-time stock quotes, business and
financial news, sports information, private-labeled electronic mail, national
weather reports and other business and entertainment information.
Our executive offices are located at One Station Place, Stamford,
Connecticut 06902 and our telephone number is (203) 353-5950.
SUMMARY FINANCIAL DATA
This summary financial data is derived from our financial statements
for the fiscal years ended June 30, 1999, June 30, 1998, and June 30, 1997, and
for the fiscal quarters ended September 30, 1999 and September 30, 1998 certain
of which are included elsewhere herein. You should read the following summary
financial data in conjunction with the Financial Statements and notes to those
statements.
<TABLE>
<CAPTION>
Quarters Ended
September 30 Years Ended June 30
---------------------------------------- -------------------------------------------------
Statement of Operations 1999 1998 1999 1998 1997
--------------------------------------- -------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 808,292 $349,705 $ 1,443,781 $ 873,476 $ 688,610
Loss from Operations (326,684) (715,283) (3,750,471) (4,488,307) (4,457,343)
Net Loss (315,667) (854,177) (7,124,126) (5,040,009) (4,434,482)
Basic and Diluted Loss per (.23) (.92) (6.44) (7.65) (7.20)
Share
Balance Sheet September 30 At June 30
---------------------------------------- -------------------------------------------------
1999 1999 1998 1997
---------------------------------------- -------------------------------------------------
Cash and Cash Equivalents $ 1,103,443 $ 2,165,551 $ 354,225 $ 93,345
Working Capital Deficiency (2,181,401) (1,822,340) (1,850,287) (901,026)
Total Assets 2,840,462 3,820,598 1,276,853 1,246,689
Total Liabilities and Deferred
Revenues 7,321,783 8,527,898 2,523,714 1,945,017
Shareholders' Deficiency (4,481,321) (4,707,300) (1,246,861) (698,328)
</TABLE>
-3-
<PAGE>
RISK FACTORS
An investment in our common stock is highly speculative and involves a
high degree of risk. Therefore, you should consider all of the risk factors
discussed below, as well as the other information contained in this document.
You should not invest in our common stock unless you can afford to lose your
entire investment and you are not dependent on the funds you are investing.
WE HAVE A HISTORY OF LOSSES AND IF WE DO NOT ACHIEVE PROFITABILITY WE
MAY NOT BE ABLE TO CONTINUE OUR BUSINESS
We have incurred net losses of $7,124,126 for the year ended June 30,
1999, $5,040,009 for the year ended June 30, 1998, $4,434,482 for the year ended
June 30, 1997 and $2,966,287 for the year ended June 30, 1996. Additionally, we
have incurred a net loss of $315,667 for the three month period ended September
30, 1999. At September 30, 1999, we had an accumulated deficit of $22,261,672
and a deficiency of net assets of $4,481,321. These conditions raise substantial
doubt about our ability to continue as a going concern. Losses have resulted
principally from costs incurred in connection with activities aimed at
developing our software, information and transactional services and from costs
associated with our marketing and administrative activities. We have incurred
substantial expenses and commitments and continue to operate at a deficit on a
monthly basis. No assurance can be provided that we will be able to develop
revenues sufficient to support our operations.
WE DEPEND ON ONE CUSTOMER, AND THE LOSS OF THIS CUSTOMER COULD ADVERSELY
AFFECT OUR OPERATING RESULTS
Currently, substantially all of our revenues are generated through our
licensing arrangement with Data Transmission Network Corporation, or DTN. Our
results of operations will depend upon numerous factors including sustained
revenues from our arrangement with DTN, the regulatory environment, introduction
and market acceptance of new services, establishing alliances with strategic
marketing partners and competition. If an event of default occurs under the
license agreement, DTN may at its sole cost elect to provide its own maintenance
to both the system software and related hardware. Under these circumstances, DTN
will have the right to own the system software, including the source codes, and
related hardware, and DTN will have no further obligation to pay us licensing
fees which we currently rely on for a significant part of our revenues.We
anticipate that our results of operations in any given period will continue to
depend to a significant extent upon revenues from DTN and a small number of
customers. In order to increase our revenues, we will need to attract and retain
additional customers. Our failure to obtain a sufficient number of additional
customers could adversely affect our results of operations.
OUR CAPITAL REQUIREMENTS MAY REQUIRE ADDITIONAL FINANCING WHICH MAY NOT
BE AVAILABLE TO US
We estimate that we have sufficient cash resources to fund operations
through April, 2000. If our cash resources prove to be insufficient at that time
we may be required to seek additional debt or equity financing to fund the costs
of continuing operations until we achieve positive cash flow. We have no current
commitments or arrangements for additional financing and there can be no
assurance that any additional debt or equity financing will be available to us
on acceptable terms, or at all.
OUR INDEPENDENT AUDITORS HAVE ISSUED A REPORT WHICH MAY HURT OUR
ABILITY TO RAISE ADDITIONAL FINANCING AND THE PRICE OF OUR COMMON STOCK
The report of our independent auditors on our financial statements for
the years ended June 30, 1999 and 1998 contains an explanatory paragraph which
indicates that we have had recurring operating losses and a working capital
deficiency which raises substantial doubt about our ability to continue as a
going concern. This report may make it more difficult for us to raise additional
debt or equity financing needed to run our business and is not viewed favorably
by analysts of, or investors in, our
-4-
<PAGE>
common stock. We urge potential investors to review this report before making a
decision to invest in our company.
OUR SECURITIES WERE DELISTED FROM QUOTATION AND TRADING ON THE NASDAQ
SMALLCAP MARKET WHICH MAY HURT OUR ABILITY TO RAISE CAPITAL, THE PRICE OF OUR
COMMON STOCK, AND AN INVESTOR'S ABILITY TO SELL OUR COMMON STOCK
At the close of business on May 20, 1998, our common stock and public
warrants were delisted from quotation and trading on the Nasdaq SmallCap Market.
At present, trading of our securities is conducted on the NASD's
Over-the-Counter (OTC) Bulletin Board. As a result, an investor will likely find
it more difficult to dispose of our shares in the open market. Also, since we do
not have the liquidity and marketability associated with a Nasdaq listing, it
may be more difficult to raise capital from accredited and institutional
investors and our common stock price may be volatile.
OUR BUSINESS DEPENDS UPON STRATEGIC MARKETING ALLIANCES WHICH MAY NOT
MATERIALIZE
We intend to sell our services primarily by entering into non-exclusive
agreements with strategic marketing partners who would brand our "bundled"
information and transaction services with their own private label, promote the
packaged offering and then distribute our information and e-commence services to
their clients. Our success will depend on:
. our ability to enter into agreements with strategic marketing
partners;
. the ultimate success of these strategic marketing partners; and
. the ability of the strategic marketing partners to successfully
market our services.
Our failure to complete our strategic alliance strategy or the failure
of the strategic marketing partners to develop and sustain a market for our
services would have a material adverse affect on our overall performance.
Although we view strategic marketing alliances as a major factor in the
successful commercialization of our services, there can be no assurance that the
strategic marketing partners would view an alliance with us as significant to
their businesses and any potential benefits from these arrangements may not
materialize.
THE MARKET FOR OUR BUSINESS IS DEVELOPING AND MAY NOT ACHIEVE THE GROWTH
WE EXPECT
Online information and transactional services are developing markets.
Our future growth and profitability will depend, in part, upon consumer
acceptance of online information and transactional services in general and a
significant expansion in the consumer market for the delivery of such services
via wireless telephones and personal digital assistants and personal computers.
Even if these markets experience substantial growth, there can be no assurance
that our services will be commercially successful or will benefit from such
growth. Further, even if initially successful, any continued development and
expansion of a market for our services will depend in part upon our ability to
create and develop additional services and adjust existing services in
accordance with changing consumer preferences, all at competitive prices. Our
failure to develop new services and generate revenues could have a material
adverse effect on our financial condition and operating results.
WE COMPETE AGAINST LARGER, WELL KNOWN COMPANIES WITH GREATER RESOURCES
THAN WE HAVE
-5-
<PAGE>
The market for Web-based information and transactional services is
highly competitive and involves rapid innovation and technological change,
shifting consumer preferences and frequent new service introductions. Most of
our competitors and potential competitors have substantially greater financial,
marketing and technical resources than we have. Increased competition in the
market for our services could materially and adversely affect our results of
operations through price reductions and loss of market share.
The principal competitive factors in both the online and wireless
services industry include content, product features and quality, ease of use,
access to distribution channels, brand recognition, reliability and price. We
believe that potential new competitors, including large multimedia and
information system companies, are increasing their focus on transaction
processing. We face increasing competition from other emerging services
delivered through personal computers and wireless devices such as developing
transactional services offered by Checkfree Corporation, Microsoft Corporation,
PC Quote.com, Hyperfeed Technologies, Inc., Intuit Inc., Data Broadcasting
Corporation, Electronic Data Systems Corp. and other Web-based software and
online companies. Established online information services including those
offered by America Online, Inc., CompuServe and Prodigy offer competing services
delivered through personal computers. Although in its infancy, the wireless
arena too has its competitors, such as Datalink Systems Corporation, Intelligent
Information, Inc., Aether Systems, Inc. (a/k/a Aether Technologies), Saraide.com
Inc. and W-Trade Technologies, Inc. We expect competition to increase from
existing competitors and from new competitors, including telecommunications
companies.
The information content provided through our software and communication
architecture is generally purchased through non-exclusive distribution
agreements. While we are not dependent on any single content provider, existing
and potential competitors may enter into agreements with these and other such
providers and thereby acquire the ability to deliver online information and
transactional services substantially similar to those provided by us.
WE ARE HIGHLY DEPENDENT ON OUR EXECUTIVE OFFICERS AND SEVERAL TECHNICAL
EMPLOYEES, THE LOSS OF ANY OF WHOM COULD HAVE AN ADVERSE IMPACT ON OUR FUTURE
OPERATIONS
We believe that due to the rapid pace of innovation within our
industry, factors such as the technological and creative skills of our personnel
are more important in establishing and maintaining a leadership position within
the industry than legal protections of our technology. We are dependent on our
ability to recruit, retain and motivate high quality personnel. However,
competition for such personnel is intense and the inability to attract and
retain additional qualified employees or the loss of current key employees could
materially and adversely affect our business, operating results and financial
condition. We maintain and are the sole beneficiary of a key-person life
insurance policy on the life of (1) Mr. Sebastian E. Cassetta, our Chief
Executive Officer, in the amount of $1,000,000 and (2) Mr. Mario F. Rossi, our
Vice President of Technology in the amount of $500,000. The loss of the services
of either Mr. Cassetta or Mr. Rossi would have a material adverse effect upon
our business, financial condition and results of operations.
PROVISIONS IN OUR CHARTER MAY MAKE IT MORE DIFFICULT FOR A PERSON TO
ACQUIRE US AT A PREMIUM TO OUR CURRENT MARKET VALUE
Our charter restricts the ability of our stockholders to call a
stockholders meeting and provides that our stockholders may not act by written
consent or change the number of directors and classes of our board of directors.
These provisions may have the effect of deterring or delaying certain
transactions involving an actual or potential change in control of SmartServ,
including transactions in which our stockholders might otherwise receive a
premium for their shares over then current market prices, and may limit the
ability of our stockholders to approve transactions that they may deem to be in
their best interests.
-6-
<PAGE>
YOUR OWNERSHIP INTEREST, VOTING POWER AND THE MARKET PRICE OF OUR
COMMON STOCK MAY DECREASE BECAUSE WE HAVE ISSUED, AND MAY CONTINUE TO ISSUE, A
SUBSTANTIAL NUMBER OF SECURITIES CONVERTIBLE OR EXERCISABLE INTO OUR COMMON
STOCK
We have issued common stock, options and warrants to purchase our
common stock, and in the future we may issue additional shares of common stock,
options, warrants, preferred stock or other securities exercisable for or
convertible into our common stock. A substantial number of shares of common
stock are already available for sale in the public market under Rule 144 of the
Securities Act and additional shares may become available for sale in the near
future. In particular, 1,453,970 shares of our common stock issued or issuable
upon the exercise of warrants will be registered under this document and,
subject to legal or contractual restrictions with respect to 883,333 of such
shares, will be freely saleable by the selling stockholders. This represents
approximately 50.3% of our common stock which will be outstanding after the
exercise of such warrants. Sales of these shares or the market's perception that
these sales could occur may cause the market price of our common stock to fall
and may make it more difficult for us to sell equity securities in the future at
a time and price that we deem appropriate or to use equity securities as
consideration for future acquisitions. In addition, we have outstanding prepaid
warrants convertible into common stock at a discount to the market price of our
common stock. Depending upon market conditions at the time of conversion of our
prepaid warrants, the number of shares of common stock issuable upon such
conversion could increase significantly in the event of a decrease in the
trading price of the common stock. Holders of common stock could therefore
experience significant dilution upon conversion of these prepaid warrants.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS
We have designed and developed our own information platform,
"SmartServ", based on Sun Microsystems, Inc. computers and Oracle Corp.'s
version 7.X relational database manager, to support a variety of end user
devices. Although we intend to protect our rights vigorously, there can be no
assurance that any of the measures to protect our proprietary rights explained
below will be successful. In an effort to protect our proprietary rights, we
rely upon a combination of contract provisions and copyrights, trade secret laws
and a service mark. We license the use of our services to our strategic
marketing partners under agreements that contain terms and conditions
prohibiting the unauthorized reproduction of our software and services. We seek
to protect the source code of our application software and communications
architecture as a trade secret and as an unpublished copyrighted work.
We believe that our service mark "SmartServ Online" has significant
value and is important to the marketing of our services. There can be no
absolute assurance, however, that our mark does not or will not violate the
proprietary rights of others, that our mark would be upheld if challenged or
that we would not be prevented from using our mark, any of which could have an
adverse effect on us. In addition, there can be no assurance that we will have
the financial resources necessary to enforce or defend our mark. We believe that
our software, services, service mark and other proprietary rights do not
infringe on the proprietary rights of third parties. However, there can be no
assurance that third parties will not assert infringement claims against us with
respect to current features, content or services or that any such assertion may
not require us to enter into royalty arrangements or result in litigation.
OUR LICENSE ARRANGEMENT WITH DTN CONTAINS PROVISIONS WHICH ALLOW DTN TO
TERMINATE OUR RELATIONSHIP AND TAKE OWNERSHIP OF CERTAIN OF OUR PROPRIETARY
TECHNOLOGY UNDER CERTAIN CIRCUMSTANCES
We granted DTN an exclusive perpetual worldwide license to our
Internet-based (1) real-time stock quote product, (2) online trading vehicle for
customers of small and medium sized brokerage companies, (3) administrative
reporting package for brokers of small and medium sized brokerage companies, and
(4) order
-7-
<PAGE>
entry/routing system. Under the license agreement, we are required to
maintain certain systems' performance standards and to satisfy other general
business requirements. Our inability to maintain compliance with the license
agreement could result in a default thereunder. In addition, a change of control
of SmartServ is an event of default under the license agreement. A change of
control includes a change in the majority of the members on our board of
directors. Under a letter agreement with Zanett Capital, Inc., Zanett Capital
may elect a majority of the board under certain circumstances, including the
failure of our common stock to be listed on Nasdaq. Moreover, Zanett Securities
Corporation and Zanett Lombardier, Ltd. and its affiliates own shares of common
stock and warrants to purchase common stock, which, if exercised, would equal
approximately 63.5% of our common stock which would be outstanding after the
exercise of such warrants, giving them the potential to effect a change of
control of SmartServ.
If an event of default occurs under the license agreement, DTN may at
its sole cost elect to provide its own maintenance to both the system software
and related hardware. Under these circumstances, DTN will have the right to own
the system software, including the source codes, and related hardware, and DTN
will have no further obligation to pay us licensing fees which we currently rely
on for a significant part of our revenues.
WE ARE INVOLVED IN SEVERAL PENDING LEGAL PROCEEDINGS WHICH, IF RESOLVED
AGAINST US, COULD CAUSE DILUTION TO OUR STOCKHOLDERS AND HAVE A MATERIAL
NEGATIVE IMPACT ON OUR OPERATIONS
From time to time we have been, and expect to continue to be, a party
to legal proceedings and claims in the ordinary course of our business. Our
ongoing legal proceedings with Mr. Michael Fishman and Mr. Ronald G. Weiner have
been set forth in the Business section of this document under the heading "Legal
Proceedings". In addition to unspecified damages of at least $250,000, Mr.
Weiner seeks 10% of our outstanding equity securities. While we expect to
contest these matters vigorously, litigation is inherently uncertain and an
adverse judgment on any of these claims could cause dilution to our stockholders
as well as harm our business. Even if not meritorious, any of these current and
future matters could require the expenditure of significant financial and
managerial resources.
SPECIAL INFORMATION REGARDING FORWARD LOOKING STATEMENTS
Some of the statements in this prospectus or in the documents we
incorporate by reference are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve certain known and unknown risks, uncertainties and other
factors which may cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by these forward-looking statements. These factors include,
among others, the factors set forth above under "Risk Factors." The words
"believe," "expect," "anticipate," "intend" and "plan" and similar expressions
identify forward-looking statements. We caution you not to place undue reliance
on these forward-looking statements. We undertake no obligation to update or
revise any forward-looking statements or to publicly announce the result of any
revisions to any of the forward-looking statements in this document to reflect
future events or developments.
USE OF PROCEEDS
We will not receive any proceeds from the sale by the selling
stockholders of the common stock offered by this prospectus. The shares of
common stock will be sold from time to time by the selling stockholders at
prevailing market prices. We will receive approximately $1,281,500 if all of the
Warrants for the underlying shares of common stock being registered are
exercised. We expect to use these proceeds, if any, for general corporate
purposes.
-8-
<PAGE>
MARKET PRICE OF OUR COMMON STOCK AND PUBLIC WARRANTS
SmartServ's $.01 par value common stock commenced trading on March 21,
1996 on the National Association of Securities Dealers' Automated Quotation
System. Our Redeemable Common Stock Purchase Warrants, or public warrants, also
commenced trading on March 21, 1996 on the Nasdaq.
On May 20, 1998, we received notification from The Nasdaq Stock Market
that we no longer met the net tangible asset/market capitalization/net income
requirements for continued listing of our securities on The Nasdaq SmallCap
Market. Accordingly, at the close of business on May 20, 1998, our common stock
and public warrants were delisted from The Nasdaq SmallCap Market. Currently,
our securities trade on the OTC Bulletin Board as SSOL and SSOLW.
On October 15, 1998, our stockholders approved a one-for-six reverse
stock split which became effective on October 26, 1998.
The following table sets forth the high and low prices for the common
stock and public warrants during the periods indicated as reported by the Nasdaq
SmallCap Market and the OTC Bulletin Board, as applicable. Such amounts (and all
other share and price information contained in this document) have been adjusted
to reflect the reverse stock split.
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
------------ --------
HIGH LOW HIGH LOW
---- --- ---- ---
YEAR ENDING JUNE 30, 2000
- -------------------------
<S> <C> <C> <C> <C>
First Quarter $ 1.531 $ .719 $ .156 $ .063
Second Quarter 24.625 .719 6.500 .070
(through December 1, 1999)
YEAR ENDED JUNE 30, 1999
- ------------------------
First Quarter $ 4.313 $ 1.875 $ 2.250 $ .375
Second Quarter 4.125 1.031 .531 .063
Third Quarter 4.875 1.500 .625 .063
Fourth Quarter 2.500 1.500 .250 .100
YEAR ENDED JUNE 30, 1998
- ------------------------
First Quarter $ 18.750 $ 6.750 $ 4.500 $ .750
Second Quarter 21.000 4.128 5.250 .750
Third Quarter 19.125 3.750 6.563 .938
Fourth Quarter 22.500 3.000 9.188 1.688
</TABLE>
As of December 3, 1999, we had 1,435,336 shares of common stock
outstanding held by 73 shareholders of record. We estimate that our common stock
is held by approximately 1,800 beneficial holders. As of such date, we had
1,725,000 public warrants outstanding held by 27 warrant holders of record.
-9-
<PAGE>
DIVIDENDS
We have never paid a cash dividend on our common stock. It is our
present policy to retain earnings, if any, to finance the development and growth
of our business. Accordingly, we do not anticipate that cash dividends will be
paid until our earnings and financial condition justify such dividends, and
there can be no assurance that we can achieve such earnings.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PLAN OF OPERATION
SmartServ delivers Internet-based content and trade order routing
solutions, as well as "Web-to-Wireless" applications that enable the processing
of transactions for its strategic alliances, or Strategic Marketing Partners,
and their customers. SmartServ has developed online financial, transactional and
media applications using a unique "device-independent" delivery solution.
SmartServ's plan of operation includes programs for the sale of its
information and transactional application services through Strategic Marketing
Partners utilizing a "business-to-business" strategy. Such a strategy provides
access to a large number of potential subscribers and allows SmartServ to
maximize its market reach at minimal operating costs. The flexibility of
SmartServ's application software and communications architecture enables the
customization of each information package offered to each Strategic Marketing
Partner, and in turn to their end users.
As an early entrant in the dynamic market of distribution of financial
information and transaction services via wireless telephones and personal
digital assistants, or PDAs, SmartServ is developing strategic marketing
relationships with wireless equipment manufacturers, carriers and other
value-added service providers and potential corporate partners. SmartServ
continuously seeks to increase product performance and widen its distribution by
building and maintaining this network of Strategic Marketing Partners. Combining
SmartServ's application development and data platform with the core competencies
of its Strategic Marketing Partners, SmartServ is offering a packaged turnkey
solution for extending content and transactions to the wireless environment.
Management believes the wireless area has tremendous potential for distribution
of SmartServ's information products and as a source of revenues from "fee based"
transactions such as routing stock order entries.
Management believes that most of SmartServ's revenues will continue to
be derived from consumers who purchase its services through Strategic Marketing
Partners. SmartServ anticipates that Strategic Marketing Partners will brand its
"bundled" information services with their own private label and promote and
distribute SmartServ's packaged offering to their clients. SmartServ has the
ability to customize the information package to be offered to each Strategic
Marketing Partner, by device. With the licensing of four of its Internet
products by DTN, SmartServ has discontinued efforts to develop a direct
subscriber base.
Management anticipates that staffing requirements associated with the
implementation of its plan of operation will result in the addition of a minimum
of six to ten people during the period ending June 30, 2000. Such personnel will
be added to assist with the programming requirements of Strategic Marketing
Partners' product offerings, for customer support and sales and marketing.
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RESULTS OF OPERATIONS
FISCAL QUARTER ENDED SEPTEMBER 30, 1999 VERSUS FISCAL QUARTER ENDED
SEPTEMBER 30, 1998
During the quarters ended September 30, 1999 and 1998, SmartServ's
revenues were $808,292 and $349,705, respectively. Substantially all of such
revenues were obtained from SmartServ's licensing agreement with DTN. At
September 30, 1999 and 1998, SmartServ recorded deferred revenues of $5,384,055
and $960,515, respectively. Such amounts resulted from SmartServ's relationship
with DTN and will be amortized to revenues over the term of the anticipated
revenue stream.
During the quarter ended September 30, 1999, SmartServ incurred costs
of services of $232,866. Such costs consisted primarily of information and
communication costs ($48,400), personnel costs ($55,800) and computer hardware
lease, depreciation and maintenance costs ($84,600). During the quarter ended
September 30, 1998, SmartServ incurred costs of services of $207,084. Such costs
consisted primarily of information and communication costs ($95,700), personnel
costs ($29,100), and computer hardware lease, depreciation and maintenance costs
($80,800). Product development costs were $46,845 and $27,046 for the quarters
ended September 30, 1999 and 1998, respectively. Such costs consisted primarily
of the amortization of capitalized software development costs related to certain
product enhancements in accordance with Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed" ("Statement 86"). During the quarters ended
September 30, 1999 and 1998, SmartServ capitalized $244,225 and $233,005,
respectively, of development costs in accordance with Statement 86.
During the quarter ended September 30, 1999, SmartServ incurred
selling, general and administrative expenses of $855,265 vs. $830,858 for the
quarter ended September 30, 1998. Such costs were incurred primarily for
personnel costs ($221,000), marketing and advertising costs ($76,400),
professional fees ($468,800), facilities ($50,000) and telecommunications costs
($17,000). Included in professional fees are noncash charges of $291,300
resulting from the amortization of costs ascribed to common stock purchase
warrants previously issued to financial consultants. Such common stock purchase
warrants were recorded in accordance with the Black-Scholes pricing methodology.
Selling, general and administrative expenses for the quarter ended September 30,
1998 were incurred primarily for personnel costs ($185,000), marketing and
advertising costs ($61,800), professional fees ($488,400), facilities ($49,000)
and telecommunications costs ($14,700). Included in professional fees are
noncash charges of $330,400 resulting from the amortization of costs ascribed to
common stock purchase warrants previously issued to financial consultants.
In accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" SmartServ must recognize the
compensatory nature of 173,239 options issued to employees pursuant to
SmartServ's employee stock option plan, as well as 892,319 shares issued or to
be issued to Messrs. Cassetta, Rossi and Pearl. Accordingly, SmartServ will be
required to record a noncash charge to earnings based on the difference between
the market price of its common stock at December 31,1999 and the exercise price
of the option or purchase price of the restricted stock. As a result of the
volatility of SmartServ's common stock, the magnitude of such a noncash charge
is unknown. However, based on a closing price ($18.00) of SmartServ's common
stock at December 3, 1999, it would be required to record a noncash charge to
earnings of approximately $16,500,000. Such charge will have no impact on
SmartServ's statement of financial condition at December 31, 1999 or cash flows
for the period then ended.
Interest income for the quarter ended September 30, 1999 and 1998
amounted to $11,017 and $2,202, respectively. Such amounts were earned primarily
from SmartServ's investments in short-term commercial paper and cash balances.
Interest and financing costs for the quarters ended September 30, 1999
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and 1998 were $0 and $141,096, respectively. During the quarter ended September
30, 1998, such costs were primarily attributable to the issuance of 50,000
shares of common stock to Zanett Lombardier, Ltd and Bruno Guazzoni, holders of
$1,669,000 of prepaid warrants, in consideration of such holders agreeing to
restrictions on the exercise of the prepaid warrants and the resale of the
shares of common stock issuable upon such exercise. The issuance of such shares
was recorded in the financial statements at fair market value.
FISCAL YEAR ENDED JUNE 30, 1999 VERSUS FISCAL YEAR ENDED JUNE 30, 1998
During the year ended June 30, 1999, SmartServ recorded revenues of
$1,443,781. Substantially all of such revenues were earned through its licensing
agreement with DTN. During the year ended June 30, 1998, SmartServ earned
revenues of $873,476. Of such amount, $210,000 was earned through the
relationship with DTN, while $454,000 was earned from the sale of the SmartServ
Pro stock quote services.
During the year ended June 30, 1999, SmartServ incurred costs of
services of $994,465. Such costs consisted primarily of information and
communication costs ($267,600), personnel costs ($290,100), computer hardware
leases and maintenance ($339,400) and systems consultants ($97,300). During the
year ended June 30, 1998, SmartServ incurred costs of revenues of $1,216,761.
Such costs consisted primarily of information and communication costs
($551,700), personnel costs ($310,600), and computer hardware leases and
maintenance ($339,300). Information and communication costs decreased in 1999
compared to 1998 as a result of the licensing agreement entered into between
SmartServ and DTN. Personnel costs decreased in 1999 compared to 1998 as a
result of the migration of personnel resources into product development areas in
1999. Product development costs were $193,188 vs. $923,082 for the year ended
June 30, 1998. The decrease in the product development costs results from the
capitalization of software development costs related to certain product
enhancements in accordance with Statement of Financial Accounting Standards No.
86. During the year ended June 30, 1999, SmartServ capitalized $765,000 of
development costs in accordance with Statement 86. No such costs were
capitalized during the year ended June 30, 1998. During the year ended June 30,
1999, product development costs consisted primarily of the amortization of
capitalized software development costs. During the year ended June 30, 1998,
product development costs consisted primarily of personnel costs ($541,400) and
computer system consultants ($335,000).
During the year ended June 30, 1999, SmartServ incurred selling,
general and administrative expenses of $4,006,599 vs. $3,221,940 for the year
ended June 30, 1998. During the year ended June 30, 1999, such costs were
incurred primarily for personnel costs ($1,148,400), facilities ($240,500),
marketing and advertising costs ($263,100), professional fees ($2,150,000), and
telecommunications costs ($69,500). During the year ended June 30, 1998, such
costs were incurred primarily for personnel costs ($1,349,000), facilities
($216,000), marketing and advertising costs ($240,400), professional fees
($1,051,400) and telecommunications costs ($73,100). Included in professional
fees are noncash charges of $1,349,020 in 1999 and $660,576 in 1998 representing
the amortization of deferred costs in connection with the issuance of warrants
to financial consultants.
Interest income for the year ended June 30, 1999 amounted to $4,767 vs.
$40,788 for the year ended June 30, 1998. Such amounts were earned primarily
from SmartServ's investments in highly liquid commercial paper. Interest and
financing costs for the year ended June 30, 1999 were $3,378,422. Such costs
were incurred primarily in connection with the issuance of the 8% convertible
notes ($2,254,700) and SmartServ's default pursuant to the prepaid warrants
($1,095,700). Of such amounts, $2,593,800 were noncash charges for the issuance
of common stock or warrants to purchase common stock as settlement of such
obligations. Interest and financing costs for the year ended June 30, 1998 were
$592,490. These costs were incurred in connection with the origination of
SmartServ's May 1997 line of credit. Of such amount,
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$463,600 represents the noncash charges associated with the issuance of certain
common stock purchase warrants.
Loss per share was $6.44 per share for year ended June 30, 1999 vs.
$7.65 per share for the year ended June 30, 1998. While the net loss increased
$2,084,117 SmartServ's weighted average shares of common stock outstanding in
1999 increased by 446,569 shares, thereby affecting the per share loss.
FISCAL YEAR ENDED JUNE 30, 1998 VERSUS FISCAL YEAR ENDED JUNE 30, 1997
During the year ended June 30, 1998, SmartServ recorded revenues of
$873,476 from the sale of its information services vs. $688,610 during the year
ended June 30, 1997. Included in revenues for the year ended June 30, 1998 is
$210,000 resulting from SmartServ's licensing agreement with DTN and $454,000
from the sale of the SmartServ Pro stock quote services. During the year ended
June 30, 1997, SmartServ earned revenues from the enhancement, implementation
and marketing of services to Schroder & Co. Inc. of $342,200.
During the year ended June 30, 1998, SmartServ incurred costs of
services of $1,216,761. Such costs consisted primarily of information and
communication costs ($551,700), personnel costs ($310,600) and computer hardware
leases and maintenance ($339,300). During the year ended June 30, 1997, with
SmartServ's departure from the development stage, it incurred costs of revenues
of $1,133,884. Such costs consisted primarily of information and communication
costs ($390,000), personnel costs ($417,500), computer hardware leases and
maintenance ($201,800) and screenphone purchases ($95,300). Product development
costs were $923,082 vs. $1,150,224 for the year ended June 30, 1997. During the
year ended June 30, 1998, such costs consisted primarily of personnel costs
($541,400) and computer system consultants ($335,000). During the year ended
June 30, 1997 such costs consisted primarily of personnel costs ($686,100) and
computer system consultants ($454,000). Included in personnel costs in 1997 is a
noncash charge of approximately $73,000 for the change in market value of
employee stock options.
During the year ended June 30, 1998, SmartServ incurred selling,
general and administrative expenses of $3,221,940 vs. $2,861,845 for the year
ended June 30, 1997. During the year ended June 30, 1998, such costs were
incurred primarily for personnel costs ($1,349,000), facilities ($216,000),
advertising and marketing costs ($240,400), professional fees ($1,051,400) and
telecommunications costs ($73,100). During the year ended June 30, 1998,
selling, general and administrative costs increased $360,095 from the prior year
as a result of increases in professional fees ($593,000), personnel costs
($403,500) and facilities costs ($55,700). Such increases were offset by a
decrease in advertising and marketing expenses of $600,900. Professional fees
includes a noncash charge of $527,576, representing amortization of deferred
compensation in connection with the issuance of 592,592 common stock purchase
warrants to a financial consultant.
Interest income for the year ended June 30, 1998 amounted to $40,788
vs. $74,507 for the year ended June 30, 1997. Such amounts were earned primarily
from SmartServ's investments in highly liquid commercial paper. Interest and
financing costs for the year ended June 30, 1998 were $592,490. These costs were
incurred in connection with the origination of SmartServ's May 1997 line of
credit. Of such amount, $463,600 represents the noncash charges associated with
the revaluation of certain common stock purchase warrants granted to Zanett
Securities Corporation. Interest and financing costs for the year ended June 30,
1997 were $54,646. Such amounts were incurred in connection with SmartServ's May
1997 line of credit.
Loss per share was $7.65 per share for year ended June 30, 1998 vs.
$7.20 per share for the year ended June 30, 1997. While the net loss increased
$605,527 SmartServ's weighted average shares of common stock outstanding
increased by 43,201 shares, thereby affecting the per share loss.
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CAPITAL RESOURCES AND LIQUIDITY
Since SmartServ's inception on August 20, 1993 through March 21, 1996,
the date of the initial public offering of securities ("IPO"), SmartServ funded
its operations through a combination of private debt and equity financings
totaling $4,160,000 and $12,877,500, respectively.
In May 1997, SmartServ arranged a line of credit facility with Zanett
Lombardier, Ltd. 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, SmartServ issued 56,627 common stock
purchase warrants to Zanett Lombardier, Ltd. Similarly, SmartServ issued 11,438
warrants for each of the July and September amendments. As a result of
SmartServ's default on the note in August 1997, SmartServ was required to issue
50,083 "default" warrants to Zanett Lombardier, Ltd.
In May 1997, SmartServ 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, Zanett Securities Corporation, acting as
placement agent for SmartServ, completed a private placement of $4 million of
its prepaid common stock purchase warrants. As part of the placement, Zanett
Lombardier, Ltd. converted a note payable of $772,222, issued pursuant to the
line of credit facility dated May 29, 1997, as amended, and accrued interest
thereon of $63,837 into prepaid warrants. The net proceeds of the placement of
$2,643,941 were used for general working capital requirements.
On April 23, 1998, SmartServ entered into a Software License and
Service Agreement with DTN, whereby SmartServ licensed to DTN the rights to
market three of SmartServ's Internet products. SmartServ received $850,000 upon
execution of the agreement and received minimum monthly payments of $100,000
through April 1999.
On June 24, 1999, SmartServ and DTN entered into a License Agreement
that amended the Software License and Service Agreement dated April 23, 1998. In
consideration of the receipt of $5.175 million, SmartServ granted DTN an
exclusive perpetual worldwide license to its Internet-based (1) real-time stock
quote product, (2) online trading vehicle for customers of small and medium
sized brokerage companies, (3) administrative reporting package for brokers of
small and medium sized brokerage companies, and (4) order entry/routing system.
Additionally, SmartServ received $324,000 in exchange for an agreement to issue
warrants to purchase 300,000 shares of its common stock at an exercise price of
$8.60 per share. SmartServ has agreed to continue to operate these products and
provide maintenance and enhancement services in exchange for a percentage of the
revenues earned by DTN therefrom. The cost of the SmartServ's commitment to
provide such maintenance and enhancement services is limited to a maximum of 20%
of the revenues earned by SmartServ. If an event of default occurs under the
license agreement, DTN may at its sole cost elect to provide its own maintenance
to both the system software and related hardware. Under these circumstances, DTN
will have the right to own the system software, including the source codes, and
related hardware, and DTN will have no further obligation to pay us licensing
fees which we currently rely on for a significant part of our revenues. None of
SmartServ's wireless products were included in this transaction. Although
SmartServ believes that DTN has the experience and the financial ability to
distribute its services to thousands of potential customers, there can be no
assurance that the products and services will be accepted by the ultimate
consumer on a widespread basis.
On August 11, 1998, SmartServ entered into a letter of intent, as
amended on November 24, 1998, with Spencer Trask Securities, Inc. which provided
for the retention of Spencer Trask to act as exclusive placement agent in
connection with a private placement by SmartServ of a minimum of $5,000,000 and
a maximum of $10,000,000 of securities of SmartServ.
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In anticipation of completing the private placement, SmartServ
completed an interim financing of $550,000 of its securities. SmartServ sold
five and one-half (5.5) units, each consisting of a secured convertible 8% note
in the principal amount of $100,000 and warrants to purchase common stock. The
notes and the warrants are convertible and exercisable, respectively, at $.60
per share of common stock. Such notes were repaid in June 1999.
On July 1, 1999, SmartServ entered into an agreement with Arnhold & S.
Bleichroeder, Inc. to settle SmartServ's obligation to Arnhold & S. Bleichroeder
under the default provisions of the prepaid warrants. In accordance with that
agreement, SmartServ paid Arnhold & S. Bleichroeder $325,000 to redeem the
prepaid warrants and issued 180,000 shares of common stock in full settlement of
all obligations. SmartServ has agreed to file a registration statement with the
Securities and Exchange Commission covering such shares.
SmartServ's financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. SmartServ incurred
net losses of $7,124,126, $5,040,009, and $4,434,482 for the years ended June
30, 1999, 1998 and 1997, respectively. Additionally, we have incurred a net loss
of $315,667 for the three month period ended September 30, 1999. At September
30, 1999, we had an accumulated deficit of $22,261,672 and a deficiency of net
assets of $4,481,321. SmartServ is also a defendant in several legal proceedings
that could have a material adverse effect on its financial position, cash flows
and results of operations. These conditions raise substantial doubt about
SmartServ's ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of these uncertainties.
We estimate that we have sufficient cash resources to fund operations
through April, 2000. If our cash resources prove to be insufficient at that time
we may be required to seek additional debt or equity financing to fund the costs
of continuing operations until we achieve positive cash flow. We have no current
commitments or arrangements for additional financing and there can be no
assurance that any additional debt or equity financing will be available to us
on acceptable terms, or at all.
SmartServ's management believes that upon the successful implementation
of its marketing plan, sufficient revenues will be generated to meet operating
requirements. Management also believes that the successful execution of its
proposed plan of operations will generate sufficient cash flow from operations
to enable SmartServ to offer its services on an economically sound basis. No
assurance can be given that such goals will be obtained or that any expected
revenues or cash flows will be achieved.
YEAR 2000 COMPLIANCE
SmartServ's information services are distributed via a combination of
third party computer hardware and software applications, as well as its designed
application software and communication networks. SmartServ has formed a task
force to assure that its products and services are Year 2000 ("Y2K") compliant.
As part of this process, SmartServ has queried its software vendors and third
party information providers and has updated certain hardware, third party
software and/or received letters of compliance from such third party information
providers. In addition, SmartServ has reviewed and modified its proprietary
application software for compliance.
SmartServ is working diligently to ensure that all systems are Y2K
compliant and believes that its greatest risks would be the partial inability of
its systems to deliver accurate data caused by certain information vendors'
inability to supply Y2K compliant data. The inability of SmartServ's systems to
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process non-Y2K compliant data could result in a substantial decline in both new
and existing customer subscriptions to its products. This would have a material
adverse effect on SmartServ's financial condition, results of operations, and
ability to continue as a going concern. SmartServ believes that the probability
of this occurrence is minimal as SmartServ is currently receiving and processing
Y2K data from its critical information providers.
BUSINESS
THE COMPANY
SmartServ Online, Inc. was organized in 1993. We deliver Internet-based
content and trade order routing solutions, as well as "Web-to-Wireless"
applications designed to facilitate transactions. We have developed online
financial, transactional and media applications using a unique
"device-independent" delivery solution. We have demonstrated ability in
developing applications utilizing the wireless application protocol (WAP)
towards enabling information and transactions on wireless telephones and
personal digital assistants.
SERVICES
Recognizing the call for mobility, we have developed an infrastructure
to integrate and deliver our Internet-based information and to effectuate
e-commerce transactions on wireless networks and devices. We are well positioned
to provide Web-based information and transaction applications and solutions for
Strategic Marketing Partners such as financial institutions, wireless carriers,
device manufacturers and value-added service providers and retailers. Our core
competency focuses on providing financial news and reports -- including
real-time stock quotes -- with the goal of facilitating online and wireless
stock trading and other transactions. To complement our financial offerings, we
also provide a host of personalized information services from local news, sports
and weather to traffic and entertainment services that can be accessed on demand
or as an alert. We plan to build a database of client interests and preferences
towards future e-commerce offerings. We are not dependent on one or a few
information providers as such redistribution agreements are generally available
on a non-exclusive basis.
We have invested in the development of a transaction engine and a
proprietary application software and communications architecture in an attempt
to make our services easy to use and visually appealing and to take advantage of
the different virtues and capabilities of established and emerging devices
capable of interacting with Web-based and Web-to-Wireless applications. We
believe that our application software and communications architecture, which
recognize multiple devices, format the information for the particular device and
present the information in a user-friendly manner, will be attractive in the
marketplace. Product development efforts are focused on providing enhancements
to the current information and transaction services, format modifications for
emerging devices, content and features improvements and customizations based on
market requirements. We intend to continue to invest in this area and believe
our transaction engine, application software and communications architecture
represent an important competitive advantage.
MARKETING STRATEGY
We believe our primary source of revenues will ultimately be derived
from the sale of our information and transactional application services through
Strategic Marketing Partners utilizing a "business-to-business" strategy.
Strategic Marketing Partners will brand our "bundled" services, acquired from
our "information platform" with their own private label, promote the packaged
offering, and then distribute our information and e-commerce services to their
clients. Additionally, our e-commerce platform will enable our Strategic
Marketing Partners to offer transaction services via the Internet and wireless
networks. Our strategy of forming alliances with Strategic Marketing Partners
enables us to maximize our market reach at
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minimal operating costs, improve product and services performance and grow
distribution channels to end-users.
In May 1998, we licensed to DTN the rights to market and service three
of our Internet products. DTN, which has over 150,000 subscribers for its
satellite-based information services, lacked an Internet-based product and
delivery system. We filled that need. In June 1999, we entered into an agreement
with DTN that expanded our relationship. In consideration of the receipt of
$5.175 million, we granted DTN an exclusive perpetual worldwide license to our
Internet-based (1) real-time stock quote product, (2) online trading vehicle for
customers of small and medium sized brokerage companies, (3) administrative
reporting package for brokers of small and medium sized brokerage companies, and
(4) order entry/routing system. We will continue to operate and support these
products in exchange for a percentage of the revenues earned by DTN therefrom.
None of our wireless products were included in this transaction. During the year
ended June 30, 1998, we discontinued our efforts to sell products directly to
the retail market via our own marketing programs.
As an early entrant in the dynamic market of distribution of financial
information and transaction services via wireless telephones and personal
digital assistants, we are developing strategic marketing relationships with the
wireless equipment manufacturers, carriers, other value-added service providers
and potential corporate partners. We continuously seek to increase product
performance and widen our distribution by building and maintaining this network
of Strategic Marketing Partners. Combining our application development and data
platform with the core competencies of our Strategic Marketing Partners we are
offering a packaged turnkey solution for extending content and transactions to
the wireless environment. Management believes the wireless area has tremendous
potential for distribution of our information products and as a source of
revenues from "fee based" transactions such as routing stock order entries and
other e-commerce offerings.
The market for wireless services is exploding alongside the market for
Internet access, and Management believes that these markets are about to
converge. The majority of wireless data penetration will result from the
distribution of telephones and other PCS devices equipped with wireless modems
and Web browsers for accessing the Internet. Our data and communication
architecture adds user functionality and utility to both wired and wireless
technology. With our Web-server platform, application development and strategic
alliances, we have the competitive advantage of providing complete end-to-end
solutions.
While we continue to have discussions about potential marketing
opportunities with major equipment manufacturers, telecommunications and stock
brokerage companies, there can be no assurance that we will enter into
agreements with any such companies.
COMPETITION
The market for Web-based information and transactional services is
highly competitive and subject to rapid innovation and technological change,
shifting consumer preferences and frequent new service introductions. While our
application software and communications architecture makes the services "device
independent", we face increasing competition from other emerging services
delivered through personal computers and wireless devices, such as developing
transactional services offered by Checkfree Corporation, Microsoft Corporation,
Data Broadcasting Corporation, PC Quote.com, Hyperfeed Technologies, Inc.,
Intuit Inc., Electronic Data Systems Corp. and other Web-based software
companies. Established online information services including those offered by
America Online, Inc., CompuServe and Prodigy offer competing services delivered
through personal computers. Although in its infancy, the wireless arena too has
its competitors, such as DataLink Systems Corporation, Intelligent Information,
Inc., Aether Systems, Inc. (a/k/a Aether Technologies), Saraide.com Inc. and
W-Trade Technologies, Inc. We expect competition to increase from existing
competitors and from new competitors, possibly including telecommunications
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companies. Most of our competitors and potential competitors have substantially
greater financial, marketing and technical resources than we have. We believe
that potential new competitors, including large multimedia and information
system companies, are increasing their focus on transaction processing.
Increased competition in the market for our services could materially and
adversely affect our results of operations through price reductions and loss of
market share.
The information content provided through our application software and
communication architecture is generally purchased through non-exclusive
distribution agreements. While we are not dependent on any one content provider,
existing and potential competitors may enter into agreements with these and
other such providers and thereby acquire the ability to deliver online
information and transactional services substantially similar to those provided
us.
The principal competitive factors in both the online and wireless
industries include content, product features and quality, ease of use, access to
distribution channels, brand recognition, reliability and price. Our strategy of
establishing alliances with potential Strategic Marketing Partners and our
ability to provide what we believe to be unique application software and
communications should enable us to compete effectively.
SOFTWARE
We have developed an application software and communications
architecture that we believe makes our services easy to use and visually
appealing, and which maximize the capabilities of various devices.
Our user-friendly front-end application software provides instant
access to information and flexibility to the varying needs of multiple users.
Subscribers are empowered to create their own groupings of information they
routinely request and are able to navigate directly to the information they seek
with the software's easy to read menu systems and search capabilities. Our
transaction engine has been designed to facilitate various forms of e-commerce.
Our application software employs common user interface techniques, such as
icons, pull-down menus, spreadsheet formats, tree structures and the use of
"key" words, to make our product intuitive to our users. Our software is notable
for its visually appealing formats, which it has standardized across different
types of information. Subscribers are provided with several display options,
including text and graphics, according to their preferences.
During the fiscal years ended June 30, 1999, 1998 and 1997, we incurred
costs of $193,188, $923,082 and $1,150,224, respectively, for research and
project development activities. Additionally, during the fiscal year ended June
30, 1999, we capitalized software development costs amounting to $765,000; no
such costs were capitalized in either of the years ended June 30, 1998 or 1997.
PROPRIETARY RIGHTS
We have designed and developed our own "device independent" information
and transaction platform, "SmartServ", based on Sun Microsystems, Inc. computers
and Oracle Corp.'s version 7.X relational database manager, to support a variety
of end user devices. This platform formats information and the services'
interface for a particular device and presents it in a user friendly manner. We
rely upon a combination of contract provisions and copyrights, trade secret laws
and a service mark to attempt to protect our proprietary rights. We license the
use of our services to Strategic Marketing Partners under agreements that
contain terms and conditions prohibiting the unauthorized reproduction of our
software and services. Although we intend to protect our rights vigorously,
there can be no assurance that any of the foregoing measures will be successful.
We granted DTN an exclusive perpetual worldwide license to our
Internet-based (1) real-time stock quote product, (2) online trading vehicle for
customers of small and medium sized brokerage companies, (3)
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administrative reporting package for brokers of small and medium sized brokerage
companies, and (4) order entry/routing system. Under the license agreement, we
are required to maintain certain systems' performance standards and to satisfy
other general business requirements. Our inability to maintain compliance with
the license agreement could result in a default thereunder. In addition, a
change of control of SmartServ is an event of default under the license
agreement. A change of control includes a change in the majority of the members
on our board of directors. Under a letter agreement with Zanett Capital, Inc.,
Zanett Capital may elect a majority of the board under certain circumstances,
including the failure of our common stock to be listed on Nasdaq. Moreover,
Zanett Securities Corporation and Zanett Lombardier, Ltd. and its affiliates own
shares of common stock and warrants to purchase common stock, which, if
exercised, would equal approximately 63.5% of our common stock which would be
outstanding after the exercise of such warrants, giving them the potential to
effect a change of control of SmartServ.
If an event of default occurs under the license agreement, DTN may at
its sole cost elect to provide its own maintenance to both the system software
and related hardware. Under these circumstances, DTN will have the right to own
the system software, including the source codes, and related hardware, and DTN
will have no further obligation to pay us licensing fees which we currently rely
on for a significant part of our revenues.
We believe that our software, services, service mark and other
proprietary rights do not infringe on the proprietary rights of third parties.
However, there can be no assurance that third parties will not assert
infringement claims against us with respect to current features, content or
services or that any such assertion may not require us to enter into royalty
arrangements or result in litigation.
GOVERNMENT REGULATION
We are not currently subject to direct regulation other than federal
and state regulation generally applicable to businesses. However, changes in the
regulatory environment relating to the telecommunications and media industry
could have an effect on our business, including regulatory changes which
directly or indirectly affect telecommunication costs or increase the likelihood
or scope of competition from regional telephone companies. Additionally,
legislative proposals from international, federal and state governmental bodies
in the areas of content regulation, intellectual property and privacy rights, as
well as federal and state tax issues could impose additional regulations and
obligations upon all online service providers. We cannot predict the likelihood
that any such legislation will pass, or the financial impact, if any, the
resulting regulation or taxation may have.
Moreover, the applicability to online service providers of existing
laws governing issues such as intellectual property ownership, libel and
personal privacy is uncertain. The use of the Internet for illegal activities
and the dissemination of pornography have increased public focus and could lead
to increased pressure on legislatures to impose regulations on online service
providers such as ourselves. The law relating to the liability of online service
companies for information carried on or disseminated through their systems is
currently unsettled. If an action were to be initiated against us, the costs
incurred as a result of such action could have a material adverse effect on our
business.
EMPLOYEES
We employ 21 people, 19 of whom are full-time employees. We anticipate
that staffing requirements associated with the implementation of our plan of
operation will result in the addition of a minimum of six to ten people during
the period ending June 30, 2000. Such personnel will be added to assist with the
programming requirements of Strategic Marketing Partners' product offerings, for
customer support and sales and marketing. None of our employees are covered by a
collective bargaining agreement, and we believe that our relationship with our
employees is satisfactory.
-19-
<PAGE>
DESCRIPTION OF PROPERTY
We occupy approximately 6,300 square feet in a leased facility located
in Stamford, Connecticut. The lease expires in October 2002.
LEGAL PROCEEDINGS
By letter dated April 10, 1998, Michael Fishman, then our Vice
President of Sales resigned his position. On or about April 24, 1998, Mr.
Fishman filed a complaint against us, Sebastian E. Cassetta and four other
defendants in the United States District Court for the District of Connecticut.
The complaint asserted claims under Sections 10(b) and 18 of the Securities
Exchange Act of 1934, as well as several state law claims, including breach of
contract, fraud and misrepresentation. Mr. Fishman alleged that we (1) failed to
pay him the benefits and compensation to which he was entitled and (2) made
material misrepresentations in our filings with the Securities and Exchange
Commission. On December 11, 1998, the Court granted our motion to dismiss Mr.
Fishman's action without prejudice to the plaintiff to seek leave to file an
amended complaint within 30 days. On May 12, 1999, the Court denied the
plaintiff's subsequent motion for leave to file a substituted complaint on the
basis that the federal securities law claim, the only federal claim alleged by
the plaintiff, was still deficient. Accordingly, the federal securities claim
was dismissed with prejudice. On or about June 4, 1999, Mr. Fishman commenced an
action against the same defendants and added as a seventh defendant, our former
President, Steven Francesco, in the Connecticut Superior Court for the Judicial
District of Stamford/Norwalk at Stamford alleging breach of contract, breach of
duty of good faith and fair dealing, fraudulent misrepresentation, negligent
misrepresentation, intentional misrepresentation and failure to pay wages. The
defendants have answered the complaint and filed counterclaims for fraudulent
inducement and breach of contract. Plaintiff has responded to the counter-claim,
and discovery is proceeding. Although we are vigorously defending this action,
there can be no assurance that it will be successful.
By memorandum dated April 10, 1998, Jonathan Paschkes, then our Vice
President of Marketing resigned his position. On or about November 17, 1998, Mr.
Paschkes filed a complaint against us and Sebastian E. Cassetta in the United
States District Court, District of Connecticut. In the complaint, Mr. Paschkes
alleges (1) fraudulent inducement to him to accept his position with us; (2)
breach of various terms of our employment contract with him; and (3) failure by
us to pay him wages and bonuses and issue options to him pursuant to the terms
of his employment contract. On or about February 18, 1999, Mr. Paschkes filed an
amended complaint. We answered the amended complaint and asserted counterclaims
against Mr. Paschkes for fraudulent inducement, breach of contract, conversion
and statutory theft. On October 5, 1999, an agreement in principle was reached
between Mr. Paschkes and us in full settlement of these claims. We have executed
a settlement agreement with Mr. Paschkes and have filed a Stipulation of
Dismissal with prejudice.
On or about May 11, 1998, Ronald G. Weiner filed a complaint against
Mr. Francesco and us in the Supreme Court of the State of New York, County of
New York. The complaint alleges, among other things, that in May 1993, by letter
from Mr. Francesco, Mr. Weiner was offered a 10% equity stake in Smart Phone
Services, Inc. ("SPS"), a Subchapter S company of which Mr. Francesco allegedly
was the President and sole shareholder, in exchange for his active involvement
in, among other things, raising capital and managing the financial aspects of
SPS. The complaint alleges that, in November 1993, Mr. Francesco sent a letter
to Mr. Weiner in which he (1) represented that SPS had failed to attract a
single investor and (2) withdrew his offer to Mr. Weiner of a 10% equity
position in SPS. The complaint further alleges that, in conversations with Mr.
Weiner beginning in November 1993, Mr. Francesco represented that he was ceasing
all efforts to capitalize SPS. The complaint alleges, among other things, that
Mr. Francesco and SPS breached their agreement with Mr. Weiner by withdrawing
their offer to him of a 10% equity stake in SPS, and that, at the time Mr.
Francesco represented that he was ceasing efforts to capitalize SPS, he had
actually formed SmartServ and
-20-
<PAGE>
was actively seeking investors for it. The complaint further alleges that we are
a successor entity to SPS and that, therefore, we are liable for SPS' and Mr.
Francesco's alleged conduct in derogation of their alleged agreement with Mr.
Weiner. The complaint seeks, among other things, (1) a declaratory judgment
declaring Mr. Weiner a 10% equity shareholder of the Company, (2) a constructive
trust in Mr. Weiner's favor for 10% of our equity shares and (3) restitution
against Mr. Francesco and us for unjust enrichment. On his unjust enrichment
claim, Mr. Weiner seeks unspecified damages that he alleges to be at least
$250,000. In our answer to the complaint, we denied the material allegations of
the complaint and asserted affirmative defenses. No discovery in this action has
yet been taken. Although we are vigorously defending this action there can be no
assurance that we will be successful.
While we intend to vigorously defend these actions, the unfavorable
outcome of any such action could have a material adverse effect on our financial
condition, results of operations, and cash flows.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to the
executive officers and directors of SmartServ Online, Inc.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Sebastian E. Cassetta 51 Chief Executive Officer, Chairman of the Board, Secretary and Class
III Director
Mario F. Rossi 61 Vice President of Operations and Class II Director
Thomas W. Haller, CPA 45 Vice President, Treasurer and Chief Financial Officer
Claudio Guazzoni (3) 36 Class I Director
L. Scott Perry (2) 51 Class I Director
Robert Steele (1) (3) 60 Class II Director
Catherine Cassel Talmadge (2) (3) 47 Class I Director
Charles R. Wood (1) 58 Class III Director
</TABLE>
- ---------------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Member of the Finance Committeee
SEBASTIAN E. CASSETTA has been Chief Executive Officer, Chairman of the
Board, Secretary and a director of SmartServ since its inception. Mr. Cassetta
was also SmartServ's Treasurer from its inception until March 1996. From June
1987 to August 1992, Mr. Cassetta was the President of Burns and Roe Securacom
Inc., an engineering and large-scale systems integration firm. He is also a
former Director, Managing Director and Vice President of Brinks Inc. At Brinks,
he expanded international operations in over 15 countries and became the
youngest person to be appointed Vice President in Brinks' 140 year history.
Appointed by President Reagan and Department of Commerce Secretary Malcolm
Baldridge, he served on both the U.S. Export Council and The Industry Sector
Advisory Committee (ISAC) regarding GATT negotiations. He is a former member of
the Board of Directors of The Young President's Organization and the former
Chairman of the New York Chapter.
MARIO F. ROSSI has been Vice President of Operations of SmartServ since
December 1994 and was appointed a director on February 23, 1998. Mr. Rossi has
business and operational management experience
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<PAGE>
in the computer, telecommunications and securities fields. He has an extensive
background in product development, operations and technical marketing. Prior to
joining SmartServ, Mr. Rossi was Vice President of Operations for MVS Inc., a
fiber optic company specializing in wireless technology. He also worked 17 years
for Philips Medical Systems, in both the U.S. and the Netherlands, directing the
development - from feasibility to production - of several computer-based medical
devices. He received a Bachelors Degree in Engineering and earned a Masters
Degree from Polytechnic Institute of Brooklyn.
THOMAS W. HALLER, CPA joined SmartServ as Vice President, Treasurer and
Chief Financial Officer in March 1996. From December 1992 to March 1996, Mr.
Haller was a Senior Manager at Kaufman Greenhut Forman, LLP, a public accounting
firm in New York City, where he was responsible for technical advisory services
and the firm's quality assurance program. Prior thereto, he was a Senior Manager
with Ernst & Young LLP, an international public accounting and consulting firm,
where he had responsibility for client services and new business development in
the firm's financial services practice.
CLAUDIO GUAZZONI became a director of SmartServ on January 11, 1998.
Since 1993, Mr. Guazzoni has been President of The Zanett Securities Corporation
and Zanett Capital, Inc. providing financial and strategic consulting services
to growth companies. Prior to joining the Zanett organization, Mr. Guazzoni was
a Money Manager with Delphi Capital Management, Inc. (1992) and an associate
with Salomon Brothers, Inc. from 1985 to 1991.
L. SCOTT PERRY has been a director of SmartServ since November 1996.
Since June 1998, Mr. Perry has been Vice President, Strategy & Alliances - AT&T
Solutions. From December 1995 to June 1998, Mr. Perry had been Vice President,
Advanced Platform Services of AT&T Corp. From January 1989 to December 1995, Mr.
Perry held various positions with AT&T including Vice President -- Business
Multimedia Services, Vice President (East) -- Business Communications Services
and Vice President -- Marketing, Strategy and Technical Support for AT&T Data
Systems Group. Mr. Perry serves on the Board of Directors of Junior Achievement
of New York, is a member of the Cornell University Engineering College Advisory
Council and serves on the Board of INEA, a private financial planning software
company based in Toronto, Canada.
ROBERT STEELE was appointed a director of SmartServ on February 23,
1998. Since February 1998, Mr. Steele has been Vice Chairman of the John Ryan
Company, an international bank support and marketing company. From 1992 to
February 1998, Mr. Steele was a Senior Vice President of the John Ryan Company.
Mr. Steele is the former President of Dollar Dry Dock Bank and a member of the
Board of Directors of Moore Medical Corp., Scan Optics, Inc. Accent Color
Sciences, Inc., NLC Insurance Companies, Inc., and the New York Mercantile
Exchange.
CATHERINE CASSEL TALMADGE has been a director of SmartServ since March
1996. Since May 1999, Ms. Talmadge has been Senior Vice President of Business
Development for High Speed Access Corporation. From September 1984 to May 1999,
she held various positions with Time Warner Cable, a division of Time Warner
Entertainment Company, L.P., including Vice President, Cable Programming;
Director, Programming Development; Director, Operations; Director, Financial
Analyses; and Manager, Budget Department.
CHARLES R. WOOD was appointed a director of SmartServ in September 1998.
Mr. Wood has been Senior Vice President of DTN since 1989 and President of its
Financial Services Division since 1996.
-22-
<PAGE>
BOARD OF DIRECTORS
The Board of Directors consists of seven directors divided into three
classes: Class I Directors, Class II Directors and Class III Directors. The
Class I and Class III Directors will serve until the 1999 annual meeting and the
Class II Directors will serve until the 2000 annual meeting or, in each case,
until their respective successors are duly elected and qualified or until their
earlier resignation or removal. Upon such annual meetings of stockholders, the
Class III Directors will serve until the annual meeting of SmartServ's
stockholders to be held in 2001, the Class I Directors will serve until the
annual meeting of SmartServ's stockholders to be held in 2002 and the Class II
Directors will serve until the annual meeting of SmartServ's stockholders to be
held in 2003. Directors of each Class are elected for a full term of three years
(or any lesser period representing the balance of the previous term of such
Class) and until their respective successors are duly elected and qualified or
until their earlier resignation or removal. Officers are appointed annually and
serve at the discretion of the Board for one year. As a result of the delisting
of SmartServ's common stock, Zanett Capital has the right to elect a majority of
the Board of Directors. Mr. Cassetta serves as Chief Executive Officer, Chairman
of the Board, and Secretary of SmartServ pursuant to an employment agreement.
Mr. Rossi serves as Vice President pursuant to an employment agreement.
BOARD COMMITTEES
The Compensation Committee, currently composed of Messrs. Wood and
Steele, has authority over officer compensation and administers our Amended and
Restated Stock Option Plan.
The Audit Committee, currently composed of Mr. Perry and Ms. Talmadge,
serves as the Board's liaison with our auditors.
The Finance Committee, currently composed of Mr. Guazzoni, Mr. Steele
and Ms. Talmadge, reviews expenditures of SmartServ.
COMPENSATION OF DIRECTORS
Each director who is not an officer or employee of SmartServ is
reimbursed for his or her out-of-pocket expenses incurred in connection with
attendance at meetings or other company business. Commencing December 29, 1998,
each non-employee director receives a $1,000 fee for each meeting he or she
attends during the year.
Between November 4, 1996 and April 24, 1998, each person who was not a
salaried employee of SmartServ was granted, on the date he or she became a
director, an option to purchase 5,000 shares of common stock and immediately
following each annual meeting of stockholders at which directors were elected,
each such person elected to serve as a director at that annual meeting or who
remained a director following that annual meeting was granted an option to
purchase 5,000 shares of common stock. Subsequent to April 24, 1998, the
Compensation Committee has had the discretionary authority to grant options to
non-employee directors. Pursuant to such authority, on December 28, 1998 it
granted options to purchase 10,000 shares of common stock at a price of $2.35 to
each non-employee director. The exercise price of each share of common stock
under any option granted to a director was equal to the fair market value of a
share of common stock on the date the option was granted.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning annual and
long-term compensation, paid or accrued, for the Chief Executive Officer and for
each other executive officer (the "Named Executive Officers") of SmartServ whose
compensation exceeded $100,000 in fiscal 1999 for services in all capacities to
SmartServ during the last three fiscal years.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-----------------------------------------------------------------------------------
RESTRICTED SECURITIES
NAME AND PRINCIPAL FISCAL OTHER ANNUAL STOCK AWARDS UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION (1) (2) OPTIONS COMPENSATION
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sebastian E. Cassetta 1999 $ 155,000 $ 5,414 $ 9,750 $ 185,471(3) 92,000 (5) $24,416(8)
Chief Executive 1998 125,000 -- 9,750 -- 37,500 (6) -- (9)
Officer 1997 125,000 -- 9,750 -- 16,666 (6) -- (9)
Mario F. Rossi 1999 122,500 3,249 6,000 61,824(4) 67,500 (7) -- (9)
Vice President 1998 92,400 -- 6,000 -- 20,834 (6) -- (9)
of Operations 1997 75,000 -- 6,000 -- 4,416 (6) -- (9)
</TABLE>
(1) Amounts shown consist of a non-accountable expense allowance.
(2) The Named Executive Officers did not receive any LTIP Payouts in 1999,
1998 or 1997.
(3) On December 29, 1998, the Board of Directors approved the sale to Mr.
Cassetta of 618,239 shares of restricted stock representing 9% of the
fully diluted shares of common stock of SmartServ. Compensation has been
determined as the number of shares awarded to Mr. Cassetta times the
closing price of SmartServ's common stock on December 29, 1998 ($2.50)
less the consideration to be paid by Mr. Cassetta. At June 30, 1999,
based upon the closing bid price ($1.50) of SmartServ's common stock,
the value of Mr. Cassetta's shares was $0. On October 13, 1999, the
Board of Directors agreed to reprice the shares granted to Mr. Cassetta
to $.75 per share, the fair value of the shares at that date.
(4) On December 29, 1998, the Board of Directors approved the sale to Mr.
Rossi of 206,080 shares of restricted stock representing 3% of the fully
diluted shares of common stock of SmartServ. Compensation has been
determined as the number of shares awarded to Mr. Rossi times the
closing price of SmartServ's common stock on December 29, 1998 ($2.50)
less the consideration to be paid by Mr. Rossi. At June 30, 1999, based
upon the closing bid price ($1.50) of SmartServ's common stock, the
value of Mr. Rossi's shares was $0. On October 13, 1999, the Board of
Directors agreed to reprice the shares granted to Mr. Rossi to $.75 per
share, the fair value of the shares at that date.
(5) Includes options for the purchase of 37,500 shares which were cancelled
when repriced options to purchase a like number of shares were granted
in lieu thereof.
(6) Such options were cancelled when repriced options were granted in lieu
thereof in fiscal 1999.
(7) Includes options for the purchase of 25,250 shares which were cancelled
when repriced options to purchase a like number of shares were granted
in lieu thereof.
(8) Amounts represent premiums paid by SmartServ for life and disability
insurance for the benefit of Mr. Cassetta.
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<PAGE>
(9) The aggregate amount of personal benefits not included in the Summary
Compensation Table does not exceed the lesser of either $50,000 or 10%
of the total annual salary and bonus paid to the Named Executive
Officers.
STOCK OPTIONS
The following table sets forth information with respect to stock
options granted to the Named Executive Officers during fiscal year 1999:
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL 1999
(INDIVIDUAL GRANTS) (1)
--------------------------
NUMBER OF % OF TOTAL OPTIONS
SECURITIES UNDERLYING GRANTED TO EMPLOYEES IN EXERCISE EXPIRATION
NAME OPTIONS GRANTED FISCAL 1999 PRICE DATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sebastian E. Cassetta 17,000 3.66% $ 1.625 11/19/08
37,500 8.08 1.290 10/07/08
37,500 (2) 8.08 2.530 8/06/08
Mario F. Rossi 17,000 3.66 1.625 11/19/08
25,250 5.44 1.290 10/07/08
25,250 (2) 5.44 2.530 8/06/08
</TABLE>
(1) No stock appreciation rights ("SARs") were granted to the Named
Executive Officers during fiscal 1999.
(2) Cancelled on October 8, 1998.
The following table sets forth information as to the number of unexercised
shares of common stock underlying stock options and the value of unexercised
in-the-money stock options at fiscal year end:
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year End Option Value (1)
---------------------------------------------------
Value of
Number of Unexercised In-
Unexercised The-Money
Securities Options at
Underlying Options Fiscal Year
at Fiscal Year End End
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sebastian E. Cassetta -- -- 0/54,499 $0/$7,874
Mario F. Rossi -- -- 0/42,249 $0/$5,302
</TABLE>
(1) No SARs were granted to, or exercised by, the Named Executive Officers
during fiscal 1999.
(2) Value is based on the closing bid price of SmartServ's common stock as
reported by the OTC Bulletin Board on June 30, 1999 ($1.50) less the
exercise price of the option.
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<PAGE>
EMPLOYMENT AGREEMENTS
SmartServ and Mr. Cassetta have entered into an employment agreement
("Cassetta Agreement"), effective January 1, 1999 and expiring on December 31,
2001, providing for (1) base compensation of $185,000 per annum, (2) additional
compensation of up to 100% of base compensation, (3) continuation of existing
life and disability insurance policies, (4) all benefits available to other
employees and (5) the sale to him of 618,239 shares of restricted stock
representing 9% of the fully diluted shares of common stock of SmartServ. Mr.
Cassetta's additional compensation will be equal to 10% of his base compensation
for each 10% increase in sales during the first year of the Cassetta Agreement,
subject to a maximum of 100% of base compensation. In each subsequent year of
the Cassetta Agreement, Mr. Cassetta will receive additional compensation equal
to 5% of his base compensation for each 5% increase in sales, subject again to a
maximum of 100% of base compensation. The purchase price ($2.20 per share) of
the restricted stock is equal to 110% of the fair market value of SmartServ's
common stock for the 30 days preceding the date of the stock purchase agreement
("Cassetta Stock Purchase Agreement") contemplated by the Cassetta Agreement.
The purchase price will be paid with a 5 year, non-recourse promissory note,
secured by the stock, at an interest rate of 6.75%, which is 1% below the prime
rate on the date of the Cassetta Stock Purchase Agreement. The Cassetta Stock
Purchase Agreement provides SmartServ with certain repurchase options and
provides Mr. Cassetta with a put option in the event of the termination of his
employment. In the event that Mr. Cassetta's employment is terminated without
cause, Mr. Cassetta will receive a lump sum severance payment equal to his full
base salary for the remaining term of the Cassetta Agreement, discounted to the
present value using an 8% discount rate and continuing benefit coverage for the
lesser of 12 months or the remaining term of the Cassetta Agreement. On October
13, 1999, the Board of Directors agreed to reprice the shares granted to Mr.
Cassetta to $.75 per share, the fair market value of the shares at that date.
SmartServ and Mr. Rossi have entered into an employment agreement
("Rossi Agreement"), effective January 1, 1999 and expiring on December 31,
2001, providing for (1) base compensation of $135,000 per annum, (2) additional
compensation of up to 50% of base compensation, (3) continuation of existing
life and disability insurance policies, (4) all benefits available to other
employees and (5) the sale to him of 206,080 shares of restricted stock
representing 3% of the fully diluted shares of common stock of SmartServ. Mr.
Rossi's additional compensation will be equal to 5% of his base compensation for
each 10% increase in sales during the first year of the Rossi Agreement, subject
to a maximum of 50% of base compensation. In each subsequent year of the Rossi
Agreement, Mr. Rossi will receive additional compensation equal to 2.5% of base
compensation for each 5% increase in sales, subject again to a maximum of 50% of
base compensation. The purchase price ($2.20 per share) of the restricted stock
is equal to 110% of the fair market value for the 30 days preceding the date of
the stock purchase agreement ("Rossi Stock Purchase Agreement") contemplated by
the Rossi Agreement. The purchase price will be paid with a 5 year, non-recourse
promissory note, secured by the stock, at an interest rate of 6.75%, which is 1%
below the prime rate on the date of the Rossi Stock Purchase Agreement. The
Rossi Stock Purchase Agreement provides SmartServ with certain repurchase
options and provides Mr. Rossi with a put option in the event of the termination
of his employment. In the event that Mr. Rossi's employment is terminated
without cause, Mr. Rossi will receive a lump sum severance payment equal to his
full base salary for the remaining term of the Rossi Agreement, discounted to
the present value using an 8% discount rate and continuing benefit coverage for
the lesser of 12 months or the remaining term of the Rossi Agreement. On October
13, 1999, the Board of Directors agreed to reprice the shares granted to Mr.
Rossi to $.75 per share, the fair market value of the shares at that date.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of November 15, 1999, certain
information with respect to the beneficial ownership of the common stock by (1)
each person known by SmartServ to beneficially own more than 5% of the
outstanding shares, (2) each director of SmartServ, (3) each Named Executive
Officer and (4) all executive officers and directors of SmartServ as a group.
Except as otherwise indicated, each person listed below has sole voting and
investment power with respect to the shares of common stock set forth opposite
such person's name.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP (2) OUTSTANDING SHARES (3)
-------------------- ------------------------ ----------------------
<S> <C> <C>
Kevin Kimberlin Partners, LP 450,000 (4) 23.87%
c/o Spencer Trask Securities, Inc.
535 Madison Avenue
New York, New York 10022
Sebastian E. Cassetta 295,875 (5) 17.71%
c/o SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902
Data Transmission Network Corporation 303,000 (6) 17.43%
9110 West Dodge Road
Omaha, Nebraska 68114
Spencer Trask Securities, Inc. 233,333 (7) 13.98%
535 Madison Avenue
New York, New York 10022
Arnhold & S. Bleichroeder, Inc. 196,470 13.69%
1345 Avenue of the Americas
New York, New York 10105
Steven Rosner 207,500 (8) 12.63%
1220 Mirabeau Lane
Gladwyn, Pennsylvania 19035
Steven T. Francesco 159,241 (9) 10.97%
23 Lakeview Avenue
New Canaan, Connecticut 06840
Steven Harrington 104,167 (10) 6.77%
GSB Building
One Belmont Avenue, Suite 417
Bala Cynwyd, Pennsylvania 19004
Mario F. Rossi 90,498 (11) 5.93%
c/o SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902
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<PAGE>
Claudio Guazzoni 73,729 (12) 4.99%
Charles R. Wood 18,874 (13) 1.30%
L. Scott Perry 15,833 (14) 1.09%
Catherine Cassel Talmadge 15,416 (14) 1.06%
Robert H. Steele 14,166 (15) *
All executive officers and directors
as a group (8 persons) 541,222 (16) 28.85%
</TABLE>
* Less than 1%
(1) Under the rules of the Securities and Exchange Commission (SEC), addresses
are only given for holders of 5% or more of the outstanding common stock of
SmartServ.
(2) Under the rules of the SEC, a person is deemed to be the beneficial owner
of a security if such person has or shares the power to vote or direct the
voting of such security or the power to dispose or direct the disposition
of such security. A person is also deemed to be a beneficial owner of any
securities if that person has the right to acquire beneficial ownership
within 60 days of the date hereof. Unless otherwise indicated by footnote,
the named entities or individuals have sole voting and investment power
with respect to the shares of common stock beneficially owned.
(3) Represents the number of shares of common stock beneficially owned as of
November 15, 1999 by each named person or group, expressed as a percentage
of the sum of all of the shares of such class outstanding as of such date
and the number of shares not outstanding, but beneficially owned by such
named person or group.
(4) Represents 450,000 shares of common stock subject to currently exercisable
warrants.
(5) Includes 27,249 shares of common stock subject to currently exercisable
options and 205,873 shares of common stock issuable pursuant to a
restricted stock purchase agreement between SmartServ and Mr. Cassetta.
Also includes 2,051 shares held in trust for the benefit of Mr. Cassetta's
wife.
(6) Represents 303,000 shares of common stock subject to currently exercisable
warrants.
(7) Represents 233,333 shares of common stock subject to currently exercisable
warrants.
(8) Represents 207,500 shares of common stock subject to currently exercisable
warrants.
(9) Includes 16,667 shares of common stock subject to currently exercisable
warrants.
(10) Represents 104,167 shares of common stock subject to currently exercisable
warrants.
(11) Includes 21,124 shares of common stock subject to currently exercisable
options and 68,624 shares of common stock issuable pursuant to a restricted
stock purchase agreement between SmartServ and Mr. Rossi.
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<PAGE>
(12) Includes 14,166 shares of common stock subject to currently exercisable
options. Also includes 32,953 shares of common stock owned by Zanett and
26,610 shares of common stock subject to currently exercisable warrants
owned by Zanett. Mr. Guazzoni disclaims beneficial ownership of these
shares to the extent they exceed his interest in Zanett. Mr. Guazzoni is a
managing director and principal of Zanett.
(13) Includes 14,500 shares of common stock subject to currently exercisable
options. Does not include 303,000 shares beneficially owned by DTN of which
Mr. Wood is an officer. Mr. Wood disclaims beneficial ownership of these
shares.
(14) Includes 15,000 shares of common stock subject to currently exercisable
options.
(15) Includes 14,166 shares of common stock subject to currently exercisable
options.
(16) Includes 32,953 shares of common stock owned by Zanett and 26,610 shares of
common stock subject to currently exercisable warrants owned by Zanett,
274,497 shares of common stock issuable pursuant to restricted stock
purchase agreements, 2,051 shares held in trust for the benefit of Mr.
Cassetta's wife and 137,370 shares of common stock subject to currently
exercisable options issued to all officers and directors.
CHANGES IN CONTROL
SmartServ and each of Messrs. Cassetta and Francesco have entered into
an agreement with Zanett Capital, Inc. dated September 29, 1997, as subsequently
amended, which provides, among other things, that for a period of 5 years, upon
an event of default under the prepaid warrants, SmartServ will, at the request
of Zanett Capital, Inc., appoint such number of designees of Zanett Capital,
Inc. to its Board of Directors so that the designees of Zanett Capital, Inc.,
will constitute a majority of the members of the Board of Directors of
SmartServ. Further, Messrs. Cassetta and Francesco have agreed to vote their
shares of common stock, representing approximately 14.2% of the outstanding
stock of SmartServ at November 15, 1999 in favor of the designees of Zanett
Capital, Inc., at each Annual Meeting of Stockholders of SmartServ at which
directors are elected. Although an event of default has occurred under the
prepaid warrants, Zanett Capital, Inc. has not at this time requested SmartServ
to appoint additional designees of Zanett Capital, Inc. to the Board of
Directors of SmartServ.
SELLING STOCKHOLDERS
The shares being offered for resale by the selling stockholders consist
of the shares of common stock held by Arnhold and S. Bleichroeder, Inc., and
shares of common stock underlying warrants to purchase common stock held by
Spencer Trask Securities Incorporated, Steven Rosner, Stephen P. Harrington,
Robert Rosner IRA, and Harvey and Donna Sternberg and Kevin Kimberlin Partners,
LP. Other than a consulting arrangement with Steven Rosner and an investment
advisory relationship with Spencer Trask Securities Incorporated, none of the
selling stockholders have and, within the past three years have not had, any
position, office or other material relationship with us or any of our
predecessors or affiliates.
The following table sets forth the name of the selling stockholders,
the number of shares of common stock beneficially owned by the selling
stockholders as of November 30, 1999 and the number of shares of common stock
being offered by the selling stockholders. The shares being offered hereby are
being registered to permit public secondary trading, and the selling
stockholders may offer all or part of the shares
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<PAGE>
for resale from time to time. However, the selling stockholders are under no
obligation to sell all or any portion of such shares nor are the selling
stockholders obligated to sell any shares immediately under this prospectus. All
information with respect to share ownership has been furnished by the selling
stockholders. Because the selling stockholders may sell all or part of their
shares, no estimates can be given as to the number of shares of common stock
that will be held by the selling stockholders upon termination of any offering
made hereby.
<TABLE>
<CAPTION>
Shares of Common Shares of Beneficial Ownership
Stock Beneficially Common Stock After Offering If All
Selling Stockholders Owned Sold Shares Are Sold
------------------- ------------------- -------------- -------------------
<S> <C> <C> <C>
Arnhold and S. Bleichroeder, Inc. 196,470 196,470 0
Spencer Trask Securities Incorporated
233,333 233,333 0
Steven Rosner 407,500 407,500 0
Stephen P. Harrington 104,167 104,167 0
Robert Rosner IRA 41,667 41,667 0
Harvey and Donna Sternberg 20,833 20,833 0
Kevin Kimberlin Partners, LP 450,000 450,000 0
------------------ -------------- ---------
Total 1,453,970 1,453,970 0
- -----------------
</TABLE>
We agreed with Arnhold and S. Bleichroeder, Inc., a selling
stockholder, to file the registration statement, of which this prospectus is a
part, as soon as possible after July 1, 1999, use our best efforts to cause such
registration statement to be declared effective by the Securities and Exchange
Commission as soon as practical thereafter, and to keep the registration
statement effective for a period of one year following the date it is declared
effective. In the event that we fail to obtain the effectiveness of the
registration statement on or before September 29, 1999, or any stop order or
other suspension of the effectiveness of the registration statement occurs as a
result of our failure to have current filings under the Securities Exchange Act
of 1934, we have agreed to pay ASB $10,000 per month until we obtain
effectiveness of the registration statement. In a securities purchase agreement
among us and the other selling stockholders, we have also agreed to register the
1,257,500 shares of common stock underlying warrants issued to them. Spencer
Trask Securities Incorporated and Kevin Kimberlin Partners, LP have agreed that
they will not sell any of the 683,333 shares of common stock issuable upon
exercise of the warrants owned by them until May 15, 2000 and they have further
agreed that they will not sell more than 25% of such shares in each succeeding
quarter. Pursuant to a consulting agreement with Steven Rosner, we have agreed
to register 240,833 shares of common stock underlying warrants issued to him.
Mr. Rosner has agreed not to exercise 200,000 of such warrants for the 180 day
period ending on April 21, 2000.
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<PAGE>
PLAN OF DISTRIBUTION
The shares may be sold or distributed from time to time by the selling
stockholders or by pledgees, donees or transferees of, or successors in interest
to, the selling stockholders, directly to one or more purchasers (including
pledgees) or through brokers, dealers or underwriters who may act solely as
agents or may acquire shares as principals, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices, at negotiated
prices or at fixed prices, which may be changed. The distribution of the shares
may be effected in one or more of the following methods:
. ordinary brokers transactions, which may include long or short sales,
. transactions involving cross or block trades or otherwise on the OTC
Bulletin Board,
. purchases by brokers, dealers or underwriters as principal and resale by
such purchasers for their own accounts pursuant to this prospectus,
. "at the market" to or through market makers or into an existing market for
the common stock,
. in other ways not involving market makers or established trading markets,
including direct sales to purchasers or sales effected through agents,
. through transactions in options, swaps or other derivatives (whether
exchange listed or otherwise), or
. any combination of the foregoing, or by any other legally available means.
In addition, the selling stockholders may enter into hedging
transactions with broker-dealers who may engage in short sales of shares in the
course of hedging the positions they assume with the selling stockholders. The
selling stockholders may also enter into option or other transactions with
broker-dealers that require the delivery by such broker-dealers of the shares,
which shares may be resold thereafter pursuant to this prospectus.
Brokers, dealers, underwriters or agents participating in the
distribution of the shares may receive compensation in the form of discounts,
concessions or commissions from the selling stockholders and/or the purchasers
of shares for whom such broker-dealers may act as agent or to whom they may sell
as principal, or both (which compensation as to a particular broker-dealer may
be in excess of customary commissions). The selling stockholders and any
broker-dealers acting in connection with the sale of the shares hereunder may be
deemed to be underwriters within the meaning of Section 2(11) of the Securities
Act of 1933, and any commissions received by them and any profit realized by
them on the resale of shares as principals may be deemed underwriting
compensation under the Securities Act of 1933. Neither SmartServ nor the selling
stockholders can presently estimate the amount of such compensation. SmartServ
knows of no existing arrangements between the selling stockholders and any other
stockholder, broker, dealer, underwriter or agent relating to the sale or
distribution of the shares.
SmartServ will not receive any proceeds from the sale of the shares
pursuant to this prospectus. SmartServ has agreed to bear the expenses of the
registration of the shares, including legal and accounting fees, and such
expenses are estimated to be approximately $40,000.
SmartServ has informed the selling stockholders that certain
anti-manipulative rules contained in Regulation M under the Securities Exchange
Act of 1934 may apply to their sales in the market and has furnished the selling
stockholders with a copy of such rules and has informed them of the need for
delivery of copies of this prospectus.
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<PAGE>
The selling stockholders may also use Rule 144 under the Securities Act
of 1933 to sell the shares if they meet the criteria and conform to the
requirements of such Rule.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 30, 1998, SmartServ entered into an agreement with, among
others, ZCI and Zanett, in contemplation of a specific financing transaction.
The agreement provided that upon 61 days written notice prior to the date of the
Private Placement Memorandum relating thereto, Zanett could require that
SmartServ exchange some or all of the 111,700 warrants owned by it into a
pro-rata number of shares up to a maximum of 18,616. Such financing never
occurred and presently, there is disagreement as to each parties' relative
rights and obligations under this agreement. Claudio Guazzoni, a director of
SmartServ, is a principal of ZCI and Zanett.
On January 26, 1999, SmartServ and DTN signed a letter of intent
whereby SmartServ would be merged with a subsidiary of DTN. The transaction was
subject to the execution of a definitive merger agreement. On June 24, 1999,
SmartServ and DTN entered into an agreement that terminated the letter of intent
and amended the Software License and Service Agreement dated April 23, 1998. In
consideration of the receipt of $5.175 million, SmartServ granted DTN an
exclusive perpetual worldwide license to SmartServ's Internet-based (1)
real-time stock quote product, (2) online trading vehicle for customers of small
and medium sized brokerage companies, (3) administrative reporting package for
brokers of small and medium sized brokerage companies, and (4) order
entry/routing system. Additionally, SmartServ received $324,000 in exchange for
an agreement to issue warrants to purchase 300,000 shares of SmartServ's common
stock at an exercise price of $8.60 per share. SmartServ has agreed to continue
to operate these products and provide maintenance and enhancement services in
exchange for a percentage of the revenues earned by DTN therefrom. The cost of
SmartServ's commitment to provide such maintenance and enhancement services is
limited to a maximum of 20% of the revenues earned by SmartServ. Charles R.
Wood, a director of SmartServ, is a Senior Vice President of DTN and President
of its Financial Services Division.
SmartServ believes that the terms of the transactions described above
were no less favorable to SmartServ than would have been obtained from a
non-affiliated third party for similar transactions at the time of entering into
such transactions. In accordance with SmartServ's policy, such transactions were
approved by a majority of the independent disinterested directors of SmartServ.
DESCRIPTION OF CAPITAL STOCK
The following is a summary description of our capital stock and certain
provisions of our Amended and Restated Certificate of Incorporation and By-Laws,
copies of which have been incorporated by reference as exhibits to the
registration statement of which this prospectus forms a part. The following
discussion is qualified in its entirety by reference to such exhibits. We have
also included a summary description of only those warrants held by the selling
stockholders and does not describe all of our outstanding warrants.
GENERAL
Our authorized capital stock consists of 40,000,000 shares of common
stock, par value $.01 per share, and 1,000,000 shares of preferred stock, par
value $.01 per share. As of November 30, 1999, we had 1,435,336 shares of common
stock issued and outstanding. No shares of preferred stock are issued and
outstanding. We have reserved 3,700,000 shares of common stock for issuance
pursuant to outstanding options and warrants.
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<PAGE>
COMMON STOCK
The holders of the common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders. Our Amended
and Restated Certificate of Incorporation and By-Laws do not provide for
cumulative voting rights in the election of directors. Accordingly, holders of a
majority of the shares of common stock entitled to vote in any election of
directors may elect all of the directors standing for election. Holders of
common stock are entitled to receive ratably such dividends as may be declared
by the Board out of funds legally available therefor. In the event of our
liquidation, dissolution or winding up, holders of common stock are entitled to
share ratably in the assets remaining after payment of liabilities. Holders of
common stock have no preemptive, conversion or redemption rights. All of the
outstanding shares of common stock are fully-paid and nonassessable.
PREFERRED STOCK
Our Board of Directors may, without stockholder approval, establish and
issue shares of one or more classes or series of preferred stock having the
designations, number of shares, dividend rates, liquidation preferences,
redemption provisions, sinking fund provisions, conversion rights, voting rights
and other rights, preferences and limitations that our Board may determine. The
Board may authorize the issuance of preferred stock with voting, conversion and
economic rights senior to the common stock so that the issuance of preferred
stock could adversely affect the market value of the common stock. The creation
of one or more series of preferred stock may adversely affect the voting power
or other rights of the holders of common stock. The issuance of preferred stock,
while providing flexibility in connection with possible acquisition and other
corporate purposes could, among other things and under some circumstances, have
the effect of delaying, deferring or preventing a change in control without any
action by stockholders.
WARRANTS
On November 19, 1998, we commenced a private placement consisting of
$550,000 of 8% Convertible Notes Due November 15, 1999. In connection with this
private placement, we entered into a securities purchase agreement with Spencer
Trask Securities Incorporated under which, in addition to the Convertible Notes,
we issued warrants to purchase 916,667 shares of our common stock to Spencer
Trask and certain other investors in the private placement at an exercise price
of $0.60 per share. These warrants expire on November 17, 2003. The exercise
price and number of shares into which such warrants are exercisable are subject
to adjustment under certain circumstances including the issuance or sale of our
common stock or other equity securities convertible or exchangeable into our
common stock, for less than the current exercise price or market price of our
common stock, a stock split of, or stock dividend on, or a reclassification of,
the common stock. In June 1999, we repaid the outstanding Convertible Notes in
full.
In connection with the private placement, we issued warrants to
purchase 183,333 shares of our common stock to Spencer Trask, as placement
agent, at an exercise price of $0.72 per share. These warrants expire on
November 17, 2005. The exercise price and number of shares into which such
warrants are exercisable are subject to adjustment under certain circumstances
including the issuance or sale of our common stock or other equity securities
convertible or exchangeable into our common stock, for less than the current
exercise price or market price of our common stock, a stock split of, or stock
dividend on, or a reclassification of, the common stock.
In addition to the above warrants, we issued warrants to purchase
240,833 shares of our common stock to Steven Rosner for consulting services and
for arranging our relationship with Spencer Trask at exercise prices ranging
from $.60 per share to $3.65 per share and expiring at various dates beginning
on March 3, 2003 through October 24, 2004. These warrants are subject to
adjustment of both price and amount in the event of subdivision, combination,
sale, merger or certain distributions.
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<PAGE>
With respect to each of the foregoing warrants, we have reserved an
equivalent number of shares of common stock for issuance on their exercise. The
warrants may be exercised in whole or in part, subject to the limitations
provided in the warrants.
Any warrant holders who do not exercise their warrants prior to the
conclusion of the exercise period will forfeit the right to purchase the shares
of common stock underlying the warrants and any outstanding warrants will become
void and be of no further force or effect.
Holders of the warrants have no voting, preemptive, liquidation or
other rights of a stockholder, and no dividends will be declared on the
warrants.
We have agreed to pay all registration expenses incurred in connection
with the registration of the common stock issuable upon exercise of the
warrants.
DELAWARE BUSINESS COMBINATION PROVISIONS
We are governed by the provisions of Section 203 of the Delaware
General Corporation Law ("DGCL"). In general, this statute prohibits a publicly
held Delaware corporation from engaging, under certain circumstances, in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder unless:
. prior to the date at which the stockholder became an interested
stockholder, the Board of Directors approved either the business
combination or the transaction in which the person became an interested
stockholder;
. the stockholder acquired more than 85% of the outstanding voting stock of
the corporation (excluding shares held by directors who are officers and
shares held in certain employee stock plans) upon consummation of the
transaction in which the stockholder became an interested stockholder; or
. the business combination is approved by the Board of Directors and by at
least 66-2/3% of the outstanding voting stock of the corporation (excluding
shares held by the interested stockholder) at a meeting of stockholders
(and not by written consent) held on or after the date such stockholder
became an interested stockholder.
An "interested stockholder" is a person who, together with affiliates
and associates, owns (or at any time within the prior three years did own) 15%
or more of the corporation's voting stock. Section 203 defines a "business
combination" to include, without limitation, mergers, consolidations, stock
sales and asset-based transactions and other transactions resulting in a
financial benefit to the interested stockholder.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102(b)(7) of the DGCL enables a corporation in its original
certificate of incorporation or an amendment thereto to eliminate or limit the
personal liability of a director to a corporation or its stockholders for
violations of the director's fiduciary duty, except:
. for any breach of a director's duty of loyalty to the corporation or its
stockholders,
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
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<PAGE>
. pursuant to Section 174 of the DGCL (providing for liability of
directors for unlawful payment of dividends or unlawful stock purchases
or redemptions), or
. for any transaction from which a director derived an improper personal
benefit.
The Amended and Restated Certificate of Incorporation of SmartServ provides in
effect for the elimination of the liability of directors to the extent permitted
by the DGCL.
Section 145 of the DGCL provides, in summary, that directors and
officers of Delaware corporations are entitled, under certain circumstances, to
be indemnified against all expenses and liabilities (including attorney's fees)
incurred by them as a result of suits brought against them in their capacity as
a director or officer, if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, if they had
no reasonable cause to believe their conduct was unlawful; provided, that no
indemnification may be made against expenses in respect of any claim, issue or
matter as to which they shall have been adjudged to be liable to the
corporation, unless and only to the extent that the court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, they
are fairly and reasonably entitled to indemnity for such expenses which the
court shall deem proper. Any such indemnification may be made by the corporation
only as authorized in each specific case upon a determination by the
stockholders or disinterested directors that indemnification is proper because
the indemnitee has met the applicable standard of conduct. SmartServ's By-Laws
entitle officers and directors of SmartServ to indemnification to the fullest
extent permitted by the DGCL.
SmartServ has agreed to indemnify each of its directors and certain
officers against certain liabilities, including liabilities under the Securities
Act of 1933. In addition, SmartServ maintains an insurance policy with respect
to potential liabilities of its directors and officers, including potential
liabilities under the Securities Act of 1933.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
SmartServ pursuant to the provisions described above, or otherwise, SmartServ
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by SmartServ of
expenses incurred or paid by a director, officer or controlling person of
SmartServ in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, SmartServ will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the
Securities and Exchange Commission. You may read and copy any report, proxy
statement or other information we file with the Commission at the Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's Regional Offices at 75 Park Place, Room 1400, New York, New York
10007 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You may obtain information on the operation of the Public
Reference Room by calling the Commission at 1-800-SEC-0330. In addition, we file
electronic versions of these documents on the Commission's Electronic Data
Gathering Analysis and Retrieval, or EDGAR, System. The Commission maintains a
website at http://www.sec.gov that contains reports, proxy statements and other
information filed with the Commission.
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<PAGE>
We have filed a registration statement on Form SB-2 with the Commission
to register the shares of our common stock to be sold by the selling
stockholders. This prospectus is part of that registration statement and, as
permitted by the Commission's rules, does not contain all of the information set
forth in the registration statement. For further information with respect to us
or our common stock, you may refer to the registration statement and to the
exhibits and schedules filed as part of the registration statement. You can
review a copy of the registration statement and its exhibits and schedules at
the public reference room maintained by the Commission, and on the Commission's
web site, as described above. You should note that statements contained in this
prospectus that refer to the contents of any contract or other document are not
necessarily complete. Such statements are qualified by reference to the copy of
such contract or other document filed as an exhibit to the registration
statement.
TRANSFER AGENT
The Transfer Agent and Registrar for the common stock is Continental
Stock Transfer & Trust Company, Two Broadway, New York, New York 10004. Its
telephone number is (212) 509-4000.
LEGAL MATTERS
The validity of the shares of common stock offered in this prospectus
has been passed upon for us by Parker Chapin Flattau & Klimpl, LLP, 1211 Avenue
of the Americas, New York, New York 10036-8735. Its telephone number is (212)
704-6000.
EXPERTS
The financial statements of SmartServ Online, Inc. at June 30, 1999 and
1998, and for each of the three years in the period ended June 30, 1999,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
(which contain an explanatory paragraph describing conditions that raise
substantial doubt about the Company's ability to continue as a going concern as
described in Note 1 to the financial statements) appearing elsewhere herein, and
are included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
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<PAGE>
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[LOGO]
SMARTSERV ONLINE, INC.
1,453,970
Shares
Common Stock
PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THAT WE
HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS IS NOT AN OFFER TO SELL COMMON
STOCK AND IS NOT SOLICITING AN OFFER TO BUY COMMON STOCK IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
____________, 1999
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.
Section 145 of the General Corporation Law of Delaware ("DGCL")
provides that directors, officers, employees or agents of Delaware corporations
are entitled, under certain circumstances, to be indemnified against expenses
(including attorneys' fees) and other liabilities actually and reasonably
incurred by them in connection with any suit brought against them in their
capacity as a director, officer, employee or agent, if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, if they had no reasonable cause to believe their conduct was
unlawful. Section 145 also provides that directors, officers, employees and
agents may also be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by them in connection with a derivative suit
bought against them in their capacity as a director, if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification may be made without
court approval if such person was adjudged liable to the corporation.
Article Tenth of the registrant's Certificate of Incorporation provides
that the registrant shall indemnify any and all persons whom it shall have power
to indemnify to the fullest extent permitted by the DGCL. Article VI of the
registrant's by-laws provides that the registrant shall indemnify authorized
representatives of the registrant to the fullest extent permitted by the DGCL.
The registrant's by-laws also permit the registrant to purchase insurance on
behalf of any such person against any liability asserted against such person and
incurred by such person in any capacity, or out of such person's status as such,
whether or not the registrant would have the power to indemnify such person
against such liability under the foregoing provision of the by-laws.
The registrant maintains a directors and officers liability insurance
policy with National Union Fire Insurance Company of Pittsburgh, PA. The policy
insures the directors and officers of the registrant against loss arising from
certain claims made against such directors or officers by reason of certain
wrongful acts.
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with the
issuance and distribution of the securities being registered hereby. All such
expenses will be borne by the registrant; none shall be borne by any selling
stockholders.
Securities and Exchange
Commission registration fee $ 6,411
Legal fees and expenses (1) $ 20,000
Accounting fees and expenses (1) $ 12,500
Miscellaneous (1) $ 1,089
Total $ 40,000
- -------------------------------
(1) Estimated.
II-1
<PAGE>
Item 26. RECENT SALES OF UNREGISTERED SECURITIES.
On May 29, 1997, the Company issued a $550,000 promissory note and
warrants to purchase 45,302 shares of common stock to Zanett Lombardier, Ltd.
("ZLL") for $550,000. On each of July 21, 1997 and September 16, 1997, the
Company issued an additional $111,111 promissory note and warrants to purchase
an additional 9,151 shares of common stock to ZLL for $111,111. The warrants are
subject to antidilution provisions and have exercise prices of $4.97 and $6.07
per share. Zanett Securities Corporation ("Zanett") received fees of $78,576 for
its services in connection with such transactions. Additionally, Zanett received
warrants to purchase 15,899 shares of common stock. Such warrants are subject to
antidilution provisions and have exercise prices of $4.97 and $6.07. The
promissory notes and warrants were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On September 16, 1997, the Company issued warrants to purchase 50,083
shares of common stock to ZLL as a default penalty under the ZLL notes. The
warrants have an exercise price of 50% of the closing price of the Company's
common stock on the exercise date. On November 16, 1999, ZLL exercised on a
cashless basis all of such warrants in exchange for 25,042 shares of common
stock. No sales commissions were paid in connection with such transactions. The
warrants were issued in reliance upon the exemption from registration provided
by Section 4 (2) of the Securities Act. The shares were issued in reliance upon
the exemption from registration provided by Section 3 (a) (9) of the Securities
Act.
On September 29, 1997, the Company issued 4,000 prepaid common stock
purchase warrants ("Prepaid Warrants") to 12 investors for $4,000,000. Included
in such amount was $772,222 of the promissory notes issued to ZLL and $63,837 of
accrued interest thereon which were cancelled in connection with this
transaction. The Prepaid Warrants are convertible into a number of shares of
common stock of the Company that is equal to $1,000 divided by the applicable
exercise price. The exercise price is 70% of the average closing bid price of
the common stock for the 10 trading days ending on the day prior to exercise of
such warrants, reduced by 1% for each 60 day period the Prepaid Warrants remain
unexercised, but in no event above $8.40 per share. Zanett received a commission
of $400,000, an unaccountable expense allowance of $120,000, and warrants to
purchase 135,906 shares, subject to antidilution provisions, of common stock at
$4.97 per share in connection with such transaction. The Prepaid Warrants, and
the warrants issued to Zanett, were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On September 29, 1997, the Company issued 113,250 warrants to Bruno
Guazzoni and, subject to stockholder approval, agreed to issue to him warrants
to purchase an additional 692,120 shares of common stock. These additional
warrants were approved by the stockholders and issued in April 1998. The
warrants are subject to antidilution provisions and have an exercise price of
$4.97 per share. No sales commissions were paid in connection with such
transaction. The warrants were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
Between January 13, 1998 and November 19, 1999, an aggregate of 1,794
Prepaid Warrants were converted into an aggregate of 429,480 shares of common
stock of the Company. No sales commissions were paid in connection with such
conversions. The shares were issued in reliance upon the exemption from
registration provided by Section 3 (a) (9) of the Securities Act.
On January 2, 1998 and March 3, 1998, the Company issued warrants to
purchase 16,666 and 20,833 shares of common stock, respectively, in connection
with consulting contracts. The warrants have exercise prices of $3.75 and $15.75
to $19.50, respectively. No sales commissions were paid in
II-2
<PAGE>
connection with such transactions. The warrants were issued in reliance upon the
exemption from registration provided by Section 4 (2) of the Securities Act.
On August 31, 1998, the Company issued 32,953 shares of common stock to
ZLL and 17,047 shares of common stock to Bruno Guazzoni in consideration for
their agreeing to certain restrictions on the exercise of the Prepaid Warrants
and the resale of the shares of common stock issuable on exercise thereof. No
sales commissions were paid in connection with such transaction. The shares were
issued in reliance upon the exemption from registration provided by Section 4
(2) of the Securities Act.
On September 8, 1998, the Company issued warrants to purchase 3,000
shares of common stock to DTN for prepayment of certain guaranteed payments in
accordance with the Software License and Service Agreement between the parties
dated April 23, 1998. Such warrants are exercisable at $3.00 per share of common
stock. These warrants were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act. No sales
commissions were paid in connection with such transaction.
On November 17, 1998, the Company issued 125,000 shares of common stock
and warrants to purchase 16,667 shares of common stock, exercisable at $5.00 per
share until November 11, 2001, to Steven Francesco, a former officer of the
Company, as partial consideration for the settlement of his claims against the
Company and certain of its officers and directors. The shares and warrants were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act. No sales commissions were paid in connection with such
transaction.
Between November 20, 1998 and December 3, 1998, the Company issued
convertible promissory notes in the amount of $500,000 and warrants to purchase
833,333 shares of common stock to investors for $500,000. Such warrants are
exercisable at $.60 per share and expire on November 19, 2003. Spencer Trask
Securities, Inc. ("Spencer Trask"), the placement agent, received a commission
of $50,000 and an unaccountable expense allowance of $15,000 in connection with
such transaction. Additionally, the Company issued warrants to purchase 166,667
shares of common stock to Spencer Trask exercisable at $.72 per share through
November 29, 2003. These promissory notes and warrants were issued in reliance
upon the exemption from registration provided by Section 4 (2) of the Securities
Act.
On January 14, 1999, the Company issued 10,000 shares of common stock
to Arnhold & S. Bleichroeder, Inc. ("ASB"), an investor in the Company's Prepaid
Warrants, in consideration of an agreement to waive certain events of default
under such Prepaid Warrants. No sales commissions were paid in connection with
such transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On January 20, 1999, the Company agreed to cancel warrants to purchase
20,833 shares of common stock exercisable at $15.75 and $19.50 per share to Mr.
Steven Rosner, a financial advisor to the Company, and to grant Mr. Rosner
warrants to purchase 40,833 shares of common stock at $.60 per share for his
efforts in arranging the Company's relationship with Spencer Trask. These
warrants expire on March 4, 2003 and January 19, 2004 and were issued in
reliance upon the exemption from registration provided by Section 4 (2) of the
Securities Act.
On January 28, 1999, the Company issued a convertible promissory note
in the amount of $50,000 and warrants to purchase 83,333 shares of common stock
to Mr. Bruno Guazzoni, an investor in the Company's Prepaid Warrants, for
$50,000. Such warrants are exercisable at $.60 per share and expire on November
19, 2003. Spencer Trask, the placement agent, received a commission of $5,000,
an unaccountable expense allowance of $1,500 and warrants to purchase 16,667
shares of common stock at $.72 per share through January 26, 2004 in connection
with this transaction. The promissory note and the
II-3
<PAGE>
warrants were issued in reliance upon the exemption from registration provided
by Section 4 (2) of the Securities Act.
On June 24, 1999, the Company agreed to issue to DTN a warrant for the
purchase of 300,000 shares of the Company's common stock at $8.60 per share in
exchange for $324,000. The warrant will expire on the earlier of April 30, 2003,
or the date one year after the market price of a share of common stock reaches
$8.60. No sales commissions were paid in connection with such transaction. The
warrant will be issued in reliance upon the exemption from registration provided
by Section 4 (2) of the Securities Act.
On July 6, 1999, the Company issued 180,000 shares of common stock to
ASB to settle the Company's obligation to ASB pursuant to the default provisions
of the Prepaid Warrants. No sales commissions were paid in connection with such
transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
Item 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
-------------------------------------------
(a) Exhibits:
The following exhibits are filed as part of this registration
statement:
EXHIBIT DESCRIPTION
------- -----------
3.1 Amended and Restated Certificate of Incorporation of the
Company***
3.2 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation filed on June 1, 1998 *
3.3 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation filed on October 16, 1998*
3.4 By-laws of the Company, as amended***
4.1 Specimen Certificate of the Company's Common Stock***
4.2 Letter agreement dated July 1, 1999 between the Company and
Arnhold and S. Bleichroeder, Inc.
4.3 Securities Purchase Agreement dated as of November 19, 1998 among
the Company and the investors listed therein.
4.4 Settlement Agreement dated June 28, 1999 between the
Company, Spencer Trask Securities Incorporated and Kevin
Kimberlin Partners, LP
4.5 Warrant Agreement dated as of among the Company and the investors
listed therein.
4.6 Consulting Agreement dated October 25, 1999 between the Company
and Steven Rosner
4.7 Form of warrant issued to Steven Rosner
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP (to be filed by
amendment)
10.1 Information Distribution License Agreement dated as of July 18,
1994 between the Company and S&P ComStock, Inc.***
10.2 New York Stock Exchange, Inc. Agreement for Receipt and Use of
Market Data dated as of August 11, 1994 between the Company and
the New York Stock Exchange, Inc.***
10.3 The Nasdaq Stock Market, Inc. Vendor Agreement for Level 1
Service and Last Sale Service dated as of September 12, 1994
between the Company and The Nasdaq Stock Exchange, Inc.
("Nasdaq")***
10.4 Amendment to Vendor Agreement for Level 1 Service and Last Sale
Service dated as of October 11, 1994 between the Company and
Nasdaq***
10.5 Lease Agreement dated as of March 4, 1994, between the Company
and One Station Place, L.P. regarding the Company's Stamford,
Connecticut offices***
10.6 Lease Modification and Extension Agreement, dated February 6,
1996, between the Company and One Station Place, L.P. regarding
the Company's Stamford, Connecticut offices****
10.7 Form of Registration Rights Agreement between the Company and
certain investors***
10.8 Form of 1996 Stock Option Plan******
10.9 Form of Registration Rights Agreement issued to purchasers of
Prepaid Common Stock Purchase Warrants*****
10.10 Consulting Agreement with Bruno Guazzoni*****
10.11 Agreement between Sprint/United Management Company and SmartServ
Online, Inc. dated September 26, 1997 **
10.12 Asset Purchase and Software License and Service Agreements
between SmartServ Online, Inc. and Data Transmission Network
Corporation, dated April 23, 1998*******
10.13 Amendment to the Software and License Agreement between SmartServ
Online, Inc. and Data Transmission Network Corporation, dated
June 24, 1999. Portions of this exhibit (indicated by asterisks)
have been omitted pursuant to a request for confidential
treatment pursuant to Rule 24b-2 and the omitted portions have
been filed separately with the Securities and Exchange Commission
*
10.14 Letter agreement dated August 26, 1999, amending the Amendment to
the Software and License Agreement between SmartServ Online, Inc.
and Data Transmission Network Corporation, dated June 24, 1999.
Portions of this exhibit (indicated by asterisks) have been
omitted pursuant to a request for confidential treatment pursuant
to Rule 24b-2 and the omitted portions have been filed separately
with the Securities and Exchange Commission *
10.15 Amended and Restated Employment Agreement between SmartServ
Online, Inc. and Sebastian E. Cassetta, dated January 1, 1999*
10.16 Restricted Stock Purchase Agreement between SmartServ Online,
Inc. and Sebastian E. Cassetta, dated December 29, 1998*
10.17 Employment Agreement between SmartServ Online, Inc. and Mario F.
Rossi, dated January 1, 1999*
10.18 Restricted Stock Purchase Agreement between SmartServ Online,
Inc. and Mario F. Rossi, dated December 29, 1998*
23.1 Consent of Ernst & Young LLP
23.2 Consent of Parker Chapin Flattau & Klimpl, LLP (Included in
Exhibit 5.1)
24.1 Power of Attorney of certain directors and officers of SmartServ
(Included as part of the signature page beginning on page II-7 of
this filing)
- ------------
* Filed as an exhibit to the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1999
** Filed as an exhibit to the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1997
*** Filed as an exhibit to the Company's registration statement on
Form SB-2 (Registration No. 333-114)
**** Filed as an exhibit to the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1996
***** Filed as an exhibit to the Company's Current Report on Form 8-K/A
for an event dated September 30, 1997
****** Filed as an exhibit to the Company's Proxy Statement dated
October 10, 1996
II-5
<PAGE>
******* Filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for the period ended March 31, 1998
Item 28. UNDERTAKINGS.
-------------
(A) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement to:
(i) Include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events
which, individually or together, represent a
fundamental change in the information set forth in
the registration statement; and
(iii) Include any material information with respect to
the plan of distribution not previously disclosed
in the registration statement or any material
change to such information in the registration
statement
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering therein,
and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
(B) Undertaking Required by Regulation S-B, Item 512(e).
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or controlling persons
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel that the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(C) Undertaking Required by Regulation S-B, Item 512(f)
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act of 1934 that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be deemed
to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on the 6th day of December, 1999.
SmartServ Online, Inc.
By: /s/ SEBASTIAN E. CASSETTA
-------------------------------------
Sebastian E. Cassetta
Chairman of the Board, Chief Executive
Officer and Secretary
POWER OF ATTORNEY
The undersigned directors and officers of SmartServ Online, Inc. hereby
constitute and appoint Sebastian E. Cassetta, Mario F. Rossi and Thomas W.
Haller and each of them, with full power to act without the other and with full
power of substitution and resubstitution, our true and lawful attorneys-in-fact
with full power to execute in our name and behalf in the capacities indicated
below any and all amendments (including post-effective amendments and amendments
thereto) to this registration statement under the Securities Act of 1933 and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and hereby ratify and
confirm each and every act and thing that such attorneys-in-fact, or any them,
or their substitutes, shall lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ SEBASTIAN E. CASSETTA Chairman of the Board, December 6, 1999
- --------------------------------------- Chief Executive Officer,
Sebastian E. Cassetta Secretary and Director
/s/ MARIO F. ROSSI Vice President and December 6, 1999
- --------------------------------------- Director
Mario F. Rossi
/s/ THOMAS W. HALLER Vice President, Treasurer December 6, 1999
- --------------------------------------- (Chief Financial Officer and Chief
Thomas W. Haller Accounting Officer)
- --------------------------------------- Director December __, 1999
Claudio Guazzoni
/s/ ROBERT H. STEELE Director December 6, 1999
- ---------------------------------------
Robert H. Steele
II-7
<PAGE>
/s/ L. SCOTT PERRY Director December 6, 1999
- ---------------------------------------
L. Scott Perry
/s/ CATHERINE CASSEL TALMADGE Director December 6, 1999
- ---------------------------------------
Catherine Cassel Talmadge
/s/ CHARLES R. WOOD Director December 6, 1999
- ---------------------------------------
Charles R. Wood
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
PAGE
<S> <C>
UNAUDITED INTERIM FINANCIAL STATEMENTS FOR THREE MONTHS ENDED SEPTEMBER 30, 1999
Balance Sheets as of June 30, 1999 and September 30, 1999 (unaudited) F-2
Statements of Operations for the three months
ended September 30, 1999 and 1998 (unaudited) F-4
Statement of Changes in Stockholders' Deficiency
for the three months ended September 30, 1999 (unaudited) F-5
Statements of Cash Flows for the three months
ended September 30, 1999 and 1998 (unaudited) F-6
Notes to Unaudited Financial Statements F-7
FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDING JUNE 30, 1999 AND JUNE 30, 1998
AND JUNE 30, 1997
Report of Independent Auditors F-12
Balance Sheets as of June 30, 1999 and 1998 F-13
Statements of Operations for the years
ended June 30, 1999, 1998 and 1997 F-15
Statement of Stockholders' Equity (Deficiency)
for the years ended June 30, 1997, 1998 and 1999 F-16
Statements of Cash Flows for the years
ended June 30, 1999, 1998 and 1997 F-20
Notes to Financial Statements F-21
</TABLE>
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
1999 1999
----------- ----------
(UNAUDITED) (Note 2)
ASSETS
Current assets
Cash and cash equivalents $1,103,443 $2,165,551
Accounts receivable 268,851 348,278
Prepaid expenses 40,665 50,150
---------- ----------
Total current assets 1,412,959 2,563,979
---------- ----------
Property and equipment, net 473,412 498,448
Other assets
Capitalized software development costs,
net of accumulated amortization of $128,953 at
September 30, 1999 and $82,108 at June 30, 1999 880,717 683,337
Security deposits 73,374 74,834
---------- ----------
954,091 758,171
---------- ----------
Total Assets $2,840,462 $3,820,598
========== ==========
F-2
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
------------ ------------
(UNAUDITED) (Note 2)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
<S> <C> <C>
Current liabilities
Accounts payable $ 622,788 $ 780,543
Accrued liabilities 480,786 474,189
Accrued liabilities to warrant holders 717,670 1,311,365
Salaries payable 69,047 93,443
Capital lease obligation - current portion 47,437 70,147
Deferred revenues - current portion 1,656,632 1,656,632
------------ ------------
Total current liabilities 3,594,360 4,386,319
------------ ------------
Deferred revenues - long-term portion 3,727,423 4,141,579
COMMITMENTS AND CONTINGENCIES - NOTE 6
STOCKHOLDERS' DEFICIENCY
Preferred stock - $0.01 par value
Authorized - 1,000,000 shares
Issued and outstanding - None
Common stock - $.01 par value
Authorized - 40,000,000 shares
Issued and outstanding - 1,199,787 shares at June 30, 1999
and 1,379,787 shares at September 30, 1999 13,798 11,998
Common stock subscribed 1,812,554 1,812,554
Notes receivable from officers (1,812,554) (1,812,554)
Additional paid-in capital 20,928,202 20,679,611
Unearned compensation (3,161,649) (3,452,904)
Accumulated deficit (22,261,672) (21,946,005)
------------ ------------
Total stockholders' deficiency (4,481,321) (4,707,300)
------------ ------------
Total Liabilities and Stockholders' Deficiency $ 2,840,462 $ 3,820,598
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS
ENDED SEPTEMBER 30
--------------------------
1999 1998
--------------------------
Revenues $ 808,292 $ 349,705
----------- -----------
Costs and expenses:
Costs of services 232,866 207,084
Product development expenses 46,845 27,046
Selling, general and administrative
expenses 855,265 830,858
----------- -----------
Total costs and expenses 1,134,976 1,064,988
----------- -----------
Loss from operations (326,684) (715,283)
----------- -----------
Other income (expense):
Interest income 11,017 2,202
Interest expense and other financing costs -- (141,096)
----------- -----------
11,017 (138,894)
----------- -----------
Net loss $ (315,667) $ (854,177)
=========== ===========
Comprehensive loss $ (315,667) $ (854,177)
=========== ===========
Basic and diluted earnings per share $ (0.23) $ (0.92)
=========== ===========
Weighted average shares outstanding 1,368,046 931,093
=========== ===========
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
THREE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
NOTES
COMMON STOCK COMMON RECEIVABLE ADDITIONAL
PAR STOCK FROM PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED OFFICERS CAPITAL COMPENSATION DEFICIT
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1999 1,199,787 $11,998 $1,812,554 $(1,812,554) $20,679,611 $(3,452,904) $(21,946,005)
Issuance of Common Stock in
connection with the
settlement of obligations
to a Prepaid Warrant holder 180,000 1,800 -- -- 266,895 -- --
Amortization of unearned
compensation over the
term of the consulting -- -- -- -- -- 291,255 --
agreement
Change in market value of
employee stock options -- -- -- -- (18,304) -- --
Net loss for the period -- -- -- -- -- -- (315,667)
------------------------------------------------------------------------------------------------
Balances at September 30, 1999 1,379,787 $13,798 $1,812,554 $(1,812,554) $20,928,202 $(3,161,649) $(22,261,672)
================================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS
ENDED SEPTEMBER 30
----------------------------------------
1999 1998
------------------ ------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (315,667) $ (854,177)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization 96,266 47,703
Noncash interest expense and other financing costs -- 128,175
Noncash compensation costs (18,304) --
Noncash consulting costs 291,255 330,421
Amortization of unearned revenues (414,156) (15,534)
Changes in operating assets and liabilities
Accounts receivable 79,427 33,995
Prepaid expenses 9,485 (83,636)
Accounts payable and accrued liabilities (476,158) 161,062
Salaries payable (24,396) 5
Unearned revenues -- 200,000
Security deposit 1,460 --
----------- -----------
Net cash used for operating activities (770,788) (51,986)
----------- -----------
INVESTING ACTIVITIES
Purchase of equipment (24,385) (11,638)
Capitalization of software development costs (244,225) (233,005)
----------- -----------
Net cash used for investing activities (268,610) (244,643)
----------- -----------
FINANCING ACTIVITIES
Repayment of capital lease obligation (22,710) (19,837)
----------- -----------
Net cash used for financing activities (22,710) (19,837)
----------- -----------
Decrease in cash and cash equivalents (1,062,108) (316,466)
Cash and cash equivalents - beginning of period 2,165,551 354,225
----------- -----------
Cash and cash equivalents - end of period $ 1,103,443 $ 37,759
=========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
SMARTSERV ONLINE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. ORGANIZATION
SmartServ Online, Inc. (the "Company") commenced operations on August 20, 1993.
The Company offers a range of services designed to facilitate e-commerce by
providing transactional and information services to its alliance partners
("Strategic Marketing Partners"). The Company has developed online financial,
transactional and media applications using a unique "device independent"
delivery solution and makes these services available through its application
software and communication architecture to wireless telephones and personal
digital assistants, personal computers and the Internet. The Company's services
include stock trading, real-time stock quotes, business and financial news,
sports information, private-labeled electronic mail, national weather reports
and other business and entertainment information.
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, 1999 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 audited financial statements included
herein. 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 three months ended September 30, 1999 are not necessarily
indicative of those expected for the year ending June 30, 2000.
The Company has completed development of its core applications software and
communications architecture; however, it has yet to generate revenues in an
amount sufficient to support its operations. 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. The Company's financial statements for
the period ended September 30, 1999 have been prepared on a going concern basis
which contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business. The Company incurred net
losses of $7,124,126, $5,040,009 and $4,434,482 for the years ended June 30,
1999, 1998 and 1997, respectively, and as of September 30, 1999 had an
accumulated deficit of $22,261,672 and a deficiency of net assets of $4,481,321.
The Company is also a defendant in several legal proceedings (see Note 6) which
could have a material adverse effect on the Company's financial position, cash
flow, and results of operations. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of these uncertainties.
F-7
<PAGE>
The Company's stockholders approved a one-for-six reverse stock split at a
Special Meeting on October 15, 1998. Such reverse stock split became effective
on October 26, 1998. All applicable financial statement amounts and related
disclosures have been restated to give effect to this transaction.
USE OF ESTIMATES
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
REVENUE RECOGNITION
- -------------------
Revenues are recognized as services are provided. Deferred revenues, resulting
from customer prepayments, are recognized as services are provided throughout
the term of the agreement. Deferred revenues resulting from the Company's
agreements with DTN are being amortized over the term of the anticipated future
revenue stream, a period of 42 months.
BASIC AND DILUTED EARNINGS PER SHARE
- ------------------------------------
In 1997, the Financial Accounting Standards Board 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.
COMPREHENSIVE INCOME
- --------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Comprehensive Income" ("Statement 130")
which requires companies to report a new, additional measure of income on the
income statement in a full set of general purpose financial statements.
Comprehensive Income includes foreign currency translation gains and losses and
unrealized gains and losses on equity securities that have been previously
excluded from income and reflected instead in equity. There were no components
of comprehensive income excluded from income and reflected in equity for the
three month periods ended September 30, 1999 and 1998.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
- --------------------------------------
In connection with certain contracts entered into between the Company and its
Strategic Marketing Partners, the Company has capitalized software development
costs related to certain product enhancements in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed", effective July 1, 1998.
F-8
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
----------- -----------
<S> <C> <C>
Data processing equipment $ 724,595 $ 700,210
Data processing equipment purchased under a capital lease 246,211 246,211
Office furniture and equipment 71,423 71,423
Display equipment 9,635 9,635
Leasehold improvements 36,678 36,678
----------- -----------
1,088,542 1,064,157
Accumulated depreciation, including $119,002 and $106,691 at
September 30, 1999 and June 30, 1999, respectively, for
equipment purchased under a capital lease (615,130) (565,709)
----------- -----------
$ 473,412 $ 498,448
=========== ===========
</TABLE>
4. EQUITY TRANSACTIONS
On July 1, 1999, the Company entered into an agreement with a holder of $325,000
of the Company's Prepaid Common Stock Purchase Warrants ("Prepaid Warrants"), to
settle the Company's obligation to such holder pursuant to the default
provisions of the Prepaid Warrants. Accordingly, the Company paid $325,000 to
redeem the Prepaid Warrants and issued 180,000 shares of Common Stock in full
settlement of all obligations to the holder. The Company has agreed to file a
registration statement with the Securities and Exchange Commission covering such
shares. Settlement costs of $268,695 were recorded during the year ended June
30, 1999.
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED SEPTEMBER 30
-------------------------------
1999 1998
------------ -------------
Numerator:
Net loss $ (315,667) $ (854,177)
============= =============
Denominator:
Weighted average shares 1,368,046 931,093
============= =============
Basic and diluted earnings per common share $ (0.23) $ (0.92)
============= =============
At September 30, 1999 there were, exclusive of the Prepaid Warrants, 3,195,000
Common Stock Purchase Warrants outstanding. Such warrants have exercise prices
ranging from $.60 to $72.00 per share and expire from March 2001 through January
2004. Based on the closing price ($.75) of the Company's Common Stock at
September 30, 1999, there were, exclusive of the Prepaid Warrants, currently
exercisable in-the-money warrants outstanding for the purchase of 507,700 shares
of Common Stock. 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
F-9
<PAGE>
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 September 30, 1999, there are options
outstanding for the purchase of 285,901 shares of the Company's Common Stock.
None of the warrants or options have been included in the computation of diluted
loss per share because their inclusion would be antidilutive.
6. COMMITMENTS AND CONTINGENCIES
By letter dated April 10, 1998, Michael Fishman, then 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 and four other
defendants in the United States District Court for the District of Connecticut.
The complaint asserted claims under Sections 10(b) and 18 of the Securities
Exchange Act of 1934, as well as several state law claims, including breach of
contract, fraud and misrepresentation. Mr. Fishman alleged that the Company (1)
failed to pay him the benefits and compensation to which he was entitled and (2)
made material misrepresentations in its filings with the Securities and Exchange
Commission. On December 11, 1998, the Court granted the Company's motion to
dismiss Mr. Fishman's action without prejudice to the plaintiff to seek leave to
file an amended complaint within 30 days. On May 12, 1999, the Court denied the
plaintiff's subsequent motion for leave to file a substituted complaint on the
basis that the federal securities law claim, the only federal claim alleged by
the plaintiff, was still deficient. Accordingly, the federal securities claim
was dismissed with prejudice. On or about June 4, 1999, Mr. Fishman commenced an
action against the same defendants and added as a seventh defendant, the
Company's former President, Steven Francesco, in the Connecticut Superior Court
for the Judicial District of Stamford/Norwalk at Stamford alleging breach of
contract, breach of duty of good faith and fair dealing, fraudulent
misrepresentation, negligent misrepresentation, intentional misrepresentation
and failure to pay wages. The defendants have answered the complaint and filed
counterclaims for fraudulent inducement and breach of contract. Plaintiff has
responded to the counterclaims and discovery is proceeding. Although the Company
is vigorously defending this action, there can be no assurance that it will be
successful.
By memorandum dated April 10, 1998, Jonathan Paschkes, then Vice President of
Marketing for the Company, resigned his position. On or about November 17, 1998,
Mr. Paschkes filed a complaint against the Company and Sebastian E. Cassetta in
the United States District Court, District of Connecticut. In the complaint, Mr.
Paschkes alleges (i) fraudulent inducement to him to accept his position with
the Company; (ii) breach of various terms of the Company's employment contract
with him; and (iii) failure by the Company to pay him wages and bonuses and
issue options to him pursuant to the terms of his employment contract. On or
about February 18, 1999, Mr. Paschkes filed an amended complaint. The Company
answered the amended complaint and asserted counterclaims against Mr. Paschkes
for fraudulent inducement, breach of contract, conversion and statutory theft.
On October 5, 1999, an agreement in principle was reached between the Company
and Mr. Paschkes in full settlement of these claims. The Company has executed a
settlement agreement with Mr. Paschkes and anticipates filing a Stipulation of
Dismissal with prejudice before November 30, 1999. The Company recorded a charge
for the settlement of such claims in the results of operations for the year
ended June 30, 1999.
On or about May 11, 1998, Ronald G. Weiner filed a complaint against the Company
and Mr. Francesco in the Supreme Court of the State of New York, County of New
York. The complaint alleges, among other things, that in May 1993, by letter
from Mr. Francesco, Mr. Weiner was offered a 10% equity stake in Smart Phone
Services, Inc. ("SPS"), a Subchapter S company of which Mr. Francesco allegedly
was the President and sole shareholder, in exchange for his active involvement
in, among other things, raising capital and managing the financial aspects of
SPS. The complaint alleges that, in November 1993, Mr. Francesco sent a letter
to Mr. Weiner in which he (i) represented that SPS had failed to attract a
single investor and (ii) withdrew his offer to Mr. Weiner of a 10% equity
position in SPS. The complaint further alleges that, in conversations with Mr.
Weiner beginning in November 1993, Mr. Francesco represented that
F-10
<PAGE>
he was ceasing all efforts to capitalize SPS. The complaint alleges, among other
things, that Mr. Francesco and SPS breached their agreement with Mr. Weiner by
withdrawing their offer to him of a 10% equity stake in SPS, and that, at the
time Mr. Francesco represented that he was ceasing efforts to capitalize SPS, he
had actually formed the Company and was actively seeking investors for it. The
complaint further alleges that the Company is a successor entity to SPS and
that, therefore, the Company is liable for SPS' and Mr. Francesco's alleged
conduct in derogation of their alleged agreement with Mr. Weiner. The complaint
seeks, among other things, (i) a declaratory judgment declaring Mr. Weiner a 10%
equity shareholder of the Company, (ii) a constructive trust in Mr. Weiner's
favor for 10% of the Company's equity shares and (iii) restitution against Mr.
Francesco and the Company for unjust enrichment. On his unjust enrichment claim,
Mr. Weiner seeks unspecified damages that he alleges to be at least $250,000. In
its answer to the complaint, the Company has denied the material allegations of
the complaint and asserted affirmative defenses. No discovery in this action has
yet been taken. Although the Company is vigorously defending this action, there
can be no assurance that it will be successful.
7. SUBSEQUENT EVENTS
On October 13, 1999, the Board of Directors authorized the establishment of the
Company's 1999 Employee Stock Option Plan ("1999 Plan"). The 1999 Plan provides
for the issuance of options to employees and directors for the purchase of a
maximum of 400,000 shares of Common Stock of the Company at not less than the
fair value of the Common Stock on the date of grant. The Board authorized the
issuance of 300,000 of such options to employees at the fair value of the Common
Stock on that date.
Also on October 13, 1999, the Board of Directors authorized the Company to enter
into a restricted stock agreement with Robert Pearl, Director of Business
Development, pursuant to which Mr. Pearl will be awarded 1% of the fully diluted
shares of Common Stock of the Company as of that date at the purchase price of
$.75 per share. Additionally, the Board of Directors agreed to reprice the
restricted shares granted to Messrs. Cassetta and Rossi to $.75 per share, the
fair value of the shares at that date.
In November 1999, $87,803 of the Company's Prepaid Warrants were converted into
an aggregate of 30,525 shares of Common Stock.
In November 1999, Zanett Lombardier, Ltd., converted certain warrants held by it
into an aggregate of 25,042 shares of Common Stock.
F-11
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
SmartServ Online, Inc.
We have audited the accompanying balance sheets of SmartServ Online, Inc. as of
June 30, 1999 and 1998, and the related statements of operations, stockholders'
equity (deficiency), and cash flows for each of the three years in the period
ended June 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SmartServ Online, Inc. at June
30, 1999 and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 1999, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that SmartServ
Online, Inc. will continue as a going concern. As more fully described in Note
1, the Company has incurred recurring operating losses and has a working capital
deficiency. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/S/ ERNST & YOUNG LLP
Stamford, Connecticut
October 13, 1999
F-12
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
JUNE 30
----------------------------
1999 1998
------------- --------------
ASSETS
Current assets
Cash and cash equivalents $2,165,551 $ 354,225
Accounts receivable 348,278 111,051
Prepaid expenses 50,150 130,603
---------- ----------
Total current assets 2,563,979 595,879
---------- ----------
Property and equipment, net 498,448 610,537
Other assets
Capitalized software development costs,
net of accumulated amortization of $82,108 683,337 --
Security deposit 74,834 70,437
---------- ----------
758,171 70,437
---------- ----------
Total Assets $3,820,598 $1,276,853
========== ==========
F-13
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
JUNE 30
-----------------------------------------
1999 1998
-----------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Accounts payable $ 780,543 $ 800,545
Accrued liabilities 474,189 736,137
Accrued liabilities to warrant holders 1,311,365 --
Salaries payable 93,443 57,308
Capital lease obligation - current portion 70,147 76,127
Deferred revenues - current portion 1,656,632 776,049
-----------------------------------------
Total current liabilities 4,386,319 2,446,166
-----------------------------------------
Capital lease obligation - long-term portion -- 77,548
Deferred revenues - long-term portion 4,141,579 --
COMMITMENTS AND CONTINGENCIES - NOTE 9
STOCKHOLDERS' DEFICIENCY
Preferred stock - $0.01 par value
Authorized - 1,000,000 shares
Issued and outstanding - None
Common Stock - $0.01 par value
Authorized - 40,000,000 shares
Issued and outstanding - 1,199,787 shares at June 30, 1999
and 836,227 shares at June 30, 1998 11,998 8,362
Common stock subscribed 1,812,554 --
Notes receivable from officers (1,812,554) --
Additional paid-in capital 20,679,611 18,184,580
Unearned compensation (3,452,904) (4,617,924)
Accumulated deficit (21,946,005) (14,821,879)
-----------------------------------------
Total stockholders' deficiency (4,707,300) (1,246,861)
-----------------------------------------
Total Liabilities and Stockholders' Deficiency $ 3,820,598 $ 1,276,853
=========================================
See accompanying notes.
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30
-----------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 1,443,781 $ 873,476 $ 688,610
-----------------------------------------------------------
Costs and expenses
Cost of services (994,465) (1,216,761) (1,133,884)
Product development expenses (193,188) (923,082) (1,150,224)
Selling, general and administrative
expenses (4,006,599) (3,221,940) (2,861,845)
-----------------------------------------------------------
Total costs and expenses (5,194,252) (5,361,783) (5,145,953)
-----------------------------------------------------------
Loss from operations (3,750,471) (4,488,307) (4,457,343)
-----------------------------------------------------------
Other income (expense):
Interest income 4,767 40,788 74,507
Interest expense (167,839) (57,485) (20,194)
Debt origination and other financing costs (3,210,583) (535,005) (31,452)
-----------------------------------------------------------
(3,373,655) (551,702) 22,861
-----------------------------------------------------------
Net loss $ (7,124,126) $ (5,040,009) $ (4,434,482)
===========================================================
Basic and diluted loss per share $ (6.44) $ (7.65) $ (7.20)
===========================================================
Weighted average shares outstanding 1,105,603 659,034 615,833
===========================================================
</TABLE>
See accompanying notes.
F-15
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
NOTES
COMMON STOCK COMMON RECEIVABLE ADDITIONAL
PAR STOCK FROM PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED OFFICERS CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1996 615,832 $ 6,158 $ -- $ -- $8,789,091 $ -- $(5,347,388)
Change in market value of
employee stock options -- -- -- -- 188,293 -- --
Issuance of Common Stock
Purchase Warrants in
connection with
investment advisory -- -- -- -- 75,000 -- --
services
Issuance of Common Stock
Purchase Warrants in
connection with
short-term line of credit -- -- -- -- 25,000 -- --
Net loss for the year -- -- -- -- -- -- (4,434,482)
----------------------------------------------------------------------------------------------
Balances at June 30, 1997 615,832 $ 6,158 $ -- $ -- $9,077,384 $ -- $ (9,781,870)
----------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
F-16
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
COMMON STOCK NOTES ADDITIONAL
PAR COMMON STOCK RECEIVABLE PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED FROM OFFICERS CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1997 615,832 $ 6,158 $ -- $ -- $ 9,077,384 $ -- $ (9,781,870)
Issuance of 4,000 Prepaid
Common Stock Purchase
Warrants; net of direct
costs of $545,000 -- -- -- -- 3,455,000 -- --
Conversion of 1,429.33
Prepaid Common Stock
Purchase Warrants into 220,395 2,204 -- -- (2,204) -- --
Common Stock
Issuance of Common Stock
Purchase Warrants to a
financial consultant in
connection with the
issuance of 4,000 Prepaid
Common Stock Purchase -- -- -- -- 5,145,500 (5,145,500) --
Warrants
Issuance of Common Stock
Purchase Warrants in
connection with the --
issuance of notes -- -- -- -- 388,900 --
Issuance of Common Stock
Purchase Warrants in
connection with investment
advisory contracts -- -- -- -- 120,000 -- --
Amortization of unearned
compensation -- -- -- -- -- 527,576 --
Net loss for the year -- -- -- -- -- -- (5,040,009)
----------------------------------------------------------------------------------------------
Balances at June 30, 1998 836,227 $ 8,362 $ -- $ -- $ 18,184,580 $ (4,617,924) $ (14,821,879)
----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-17
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
COMMON STOCK NOTES ADDITIONAL
PAR COMMON STOCK RECEIVABLE PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED FROM OFFICERS CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1998 836,227 $ 8,362 $ -- $ -- $ 18,184,580 $ (4,617,924) $ (14,821,879)
Conversion of 276.67 Prepaid
Common Stock Purchase
Warrants into Common Stock 178,560 1,786 -- -- (1,786) -- --
Issuance of Common Stock to
Prepaid Warrant holders
as consideration for
amending certain terms
and conditions of the 60,000 600 -- -- 146,713 -- --
Prepaid Warrants
Issuance of Common Stock
Purchase Warrants in
connection with 6,300
prepayments made by a -- -- -- -- -- --
marketing partner
Issuance of Common Stock
Purchase Warrants in
connection with the
issuance of 8% -- -- -- -- 1,573,000 -- --
convertible notes
Beneficial conversion 550,000
feature of 8% convertible -- -- -- -- -- --
notes
Issuance of Common Stock and
warrants to purchase
Common Stock in partial 144,500
settlement of litigation 125,000 1,250 -- -- -- --
Amortization of unearned
compensation over the
term of the consulting -- -- -- -- -- 1,165,020 --
agreement
Common Stock subscriptions
and notes receivable in
connection with officers'
employment agreements -- -- 1,812,554 (1,812,554) -- -- --
Issuance of Common Stock
Purchase Warrants to a
financial consultant as
compensation for services -- -- -- -- 59,000 -- --
Redemption of Prepaid Common
Stock Purchase Warrants -- -- -- -- (325,000) -- --
</TABLE>
See accompanying notes.
F-18
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
COMMON STOCK NOTES ADDITIONAL
PAR COMMON STOCK RECEIVABLE PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED FROM OFFICERS CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Authorization of the
issuance of Common Stock
Purchase Warrants in
connection with a -- -- -- -- 324,000 -- --
licensing agreement
Change in market value of
employee stock options -- -- -- -- 18,304 -- --
Net loss for the year -- -- -- -- -- -- (7,124,126)
----------- ----------- ------------- ------------- ------------- -------------- --------------
Balance at June 30, 1999 1,199,787 $11,998 $1,812,554 $(1,812,554) $20,679,611 $(3,452,904) $(21,946,005)
=========== =========== ============= ============= ============= ============== ==============
</TABLE>
See accompanying notes.
F-19
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30
-----------------------------------------------------
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (7,124,126) $(5,040,009) $ (4,434,482)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization 278,646 193,601 149,182
Provision for losses on and write-off of receivables -- (1,300) 29,248
Noncash interest costs 12,524 52,837 --
Noncash debt origination and other financing costs 2,593,808 475,527 30,449
Noncash compensation costs 18,304 -- 188,293
Noncash consulting services 1,349,020 660,576 75,000
Amortization of unearned revenues (1,112,138) (251,058) --
Settlement of litigation -- 145,750 --
Changes in operating assets and liabilities
Accounts receivable (237,227) 40,031 (121,040)
Prepaid expenses (44,547) (25,878) (22,415)
Accounts payable and accrued liabilities 781,264 349,764 558,317
Accrued interest -- (5,323) 16,323
Payroll taxes payable 1,696 (16,089) 5,482
Salaries payable 34,439 6,996 1,364
Unearned revenues 6,121,776 1,002,193 24,914
Security deposit (4,397) 10,781 --
-----------------------------------------------------
Net cash provided by (used for) operating activities 2,669,042 (2,401,601) (3,499,365)
-----------------------------------------------------
INVESTING ACTIVITIES
Capitalization of software development costs (765,445) -- --
Purchase of equipment (84,449) (60,424) (351,786)
-----------------------------------------------------
Net cash used for investing activities (849,894) (60,424) (351,786)
-----------------------------------------------------
FINANCING ACTIVITIES
Proceeds from the issuance of warrants 324,000 2,643,941 --
Proceeds from the issuance of short-term notes 478,500 196,500 493,646
Repayment of short-term notes (691,794) -- --
Repayment of capital lease obligation (83,528) (92,536) --
Proceeds of advances from DTN 2,058,300 -- --
Repayment of advances from DTN (2,058,300) -- --
Costs of issuing securities (35,000) (25,000) (10,000)
-----------------------------------------------------
Net cash provided by (used for) financing activities (7,822) 2,722,905 483,646
-----------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,811,326 260,880 (3,367,505)
Cash and cash equivalents - beginning of year 354,225 93,345 3,460,850
=====================================================
Cash and cash equivalents - end of year $ 2,165,551 $ 354,225 $ 93,345
=====================================================
</TABLE>
See accompanying notes.
F-20
<PAGE>
SMARTSERV ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND LIQUIDITY
SmartServ Online, Inc. (the "Company") commenced operations on August 20, 1993.
The Company offers a range of services designed to facilitate e-commerce by
providing transactional and information services to its alliance partners
("Strategic Marketing Partners"). The Company has developed online financial,
transactional and media applications using a unique "device independent"
delivery solution and makes these services available through its application
software and communication architecture to wireless telephones and personal
digital assistants, personal computers and the Internet. The Company's services
include stock trading, real-time stock quotes, business and financial news,
sports information, private-labeled electronic mail, national weather reports
and other business and entertainment information.
The Company's financial statements for the year ended June 30, 1999 have been
prepared on a going concern basis which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business. The Company incurred net losses of $7,124,126, $5,040,009, and
$4,434,482 for the years ended June 30, 1999, 1998, and 1997, respectively, and
as of June 30, 1999 had an accumulated deficit of $21,946,005 and a deficiency
of net assets of $4,707,300. The Company is also a defendant in several legal
proceedings (see Note 9) which could have a material adverse effect on the
Company's financial position, cash flow, and results of operations. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of these uncertainties.
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 and transaction services to their customers. Management
believes that the Company's primary source of revenues will be derived from
consumers who purchase the services through its Strategic Marketing Partners.
Through the use of this strategy, the consumer is a customer of both SmartServ
and its Strategic Marketing Partner. The Company also believes that the sale of
its information and transaction services through the cooperative efforts of
partners with more recognizable brand names than its own is important to its
success.
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 5. An integral part of this Placement was the
conversion of notes payable and accrued interest thereon, aggregating $836,059,
into Prepaid Warrants. The net proceeds of $2,643,941 provided the Company with
working capital to continue its marketing efforts.
Effective May 1, 1998, the Company entered into an agreement with Data
Transmission Network Corporation ("DTN") whereby DTN purchased the exclusive
right to market three of the Company's Internet products: SmartServ Pro, a real
time stock quote product; TradeNet, an online trading vehicle for the customers
of small and medium sized brokerage companies, and BrokerNet, an administrative
reporting package for brokers of small and medium sized brokerage companies. The
consummation of this agreement has removed the Company from the retail market
and allows the Company to focus on business-to-business marketing. The Company
received $850,000 upon execution of the agreement and
F-21
<PAGE>
received minimum monthly payments of $100,000 through April 1999. On June 24,
1999, the Company and DTN entered into an agreement that amended the Software
License and Service Agreement dated April 23, 1998. In consideration of the
receipt of $5.175 million, the Company granted DTN an exclusive perpetual
worldwide license to the Company's Internet-based (i) SmartServ Pro, (ii)
TradeNet, (iii) BrokerNet, and (iv) an order entry/routing system. Additionally,
the Company received $324,000 in exchange for an agreement to issue warrants to
purchase 300,000 shares of the Company's Common Stock at an exercise price of
$8.60 per share. The Company has agreed to continue to operate these products
and provide maintenance and enhancement services in exchange for a percentage of
the revenues earned by DTN therefrom. The cost of the Company's commitment to
provide such maintenance and enhancement services is limited to a maximum of 20%
of the revenues earned by the Company. None of the Company's wireless products
were included in this transaction.
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 the DTN agreements and the continual
discussions with potential Strategic Marketing Partners about future
relationships, the Company's ability to generate fee revenue and working capital
may not be sufficient to meet management's objectives as presently structured.
Management recognizes that the Company must generate additional revenues or
consider additional modifications to its sales and marketing program or
institute cost reductions to allow it to continue to operate with available cash
resources. There is no assurance that the Company will generate future revenues
or cash flow from operations or that the Company's products and services will
continue to be accepted in the marketplace by the ultimate consumers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
- ---------------------
The financial statements are prepared in conformity with generally accepted
accounting principles.
The Company's stockholders approved a one-for-six reverse stock split at a
Special Meeting on October 15, 1998. Such reverse stock split became effective
on October 26, 1998. All applicable financial statement amounts and related
disclosures have been restated to give effect to this transaction.
USE OF ESTIMATES
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
REVENUE RECOGNITION
- -------------------
Revenues are recognized as services are provided. Deferred revenues, resulting
from customer prepayments, are recognized as services are provided throughout
the term of the agreement. Deferred revenues resulting from the Company's
agreements with DTN are being amortized over the anticipated future revenue
stream, a period of 42 months.
F-22
<PAGE>
BASIC AND DILUTED EARNINGS PER SHARE
- ------------------------------------
In 1997, the Financial Accounting Standards Board 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.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
- --------------------------------------
In connection with certain contracts entered into between the Company and its
Strategic Marketing Partners, the Company has capitalized software development
costs related to certain product enhancements in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed", effective July 1, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------
The carrying amounts of the Company's financial instruments approximate fair
value.
SUPPLEMENTAL CASH FLOW DATA
- ---------------------------
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Interest, debt origination and other financing costs paid during the years ended
June 30, 1999, 1998, and 1997 were $101,974, $32,536, and $9,194, respectively.
CONCENTRATION OF CREDIT RISK
- ----------------------------
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of accounts receivable. There is no single
geographic concentration of sales or related accounts receivable in the United
States. At June 30, 1999, accounts receivable consist principally of amounts due
from DTN ($268,000), and a telecommunications company ($78,100). The Company
performs periodic credit evaluations of its customers and, if applicable,
provides for credit losses in the financial statements.
PROPERTY AND EQUIPMENT
- ----------------------
Property and equipment are stated at cost. Equipment purchased under a capital
lease has been recorded at the present value of the future minimum lease
payments at the date of acquisition. Depreciation is computed using the
straight-line method over estimated useful lives of three to ten years.
ADVERTISING COSTS
- -----------------
Advertising costs are expensed as incurred and were approximately $20,500,
$97,100, and $540,000 in 1999, 1998 and 1997,
respectively.
STOCK BASED COMPENSATION
- ------------------------
The Company maintains a stock option plan for employees and non-employee
directors that provides for the granting of stock options for a fixed number of
shares with an exercise price equal to the fair value of the shares at the date
of grant. The Company accounts for this stock compensation plan in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). Accordingly, compensation expense is recognized to
the extent that the fair value of the stock exceeds the exercise price of the
option at the measurement date. In 1997, the Company adopted the
F-23
<PAGE>
disclosure provisions of Statement of Financial Accounting Standards No. 123
"Accounting for Stock-based Compensation".
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, as amended by SOP 98-4, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). The
adoption of SOP 98-1 is not expected to have a material effect on the Company's
operations. SOP 98-1 is required to be adopted by the Company no later than July
1, 1999.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30
------------------------------------------
1999 1998
------------------- -----------------
<S> <C> <C>
Data processing equipment $ 700,210 $ 616,587
Data processing equipment purchased under a capital lease 246,211 246,211
Office furniture and equipment 71,423 70,597
Display equipment 9,635 9,635
Leasehold improvements 36,678 36,678
------------------- -----------------
1,064,157 979,708
Accumulated depreciation, including $106,691 and
$57,449 for equipment purchased under a capital lease (565,709) (369,171)
------------------- -----------------
$ 498,448 $ 610,537
=================== =================
</TABLE>
During the year ended June 30, 1997, the Company leased computer equipment with
a capitalized cost of $246,211. The recording of such costs and the related
capitalized lease obligation are non-cash transactions for the purposes of the
Statement of Cash Flows.
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 Company's Prepaid Warrants as more fully described in Note 5.
In conjunction with the origination of the line of credit facility, the Company
issued 56,627 common stock purchase warrants to the financial institution.
Similarly, the Company issued 11,438 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 50,083 "default" warrants to such institution. At
June 30, 1999, these warrants were exercisable at prices ranging from $.75 to
$6.07. These warrants are subject to certain antidilution provisions 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 debt
origination and other financing costs. The Company recorded debt origination and
other financing costs associated with these warrants of $463,567 for the year
ended June 30, 1998.
F-24
<PAGE>
Commencing November 20, 1998, the Company sold five and one-half (5.5) units,
each consisting of a secured 8% convertible note in the principal amount of
$100,000 and warrants to purchase Common Stock of the Company. The warrants are
exercisable at $.60 per share of Common Stock. The convertible notes were repaid
in June 1999. The Company has agreed to register the shares of Common Stock
issuable upon exercise of the warrants. In addition to customary fees and
expenses, Spencer Trask Securities, Inc. ("Spencer Trask"), the placement agent,
received for nominal consideration, warrants to purchase ten percent (10%) of
the shares of Common Stock of the Company issuable on conversion of the notes
and exercise of the warrants at $.72 per share. The issuance to the noteholders
of warrants to purchase 916,667 shares of Common Stock, as well as those issued
to Spencer Trask for the purchase of 183,333 shares of Common Stock have been
valued in accordance with the Black-Scholes pricing methodology and recorded as
debt origination and other financing costs. Also in connection with the 8%
convertible notes, the Company has recorded a non-cash charge to debt
origination and other financing costs of $550,000 representing the perceived
cost of the beneficial conversion feature of the notes. Emerging Issues Task
Force Issue 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios" ("Issue 98-5")
defines the beneficial conversion feature as the non-detachable conversion
feature that is "in-the-money" at the date of issuance. Issue 98-5 requires the
recognition of the intrinsic value of the conversion feature as the difference
between the conversion price and the fair value of the common stock into which
the notes are convertible. Such amount is limited to the proceeds of the
financing ($550,000) and has been recorded in debt origination and other
financing costs as of the date of issuance.
On December 30, 1998, the Company executed an agreement with a service provider
whereby certain obligations of the Company, amounting to $141,794, were
converted into a 12% note payable. On June 28, 1999, the outstanding balance of
$66,794 was repaid.
5. EQUITY TRANSACTIONS
During the year ended June 30, 1997, the Company authorized the issuance of
warrants for the purchase of 33,333 shares of Common Stock in connection with
certain investment advisory agreements. Such warrants are exercisable at prices
ranging from $12.00 to $24.00 per share through May 2002.
On September 30, 1997, The Zanett Securities Corporation ("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 the Prepaid Warrants was exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2)
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 $8.40. The Prepaid Warrants became exercisable on December 29, 1997 and
expire on September 30, 2000.
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 135,906 Common Stock Purchase Warrants to Zanett that are subject to
antidilution provisions and are exercisable at $4.97 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 Bruno Guazzoni, a financial consultant who is an affiliate of Zanett
Lombardier, Ltd., an investor in the Prepaid Warrants.
F-25
<PAGE>
During the five-year term of the agreement such consultant will provide the
Company with advisory services relating to financial and strategic ventures and
alliances, investment banking and general financial advisory services, and
advice and assistance with the Company's market development activities. As
compensation for these services, the Company authorized the issuance of 805,370
Common Stock Purchase Warrants ("Consulting Warrants") to this consultant that
are subject to antidilution provisions and are exercisable at $4.97 per share of
Common Stock. The Company has valued 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
$5,145,500 and recorded this amount in stockholders' equity as unearned
compensation. Unearned compensation is being 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 $1,165,020 and $527,576 for the
years ended June 30, 1999 and 1998, respectively.
During the year ended June 30, 1999, holders of 276.67 of the Company's Prepaid
Warrants converted such warrants into 178,560 shares of Common Stock at exercise
prices ranging from $.75 to $2.38 per share.
On August 31, 1998, the Company issued 32,953 shares of Common Stock to Zanett
Lombardier, Ltd. and 17,047 shares of Common Stock to Bruno Guazzoni in
consideration of their agreement to certain restrictions on the exercise of
Prepaid Warrants and the resale of the shares of Common Stock issuable on
exercise thereof. Such shares have been recorded at the fair value of the
Company's Common Stock at that date as other financing costs.
On September 8, 1998, the Company issued warrants to purchase 3,000 shares of
Common Stock to DTN for prepayment of certain guaranteed payments in accordance
with the Software License and Service Agreement between the parties dated April
23, 1998. Such warrants are exercisable at $3.00 per share of Common Stock and
have been recorded in accordance with the Black-Scholes pricing methodology as
other financing costs.
On November 17, 1998, the Company issued 125,000 shares of Common Stock and
warrants to purchase 16,667 shares of Common Stock, exercisable at $5.00 per
share until November 11, 2001, to Steven Francesco, a former officer of the
Company, as partial consideration for the settlement of his claims against the
Company and certain of its officers and directors. The value of these shares has
been recorded in selling, general and administrative expenses based upon the
fair value of the Company's Common Stock at that date while the warrants have
been recorded in accordance with the Black-Scholes pricing methodology.
On December 29, 1998, the Board of Directors approved the terms of employment
contracts for Sebastian E. Cassetta, Chairman and Chief Executive Officer, and
Mario F. Rossi, Vice President of Technology. The employment agreement with Mr.
Cassetta ("Cassetta Agreement"), is effective January 1, 1999, expires on
December 31, 2001, and provides for, among other things, the sale to him of
618,239 shares of restricted stock representing 9% of the fully diluted shares
of Common Stock of the Company. The purchase price ($2.20 per share) of the
restricted stock is equal to 110% of fair market value of the Company's Common
Stock for the 30 days preceding the date of the stock purchase agreement
("Cassetta Stock Purchase Agreement") contemplated by the Cassetta Agreement.
The purchase price has been paid with a 5 year, non-recourse promissory note,
secured by the stock, at an interest rate of 6.75%, which is 1% below the prime
rate on the date of the Cassetta Stock Purchase Agreement. The Cassetta Stock
Purchase Agreement provides the Company with certain repurchase options and
provides Mr. Cassetta with a put option in the event of the termination of his
employment. In accordance with APB No. 25, the Company will record the changes
in the fair value of such shares in recognition of the compensatory
F-26
<PAGE>
nature of their issuance. On October 13, 1999, the Board of Directors agreed to
reprice the shares granted to Mr. Cassetta to $.75 per share, the fair value of
the shares at that date.
The Company and Mr. Rossi have also entered into an employment agreement ("Rossi
Agreement"), effective January 1, 1999 and expiring on December 31, 2001,
providing for, among other things, the sale to him of 206,080 shares of
restricted stock representing 3% of the fully diluted shares of Common Stock of
the Company. The purchase price ($2.20 per share) of the restricted stock is
equal to 110% of fair market value for the 30 days preceding the date of the
stock purchase agreement ("Rossi Stock Purchase Agreement") contemplated by the
Rossi Agreement. The purchase price has been paid with a 5 year, non-recourse
promissory note, secured by the stock, at an interest rate of 6.75%, which is 1%
below the prime rate on the date of the Rossi Stock Purchase Agreement. The
Rossi Stock Purchase Agreement provides the Company with certain repurchase
options and provides Mr. Rossi with a put option in the event of the termination
of his employment. In accordance with APB No. 25, the Company will record the
changes in the fair value of such shares in recognition of the compensatory
nature of their issuance. On October 13, 1999, the Board of Directors agreed to
reprice the shares granted to Mr. Rossi to $.75 per share, the fair value of the
shares at that date.
On January 14, 1999, the Company issued 10,000 shares of Common Stock to Arnhold
& S. Bleichroeder, Inc. ("ASB"), an investor in the Company's Prepaid Warrants,
in consideration of an agreement to waive certain events of default under such
Prepaid Warrants. These shares have been recorded at the fair value of the
Company's Common Stock at that date as other financing costs.
On January 20, 1999, the Company agreed to cancel warrants to purchase 20,833
shares of Common Stock exercisable at $15.75 and $19.50 per share to Steven
Rosner, a financial advisor to the Company, and to grant Mr. Rosner warrants to
purchase 40,833 shares of Common Stock at $.60 per share for his efforts at
arranging the Company's relationship with Spencer Trask. Such warrants will
expire on January 20, 2004. These warrants have been recorded in accordance with
the Black-Scholes pricing methodology as selling, general and administrative
expenses.
On June 24, 1999, in consideration of the receipt of $324,000, the Company
agreed to issue DTN warrants for the purchase of 300,000 shares of the Company's
Common Stock at $8.60 per share. The warrants will expire on the earlier of
April 30, 2003, or the date one year after the market price of a share of Common
Stock reaches $8.60. These warrants have been recorded in accordance with the
Black-Scholes pricing methodology.
The delisting of the Company's Common Stock from the Nasdaq Small Cap Market
caused the Company to default on certain terms and conditions of the Prepaid
Warrants. Such default obligates the Company to pay financial penalties, as well
as to redeem the outstanding Prepaid Warrants at a 43% premium. The Company has
been unable to obtain appropriate waivers from holders of $1,994,000 of such
Prepaid Warrants. Accordingly, the Company has recorded a charge to debt
origination and other financing costs in the amount of $986,365, representing
the potential penalties due such holders.
F-27
<PAGE>
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------------------------------------------------
1999 1998 1997
------------------ -------------------- --------------------
<S> <C> <C> <C>
Numerator:
Net loss $ (7,124,126) $ (5,040,009) $ (4,434,482)
================== ==================== ====================
Denominator:
Weighted average shares 1,105,603 659,034 615,833
================== ==================== ====================
Basic and diluted loss per common share
$ (6.44) $ (7.65) $ (7.20)
================== ==================== ====================
</TABLE>
At June 30, 1999 there were, exclusive of the Prepaid Warrants (Note 5),
3,195,000 Common Stock Purchase Warrants outstanding. Such warrants have
exercise prices ranging from $.60 to $72.00 per share and expire from March 2001
through January 2004. Based on the closing bid price ($1.50) of the Company's
Common Stock at June 30, 1999, there were, exclusive of the Prepaid Warrants,
currently exercisable in-the-money warrants outstanding for the purchase of
507,700 shares of Common Stock. 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 June 30, 1999, there are options outstanding for the purchase of
285,901 shares of the Company's Common Stock. None of the warrants or options
have been included in the computation of diluted loss per share because their
inclusion would be antidilutive. (See Note 11 for a discussion of the Company's
stock option plans.)
7. INCOME TAXES
At June 30, 1999 and 1998, the Company has deferred tax assets as follows:
1999 1998
---- ----
Capitalized Start-up Costs $ 741,600 $ 1,112,500
Net Operating Loss Carryforwards 6,578,000 4,126,000
------------- ------------
$ 7,319,600 $ 5,238,500
============= ============
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," the Company has established a valuation allowance
to fully reserve the future income tax benefit of these deferred tax assets due
to uncertainty about their future realization. The valuation allowance increased
to $7,319,600 at June 30, 1999 from $5,238,500 at June 30, 1998 and $3,540,000
at June 30, 1997.
At June 30, 1999, the Company has net operating loss carryforwards for Federal
income tax purposes of approximately $8,930,000 which expire in the years 2009
through 2013. As a result of the public issuance of stock by the Company on
March 21, 1996, and the resultant change in ownership pursuant to
F-28
<PAGE>
Internal Revenue Code Section 382, the utilization of net operating losses
incurred prior to this date may be limited.
8. LEASES
The Company leases office space for its Stamford, Connecticut headquarters under
a noncancelable lease. The lease includes escalation clauses for items such as
real estate taxes, building operation and maintenance expenses, and electricity
usage.
On May 1, 1997, the Company entered into a 3 year noncancelable capital lease
for certain computer equipment used to provide information services. The Company
also leases certain other computer equipment under operating leases which expire
through July 2000.
Rent expense amounted to approximately $290,600, $278,000, and $207,000 for the
years ended June 30, 1999, 1998, and 1997, respectively.
Minimum future rental payments at June 30, 1999 are as follows:
OPERATING LEASES CAPITAL
------------------------------------
YEAR ENDING JUNE 30 PREMISES EQUIPMENT LEASE
- ------------------- ----------------- --------------- ---------------
2000 $ 179,700 $ 41,000 $ 75,341
2001 186,000 1,600 --
2002 192,300 -- --
2003 67,000 -- --
----------------- --------------- ---------------
$ 625,000 $ 42,600 75,341
================= ===============
Less amounts
representing interest 5,194
and executory costs ---------------
$ 70,147
===============
9. COMMITMENTS AND CONTINGENCIES
By letter dated April 10, 1998, Michael Fishman, then 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 and four other
defendants in the United States District Court for the District of Connecticut.
The complaint asserted claims under Sections 10(b) and 18 of the Securities
Exchange Act of 1934, as well as several state law claims, including breach of
contract, fraud and misrepresentation. Mr. Fishman alleged that the Company (1)
failed to pay him the benefits and compensation to which he was entitled and (2)
made material misrepresentations in its filings with the Securities and Exchange
Commission. On December 11, 1998, the Court granted the Company's motion to
dismiss Mr. Fishman's action without prejudice to the plaintiff to seek leave to
file an amended complaint within 30 days. On May 12, 1999, the Court denied the
plaintiff's subsequent motion for leave to file a substituted complaint on the
basis that the federal securities law claim, the only federal claim alleged by
the plaintiff, was still deficient. Accordingly, the federal securities claim
was dismissed with prejudice. On or about June 4, 1999, Mr. Fishman commenced an
action against the same defendants and added as a seventh defendant, the
Company's former President, Mr. Steven Francesco, in the Connecticut Superior
Court for the Judicial
F-29
<PAGE>
District of Stamford/Norwalk at Stamford alleging breach of contract, breach of
duty of good faith and fair dealing, fraudulent misrepresentation, negligent
misrepresentation, intentional misrepresentation and failure to pay wages. The
defendants have answered the complaint and filed counterclaims for fraudulent
inducement and breach of contract. Plaintiff's response to counterclaims was due
October 14, 1999 and has yet to be received. Although the Company is vigorously
defending this action, there can be no assurance that it will be successful.
By memorandum dated April 10, 1998, Jonathan Paschkes, then Vice President of
Marketing for the Company, resigned his position. On or about November 17, 1998,
Mr. Paschkes filed a complaint against the Company and Sebastian E. Cassetta in
the United States District Court, District of Connecticut. In the complaint, Mr.
Paschkes alleges (i) fraudulent inducement to him to accept his position with
the Company; (ii) breach of various terms of the Company's employment contract
with him; and (iii) failure by the Company to pay him wages and bonuses and
issue options to him pursuant to the terms of his employment contract. On or
about February 18, 1999, Mr. Paschkes filed an amended complaint. The Company
answered the amended complaint and asserted counterclaims against Mr. Paschkes
for fraudulent inducement, breach of contract, conversion and statutory theft.
On October 5, 1999, an agreement in principle was reached between the Company
and Mr. Paschkes in full settlement of these claims. The Company anticipates
executing a settlement agreement with Mr. Paschkes and filing a Stipulation of
Dismissal with prejudice before October 31, 1999. The Company has recorded a
charge for the settlement of such claims in the results of operations for the
year ended June 30, 1999.
On or about May 11, 1998, Ronald G. Weiner filed a complaint against the Company
and Mr. Francesco in the Supreme Court of the State of New York, County of New
York. The complaint alleges, among other things, that in May 1993, by letter
from Mr. Francesco, Mr. Weiner was offered a 10% equity stake in Smart Phone
Services, Inc. ("SPS"), a Subchapter S company of which Mr. Francesco allegedly
was the President and sole shareholder, in exchange for his active involvement
in, among other things, raising capital and managing the financial aspects of
SPS. The complaint alleges that, in November 1993, Mr. Francesco sent a letter
to Mr. Weiner in which he (i) represented that SPS had failed to attract a
single investor and (ii) withdrew his offer to Mr. Weiner of a 10% equity
position in SPS. The complaint further alleges that, in conversations with Mr.
Weiner beginning in November 1993, Mr. Francesco represented that he was ceasing
all efforts to capitalize SPS. The complaint alleges, among other things, that
Mr. Francesco and SPS breached their agreement with Mr. Weiner by withdrawing
their offer to him of a 10% equity stake in SPS, and that, at the time Mr.
Francesco represented that he was ceasing efforts to capitalize SPS, he had
actually formed the Company and was actively seeking investors for it. The
complaint further alleges that the Company is a successor entity to SPS and
that, therefore, the Company is liable for SPS' and Mr. Francesco's alleged
conduct in derogation of their alleged agreement with Mr. Weiner. The complaint
seeks, among other things, (i) a declaratory judgment declaring Mr. Weiner a 10%
equity shareholder of the Company, (ii) a constructive trust in Mr. Weiner's
favor for 10% for the Company's equity shares and (iii) restitution against Mr.
Francesco and the Company for unjust enrichment. On his unjust enrichment claim,
Mr. Weiner seeks unspecified damages that he alleges to be at least $250,000. In
its answer to the complaint, the Company has denied the material allegations of
the complaint, asserted affirmative defenses and also asserted cross-claims
against Mr. Francesco seeking indemnification from, or contribution towards, any
judgment that Mr. Weiner may obtain against the Company. In accordance with an
agreement dated November 11, 1998, the Company has filed a motion to discontinue
the cross-claims that it asserted against Mr. Francesco. No discovery in this
action has yet been taken. Although the Company is vigorously defending this
action there can be no assurance that it will be successful.
F-30
<PAGE>
10. SIGNIFICANT RELATIONSHIPS
During the year ended June 30, 1999, the Company's relationship with DTN
accounted for 94.8% of its revenues. During the year ended June 30, 1998, three
Strategic Marketing Partner relationships accounted for 10.2%, 10.0% and 24.1%,
respectively, of the Company's revenues while during the year ended June 30,
1997, one Strategic Marketing Partner relationship accounted for approximately
46.4% of the Company's revenues.
11. EMPLOYEE STOCK OPTION PLAN
In April 1996, the Board of Directors approved the establishment of an Employee
Stock Option Plan authorizing stock option grants to directors, key employees,
and consultants of the Company. The options are intended to qualify as incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, or as nonqualified stock options. The Plan provides for the
issuance of up to 250,000 of such options at not less than the fair value of the
stock on the date of grant. The options are partially exercisable after one year
from date of grant and expire on the tenth anniversary of the date of grant.
On September 24, 1997, the Compensation Committee granted new stock options to
employees and non-employee directors conditional upon cancellation of all of
their existing stock options. Such options were exercisable at $12.00. On
October 8, 1998, the Board of Directors voted to cancel the outstanding employee
and non-employee director options and reissue options covering a like number of
shares to employees and non-employee directors at an exercise price not less
than the fair value at that date. The exercise price of the options issued to
employees and non-employee directors on October 8, 1998 was $1.29 per share.
Such options expire on October 7, 2008. In accordance with APB No. 25, the
Company has recorded the changes in the fair value of the shares underlying
177,201 of such options to reflect the compensatory nature of their issuance. On
November 20, 1998, the Board of Directors granted employees options to purchase
58,700 shares of Common Stock at $1.625 per share. Such options expire on
November 19, 2008.
On December 29, 1998, the Board approved a plan to compensate non-employee
directors for their service to the Company by granting to them options to
purchase 10,000 shares of the Company's Common Stock at the commencement of each
calendar year. Effective January 1, 1999, the Company issued options to such
persons to purchase 50,000 shares of Common Stock exercisable at $2.35 per share
through December 31, 2003.
On October 13, 1999, the Board of Directors authorized the establishment of the
Company's 1999 Employee Stock Option Plan ("1999 Plan"). The 1999 Plan provides
for the issuance of options to employees and directors for the purchase of a
maximum of 400,000 shares of Common Stock of the Company at not less than the
fair value of the Common Stock on the date of grant. The Board authorized the
issuance of 300,000 of such options to employees at the fair value of the Common
Stock on that date.
F-31
<PAGE>
Information concerning stock options for the Company is as follows:
AVERAGE
EXERCISE
OPTIONS PRICE
-------------------- -----------------------
Balance at July 1, 1996 51,925 $ 38.82
Granted 70,829 31.38
Exercised -- --
Cancelled 66,362 37.32
-------------------- -----------------------
Balance at June 30, 1997 56,392 31.26
Granted 206,391 12.00
Exercised -- --
Cancelled 85,216 25.50
-------------------- -----------------------
Balance at June 30, 1998 177,567 12.00
Granted 463,858 1.92
Exercised -- --
Cancelled 355,524 7.26
==================== =======================
Balance at June 30, 1999 285,901 $ 1.54
==================== =======================
The following table summarizes information about the Company's stock options
outstanding as of June 30, 1999.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -----------------------------------
AVERAGE
AVERAGE REMAINING AVERAGE
RANGE OF NUMBER OF EXERCISE CONTRACTUAL NUMBER OF EXERCISE
EXERCISE PRICES OPTIONS PRICE LIFE (YEARS) OPTIONS PRICE
- --------------------------- ----------------- --------------- --------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
$1.29 - $2.35 285,901 $ 1.54 8.25 81,164 $ 1.96
=========================== ================= =============== =============== ================ ==================
</TABLE>
SUPPLEMENTAL AND PRO FORMA DISCLOSURE
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation." This Statement requires companies to recognize compensation
expense based on the respective fair values of the options at the date of grant.
Companies that choose not to adopt the new rules will continue to apply the
existing accounting rules contained in APB No. 25, but are required to disclose
the pro forma effects on net income and earnings per share, as if the fair value
based method of accounting had been applied.
The pro forma information regarding net loss and loss per share required by
Statement 123 has been determined as if the Company had accounted for its
employee stock option plan under the fair value methods described in that
Statement. The fair value of options granted under the Company's employee stock
option plan was estimated at the date of grant using the Black-Scholes option
pricing model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require
F-32
<PAGE>
the input of highly subjective assumptions including the expected dividend
yield, the expected life of the options, the expected stock price volatility,
and the risk-free interest rate.
Pertinent assumptions with regard to the determination of fair value of the
options and their impact on earnings per share are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- --------------- ------------------
<S> <C> <C> <C>
Weighted average dividend yield for options
granted 0.0% 0.0% 0.0%
Weighted average expected life in years 5.0 5.0 5.0
Weighted average volatility 147.0% 143.9% 70.8%
Risk-free interest rate 5.75% 6.0% 6.5%
Weighted average grant date fair value of
options $1.92 $10.92 $19.80
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. As such, the pro forma
net loss and loss per share are not indicative of future years.
The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------------------------
REPORTED PROFORMA REPORTED PROFORMA REPORTED PROFORMA
--------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net Loss $7,124,126 $7,308,036 $5,040,009 $5,654,512 $4,434,482 $5,209,947
=============== ============== ============== ============== ============== ==============
Loss per Share $6.44 $6.61 $7.65 $8.58 $7.20 $8.46
=============== ============== ============== ============== ============== ==============
</TABLE>
12. SUBSEQUENT EVENTS
On July 1, 1999, the Company entered into an agreement with ASB, a holder of
$325,000 of the Company's Prepaid Warrants, to settle the Company's obligation
to ASB pursuant to the default provisions of the Prepaid Warrants. Pursuant to
such agreement, the Company paid ASB $325,000 to redeem the Prepaid Warrants and
issued 180,000 shares of Common Stock in full settlement of all obligations to
ASB. The Company has agreed to file a registration statement with the Securities
and Exchange Commission covering such shares. Settlement costs of $268,695 have
been recorded as debt origination and other financing costs during the year
ended June 30, 1999.
On October 13, 1999, the Board of Directors agreed to enter into a restricted
stock purchase agreement with Mr. Robert Pearl, Director of Business
Development. Accordingly, Mr. Pearl has been granted 1% of the fully diluted
shares of Common Stock of the Company as of that date at the purchase price of
$.75 per share.
F-33
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SMARTSERV ONLINE, INC.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE NO.
- ------- ----------- --------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation of the Company
3.2 Certificate of Amendment to the Amended and Restated Certificate of
Incorporation filed on June 1, 1998
3.3 Certificate of Amendment to the Amended and Restated Certificate of
Incorporation filed on October 16, 1998
3.4 By-laws of the Company, as amended
4.1 Specimen Certificate of the Company's Common Stock
4.2 Letter agreement dated July 1, 1999 between the Company and Arnhold
and S. Bleichroeder, Inc.
4.3 Securities Purchase Agreement dated as of November 19, 1998 among the
Company and the investors listed therein.
4.4 Settlement Agreement dated as of June 28, 1999 between the Company,
Spencer Trask Securities Incorporated and Kevin Kimberlin Partners, LP
4.5 Warrant Agreement dated as of among the Company and the investors
listed therein.
4.6 Consulting Agreement dated October 25, 1999 between the Company and
Steven Rosner
4.7 Form of warrant issued to Steven Rosner
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP
10.1 Information Distribution License Agreement dated as of July 18, 1994
between the Company and S&P ComStock, Inc.
10.2 New York Stock Exchange, Inc. Agreement for Receipt and Use of Market
Data dated as of August 11, 1994 between the Company and the New York
Stock Exchange, Inc.
10.3 The Nasdaq Stock Market, Inc. Vendor Agreement for Level 1 Service and
Last Sale Service dated as of September 12, 1994 between the Company
and The Nasdaq Stock Exchange, Inc. ("Nasdaq")
10.4 Amendment to Vendor Agreement for Level 1 Service and Last Sale
Service dated as of October 11, 1994 between the Company and Nasdaq
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE NO.
- ------- ----------- --------
<S> <C> <C>
10.5 Lease Agreement dated as of March 4, 1994, between the Company and One
Station Place, L.P. regarding the Company's Stamford, Connecticut
offices
10.6 Lease Modification and Extension Agreement, dated February 6, 1996,
between the Company and One Station Place, L.P. regarding the
Company's Stamford, Connecticut offices
10.7 Form of Registration Rights Agreement between the Company and certain
investors
10.8 Form of 1996 Stock Option Plan
10.9 Form of Registration Rights Agreement issued to purchasers of Prepaid
Common Stock Purchase Warrants
10.10 Consulting Agreement with Bruno Guazzoni
10.11 Agreement between Sprint/United Management Company and SmartServ
Online, Inc. dated September 26, 1997
10.12 Asset Purchase and Software License and Service Agreements between
SmartServ Online, Inc. and Data Transmission Network Corporation,
dated April 23, 1998
10.13 Amendment to the Software and License Agreement between SmartServ
Online, Inc. and Data Transmission Network Corporation, dated June 24,
1999. Portions of this exhibit (indicated by asterisks) have been
omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 and the omitted portions have been filed separately with
the Securities and Exchange Commission
10.14 Letter agreement dated August 26, 1999, amending the Amendment to the
Software and License Agreement between SmartServ Online, Inc. and Data
Transmission Network Corporation, dated June 24, 1999. Portions of
this exhibit(indicated by asterisks) have been omitted pursuant to a
request for confidential treatment pursuant to Rule 24b-2 and the
omitted portions have been filed separately with the Securities and
Exchange Commission
10.15 Amended and Restated Employment Agreement between SmartServ Online,
Inc. and Sebastian E. Cassetta, dated January 1, 1999
10.16 Restricted Stock Purchase Agreement between SmartServ Online, Inc. and
Sebastian E. Cassetta, dated December 29, 1998
10.17 Employment Agreement between SmartServ Online, Inc. and Mario F.
Rossi, dated January 1, 1999
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE NO.
- ------- ----------- --------
<S> <C> <C>
10.18 Restricted Stock Purchase Agreement between SmartServ Online, Inc. and
Mario F. Rossi, dated December 29, 1998
23.1 Consent of Ernst & Young LLP
23.2 Consent of Parker Chapin Flattau & Klimpl, LLP (Included in Exhibit
5.1)
24.1 Power of Attorney of certain directors and officers of SmartServ
(Included as part of the signature page beginning on page II-7 of this
filing)
</TABLE>
EXHIBIT 4.2
July 1, 1999
Mr. Sebastian E. Cassetta
Chairman of the Board, Chief Executive Officer
SmartServ Online, Inc.
One Station Place
Stamford, CT 06902
VIA FACSIMILE
- -------------
Dear Sam:
Pursuant to Arnhold and S. Bleichroeder, Inc.'s ("A&SB") demand for immediate
payment by SmartServ Online, Inc. (the "Company") of the full Default Amount on
A&SB's outstanding $325,000 Prepaid Common Stock Warrants including interest and
penalties totaling $593,695 as of June 28, 1999, A&SB and the Company hereby
agree to the following (the "Resolution").
The Company shall Redeem A&SB's outstanding Prepaid Common Stock Warrants (the
"Warrants") in return for (i) $325,000 in cash (the "Redemption Cash") to be
paid no later than the close of business on July 2, 1999; and (ii) 180,000
shares (the "Settlement Shares") of SmartServ Online, Inc. common stock to be
issued within six (6) business days of the execution of this letter.
The Warrants are to be delivered in physical form by A&SB to Michael Shef, Esq.,
of Parker Chapin et. al., counsel to the Company, who shall hold the Warrants in
escrow until A&SB receives (i) the Redemption Cash by the close of business on
July 2, 1999; and (ii) the Settlement Shares as instructed above. If the
Resolution is not effected as contemplated herein and therefore not accepted by
A&SB, the Warrants will be returned to A&SB as soon as possible thereafter and
A&SB will continue to demand payment from the Company of the full Default Amount
on A&SB's outstanding $325,000 Prepaid Common Stock Warrants including interest
and penalties due, but crediting the Company with the payment to A&SB of the
amount of the Redemption Cash paid to A&SB in and against the amount ultimately
determined to be due to A&SB.
<PAGE>
Mr. Sebastian E. Cassetta
Page 2
If the Warrants are released from Escrow as contemplated herein, A&SB hereby
agrees to, upon satisfaction of the events as described above, release the
Company from all breaches relating to A&SB's investment in the Company's
September 29, 1997 Private Placement of Prepaid Common Stock Purchase Warrants.
Furthermore, the Company agrees to (i) file a Registration Statement with the
S.E.C. as soon as possible after the execution of this letter relating to the
following SmartServ Online, Inc. Common Shares held (or to be held) by A&SB:
180,000 Settlement Shares; 10,000 Penalty Shares issued pursuant to the January
8, 1999 Waiver; and 6,470 Common Shares issued pursuant to the December 9, 1998
Notice of Exercise; (ii) use its best efforts to cause said Registration
Statement to be declared effective by the S.E.C. as soon as practical
thereafter, but in no event later than 90 days from the date this letter is
executed (the "Registration Deadline") and (iii) keep said Registration
Statement effective for a period of one (1) year following the date of its
effectiveness (the "Registration Period").
In the event that the Company fails to obtain the effectiveness of said
Registration Statement, the Company shall make cash registration penalty
payments to A&SB as follows: $10,000 per month until the Company can obtain
effectiveness of said Registration Statement. The first cash registration
penalty payment of $10,000 will become due and immediately payable to A&SB on
the first day following the Registration Deadline. In the event any stop order
or other suspension of effectiveness of the Registration Statement resulting
from the failure of the Company to be current in its filings under the
Securities Exchange Act of 1934 occurs during the Registration Period, the
Company will pay to A&SB cash registration penalty payments to A&SB as follows:
$10,000 per month until the Company can obtain re-effectiveness of said
Registration Statement, starting 30 days following the date any stop order or
other suspension of effectiveness of the Registration Statement occurs.
Please wire the Redemption Cash to the following:
Bank of New York
One Wall Street
New York, NY 10286
Account # 8540905100
ABA #021000018
Arnhold and S. Bleichroeder, Inc.
Re: SmartServ
<PAGE>
Mr. Sebastian E. Cassetta
Page 3
Please call me if you have any questions regarding the above.
Very truly yours,
David E. Basner
Agreed to:
- -------------------------------
Sebastian E. Cassetta
Chairman of the Board, Chief Executive Officer
SmartServ Online, Inc.
Cc: Michael Shef, Parker Chapin et. al.
EXHIBIT 4.3
SECURITIES PURCHASE AGREEMENT, dated November 19, 1998, by and between
SMARTSERV ONLINE, INC., a Delaware corporation (the "Company"), and each of the
Investors (as defined below).
WHEREAS, the Company desires to issue and sell a total of five units (the
"Units"), each Unit consisting of (i) 8% convertible promissory notes in the
original principal amount of $100,000 in the form of Exhibit 1 hereto ("Notes")
and (ii) warrants to purchase shares of Common Stock, par value $.01 per share,
of the Company ("Common Stock") pursuant to a Warrant Agreement and Warrant in
the form of Exhibit 2 hereto ("Warrants"), on the terms and conditions provided
herein (the "Offering");
WHEREAS, each Investor desires and has agreed to purchase at the Closing
(as defined below) the amount of Units set forth on such Investor's signature
page hereto; and
WHEREAS, the parties desire to set forth their mutual agreements with
respect to the sale and purchase of the Units as herein below set forth.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. Definitions.
-------------
As used herein, the following terms shall have the following meanings:
"Business Day" shall mean any day other than a day on which commercial
banks are closed for business in New York.
"Closing" shall mean the closing or closings of the sale of the Units
which shall occur from time to time at the offices of Spencer Trask Securities
Incorporated, 535 Madison Avenue, New York, New York, pursuant to Sections 2.1,
2.2 and 2.3 hereof.
"Common Stock" shall have the meaning set forth in the preamble
hereto.
"Company" shall have the meaning set forth in the preamble hereto.
"Conversion Price" shall have the meaning set forth in the Notes.
"Escrow Account" shall mean account no. 37311689 at Citibank N.A., 153
E. 53rd Street, 20th Floor, New York NY in which each Investor's payment of
Purchase Price is held pursuant to Section 2.2 hereof.
"Escrow Agent" shall mean Piper & Marbury L.L.P.
<PAGE>
"Further Placement" shall mean the closing of a private placement of
the Company's securities in which the Company receives gross proceeds of a
minimum of $5,000,000.
"Investor" shall mean each party that has executed a signature page
hereto as an Investor and delivered the Purchase Price set forth thereon to the
Placement Agent by wire transfer of immediately available funds.
"Majority in Interest" shall mean Investors holding Notes, the
outstanding principal amount of which is in excess of 66.67% of the outstanding
principal amount of all Notes sold in this Offering.
"Maturity Date" shall mean the earliest to occur of (i) the closing of
a private placement of securities in which the Company receives gross proceeds
of a minimum of $5,000,000 or (ii) November 15, 1999.
"Notes" shall have the meaning set forth in the preamble hereto.
"Offering" shall have the meaning set forth in the preamble hereto.
"Offering Period" shall mean the initial 90 day period in which the
Placement Agent uses its best efforts to offer the Units and extension by the
Placement Agent for up to an additional 90 days.
"Placement Agent" shall mean Spencer Trask Securities Incorporated, a
Delaware corporation.
"Public Offering" shall mean an underwritten public offering of equity
securities of the Company pursuant to an effective registration statement under
the Securities Act covering the offer and sale of equity securities of such
entity to the public.
"Purchase Price" shall mean, with respect to the Units, the face
amount of each Note.
"Registrable Shares" shall mean the common stock of the Company issued
upon conversion of the Notes or exercise of the Warrants. Registrable Shares
shall cease to be Registrable Shares when they may be sold under Rule 144(k) and
all requisite steps have been taken to remove any legends or restrictions on
transfer with respect to such Registrable Shares.
"Registration Statement" shall mean any registration statement of the
Company that covers any of the Registrable Shares pursuant to the provisions of
this Agreement, including the prospectus included therein, any amendment or
supplement thereof, including post-effective amendments, and all exhibits and
all material incorporated by reference in such Registration Statement.
-2-
<PAGE>
"SEC" shall mean the United States Securities and Exchange Commission
or any successor thereto.
"Securities" shall mean the Notes, the shares of Common Stock issuable
upon conversion thereof, the Warrants to purchase Common Stock and the shares of
Common Stock issuable upon exercise of the Warrants.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Units" shall have the meaning set forth in the preamble hereto.
"Warrants" shall have the meaning set forth in the preamble hereto.
2. Sale and Purchase of Units: Payment and Interest: Use of Proceeds.
------------------------------------------------------------------
2.1 Purchase. Upon the terms and subject to the conditions
---------
hereof, the Company agrees to sell to each Investor, and each such Investor
agrees to purchase from the Company, the number of Units set forth on such
Investor's signature page hereto at the Closing. The Offering will terminate on
the earliest to occur of (i) expiration of the Offering Period, (ii) the sale of
all of the Units or (iii) the termination of the Offering by the Company. Each
Investor understands and agrees that the Company in its sole discretion reserves
the right to accept or reject this or any other subscription for Units, in whole
or in part, notwithstanding prior receipt by the Investor of notice of
acceptance of this subscription. The Company shall have no obligation hereunder
until the Company shall execute and deliver to the Investor an executed copy of
this Agreement. If this subscription is rejected in whole or the Offering is
terminated by the Company or subscriptions for the Units are not received during
the Offering Period, the Offering will be terminated, no Units will be sold and
all funds received from the Investors will be returned without interest, and
this Agreement shall thereafter be of no further force or effect. If this
subscription is rejected in part, the funds for the rejected portion of this
subscription will be returned without interest, and this Agreement will continue
in full force and effect to the extent this subscription was accepted.
2.2. Escrow of Funds.
----------------
(a) Until Closing, the Purchase Price for the Units (the "Escrow
Amount") will be deposited in the Escrow Account with the Escrow Agent, for the
benefit of the Company. All such funds for subscriptions will be held in the
Escrow Account pursuant to the terms of this Section 2.2. The Company will pay
all fees, if any, related to the establishment and maintenance of the Escrow
Account. Any interest accruing on funds in the Escrow Account shall be utilized
first to reimburse the Company for such fees and the balance shall be
distributed to the Company. The Company and the Placement Agent, as agent for
the Investor, shall send, or cause to be sent, a request that the Escrow Amount
be released at the Closing. The Company hereby agrees that the Placement Agent
shall be solely responsible for the disbursement of the Escrow Amount, and the
Escrow Agent shall be entitled to rely exclusively on such instructions.
-3-
<PAGE>
(b) Any notice, demand or request to the Escrow Agent shall be
sufficient only if received within the applicable time period set forth herein,
if any. Notices, demands and requests shall be delivered by facsimile
transmission (provided receipt is confirmed) or hand delivered by courier with
receipt for signature to it (i) if to the Escrow Agent to it at Piper & Marbury
L.L.P., 1251 Avenue of the Americas, New York, NY 10020, facsimile no. (212)
835-6001, Attention: Paul J. Pollock, Esq.; (ii) if to the Company, to it at the
Company's address, One Station Place, Stamford, Connecticut 06902, facsimile no.
(203) 353-5962; or (iii) if to the Placement Agent, to it at Spencer Trask
Securities Incorporated, 535 Madison Avenue, 18th Floor, New York, New York
10022, facsimile no. (212) 486-7392, Attention: A. Emerson Martin, II. Notices,
demands and requests from the Escrow Agent to the Company or the Placement Agent
shall be delivered to them at their respective addresses set forth herein, in
the manner aforesaid.
(c) If a dispute arises regarding disposition of all or any
portion of the Escrow Amount held by the Escrow Agent, the Escrow Agent shall,
upon written demand by either the Company or the Placement Agent, deposit the
Escrow Amount plus interest in a federal or state court located in the City of
New York, pending the decision of that court, and shall be entitled to rely upon
the decision of that court with respect to the disposition of the Escrow Amount.
(d) The Escrow Agent shall not be liable for any error of
judgment or for any action taken or omitted by it in good faith, or for any
mistake of fact or law, or for anything which it may do or refrain from doing in
connection herewith, except its own gross negligence or willful misconduct.
(e) The Company and the Investors, jointly and severally, hereby
agree to indemnify the Escrow Agent and hold it harmless from and against any
loss, liability, expenses (including reasonable outside attorneys' fees and
expenses), claim or demand arising out of or in connection with the performance
of its obligations in accordance with the provisions of this Agreement, except
for the gross negligence or willful misconduct of the Escrow Agent. These
indemnities shall survive the resignation of the Escrow Agent or the termination
of this Agreement. Notwithstanding the foregoing, the obligation of the Company
and the Investors to indemnify the Escrow Agent shall in no event exceed the
Escrow Amount.
(f) The Company and the Placement Agent acknowledge that the
Escrow Agent is serving as counsel to the Placement Agent. The Escrow Agent
shall be entitled to represent the Placement Agent in any lawsuit arising out of
the terms of this Agreement.
2.3 Closing. At the Closing, the Company shall deliver to each
-------
Investor the Units to be purchased by such Investor, appropriately completed and
duly executed to the Company or Placement Agent against payment therefor in an
amount equal to the Purchase Price thereof by transfer pursuant to Section 2.2
herein of such amount from the Escrow Account to such accounts of the Company as
the Company may designate in writing to the Placement Agent.
-4-
<PAGE>
2.4 Payment of Principal and Interest on Notes. The outstanding
----------------------------------------------
principal amount of each Note shall be due on or before the Maturity Date and
shall bear interest from the date of such Note to the date of repayment at the
rate set forth therein, except as set forth in Section 8 hereof. Interest shall
be payable as provided in such Note. Upon each payment under a Note, the Company
shall simultaneously pay all amounts of the same type due under all other Notes.
2.5 Prepayments.
-----------
(a) Principal of the Notes may be prepaid, together with
interest on the amount prepaid, prior to the Maturity Date, without premium or
penalty, upon delivery of irrevocable written notice by the Company delivered
not less than ten (10) days prior to the date of repayment, subject to the
rights of conversion set forth in the Notes. All amounts prepaid pursuant to
this Section 2.5(a) shall be paid to holders of the Notes in proportion to the
outstanding principal amounts.
(b) The Company shall notify the Investors in writing of the
first closing of the Further Placement. At any time during the ten (10) day
period following receipt of such notice, the Investors shall have the right to
require the Company to prepay up to one-half of the original principal amount of
this Note. Within five (5) days after receipt of such notice, the Company shall
pay such principal amount to the Holder.
2.6 Exercise of Warrants. The terms of the Warrants, including the
--------------------
termination date of the Warrants, shall be as set forth in the Warrant Agreement
annexed hereto as Exhibit 2 and shall be exercisable by the Investors at any
time during the exercise period thereof for the Conversion Price per share,
subject to anti-dilution adjustments as set forth therein.
2.7 Use of Proceeds. The proceeds from the sale of the Units will be
---------------
used as working capital of the Company and for such other purposes as may be
reasonably acceptable to the Placement Agent, exclusive of repayment of
indebtedness to current executive officers or principal shareholders, except as
authorized by the Placement Agent.
3. Conditions. The Company's obligation to sell and each Investor's
----------
obligations to purchase Units agreed to be purchased by it shall be subject to
satisfaction of the following conditions, respectively, on or before the
Closing:
3.1 Conditions to Company's Obligations.
-----------------------------------
(a) subscriptions for all of the Units offered to be sold by the
Company prior to the Closing shall have been agreed to be purchased at the
Closing and the Purchase Price therefor shall be on deposit in cleared funds in
the Escrow Account; and
(b) each Investor shall have executed the signature page and
Accredited Investor Certification attached hereto.
-5-
<PAGE>
3.2 Conditions to Investor's Obligations.
------------------------------------
(a) each of the representations and warranties of the Company
contained in Section 4 hereof shall be true on the date of Closing as though
made on such date;
(b) the Company shall have performed all of its obligations hereunder
to be performed by it on or before the date of Closing;
(c) Placement Agent shall have received, for the benefit of Investors,
a certificate from a duly authorized officer of the Company as to the accuracy
of the matters set forth in (a) and (b) above;
(d) Investor shall have received the Units purchased by it at such
Closing;
(e) Placement Agent shall have received a legal opinion of counsel
addressed to the Investors in form and substance satisfactory to the Placement
Agent as to the matters set forth in Sections 4.1, 4.2, 4.3 and 4.4, subject to
such qualifications and exclusions as may be agreed upon between counsel for the
Placement Agent and counsel for the Company;
(f) there shall be authorized and reserved for issuance, the number of
shares of securities into which (i) the Notes to be sold at such Closing shall
be convertible and (ii) the Warrants to be sold at such Closing shall be
exercisable; and
(g) the Company shall have delivered the Security Agreement in the
form annexed hereto as Exhibit 3.
3.3 Placement Agent's Authorization. Each Investor hereby authorizes
--------------------------------
and directs the Placement Agent to determine, in its sole discretion,
satisfaction of the conditions set forth in Section 3.2 above. Any condition not
so satisfied may be waived in writing by the Placement Agent. Each Investor
agrees to be bound to all such determinations and waivers.
4. Representations, Warranties and Covenants of the Company. To induce
--------------------------------------------------------
each Investor to enter into this Agreement and to purchase Units hereunder, the
Company hereby represents, warrants and covenants to each Investor that:
4.1 Organization, Good Standing, etc. The Company is a
-------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has the requisite corporate power and authority to
own its properties and to carry on its business and to execute and deliver this
Agreement and perform its obligations hereunder. The Company is duly qualified
to transact business and is in good standing in each jurisdiction in which the
failure to so qualify would have a material adverse effect on the business or
properties of the Company.
-6-
<PAGE>
4.2 Corporate Acts and Proceedings. This Agreement has been
------------------------------
duly authorized by all necessary corporate action on behalf of the Company, has
been duly executed and delivered by authorized officers of the Company and is a
valid and binding agreement on the part of the Company enforceable against the
Company in accordance with its terms, except as the enforceability thereof may
be limited by bankruptcy, insolvency, moratorium, fraudulent conveyance,
reorganization or other similar laws affecting the enforcement of creditors'
rights generally and to judicial limitations on the enforcement of the remedy of
specific performance and other equitable remedies. All corporate action
necessary to the authorization, creation, issuance and delivery of the
Securities has been taken by the Company or will be taken by the Company on or
prior to the issuance thereof.
4.3 Capitalization and Issuances of Stock.
--------------------------------------
(a) The Company has authorized and outstanding capital stock as
set forth under the heading "Capitalization" in its Private Placement Memorandum
dated November 19, 1998 (the "Memorandum"). All outstanding shares of capital
stock of the Company are duly authorized, validly issued and outstanding, fully
paid and nonassessable. Except as set forth in the Memorandum: (i) there are no
outstanding options, stock subscription agreements, warrants or other rights
permitting or requiring the Company or others to purchase or acquire any shares
of capital stock or other equity securities of the Company; (ii) there are no
securities issued or outstanding which are convertible into or exchangeable for
any of the foregoing and there are no contracts, commitments or understandings,
whether or not in writing, to issue or grant any such option, warrant, right or
convertible or exchangeable security; (iii) there are no shares of stock or
other securities of the Company reserved for issuance for any purpose; (iv)
there are no voting trusts or other contracts, commitments, understandings,
arrangements or restrictions of any kind with respect to the ownership, voting
or transfer of shares of stock or other securities of the Company to which the
Company or, to the best of the Company's knowledge, any stockholder of the
Company is a party, including without limitation, any preemptive rights, rights
of first refusal, proxies or similar rights and (v) there is no person who holds
a right to require the Company to register any securities of the Company under
the Securities Act or to participate in any such registration. The issued and
outstanding shares of capital stock of the Company conform to all statements in
relation thereto contained in the Memorandum, and the Memorandum describes all
material terms and conditions thereof. All issuances by the Company of its
securities were exempt from registration under the Act and any applicable state
securities laws or were issued pursuant to a registration statement declared
effective by the SEC under the Securities Act and which registration statement
was available for the sale of the type of securities sold thereunder.
(b) The Securities have been duly authorized and, when issued
and delivered against payment therefor as provided in the Memorandum, will be
validly issued, fully paid and nonassessable. No holder of any of the Securities
will be subject to personal liability solely by reason of being such a holder,
and none of the Securities are subject to preemptive or similar rights of any
stockholder or securityholder of the Company. A sufficient number of authorized
but unissued shares of Common Stock have been reserved for issuance, and will
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<PAGE>
continue to be reserved for issuance, upon the conversion of the Notes into
Common Stock and the exercise of the Warrants.
4.4 Non-Contravention. Neither the execution, delivery and performance
-----------------
of this Agreement nor the consummation of the transactions contemplated herein
will violate or be in conflict with any provision of the certificate of
incorporation or by-laws of the Company, or violate or be in conflict with any
debt, note, bond, lease, mortgage, indenture, license, obligation, contract,
commitment, franchise, permit, instrument or other agreement or obligation to
which the Company is a party and for which the Company has not received a
waiver, or violate or be in conflict with any law, judgment, decree, order,
regulation or ordinance by which the Company is bound or affected.
4.5 No Brokers or Finders. Except for the Placement Agent, who has
---------------------
been retained by the Company, and whose fees and commissions will be paid by the
Company, no person, firm or corporation has or will have, as a result of any act
or omission by the Company, any right, interest or valid claim against the
Company, the Placement Agent or any Investor for any commission, fee or other
compensation as a finder or broker, or in any similar capacity, in connection
with the transactions contemplated by this Agreement. The Company will indemnify
and hold each Investor harmless against any and all liability with respect to
any such commission, fee or other compensation which may be payable or
determined to be payable as a result of the actions of the Company in connection
with the transactions contemplated by this Agreement.
4.6 Governmental Authorization; Third Party Consents. No approval,
---------------------------------------------------
consent, compliance, exemption, authorization or other action by, or notice to
or filing with, any governmental authority or any other entity which the Company
has not received, and no lapse of a waiting period, is necessary or required in
connection with the execution, delivery or performance by the Company, or
enforcement against the Company, of this Agreement or the transactions
contemplated hereby.
4.7 Litigation. Except as set forth in the Memorandum, there are no
-----------
legal actions, suits, proceedings, claims or disputes pending, or to the
knowledge of the Company, overtly threatened, at law, in equity, in arbitration
or before any governmental authority in which an adverse determination could
have a material adverse effect on the Company.
4.8 Compliance with Laws. The Company is in compliance in all material
--------------------
respects with all laws, ordinances, regulations and orders of all governmental
entities applicable to the Company.
4.9 Taxes
-----
(a) The Company has filed all returns with respect to all
federal, state, county, local, foreign and other taxes, whether or not measured
in whole or in part by net income (collectively, "Taxes"), required to be filed
through the date hereof in a manner consistent with prior years and all such tax
returns are true and complete in all material respects. The Company
-8-
<PAGE>
has paid all Taxes (including deficiencies, interest, additions to tax or
interest, and penalties with respect thereto) that are due through the date
hereof, or that are claimed or asserted by any taxing authority to be due
through the date hereof, with respect to the operations of the Company in each
case except for those Taxes that are being contested in good faith by
appropriate proceedings and with respect to which adequate reserves have been
set aside. With respect to any period for which Tax returns have not yet been
filed, or for which Taxes are not yet due or owing, the Company has no material
liability for Taxes in each case other than Taxes incurred in the ordinary
course of business.
(b) No audit or other proceedings by any court, taxing
authority, or similar person is pending or, to the knowledge of the Company,
overtly threatened with respect to any Taxes due from or with respect to the
operations of the Company or any Tax return filed by or with respect to the
operations of the Company. No assessment of Taxes is proposed against the
Company or its assets.
4.10 Offering Exemption. Assuming the accuracy of the information
--------------------
provided by the respective Investors in the respective Agreements and (ii) that
the Placement Agent has complied in all material respects with the provisions of
Regulation D promulgated under the Securities Act, the offer and sale of the
Units pursuant to the terms of this Agreement are exempt from the registration
requirements of the Securities Act and the rules and regulations promulgated
thereunder. The Company is not disqualified from the exemption under Regulation
D by virtue of the disqualifications contained in Rule 505(b)(2)(iii) or Rule
507 under the Securities Act.
5. Representations of the Investor. Each Investor hereby severally and not
jointly represents, warrants and covenants to the Company that:
5.1 None of the Securities are registered under the Securities Act or
any state securities laws. The Investor understands that the offering and sale
of the Units is intended to be exempt from registration under the Securities
Act, by virtue of Section 4(2) and/or Section 4(6) thereof and the provisions of
Regulation D promulgated thereunder, based, in part, upon the representations,
warranties and agreements of the Investor contained in this Agreement.
5.2 The Investor and the Investor's attorney, accountant, Investor
representative and/or tax advisor, if any (collectively, the "Advisors") have
received all documents and other information regarding the Company requested by
the Investor, have carefully reviewed such documents and information requested
by the Investor, and the Investor and the Advisors, if any, have had access to
the same kind of information which would be available in a registration
statement filed by the Company under the Securities Act.
5.3Neither the SEC nor any state securities commission has approved
the Securities, or passed upon or endorsed the merits of the Offering.
5.4The Investor acknowledges that all documents, records, and books
pertaining to the investment in the Units have been made available for
inspection by such Investor and the Advisors.
-9-
<PAGE>
5.5The Investor and the Advisors, if any, have had a reasonable
opportunity to ask questions of and receive answers from a person or persons
acting on behalf of the Company concerning the offering of the Units and all
such questions have been answered to the full satisfaction of the Investor and
the Advisors.
5.6In evaluating the suitability of an investment in the Company, the
Investor has not relied upon any representation or other information (oral or
written) other than as contained in documents or answers to questions so
furnished to the Investor or the Advisors by the Company.
5.7The Investor is unaware of, is in no way relying on, and did not
become aware of the offering of the Units through or as a result of any form of
general solicitation or general advertising including, without limitation, any
article, notice, advertisement or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio, in
connection with the offering and sale of the Units and is not subscribing for
Units and did not become aware of the offering of the Units through or as a
result of any seminar or meeting to which the Investor was invited by, or any
solicitation of a subscription by, a person not previously known to the Investor
in connection with investments in securities generally.
5.8The Investor has taken no action which would give rise to any claim
by any person for brokerage commissions, finders' fees or the like relating to
this Agreement or the transactions contemplated hereby (other than commissions
to be paid by the Company to the Placement Agent).
5.9The Investor or the Advisors have such knowledge and experience in
financial, tax and business matters, and, in particular, investments in
securities, so as to enable them to utilize the information made available to
them in connection with this Offering to evaluate the merits and risks of an
investment in the Units and to make an informed investment decision with respect
thereto.
5.10 The Investor is not relying on the Company, the Placement Agent
or any of their respective employees or agents with respect to the legal, tax,
economic and related considerations of an investment in the Units, and the
Investor has relied on the advice of, or has consulted with, only his own
Advisors.
5.11 The Investor is acquiring the Units solely for such Investor's
own account for investment and not with a view to resale or distribution
thereof, in whole or in part. The Investor has no agreement or arrangement,
formal or informal, with any person to sell or transfer all or any part of the
Securities, and the Investor has no plans to enter into any such agreement or
arrangement.
5.12 The Investor must bear the substantial economic risks of the
investment in the Units indefinitely because none of the Securities may be sold,
hypothecated or otherwise disposed of unless subsequently registered under the
Securities Act and applicable state securities laws or an exemption from such
registration is available. Legends shall be placed on the Securities to the
effect that they have not been registered under the Securities Act or applicable
-10-
<PAGE>
state securities laws and appropriate notations thereof will be made in the
Company's stock books. Stop transfer instructions will be placed with the
transfer agent of the Securities. It is not anticipated that there will be any
market for resale of the Units, and such Units will not be freely transferable
at any time in the foreseeable future.
5.13 The Investor has adequate means of providing for such Investor's
current financial needs and foreseeable contingencies and has no need for
liquidity of the investment in the Units.
5.14 The Investor is aware that an investment in the Units involves a
number of very significant risks.
5.15 The Investor meets the requirements of at least one of the
suitability standards for an "accredited investor" as set forth on the
Accredited Investor Certification attached hereto.
5.16 The Investor: (i) if a natural person represents that the
Investor has reached the age of 21 and has full power and authority to execute
and deliver this Agreement and all other related agreements or certificates and
to carry out the provisions hereof and thereof; (ii) if a corporation,
partnership, limited liability company or partnership, association, joint stock
company, trust, unincorporated organization or other entity, represents that
such entity is duly organized, validly existing and in good standing under the
laws of the state of its organization, the consummation of the transactions
contemplated hereby is authorized by, and will not result in a violation of
state law or its charter or other organizational documents, such entity has full
power and authority to execute and deliver this Agreement and all other related
agreements or certificates and to carry out the provisions hereof and thereof
and to purchase and hold the securities constituting the Units, the execution
and delivery of this Agreement has been duly authorized by all necessary action,
this Agreement has been duly executed and delivered on behalf of such entity and
is a legal, valid and binding obligation of such entity, subject to bankruptcy,
etc. and (iii) if executing this Agreement in a representative or fiduciary
capacity, represents that it has full power and authority to execute and deliver
this Agreement in such capacity and on behalf of the subscribing Investor, and
such Investor has full right and power to perform pursuant to this Agreement and
make an investment in the Company, and that this Agreement constitutes a legal,
valid and binding obligation of such entity. The execution and delivery of this
Agreement will not violate or be in conflict with any order, judgment,
injunction, agreement or controlling document to which the Investor is a party
or by which the Investor is bound.
5.17 The Investor represents to the Company that any information which
the Investor has heretofore furnished or furnishes herewith to the Company or
the Placement Agent is complete and accurate in all material respects and may be
relied upon by the Company in determining the availability of an exemption from
registration under federal and state securities laws in connection with this
Offering. The Investor further covenants and agrees that it will notify and
supply corrective information to the Company and the Placement Agent immediately
-11-
<PAGE>
upon the occurrence of any change therein occurring prior to the Company's
issuance of the Securities.
5.18 Other than as set forth in this Agreement, no oral or written
representations have been made, or oral or written information furnished, to the
Investor or the Investor's Advisors, if any, in connection with this Offering.
5.19 Within five (5) days after receipt of a request from the Company
or the Placement Agent, the Investor will provide such information and deliver
such documents as may reasonably be necessary to comply with any and all laws
and ordinances to which the Company or the Placement Agent is subject.
6. Restriction on Transfer of Securities.
-------------------------------------
6.1 Restrictions. The Securities are only transferable pursuant to (a)
------------
an offering registered under the Securities Act, (b) Rule 144 under the
Securities Act (or any similar rule then in effect) if such rule is available,
or (c) subject to the conditions specified elsewhere in this Section 6, any
other legally available means of transfer.
6.2 Legend. Each Security shall be endorsed with the following legend:
------
"THE SECURITIES REPRESENTED HEREBY HAVE BEEN ISSUED WITHOUT
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER
ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED OR PLEDGED
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER APPLICABLE
FEDERAL AND STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
SATISFACTORY TO THE ISSUER THAT THE TRANSFER IS EXEMPT FROM
REGISTRATION UNDER APPLICABLE FEDERAL AND STATE SECURITIES LAWS."
6.3 Removal of Legend. Any legend endorsed on a Security pursuant to
-----------------
Section 6.2 hereof shall be removed, and the Company shall issue a Security
without such legend to the holder of such Security, if such Security is being
disposed of pursuant to a registration statement declared effective under the
Securities Act or pursuant to Rule 144 or any similar rule then in effect or if
such holder provides the Company with an opinion of counsel satisfactory to the
Company to the effect that a transfer of such Security may be made without
registration. In addition, if the holder of such Security delivers to the
Company an opinion of such counsel to the effect that no subsequent transfer of
such Security will require registration under the Securities Act, the Company
shall promptly upon such contemplated transfer deliver new Securities that do
not bear the legend set forth in Section 6.2.
7. Indemnification. The Investor agrees to indemnify and hold harmless the
---------------
Company, the Placement Agent and their respective officers, directors,
employees, agents, control persons and affiliates against all losses,
liabilities, claims, damages, and expenses whatsoever (including, but not
limited to, any and all expenses incurred in investigating,
-12-
<PAGE>
preparing, or defending against any litigation commenced or threatened) based
upon or arising out of any actual or alleged false acknowledgment,
representation or warranty, or misrepresentation or omission to state a material
fact, or breach by the Investor of any covenant or agreement made by the
Investor herein or in any other document delivered in connection with this
Agreement.
8. Events of Default.
-----------------
If any of the following events ("Events of Default") shall occur and be
continuing: (a) the Company fails to pay principal or interest on the Notes when
the same shall become due and payable and such failure shall continue for a
period of fifteen (15) days; (b) the failure by the Company to perform any of
its other material obligations hereunder, which failure shall continue for a
period of ten (10) days after receipt of notice thereof by the Company; (c) any
representations or warranties of the Company contained herein shall prove to
have been false in any material respect when made; (d) any proceedings involving
the Company are commenced by or against the Company under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt, dissolution or
liquidation law or statute of the federal government or any state government
and, if such proceedings are instituted against the Company, the Company by any
action or failure to act indicates its approval of, consent to or acquiescence
therein, or an order shall be entered approving the petition in such proceedings
and, within sixty (60) days after the entry thereof, such order is not vacated
or stayed on appeal or otherwise, or shall otherwise have ceased to continue in
effect; then, (i) as to the Events of Default under clauses (a) or (d) above,
the holder of each affected Note may, at its option, declare such Note to be
forthwith due and payable in cash and (ii) as to the Events of Default under
clauses (b) or (c) above, the Majority in Interest may, at its option, declare
all Notes to be forthwith due and payable in cash. Upon any acceleration of a
Note pursuant to the immediately preceding sentence, the Holder thereof may
pursue all remedies available to it at law or equity and all rights available to
it under its Note including, without limitation, the right to convert the Note
into shares of Common Stock. During the pendency of any Event of Default,
interest shall accrue on the outstanding principal amount of each Note at the
default rate of ten (10%) percent per annum.
9. Registration.
-------------
(a) Agreement to Register.
----------------------
(i) In the event that the offering contemplated by the Further
Placement is terminated prior to the receipt of gross proceeds of not less than
$5,000,000 (the "Termination Date"), the Company shall promptly, but in no event
later than 60 days after the Termination Date, prepare and file with the SEC a
Registration Statement covering the resale of the Registrable Shares and use its
best efforts to cause such Registration Statement to become effective within 90
days from the Termination Date. In the event that the Registration Statement
shall not have been declared effective within 105 days from the Termination
Date, the interest rate on the Notes shall increase ten basis points per day
until such Registration Statement has been declared effective.
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<PAGE>
(ii) If the holders of Registrable Shares desire to distribute
the Registrable Shares by means of an underwriting, they shall so advise the
Company and shall select an underwriter reasonably acceptable to the Company.
The Company and all holders of Registrable Shares proposing to distribute their
Registrable Shares through such underwriter shall enter into an underwriting
agreement in customary form with the underwriter selected for such underwriting
by the holders of Registrable Shares.
(b) Provisions Applicable to Registration. The following provisions
--------------------------------------
shall apply, as applicable, in connection with the Investors' Registrable Shares
to be included in the Registration Statement pursuant to this Section 9:
(i) Each Investor, if reasonably requested by the Company or by
the underwriter with respect to any Public Offering, shall agree not to sell,
make any short sale of, loan, grant any options for the purchase of, or
otherwise dispose of any Registrable Shares (other than those included in the
Registration Statement) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed one
hundred eighty (180) days), from the effective date of such Registration
Statement, or the commencement of the offering, as applicable, as may be
requested by the underwriters;
(ii) Each Investor shall promptly provide the Company with such
non-confidential and non-proprietary information as it shall reasonably request
and that is available to the Investors in order to prepare the Registration
Statement;
(iii) All reasonable and necessary expenses in connection with
the preparation of theRegistration Statement, including, without limitation, any
and all legal, accounting and filing fees, but not including fees and
disbursements of experts and counsel retained by the Investors or underwriting
discounts and commissions to be paid by the Investors, shall be borne by the
Company; and
(iv) The Company shall use its best efforts to effect such
Registration permitting the saleof such Registrable Shares in accordance with
the intended method or methods of distribution thereof, and pursuant thereto,
the Company shall as expeditiously as possible:
(1) prepare and file with the SEC a
Registration Statement relating to the applicable
Registration on any appropriate form under the Securities
Act, which form shall be available for the sale of the
Registrable Shares in accordance with the intended method or
methods of distribution thereof and use its best efforts to
cause such Registration Statement to become effective and
keep such Registration Statement effective in accordance with
Section 9(b)(iv)(2) below;
(2) prepare and file with the SEC such
amendments and post-effective amendments to the Registration
Statement as may be necessary to keep the Registration
effective until all such Registrable Shares are sold; cause
the prospectus to
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<PAGE>
be supplemented by any required prospectus supplement, and as
so supplemented to be filed pursuant to Rule 424 under the
Securities Act; and comply with the provisions of the
Securities Act with respect to the disposition of all
securities covered by such Registration Statement during the
applicable period in accordance with the intended method or
methods of distribution by the sellers thereof as set forth
in such Registration Statement or supplement to the
prospectus; provided, however that the Company may, from time
to time, request that the holders of the Registrable Shares
immediately discontinue the disposition of the Registrable
Shares if the Company determines, in the good faith exercise
of its reasonable business judgment, that the offering and
disposition of the Registrable Shares could materially
interfere with bona fide financing, acquisition or other
material business plans of the Company or would require
disclosure of non-public information, the premature
disclosure of which could materially adversely affect the
Company (it being acknowledged that the Company is not
required to disclose in such request any such transaction,
plan or non-public information), so long as the Company
promptly after the disclosure of such transaction, plan or
non-public information complies with this Section
9(b)(iv)(2).
(3) notify the Investors and the
underwriter, if any, promptly, and (if requested by any such
person) confirm such advice in writing, (A) when the
prospectus or any prospectus supplement or post-effective
amendment has been filed, and, with respect to the
Registration Statement or any post-effective amendment
thereto, when the same has become effective, (B) of any
request by the SEC for amendments or supplements to the
Registration Statement or the prospectus or for additional
information, (C) of the issuance by the SEC of any stop order
suspending the effectiveness of the Registration Statement or
the initiation of any proceedings for that purpose, (D) of
the receipt by the Company of any notification with respect
to the suspension of the qualification of the Registrable
Shares for sale in any jurisdiction or the initiation of any
proceedings for such purpose and (E) subject to the proviso
below, of the happening of any event as a result of which the
prospectus included in such Registration Statement, as then
in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in
light of the circumstances then existing and, subject to
Section 9(b)(iv)(2) above, at the request of any such person,
prepare and furnish to such person a reasonable number of
copies of a supplement to or an amendment of such prospectus
as may be necessary so that, as thereafter delivered to the
purchasers of such shares, such prospectus shall not include
an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the
circumstances then existing; provided, however, the Company
need not disclose the event if it otherwise has not disclosed
such event to the public.
(4) if requested by the underwriter or an
Investor, promptly incorporate in a prospectus supplement or
post-effective amendment such information as the underwriter
and the Investors agree should be included therein relating
to the plan of distribution with respect to such Registrable
Shares, including, without limitation, the
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<PAGE>
purchase price being paid therefor by such underwriters and
with respect to any other terms of the underwritten offering
of the Registrable Shares to be sold in such offering; and
make all required filings of such prospectus supplements or
post-effective amendments as soon as notified of the matters
to be incorporated in such prospectus supplements or
post-effective amendments;
(5) deliver to each Investor and the
underwriters, if any, without charge, as many copies of the
prospectus (including each preliminary prospectus) in
conformity with the requirement of the Securities Act and any
amendments or supplements thereto as such persons may
reasonably request and such other documents as they may
reasonably request to facilitate the prior sale or other
disposition of such Registrable Shares;
(6) prior to any Public Offering of
Registrable Shares, register or qualify or cooperate with the
Investors, or the underwriters, if any, in connection with
the registration or qualification of such Registrable Shares
for offer and sale under the securities or blue sky laws of
such jurisdictions as the Investors or underwriters, if any,
reasonably request in writing and do any and all other acts
or things necessary or advisable to enable the disposition in
such jurisdictions of the Registrable Shares covered by the
Registration Statement; provided, however, that the Company
shall not be required to qualify to do business in any
jurisdiction where it is not then so qualified or to take any
action that would subject it to general service of process in
any such jurisdiction where it is not then so subject or
would subject the Company to any tax in any such jurisdiction
where it is not then so subject; and
(7) with a view to making available the
benefits of certain rules and regulations of the SEC which
may at any time permit the sale of Registrable Shares to the
public without registration, during such time as a public
market exists for its equity securities, the Company agrees
to:
a) make and keep public information
available, as those terms are understood and defined in Rule
144 under the Securities Act, at all times after the
effective date of the first registration under the
Securities Act filed by the Company for an offering of its
equity securities to the general public;
b) use its best efforts to file with the
SEC in a timely manner all reports and other documents
required of the Company under the Securities Act and the
Securities Exchange Act of 1934, as amended (the "Exchange
Act"); and
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<PAGE>
c) furnish to the Investors forthwith
upon the Investors' request a written statement by the
Company as to the Company's compliance with the reporting
requirements of said Rule 144, and of the Securities Act and
the Exchange Act, a copy of the most recent annual or
quarterly report of the Company and such other reports and
documents of the Company as the Investors may reasonably
request in availing themselves of any rule or regulation of
the SEC allowing a holder to sell any such securities
without registration.
(v) Notwithstanding the provisions of this Section 9 to the
contrary, the Company may require:
(1) The Investors to furnish to the
Company such information regarding the distribution of such
securities as the Company may from time to time reasonably
request in writing, and the Company may limit such
registration rights to situations where a proposed
distribution of Registrable Shares is to be effected
forthwith upon the effectiveness of the Registration
Statement; and
(2) The Investors to covenant that the
Investors have not taken, and will not take, directly or
indirectly, any action designed, or which might reasonably be
expected, to cause or result in, under the Exchange Act or
otherwise, or which has caused or resulted in, stabilization
or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Registrable Shares.
(vi) The Investors agree by acquisition of such Registrable
Shares that, upon receipt of the request referred to in the proviso of Section
9(b)(iv)(2) or of any notice from the Company of the happening of any event of
the kind described in Section 9(b)(iv)(3) hereof (other than as provided in
Section 9(b)(iv)(3)(A) hereof), the Investors shall forthwith discontinue
disposition of Registrable Shares until they are advised in writing by the
Company that the use of the prospectus may be resumed, and have received copies
of any additional or supplemental documents or filings that are incorporated by
reference in the prospectus, and, if so directed by the Company, the Investors
shall deliver to the Company (at the Company's expense) all copies other than
permanent file copies then in the Investors' possession, of the prospectus
covering such Registrable Shares current prior to the time of receipt of such
notice.
(c) Lock-Up. Notwithstanding the effectiveness of the
-------
Registration Statement covering the Registrable Shares, the Investors shall not,
directly or indirectly, offer or sell any Registrable Shares issued upon
conversion or exercise of the Registrable Shares (the "Converted Shares") until
the later of the 90th day after the date of conversion or exercise with respect
to such Converted Shares (the "Trigger Date") and thereafter shall not offer or
sell more than the following percentage of the Converted Shares which have been
the subject of such conversion or exercise during the following periods after
the Trigger Date:
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<PAGE>
Days after Trigger Date Percentage of Converted Shares
90-179 25%
180-269 50%
270-359 75%
360 and beyond 100%
(d) Indemnification.
---------------
(i) In the event of a Registration or qualification of any
Registrable Shares under the Securities Act pursuant to the provisions of this
Section 9, the Company shall indemnify and hold harmless the Investors, the
officers and directors of the Investors and each director or officer of any
person or entity who controls the Investors, each underwriter of such
Registrable Shares and each other person or entity who controls the Investors or
such underwriter within the meaning of the Securities Act (collectively, the
"Investor Indemnitees"), from and against any and all losses, claims, damages or
liabilities, joint or several, to which any of the Investor Indemnitees, joint
or several, may become subject under the Securities Act or the applicable
securities laws or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (x)
any untrue statement or alleged untrue statement of any material fact contained
in any Registration Statement under which such Registrable Shares were
registered or qualified under the Securities Act, or any amendment or supplement
thereto, any preliminary prospectus or final prospectus contained therein, or
any supplement thereto, or any document prepared and/or furnished to the
Investors incident to the registration or qualification on any Registrable
Shares, or (y) the omission or alleged omission to state in any Registration
Statement a material fact required to be stated therein or necessary to make the
statements therein not misleading or, with respect to any prospectus, necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading, or (z) any violation by the Company of the Securities
Act or state securities or "blue sky" laws applicable to the Company and
relating to action or inaction required of the Company, in connection with such
registration or qualification under such state securities or "blue sky" laws,
and in each case shall reimburse the Investor Indemnitees for any legal or other
expenses reasonably incurred by such the Investor Indemnitees in connection with
investigating or defending any such loss, claim, damage or liability (or action
in respect thereof); provided, however, that the Company shall not be liable in
any such case to the extent that any such loss, claim, damage or liability (or
action in respect thereof) arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in such
Registration Statement in reliance upon and in conformity with information
furnished to the Company through an instrument duly executed by any of the
Investor Indemnitees; and provided further, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage or liability
(or action in respect thereof) arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission in such
Registration Statement, which untrue statement or alleged untrue statement or
omission or alleged omission is completely corrected in an amendment or
supplement to the Registration Statement and such Investor Indemnitee thereafter
fails to deliver or cause to be delivered such Registration Statement as so
amended or supplemented prior to or
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<PAGE>
concurrently with the sale of the Registrable Shares to the person asserting
such loss, claim, damage or liability (or actions in respect thereof) or expense
after the Company has furnished the Investors with the same.
(ii) In the event of the Registration or qualification of any
Registrable Shares under the Securities Act pursuant to the provisions of this
Section 9, the Investors, severally and not jointly, shall indemnify and hold
harmless the Company, each person who controls the Company within the meaning of
the Securities Act, each officer and director of the Company and any other
Investors from and against any losses, claims, damages or liabilities to which
the Company, such controlling person, any such officer or director or any other
selling holder may become subject under the Securities Act or the applicable
securities laws or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (x)
any untrue statement or alleged untrue statement of any material fact contained
in any Registration Statement under which such Registrable Shares were
registered or qualified under the Securities Act, or any amendment or supplement
thereto, or (y) the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, which untrue statement or alleged untrue statement or omission
or alleged omission was made therein in reliance upon and in conformity with
written information furnished to the Company through an instrument duly executed
by such Investor specifically for use in preparation thereof, and in each case
shall reimburse the Company, such controlling person, each such officer or
director and any other selling holder for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage or liability (or action in respect thereof).
(iii) Promptly after receipt by a person entitled to
indemnification under this Section 9(d) (an "Indemnified Party") of notice of
the commencement of any action or claim relating to any Registration Statement
filed under the provisions of this Section 9 or as to which indemnity may be
sought hereunder, such Indemnified Party shall, if a claim for indemnification
hereunder in respect thereof is to be made against any other party hereto (an
"Indemnifying Party"), give written notice to such Indemnifying Party of the
commencement of such action or claim, but the omission so to notify the
Indemnifying Party will not relieve such person from any liability that such
person may have to any Indemnified Party otherwise than pursuant to the
provisions of this Section 9(d) and shall also not relieve the Indemnifying
Party of such party's obligations under this Section 9(d), except to the extent
that the omission so to notify results in the Indemnifying Party being damaged
solely as a result of the failure to give timely notice. In case any such action
is brought against an Indemnified Party, and such party notifies an Indemnifying
Party of the commencement thereof, the Indemnifying Party shall be entitled (at
such party's own expense) to participate in and, to the extent that the
Indemnifying Party may wish, jointly with any other Indemnifying Party similarly
notified, to assume the defense, with counsel satisfactory to such Indemnified
Party, of such action and/or to settle such action and, after notice from the
Indemnifying Party to such Indemnified Party of its election so to assume the
defense thereof, the Indemnifying Party shall not be liable to such Indemnified
Party for any legal or other expenses subsequently incurred by such Indemnified
Party in connection with the defense thereof, other than the reasonable cost of
investigation; provided, however, that no
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<PAGE>
Indemnifying Party and no Indemnified Party shall enter into any settlement
agreement that would impose any liability on such other party or parties without
the prior written consent of such other party or parties, unless such other
party or parties are fully indemnified to such party's satisfaction, as the case
may be, against any such liability.
(iv) If for any reason the indemnification provided for in
this Section 9 is unavailable to an Indemnified Party or is insufficient to hold
it harmless as contemplated by this Section 9, then the Indemnifying Party shall
contribute to the amount paid or payable by the Indemnified Party as a result of
such loss, claim, damage, liability or action in such proportion as is
appropriate to reflect not only the relative benefits received by the
Indemnified Party and the Indemnifying Party, but also the relative fault of the
Indemnified Party and the Indemnifying Party, as well as any other relevant
equitable considerations. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
10. Miscellaneous.
-------------
10.1 Waivers, Amendments and Approvals. With the written
---------------------------------
consent of a Majority in Interest, the obligations of the Company under this
Agreement may be waived (either generally or in a particular instance and either
retroactively or prospectively) and with the written consent of a Majority in
Interest, the Company may enter into a supplementary agreement for the purpose
of adding any provisions of this Agreement; provided, however, that no such
waiver or supplemental agreement shall (a) modify the definition of Majority in
Interest so as to increase the percentage set forth therein; (b) extend the
Maturity Date; (c) decrease the interest payable under the Notes or (d) increase
the Conversion Price, all of which shall require the unanimous consent of the
Investors. Written notice of any such waiver, consent or agreement of amendment,
modification or supplement shall be given to the record holders of the Notes who
have not previously consented thereto in writing.
10.2 Changes, Waivers, etc. Neither this Agreement nor any
---------------------
provision hereof may be changed, waived, discharged or terminated orally, but
only by a statement in writing signed by the party against which enforcement of
the change, waiver, discharge or termination is sought, except to the extent
provided in Section 10.1 hereof.
10.3 Notices. All notices, requests, demands and other
-------
communications required or permitted hereunder shall be made in writing and
shall be deemed to have been duly given and effective: (i) on the date of
delivery, if delivered personally; (ii) on the earlier of the fourth (4th) day
after mailing or the date of the return receipt acknowledgment if mailed,
postage prepaid, by certified or registered mail, return receipt requested; or
(iii) on the date of transmission if sent by facsimile, telecopy, telegraph,
telex or other similar telegraphic communications equipment,
(a) if to Investor, at its address as shown on such
Investor's signature page hereto, or at such other address as such
holder may specify by written notice to the Company, or
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<PAGE>
(b) if the Company at One Station Place, Stamford, CT
06902, Attention: President, or at such other address as the Company
may specify by written notice to the investors.
10.4 Survival. The Investor's representations and warranties
--------
set forth herein shall survive the Closing.
10.5 Assignment. All terms and provisions of this Agreement
----------
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
10.6 Governing Law. (a) This Agreement and each Unit issued
-------------
hereunder shall be deemed to be a contract made under the laws of the State of
New York and for all purposes shall be construed in accordance with the laws of
said State without giving effect to the rules of said State governing the
conflicts of laws.
(b) The Company and the Investors, by accepting Units issued
pursuant to this Agreement, hereby agree that any action, proceeding or claim
against it or them arising out of, or relating in any way to, this Agreement
shall be brought and enforced in the courts of the United States and the State
of New York, located in the City of New York, and shall be irrevocably submitted
to such jurisdiction, which jurisdiction shall be exclusive. The Company and the
Investors hereby irrevocably waive any objection to such exclusive jurisdiction
or inconvenient forum. Any process or summons to be served upon any of the
Company and the Investors (at the option of the party bringing such action,
proceeding or claim) may be served by transmitting a copy thereof, by registered
or certified mail, return receipt requested, postage prepaid, addressed to it at
the address as set forth in Section 10.3 hereof. Such mailing shall be deemed
personal service and shall be legal and binding upon the party so served in any
action, proceeding or claim. The Company and the Investors agree that the
prevailing party(ies) in any such action or proceeding shall be entitled to
recover from the other party(ies) all of its/their reasonable legal costs and
expenses relating to such action or proceeding and/or incurred in connection
with the preparation therefor. THE COMPANY AND THE INVESTORS AGREE TO WAIVE
THEIR RIGHTS TO A JURY TRIAL ON ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF THIS AGREEMENT OR ANY DOCUMENT OR AGREEMENT CONTEMPLATED HEREBY.
10.7 Blue Sky Qualification. The purchase of Units under this
-----------------------
Agreement is expressly conditioned upon the exemption from qualification of the
offer and sale of the Units from applicable federal and state securities laws.
The Company shall be required to qualify this transaction under the securities
laws of any applicable jurisdiction.
10.8 Headings. The headings of the Sections of this Agreement
--------
have been inserted for convenience of reference only and do not constitute a
part of this Agreement.
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<PAGE>
10.9 Counterparts. This Agreement may be executed in two or
------------
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10.10 Entire Agreement. This Agreement, together with the Note
----------------
and the Warrant Agreement, represent the entire agreement among the parties with
respect to the subject matter hereof superseding all prior agreements and
understandings, written or oral.
10.11 Expenses. Each party shall be responsible and shall pay
--------
for all expenses incurred by it in connection with the preparation, negotiation
and execution of this Agreement and the consummation of the transactions
contemplated herein. All costs of enforcement hereof and of the Notes,
including, without limitation, reasonable attorney's fees, shall be borne by the
Company.
10.12 Confidentiality. The Company and Investor each
---------------
acknowledge and agree that this Agreement, and all other agreements and
instruments contemplated hereby, and all of the terms and provisions hereof and
thereof, and information regarding the identity and business activities of each
Investor, shall be confidential and shall not be disclosed by any party without
the consent of the Company and such Investor, except to the extent such
disclosure is a matter of public record or shall be required by applicable law
or stock exchange or listing rule or regulation. In the event any disclosure is
required to be made as aforesaid, the disclosing party shall, to the extent
practicable, notify the Company and the affected Investor, as the case may be,
of the nature and substance thereof (and provide a draft thereof, if in writing)
prior thereto and permit the other to make reasonable comments thereon with
respect to information relating to it.
10.13 Severability. Each provision of this Agreement shall be
------------
considered separable and if for any reason any provision or provisions hereof
are determined to be invalid or contrary to applicable law, such invalidity or
illegality shall not impair the operation of or affect the remaining portions of
this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed by their duly authorized representatives as of the day and year
first stated above.
SMARTSERV ONLINE, INC.
By: ________________________________
Thomas W. Haller
Chief Financial Officer
[next page is Investor's signature page]
-23-
<PAGE>
SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT, DATED
NOVEMBER 19, 1998, AMONG SMARTSERV ONLINE, INC. AND THE INVESTOR
NAMED BELOW, AMONG OTHERS
IN WITNESS WHEREOF, the Investor has executed this Securities
Purchase Agreement this ___ day of ______________, 1998.
----------------- = ---------------
Amount of Notes Purchase Price
being purchased
-----------------
Amount of Warrants
(face amount of
Notes / $.60)
If the Investor is an INDIVIDUAL, and if purchased as JOINT
TENANTS, as TENANTS IN COMMON, or as COMMUNITY PROPERTY:
- ------------------------------- -------------------------------
Print Name(s) Social Security Number(s)
- ------------------------------- -------------------------------
Signature(s) of Purchaser(s)
- ------------------------------- -------------------------------
Date Address
If the Investor is a PARTNERSHIP, CORPORATION or TRUST:
- ------------------------------- -------------------------------
Name of Partnership, Federal Taxpayer
Corporation or Trust Identification Number
- -------------------------------
Date
By:
---------------------------- --------------------------------
Name: State of Organization
Title:
---------------------------- --------------------------------
Address
EACH INVESTOR MUST COMPLETE THE ACCREDITED INVESTOR
CERTIFICATION ON THE NEXT PAGE.
<PAGE>
Accredited Investor Certification
---------------------------------
(Please initial the appropriate box(es))
------
____ (i) The Investor is a natural person who had individual income of more
than $200,000 in each of the most recent two years, or joint income
with his/her spouse in excess of $300,000 in each of the most recent
two years, and reasonably expect to reach that same income level for
the current year ("income," for purposes hereof, should be computed as
follows: individual or joint adjusted gross income, as reported (or to
be reported) on a federal income tax return, increased by (1) any
deduction of long-term capital gains under section 1202 of the Internal
Revenue Code of 1986 (the "Code"), (2) any deduction for depletion
under Section 611 et seq. of the Code, (3) any exclusion for interest
under Section 103 of the Code and (4) any losses of a partnership as
reported on Schedule E of Form 1040);
____ (ii) The Investor is a natural person whose individual net worth (i.e.,
total assets in excess of total liabilities), or joint net worth with
his/her spouse, will at the time of purchase of the Units be in excess
of $1,000,000;
____ (iii) The Investor is an investor satisfying the requirements of
Section 501(a)(l), (2) or (3) of Regulation D promulgated under the
Securities Act, which includes but is not limited to, a self-directed
employee benefit plan where investment decisions are made solely by
persons who are "accredited investors" as otherwise defined in
Regulation D.
____ (iv) The Investor is a trust, which trust has total assets in excess of
$5,000,000, which is not formed for the specific purchase of acquiring
the Units offered hereby and whose purchase is directed by a
sophisticated person as described in Rule 506(b)(2)(ii) of Regulation D
and who has such knowledge and experience in financial and business
matters that he is capable of evaluating the risks and merits of an
investment in the Units;
____ (v) The Investor is an employee benefit plan within the meaning of
Title I of the Employee Retirement Income Security Act of 1974, and
either (a) the investment decision will be made by a plan fiduciary, as
defined in Section 3(21) of such act, which is either a bank, insurance
company or a registered investment advisor; or (b) the employee benefit
plan has total assets in excess of $5,000,000; or (c) the employee
benefit plan is a self-directed plan, within the meaning of Title I of
such act, and the person directing the purchase is an Accredited
Investor;*
*Note. If the undersigned is relying solely on Item (v) for its Accredited
Investor status, please print the name of the person directing the purchase
in the following space and furnish a completed and signed Accredited
Investor Certification for such person.
-----------------------------
____ (vi) The Investor is a director or executive officer of SmartServ
Online, Inc.; or
____ (vii) The Investor is an entity (other than a trust) in which all of
the equity owners meet the requirements of at least one of the above
subparagraphs.
EXHIBIT 4.4
SMARTSERV ONLINE, INC.
SPENCER TRASK SECURITIES, INC.
KEVIN KIMBERLIN PARTNERS, L.P.
SETTLEMENT AGREEMENT
JUNE 28, 1999
SmartServ Online Inc. ("SmartServ") has certain obligations to Spencer Trask
Securities Incorporated ("Trask") pursuant to a Letter of Intent dated August
11, 1998, as amended on November 24, 1998, and a Letter of Intent dated
September 3, 1998 (together the "Letters of Intent"), as well as a Securities
Purchase Agreement dated November 19, 1998, an 8% Convertible Note dated
November 25, 1998 in the original principal amount of $30,000, a Warrant
Agreement and a related Warrant Certificate each dated November 19, 1999
evidencing the right to purchase 50,000 shares of SmartServ's Common Stock.
SmartServ also has certain obligations to Kevin Kimberlin Partners, L.P.
("Kimberlin") pursuant to a Securities Purchase Agreement dated November 19,
1998, an 8% Convertible Note dated November 25, 1998 in the original principal
amount of $270,000, a Warrant Agreement and a related Warrant Certificate each
dated November 19, 1999 evidencing the right to purchase 450,000 shares of
SmartServ's Common Stock. In full satisfaction of SmartServ's obligation to
Trask and Kimberlin and the termination of the Letters of Intent, SmartServ,
Trask and Kimberlin agree that upon the closing of SmartServ's licensing
agreement with Data Transmission Network Corporation ("Closing"):
i) SmartServ will redeem the 8% convertible notes issued to
Kimberlin and Trask. SmartServ will deliver checks to Kimberlin
and Trask for the principal amounts of $270,000 and $30,000,
respectively, plus interest through the date of Closing,
ii) SmartServ will issue Trask a check in the amount of $150,000 and
execute and deliver the Warrant Agreement and the related Warrant
Certificate each dated November 19, 1998 evidencing the right to
purchase 166,667 shares of SmartServ's Common Stock and the
Warrant Agreement and related Warrant Certificate each dated
January 27, 1999 evidencing the right to purchase 16,666 shares
of SmartServ's Common Stock (the "Agent's Warrants").
iii) In accordance with Section 9 of the Securities Purchase
Agreements referenced above, SmartServ agrees to file a
registration statement covering the resale of the shares issuable
upon exercise of the Warrants and otherwise comply with the
provisions of such Section 9 except that SmartServ shall not be
required to file such registration statement until October 31,
1999. Until October 31, 1999, the registration rights provisions
of the Agent's Warrants shall not apply. SmartServ further agrees
to include the Agent's Warrants in such registration statement.
Notwithstanding the foregoing, Trask and Kimberlin agree to
lock-up and not sell, assign, exercise, transfer, or exchange the
shares issuable upon exercise of the warrants or the Agent's
Warrants until
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<PAGE>
May 15, 2000 except in connection with the merger of SmartServ
with or into another entity in which SmartServ shall not be the
surviving corporation or the sale of all or substantially all of
the assets of SmartServ. SmartServ shall permit Trask to transfer
a portion of the Agent's warrants to officers, directors and
employees of Trask subject to the restrictions set forth in this
Agreement.
iv) SmartServ, Trask and Kimberlin agree that Trask and Kimberlin may
sell, assign, exercise, transfer, or exchange not more than 25%
of the shares issuable on conversion of the warrants or the
Agent's Warrants held by each of them after May 15, 2000, August
15, 2000, November 15, 2000 and February 15, 2001, respectively.
SmartServ agrees that the rights of Trask and Kimberlin to sell,
assign, exercise, transfer, or exchange 25% of the shares issued
on conversion of the warrants or the Agent's Warrants held by
each of them at the above dates shall be cumulative such that
after August 15, 2000 through November 15, 2000, Trask and
Kimberlin will each be able to sell, assign, exercise, transfer,
or exchange up to 50% of the shares issuable upon exercise of the
warrants held by each of them; that after November 15, 2000
through February 15, 2001, Trask and Kimberlin will each be able
to sell, assign, exercise, transfer, or exchange up to 75% of the
shares issuable upon exercise of the warrants held by each of
them; and that after February 15, 2001, Trask and Kimberlin will
each be able to sell, assign, exercise, transfer, or exchange all
of the shares issuable upon exercise of the warrants held by each
of them; in each case subject to applicable federal and state
securities laws.
v) The Letters of Intent will be automatically cancelled upon payment
to Trask and Kimberlin of the amounts enumerated in (i) and (ii)
above and the delivery of the Agent's Warrants.
vi) SmartServ acknowledges that the cancellation of the Letters of
Intent and the determination not to proceed with the offerings
contemplated thereby were initiated by SmartServ. Accordingly,
SmartServ agrees to indemnify and hold harmless Trask and its
directors, officers, employees and agents from and against any
and all liabilities that it may incur arising out of or relating
to the Letters of Intent and the failure to proceed with the
transactions contemplated thereby. In addition, SmartServ, for
itself and its predecessors, successors and assigns does forever
discharge Trask its directors, officers, employees and agents,
from any and all claims, demands, causes and rights of action at
law or in equity which the undersigned had or now has against
Trask, including, but not limited to any and all claims, demands,
causes and rights of action in law or equity that can be asserted
as a result of any acts or omissions of Trask in executing,
operating under or terminating the Letters of Intent or any
transaction contemplated thereunder and all transactions in
anticipation of the private placement.
Promptly after receipt by an indemnified party of notice of the
commencement of any action or claim relating to the Letters of
Intent or the failure to proceed with the transactions
contemplated thereby or as to which
-2-
<PAGE>
indemnity may be sought hereunder, such indemnified party shall,
if a claim for indemnification hereunder in respect thereof is to
be made against SmartServ, give written notice to SmartServ of
the commencement of such action or claim, but the omission so to
notify will not relieve SmartServ from any liability that
SmartServ may have to any indemnified party except to the extent
that the omission so to notify results in SmartServ being damaged
solely as a result of the failure to give timely notice. In case
any such action is brought against an indemnified party, and such
party notifies SmartServ of the commencement thereof, SmartServ
shall be entitled (at its own expense) to participate in and, to
the extent that SmartServ may wish to assume the defense, with
counsel satisfactory to such indemnified party, of such action
and/or to settle such action and, after notice from SmartServ to
such indemnified party of its election so to assume the defense
thereof, SmartServ shall not be liable to such indemnified party
for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof, other
than the reasonable cost of investigations unless counsel to an
indemnified party reasonably concludes that conflicts of interest
would preclude assumption of such defense; provided, however,
that neither SmartServ nor any indemnified party shall enter into
any settlement agreement that would impose any liability on such
other party or parties without the prior written consent of such
other party or parties, unless such other party or parties are
fully indemnified to such party's satisfaction, as the case may
be, against any such liability.
SMARTSERV ONLINE, INC.
- ----------------------------
Sebastian E. Cassetta
Chairman & Chief Executive Officer
SPENCER TRASK SECURITIES, INC.
- ----------------------------
A. Emerson Martin, II
Senior Managing Director
KEVIN KIMBERLIN PARTNERS, L.P.
- -----------------------------
By:
EXHIBIT 4.5
WARRANT AGREEMENT dated as of October 21, 1998 between
SMARTSERV ONLINE, INC., a Delaware corporation (the "Company"), and the
investors whose names appear on the signature page hereto (each, an "Investor"
and, collectively, the "Investors").
W I T N E S S E T H
-------------------
WHEREAS, the Investor has agreed, pursuant to a Securities
Purchase Agreement ("Agreement"), dated as of the date hereof, between the
Investors and the Company, to purchase Units described therein in connection
with the Company's proposed sale of four Units (the "Offering"); and
WHEREAS, each Unit contains warrants ("Warrants") to purchase
shares of Common Stock, $0.01 par value per share, of the Company ("Common
Stock").
NOW, THEREFORE, in consideration of the payment by each
Investor to the Company of ONE DOLLAR, the agreements herein set forth and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. GRANT. Each Investor is hereby granted the right to purchase the
number of shares set forth on such Investor's signature page to the Agreement
("Warrant Shares"), as such number may be adjusted pursuant hereto, at any time
from the date hereof until 5:30 p.m., New York time, on _______________, 2003
(the "Warrant Exercise Term"), at the Exercise Price. "Exercise Price" shall
initially mean $_____ per share as such price may be, from time to time,
adjusted pursuant to Section 7 hereof.
2. WARRANT CERTIFICATES. Simultaneous with the delivery of this Warrant
Agreement, the Company shall deliver to each Investor or each Investor's
designees, warrant certificates (the "Warrant Certificates") evidencing Warrants
to purchase the appropriate number of Warrant Shares. Each Warrant Certificate
delivered and to be delivered pursuant to this Agreement shall be in the form
set forth in Exhibit 1 attached hereto and made a part hereof, with such
appropriate insertions, omissions, substitutions and other variations as
required or permitted by this Agreement and shall be delivered without tax, cost
or other expense of any kind to each Investor. The Warrant Certificates, and the
certificates representing the Warrant Shares and/or other securities, property
or rights issuable upon exercise of the Warrants, shall be executed on behalf of
the Company by the manual or facsimile signature of the then present Chairman or
Vice Chairman of the Board of Directors or President or Vice President of the
Company attested to by the manual or facsimile signature of the then present
Secretary or Assistant Secretary of the Company. Warrant Certificates shall be
dated the date of execution by the Company upon initial issuance notwithstanding
any subsequent division, exchange, substitution or transfer.
3. EXERCISE OF WARRANT.
--------------------
<PAGE>
3.1 METHOD OF EXERCISE. A Warrant Certificate may be exercised
by each Investor and/or other registered holders (collectively, the "Holders")
thereof by surrender of such Warrant Certificate with the annexed Form of
Election to Purchase duly executed, together with payment of the Exercise Price
by certified or official bank check in New York Clearing House funds for the
Warrant Shares purchased, at the Company's principal offices, currently at One
Station Place, Stamford, Connecticut 06902. The Warrant Certificate may be
exercised to purchase all or part of the Warrant Shares covered thereby (but not
for fractional shares of Common Stock). In the event that any Warrant
Certificate is exercised to purchase less than all the Warrant Shares covered
thereby, the Company shall cancel said Warrant Certificate upon the surrender
thereof and shall execute and deliver a new Warrant Certificate of like tenor
for the balance of the Warrant Shares.
3.2 EXERCISE BY SURRENDER OF WARRANT. Warrants may also be
exercised, in full or in part, without cash payment, by surrendering the Warrant
Certificate with the annexed Form of Election to Purchase duly executed in
exchange for the number of shares of Common Stock equal to the product of (i)
the number of shares as to which the Warrants are being exercised multiplied by
(ii) a fraction, the numerator of which is the Market Price (as hereinafter
defined) of the Common Stock minus the Exercise Price and the denominator of
which is such Market Price. For the purposes of this Agreement, the phrase
"Market Price" at any date shall be deemed to be the last reported sale price,
or, in case no such reported sale takes place on such day, the average of the
last reported sale prices for the last five trading days, in either case as
officially reported by the principal securities exchange on which the Common
Stock is listed or admitted to trading, or, if the Common Stock is not listed or
admitted to trading on any national securities exchange, the average closing bid
price as furnished by the National Association of Securities Dealers, Inc.
("NASD") through The NASDAQ Stock Market ("Nasdaq"), the OTC Bulletin Board, or
a similar organization if Nasdaq is no longer reporting such information, or if
the Common Stock is not quoted on Nasdaq or such a similar organization, as
determined in good faith by resolution of the Board of Directors of the Company,
based on the best information available to it.
4. ISSUANCE OF CERTIFICATES. Upon the exercise of the Warrants, the
issuance of certificates for the Warrant Shares shall be made within five (5)
business days thereafter without charge to the Holder thereof including, without
limitation, any tax which may be payable in respect of the issuance thereof.
Such certificates shall be issued in the name of the Holder thereof. The Warrant
Certificates and the certificates representing the Warrant Shares shall be duly
executed on behalf of the Company. Warrant Certificates shall be dated the date
of initial issuance, division, exchange, substitution or transfer.
5. TRANSFER OF SECURITIES. Each Investor covenants and agrees that he
is acquiring the Warrants and the Warrant Shares (collectively, the "Warrant
Securities") for his own account, for investment, and not with a view to
distribution thereof. Holders of the Warrants or Warrant Shares may transfer
such Warrants or Warrant Shares only in compliance with applicable federal and
state securities laws. In order for any transferee of any Warrants or Warrant
Shares to receive any of the benefits of this Agreement, the Company must have
received notice of such
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<PAGE>
transfer, at the address in Section 3.1 above, in the Form of Assignment annexed
hereto, accompanied by an opinion of counsel, which opinion and counsel shall be
reasonably acceptable to the Company, that an exemption from registration of
such Warrants or Warrant Shares under the Securities Act of 1933, as amended
(the "1933 Act"), and under any applicable state securities laws is available.
Any transferee must also covenant and agree that it is acquiring such Warrants
or Warrant Shares, as the case may be, as an investment and not with a view to
distribution thereof.
6. NO REGISTRATION UNDER THE 1933 ACT. The Warrant Securities have not
been registered under the 1933 Act or any state securities or "blue sky" laws
and may not be resold except pursuant to an effective registration statement
thereunder or exemption therefrom. The Warrant Certificates and certificates
representing the Warrant Shares shall bear the legend set forth below:
"The securities represented by this certificate have been issued
without registration under the Securities Act of 1933, as amended, or
under any state securities laws, and may not be sold, transferred or
pledged in the absence of an effective registration statement under
applicable federal and state securities laws, or an opinion of counsel,
that the transfer is exempt from registration under applicable federal
and state securities laws."
7. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SECURITIES.
-------------------------------------------------------
7.1 COMPUTATION OF ADJUSTED EXERCISE PRICE. Except as
hereinafter provided, in case the Company shall at any time after the date
hereof issue or sell any shares of Common Stock, including, without limitation,
shares held in the Company's treasury and shares of Common Stock issued upon the
exercise of any options, rights or warrants to subscribe for shares of Common
Stock and shares of Common Stock issued upon the direct or indirect conversion
or exchange of securities for shares of Common Stock, (i) for a consideration
per share less than the Exercise Price in effect immediately prior to the
issuance or sale of such shares or (ii) to officers, directors or holders of 5%
of more of the Company's outstanding Common Stock on a fully diluted basis for a
consideration per share less than the Market Price of a share of Common Stock on
the last business day immediately preceding the issuance or sale of such shares
(other than shares issued upon the exercise of options, rights or warrants
granted prior to the date hereof or issued upon the exercise of options granted
after the date hereof under the terms of the Company's stock option plan) or
(iii) without consideration, then forthwith upon such issuance or sale, the
Exercise Price shall (until another such issuance or sale) be reduced to the
lower of the prices (calculated to the nearest full cent) determined as follows:
(a) By dividing (i) an amount equal to the sum of (A) the number
of shares of Common Stock outstanding immediately prior to such issuance or sale
multiplied by the then existing Exercise Price, and (B) the aggregate amount of
the consideration, if any, received by the Company upon such issuance or sale,
by (ii) the total number of shares of Common Stock outstanding immediately after
such issuance or sale; and
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(b) By multiplying the Exercise Price in effect immediately prior
to the time of such issuance or sale by a fraction, the numerator of which shall
be the sum of (i) the number of shares of Common Stock outstanding immediately
prior to such issuance or sale multiplied by the Market Price of a share of
Common Stock on the last business day immediately preceding such issuance or
sale, plus (ii) the aggregate amount of the consideration received by the
Company upon such issuance or sale, and the denominator of which shall be the
product of (A) the total number of shares of Common Stock outstanding
immediately after such issuance or sale, multiplied by (B) such Market Price;
provided, however, that in no event shall the Exercise Price be adjusted
pursuant to the computations in this Section 7.1 to an amount in excess of the
Exercise Price in effect immediately prior to such computation, except in the
case of a combination of outstanding shares of Common Stock, as provided by
Section 7.3 hereof.
(c) For the purposes of any computation to be made in accordance
with this Section 7.1, the following provisions shall be applicable:
(1) In case of the issuance or sale of shares of Common Stock for
a consideration part or all of which shall be cash, the amount of the cash
consideration therefor shall be deemed to be the amount of cash received by the
Company for such shares (or, if shares of Common Stock are offered by the
Company for subscription, the subscription price, or, if shares of Common Stock
are sold to underwriters or dealers for public offering without a subscription
offering, the public offering price, before deducting therefrom any compensation
paid or discount allowed in the sale, underwriting or purchase thereof by
underwriters or dealers or others performing similar services, or any expenses
incurred in connection therewith) plus any amounts payable to security holders
or any affiliate thereof, including without limitation, any employment
agreement, royalty, consulting agreement, covenant not to compete, earnout or
contingent payment right or similar arrangement, agreement or understanding,
whether oral or written; all such amounts shall be valued at the aggregate
amount payable thereunder whether such payments are absolute or contingent and
irrespective of the period or uncertainty of payment, the rate of interest, if
any, or the contingent nature thereof except if the payment of such amounts has
been approved by the Placement Agent (as defined in the Agreement).
(2) In case of the issuance or sale (otherwise than as a dividend
or other distribution on any stock of the Company) of shares of Common Stock for
a consideration part or all of which shall be other than cash, the amount of the
consideration therefor other than cash shall be deemed to be the value of such
consideration as determined in good faith by the Board of Directors of the
Company.
(3) Shares of Common Stock issuable by way of dividend or other
distribution on any stock of the Company shall be deemed to have been issued
immediately after the opening of business on the day following the record date
for the determination of stockholders entitled to receive such dividend or other
distribution and shall be deemed to have been issued without consideration.
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(4) The reclassification of securities of the Company other than
shares of Common Stock into securities including shares of Common Stock shall be
deemed to involve the issuance of such shares of Common Stock for a
consideration other than cash immediately after the opening of business on the
day following the record date for the determination of security holders entitled
to receive such shares, and the value of the consideration allocable to such
shares of Common Stock shall be determined as provided in paragraph (2) of this
Section 7.1(c).
(5) The number of shares of Common Stock at any one time
outstanding shall include the aggregate number of shares issued or issuable
(subject to readjustment upon the actual issuance thereof) upon the exercise of
then outstanding options, rights, warrants and upon the conversion or exchange
of then outstanding convertible or exchangeable securities.
(6) No adjustment shall be made to the Exercise Price then in
effect upon the exercise of the Warrants or the conversion or exchange of
convertible or exchangeable securities outstanding as of the date hereof.
7.2 OPTIONS, RIGHTS, WARRANTS AND CONVERTIBLE AND EXCHANGEABLE
SECURITIES. In case the Company shall at any time after the date hereof grant or
issue options, rights or warrants to subscribe for shares of Common Stock, or
issue any securities convertible into or exchangeable for shares of Common
Stock, where the aggregate consideration per share is less than the Exercise
Price in effect immediately prior to the issuance of such options, rights or
warrants, or such convertible or exchangeable securities, the Exercise Price in
effect immediately prior to the issuance of such options, rights or warrants, or
such convertible or exchangeable securities, as the case may be, shall be
reduced to a price determined by making a computation in accordance with the
provisions of Section 7.1 hereof, provided that:
(a) The aggregate maximum number of shares of Common Stock, as
the case may be, issuable under such options, rights or warrants shall be deemed
to be issued and outstanding at the time such options, rights or warrants were
issued;
(b) The aggregate consideration for any such options, rights or
warrants shall be equal to the minimum purchase price per share provided for in
such options, rights or warrants at the time of issuance, plus the
consideration, if any, received by the Company for such options, rights or
warrants;
(c) The aggregate maximum number of shares of Common Stock
issuable upon conversion or exchange of any convertible or exchangeable
securities shall be deemed to be issued and outstanding at the time of issuance
of such securities;
(d) The aggregate consideration for any such convertible or
exchangeable securities shall be equal to the consideration received by the
Company for such securities, plus the minimum consideration, if any, receivable
by the Company upon the conversion or exchange thereof;
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(e) If any change shall occur in the exercise price per share
provided for in any of such options, rights or warrants or in the price per
share at which such convertible or exchangeable securities are convertible or
exchangeable, such options, rights or warrants or convertible or exchangeable
securities, as the case may be, shall be deemed to have expired or terminated on
the date when such price change became effective in respect of shares not
theretofore issued pursuant to the exercise or conversion or exchange thereof,
and the Company shall be deemed to have issued upon such date new options,
rights or warrants or convertible or exchangeable securities at the new price in
respect of the number of shares issuable upon the exercise of such options,
rights or warrants or the conversion or exchange of such convertible or
exchangeable securities; and
(f) In case there has been any adjustment hereunder in the
Exercise Price by reason of the offer, issue or sale of any subscription or
purchase rights or options or any convertible or exchangeable securities or
obligations and the purchase, conversion or exchange privilege so created
thereafter terminates unexercised or changes, such Exercise Price shall as of
the date of such termination or change be adjusted to reflect such termination
or change.
7.3 SUBDIVISION AND COMBINATION. In case the Company shall at any time
subdivide or combine the outstanding shares of Common Stock, the Exercise Price
shall forthwith be proportionately decreased in the case of subdivision or
increased in the case of combination.
7.4 ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Section 7, the number of
Warrant Shares issuable upon exercise of the Warrants shall be adjusted to the
nearest full amount by multiplying a number equal to the Exercise Price in
effect immediately prior to such adjustment by the number of Warrant Shares
issuable upon exercise of the Warrants immediately prior to such adjustment and
dividing the product so obtained by the adjusted Exercise Price.
7.5 DEFINITION OF COMMON STOCK. For the purpose of this Agreement, the
term "Common Stock" shall mean (i) the class of stock designated as Common Stock
in the Certificate of Incorporation of the Company as such Certificate of
Incorporation may be amended as of the date hereof, or (ii) any other class of
stock resulting from successive changes or reclassifications of such Common
Stock consisting solely of changes in par value, or from par value to no par
value, or from no par value to par value.
7.6 MERGER OR CONSOLIDATION. In case of any consolidation of the
Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
each Holder a supplemental warrant agreement providing that the Holder of each
Warrant then outstanding or to be outstanding shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of such
Warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger,
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<PAGE>
by a holder of the number of shares of Common Stock of the Company for which
such Warrant might have been exercised immediately prior to such consolidation
or merger. Such supplemental warrant agreement shall provide for adjustments
which shall be identical to the adjustments provided in this Section 7. The
above provision of this subsection 7.6 shall similarly apply to successive
consolidations or mergers.
7.7 NO ADJUSTMENT OF EXERCISE PRICE IN CERTAIN CASES. No adjustment of
the Exercise Price shall be made:
(a) Upon the issuance of shares of Common Stock issuable upon
conversion of the Notes or exercise of the Warrants contained in Units sold in
the Offering;
(b) Upon the issuance of shares of Common Stock issuable upon
exercise or conversion of securities outstanding as of the date of this Warrant
Agreement;
(c) Upon the issuance of shares issued in respect of the
anti-dilution provisions of any securities of the Company; or
(d) If the amount of said adjustment shall be less than $0.01 per
Warrant Share; provided, however, that in such case any adjustment that would
otherwise be required then to be made shall be carried forward and shall be made
at the time of and together with the next subsequent adjustment which, together
with any adjustment so carried forward, shall amount to at least $0.01 per
Warrant Share.
7.8 DIVIDENDS AND OTHER DISTRIBUTIONS. In the event that the Company
shall at any time prior to the exercise of all Warrants declare a dividend
(other than a dividend consisting solely of shares of Common Stock) or otherwise
distribute to its stockholders any assets, property, rights, evidences of
indebtedness, securities (other than shares of Common Stock), whether issued by
the Company or by another, or any other thing of value, the Holders of the
unexercised Warrants shall thereafter be entitled, in addition to the shares of
Common Stock or other securities and property receivable upon the exercise
thereof, to receive, upon the exercise of such Warrants, the same property,
assets, rights, evidences of indebtedness, securities or any other thing of
value that they would have been entitled to receive at the time of such dividend
or distribution as if the Warrants had been exercised immediately prior to such
dividend or distribution. At the time of any such dividend or distribution, the
Company shall make appropriate reserves to ensure the timely performance of the
provisions of this Subsection 7.8.
8. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES. (a) Each Warrant
Certificate shall be exchangeable, upon the surrender thereof by the registered
Holder at the principal office of the Company and reimbursement to the Company
of all reasonable expenses incidental thereto, for a new Warrant Certificate of
like tenor and date representing in the aggregate the right to purchase the same
number of Warrant Shares in such denominations as shall be designated by the
Holder thereof at the time of such surrender.
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<PAGE>
(b) Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Warrant Certificate, if mutilated, the Company shall make and deliver a new
Warrant Certificate of like tenor, in lieu thereof.
9. ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Warrants, nor shall it be required to issue scrip or
pay cash in lieu of fractional interests, it being the intent of the parties
that all fractional interests shall be eliminated by rounding any fraction to
the nearest whole number of shares of Common Stock or other securities,
properties or rights.
10. RESERVATION OF SECURITIES. The Company shall at all times reserve
and keep available out of its authorized shares of Common Stock, solely for the
purpose of issuance upon the exercise of the Warrants, such number of shares of
Common Stock or other securities, properties or rights as shall be issuable upon
the exercise thereof. The Company covenants and agrees that, upon exercise of
the Warrants and payment of the Exercise Price therefor, all shares of Common
Stock and other securities issuable upon such exercise shall be duly and validly
issued, fully paid, non-assessable and not subject to the preemptive rights of
any stockholder.
11. NOTICES TO WARRANT HOLDERS. Nothing contained in this Agreement
shall be construed as conferring upon the Holders the right to vote for, consent
to or receive notice as a stockholder in respect of, any meetings of
stockholders for the election of directors or any other matter, or to confer
upon the Holders any rights whatsoever as a stockholder of the Company. If,
however, at any time prior to the expiration of the Warrants and their exercise,
any of the following events shall occur:
(a) The Company intends to declare a dividend (other than a
dividend consisting solely of shares of Common Stock) or otherwise distribute to
its stockholders any assets (other than shares of Common Stock), whether issued
by the Company or by another, or any other thing of value; or
(b) The Company shall take a record of the holders of its
shares of Common Stock for the purpose of entitling them to receive a dividend
or distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained earnings, as
indicated by the accounting treatment of such dividend or distribution on the
books of the Company; or
(c) The Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the Company, or
any option right or warrant to subscribe therefor; or
-8-
<PAGE>
(d) A dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall be
proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least fifteen (15) days prior to the date fixed as a record
date or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
12. NOTICES. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, or mailed by registered or certified mail, return receipt requested:
(a) If to a registered Holder of Warrants, to the address of
such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3.1
hereof or to such other address as the Company may designate by notice to the
Holders.
13. SUPPLEMENTS AND AMENDMENTS. Amendments to this Agreement may be
made only with the written consent of the Company and the Holders of a majority
of the Warrants.
14. SUCCESSORS. All the covenants and provisions of this Agreement
shall be binding upon and inure to the benefit of the Company and the Holders
and their respective successors and assigns hereunder.
15. TERMINATION. This Agreement shall terminate at the close of
business on the last date of the Warrant Exercise Term.
16. GOVERNING LAW; SUBMISSION TO JURISDICTION. (a) This Agreement and
each Warrant Certificate issued hereunder shall be deemed to be a contract made
under the laws of the State of New York and for all purposes shall be construed
in accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.
(b) The Company and the Holders, by accepting Warrants issued
pursuant to this Agreement, hereby agree that any action, proceeding or claim
against it or them arising out of, or relating in any way to, this Agreement
shall be brought and enforced in the courts of the United States and the State
of New York, located in the City of New York, and shall be irrevocably submitted
to such jurisdiction, which jurisdiction shall be exclusive. The Company and the
Holders hereby irrevocably waive any objection to such exclusive jurisdiction or
inconvenient forum. Any process or summons to be served upon any of the Company
and the Holders (at the option of the party bringing such action, proceeding or
claim) may be served by transmitting a copy thereof, by registered or certified
mail, return receipt requested, postage
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<PAGE>
prepaid, addressed to it at the address as set forth in Section 12 hereof. Such
mailing shall be deemed personal service and shall be legal and binding upon the
party so served in any action, proceeding or claim. The Company and the Holders
agree that the prevailing party(ies) in any such action or proceeding shall be
entitled to recover from the other party(ies) all of its/their reasonable legal
costs and expenses relating to such action or proceeding and/or incurred in
connection with the preparation therefor. THE COMPANY AND THE HOLDERS AGREE TO
WAIVE THEIR RIGHTS TO A JURY TRIAL ON ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF THIS AGREEMENT OR ANY DOCUMENT OR AGREEMENT CONTEMPLATED HEREBY.
17. ENTIRE AGREEMENT; MODIFICATION. This Agreement contains the entire
understanding among the parties hereto with respect to the subject matter hereof
and may not be modified or amended except as provided in Section 13 hereof or by
a writing duly signed by the party against whom enforcement of the modification
or amendment is sought.
18. SEVERABILITY. If any provision of this Agreement shall be held to
be invalid and unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
19. CAPTIONS. The caption headings of the Sections of this Agreement
are for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
20. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Investors and any other registered Holder(s) of the Warrants or Warrant
Securities any legal or equitable right, remedy or claim under this Agreement;
and this Agreement shall be for the sole and exclusive benefit of the Company
and the Investors and any other Holder(s) of the Warrants or Warrant Shares.
This Agreement shall not be assignable, except as expressly permitted herein.
21. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
[Signature Page follows]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Warrant Agreement to be duly executed, as of the day and year first above
written.
SMARTSERV ONLINE, INC.
By______________________________
Title:
[NEXT PAGE IS INVESTOR'S SIGNATURE PAGE]
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<PAGE>
SIGNATURE PAGE TO WARRANT AGREEMENT, DATED OCTOBER 21, 1998,
AMONG SMARTSERV ONLINE, INC. AND THE INVESTOR NAMED BELOW,
AMONG OTHERS
IN WITNESS WHEREOF, the Investor has executed this Warrant
Agreement this ___ day of ______________, 1998.
----------------- (divided by) $------ = -------------------
Amount of Notes Warrants contained
In Units being Purchased
If the Investor is an INDIVIDUAL, and if purchased as JOINT
TENANTS, as TENANTS IN COMMON, or as COMMUNITY PROPERTY:
- ------------------------------- -------------------------------
Print Name(s) Social Security Number(s)
- ------------------------------- -------------------------------
Signature(s) of Purchaser(s)
- ------------------------------- -------------------------------
Date Address
If the Investor is a PARTNERSHIP, CORPORATION or TRUST:
- ------------------------------- -------------------------------
Name of Partnership, Federal Taxpayer
Corporation or Trust Identification Number
- -------------------------------
Date
By:_____________________________ ________________________________
Name: State of Organization
Title:____________________________ _________________________________
Address
<PAGE>
EXHIBIT 1
[FORM OF WARRANT CERTIFICATE]
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED
WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY
STATE SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED OR PLEDGED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER APPLICABLE FEDERAL AND
STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY,
THAT THE TRANSFER IS EXEMPT FROM REGISTRATION UNDER APPLICABLE FEDERAL AND STATE
SECURITIES LAWS.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO
HEREIN.
No. W- _______ Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that ______________ is the
registered holder of ___________ Warrants each to purchase initially, at any
time after the date hereof until 5:30 p.m. New York time on ______________, 2003
(the "Expiration Date"), one fully paid and non-assessable share of Common
Stock, par value $0.01 per share ("Common Stock"), of the Company at the initial
exercise price, subject to adjustment in certain events (the "Exercise Price"),
of $______ per share upon surrender of this Warrant Certificate and payment of
the Exercise Price at an office or agency of the Company, or by surrender of
this Warrant Certificate in lieu of cash payment, but subject to the conditions
set forth herein and in the Warrant Agreement dated as of October 21, 1998
between the Company and the Investors named therein (the "Warrant Agreement").
Capitalized terms not otherwise defined herein shall have the meanings ascribed
to them in the Warrant Agreement. Payment of the Exercise Price shall be made by
certified or official bank check in New York Clearing House finds payable to the
order of the Company or by any other method permitted by the Warrant Agreement.
No Warrant may be exercised after 5:30 p.m., New York time, on
the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in, and made a part
of, this instrument and is hereby referred to for a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company, the Investors and the holders (the words "holders" or "holder" meaning
the registered holder or registered holders) of the Warrants.
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Upon due presentment for registration of transfer of this
Warrant Certificate in accordance with the Warrant Agreement at an office or
agency of the Company, a new Warrant Certificate or Warrant Certificates of like
tenor and evidencing in the aggregate a like number of Warrants shall be issued
to the transferee(s) in exchange for this Warrant Certificate, subject to the
limitations provided herein and in the Warrant Agreement, without any charge
except for any tax or other governmental charge imposed in connection with such
transfer or as provided in the Warrant Agreement.
Upon the exercise of less than all of the Warrants evidenced by
this Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as
the absolute owner(s) of this Warrant Certificate (notwithstanding any notation
of ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated as of , 1998
SMARTSERV ONLINE, INC.
By: _____________________________
Title:
Attest:
- --------------------------------
Title:
<PAGE>
FORM OF ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase ____________ shares
of Common Stock.
In accordance with the terms of Section 3.1 of the Warrant
Agreement dated as of ___________________, 1998 between SmartServ Online, Inc.
and the Investors named therein, the undersigned requests that a certificate for
such securities be registered in the name of ___________________ whose address
is ____________________________________________ ______________________________
and that such Certificate be delivered to _______________ whose address is
_______________________________________________________________.
Dated: _____________
Signature
----------------------------------
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
-------------------------------------------
(Insert Social Security or Other Identifying
Number of Holder)
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED __________________ hereby sells,
assigns and transfers unto ---------------------------------------------
- ------------------------------------------------------------------------------
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint
________________________________________________, Attorney, to transfer the
within Warrant Certificate on the books of the within-named Company, with full
power of substitution.
Dated: ____________
Signature ______________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
----------------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
EXHIBIT 4.6
CONSULTING AGREEMENT
--------------------
THIS CONSULTING AGREEMENT (the "Agreement") is made this 25th day of
October 1999, by and between SmartServ Online, Inc., a Delaware corporation (the
"Company"), and Steven Rosner (the "Consultant").
RECITALS
WHEREAS, the Company wishes to engage the Consultant to consult with
respect to certain aspects of its business;
WHEREAS, the Consultant is willing to make available to the Company the
consulting services provided for in this Agreement as set forth below;
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the respective
convenants and agreements of the parties herein contained, the parties hereto
agree as follows:
1. TERM.
The term of this Agreement shall commence on the date hereof and end
twelve months thereafter.
2. CONSULTING SERVICES.
(a) For the term of this Agreement, the Consultant agrees to provide the
following Consulting services to the Company:
(i) Consult with the Company's management concerning marketing surveys,
investor profile information, methods of expanding investor support and
increasing investor awareness of the Company and products and/or services.
(ii) Strategic planning (including market analysis, competition analysis,
and identification of strategic business opportunities);
(iii) Market research on proposed new business opportunities;
(iv) Assistance in the preparation of a revised business plan including
financial projections, operating strategy, and business development
strategy;
(v) Identification of and negotiation with merger and/or acquisition
candidates
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(vi) identification and selection, when necessary, of an accounting firm,
appropriate legal counsel, and additional professional advisors;
(vii) Assistance, when necessary, in negotiations leading to strategic
business relationships;
(viii) Preparation of merger agreements, correspondence, and other
documentation necessary to negotiate mergers or acquisitions; and
(ix) Due diligence regarding merger or acquisition candidates including, if
necessary, domestic and international travel for meetings, negotiations and
research.
(b) COMPENSATION. The Company and the Consultant agree that the fair
value of the services to be rendered by Consultant on behalf of the Company is
five thousand dollar ($5,000) per month. In lieu of cash consideration for such
services, Consultant hereby agrees to accept upon execution of this agreement:
(i) A Noncancellable Common Stock Purchase Warrant for the purchase, in the
aggregate, of 100,000 shares of the Common Stock of the Company at an
exercise price of two dollars, sixty-two and one-half cents ($2.625) per
share, and
(ii) A Noncancellable Common Stock Purchase Warrant for the purchase, in
the aggregate, of 100,000 shares of Common Stock of the Company at an
exercise price of three dollars, sixty-two and one-half cents ($3.625).
The warrants shall not be exercisable or transferable for a period of
one hundred and eighty (180) days from date hereof and shall expire on the fifth
anniversary of the date of issuance.
Consultant shall pay all applicable taxes which are assessed against
him as a result of his receipt of compensation under this Agreement, and the
Company shall not withhold any such taxes from the compensation paid to
Consultant. Consultant agrees to indemnify and hold harmless the Company,
together with its officers and directors, with respect to any such taxes or
other assessments which may be due and payable as a result of the payment or
receipt of compensation hereunder.
c. REGISTRATION RIGHTS.
--------------------
(i) As soon as practicable following the date of this Agreement, the
Company shall cause to be prepared and filed with the SEC a Registration
Statement on Form S-8, Form S-3 or other appropriate form (the "Registration
Statement") registering for sale the shares of Common Stock issuable upon
exercise of the Warrants (the "Shares").
(ii) In connection with the preparation and filing of the Registration
Statement, the Company agrees to (1) use its best efforts to cause such
Registration Statement to become and remain effective; (2) prepare and file with
SEC such amendments and supplements to such Registration Statement as may be
necessary to keep such Registration Statement effective for a
2
<PAGE>
period of not less than one-hundred eighty (180) days; (3) furnish to Consultant
such number of copies of a prospectus, including a preliminary prospectus, in
conformity with the requirements of the Securities Act of 1933, as amended (the
"Act"), and such other documents as Consultant may reasonably request in order
to facilitate the disposition of the shares of Common Stock; and (4) use its
best efforts to register and qualify the shares of Common Stock covered by such
Registration Statement under the Blue Sky laws of the States of Connecticut and
Pennsylvania for the distribution of the securities covered by the Registration
Statement. Consultant agrees to cooperate in all reasonable respects with the
preparation and filing of the Registration Statement.
(iii) All fees and other expenses incurred in connection with the
registration, offering and distribution of the shares of Common Stock underlying
the Warrants shall be borne by the Company, including, without limitation, fees
of the Company's legal counsel, Securities and Exchange Commission filing fees,
Blue Sky filing fees, printing costs, accounting costs, transfer agent fees, and
any other miscellaneous costs and disbursements. Consultant shall be liable for
any and all underwriting discounts, brokerage commissions or other fees or
expenses incurred in connection with the sale or other disposition by Consultant
of the shares of Common Stock covered by the Registration Statement.
(iv) To the extent permitted by law, Consultant will indemnify, defend
and hold harmless the Company, and its directors, officers, employees, agents
and representatives, as well as its controlling persons (within the meaning of
the Act) against any losses, claims, damages, liabilities, or expenses,
including without limitation, attorneys' fees and disbursements, which arise out
of or are based upon any violation by Consultant of the Act or under the
Securities Exchange Act of 1934, or any rule or regulation promulgated
thereunder applicable to Consultant, or arise out of or are based upon any
untrue statement or omission of Consultant in this Agreement or any Subscription
Agreement between the Company and Consultant, or arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, but only to the
extent that such untrue statement or alleged untrue statement or omission, or
alleged omission was made in such Registration Statement in reliance upon and in
conformity with information furnished by Consultant in writing, expressly for
use in connection with such Registration Statement.
(v) To the extent permitted by law, the Company will indemnify, defend
and hold the Consultant harmless against any losses, claims, damages,
liabilities, or expenses, including without limitation attorneys' fees and
disbursements, to which Consultant may become subject under the Act to the
extent that such losses, claims, damages or liabilities arise out of or are
based upon any violation by the Company of the Act or under the Securities
Exchange Act of 1934, or any rule or regulation promulgated thereunder
applicable to the Company, or arise out of or are based upon any untrue or
alleged untrue statement of any material fact contained in the Registration
Statement, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statement therein not misleading, or arise out of any violation by the
Company of any rule or regulation promulgated under the Act applicable to the
Company and relating to action or inaction required of the Company in connection
with such Registration Statement; provided, however, that the
3
<PAGE>
indemnification agreement contained in this paragraph shall not apply to any
loss, damage or liability to the extent that same arises out of or is based upon
an untrue statement or omission made in connection with such Registration
Statement in reliance upon and in conformity with information furnished in
writing expressly for use in connection with such Registration Statement by
Consultant.
(vi) Consultant undertakes to comply with all applicable laws governing
the distribution of securities in connection with Consultant's sale of common
stock of the Company acquired pursuant to the exercise of the Warrants,
including, without limitation, Rule 10(b)-6 under the Securities Exchange Act of
1934, and to notify the Company of any changes in Consultant's plan of
distribution, including the determination of the public offering price and any
dealer concession or discount so that the Company can sticker or amend the
Registration Statement as the Company deems appropriate in its sole discretion.
d. EXERCISE OF WARRANTS. The Warrants shall be exercisable by
Consultant by presentation and surrender thereof to the Company with the
purchase form annexed thereto duly executed and accompanied by payment of the
aggregate exercise price, all of which must be delivered prior to the expiration
date.
e. EXPENSES. During the term of the Consultant's engagement hereunder,
the Consultant shall be entitled to receive prompt reimbursement for all
reasonable expenses incurred by the Consultant in performing services hereunder,
including all travel and living expenses while away from home on business at the
request of and in the service of the Company, provided that such expenses are
incurred and accounted for in accordance with the policies and procedures
established by the Company, and that any expenses in excess of $5,000 have been
pre-approved in writing by the Company. Notwithstanding the foregoing, the
Consultant shall bear all expenses in connection with the initial mailing of
material describing the Company to brokers and dealers.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants to the Consultant that as of
the date hereof and as of the Closing Date (after giving effect to the
transactions contemplated hereby):
(a) EXISTENCE AND AUTHORITY. The Company is a corporation duly
organized and validly existing in good standing under the laws of its
jurisdiction of incorporation and has full power and authority to own its
respective property, carry on its respective business as now being conducted,
and enter into and perform its obligations under this Agreement and to issue and
deliver the Shares to be issued by it hereunder. The Company is duly qualified
as a foreign corporation and is in good standing in all jurisdictions in which
it is necessary to be so qualified to transact business as currently conducted.
This Agreement has been duly authorized by all necessary corporate action,
executed, and delivered by the Company, and constitutes the legal, valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms subject to applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights of
creditors generally and to general principles of equity.
4
<PAGE>
(b) AUTHORIZATION AND VALIDITY OF WARRANTS AND SHARES. The Warrants and
the Shares have been duly authorized and are validly issued and outstanding, and
free of any preemptive rights, with no personal liability for the obligations of
the Company attaching to the ownership thereof by reason of such issuance. None
of the Shares is subject to any lien, pledge, security interest or other
encumbrance.
(c) AUTHORIZATION OF AGREEMENT. The Company has taken all actions and
obtained all consents or approvals necessary to authorize it to enter into and
perform its obligations under this Agreement, to issue the Warrants and Shares
to be issued by it and to consummate the transactions contemplated hereby.
(d) NO VIOLATION. Neither the execution or delivery of this Agreement,
the issuance or delivery of the Shares, the performance by the Company of its
obligations under this Agreement, nor the consummation of the transactions
contemplated hereby will conflict with, violate, constitute a breach of or a
default (with the passage of time or otherwise) under, require the consent or
approval of or filing with any person (other than consents and approvals which
have been obtained) and filings which have been made under, or result in the
imposition of a lien on or security interest in any properties or assets of the
Company, pursuant to the charter or bylaws of the Company, any award of any
arbitrator or any agreement (including any agreement with stockholders),
instrument, order, judgment, decree, statute, law, rule or regulation to which
the Company is party or to which any such person or any of their respective
properties or assets is subject.
4. FILINGS.
The Company shall furnish to the Consultant, promptly after the sending
or filing thereof, copies of all reports which the Company sends to its equity
security holders generally, and copies of all reports and registration
statements which the Company files with the Securities and Exchange Commission
(the "Commission"), and any securities exchange or the National Association of
Securities Dealers, Inc. ("NASD").
5. SUPPLYING INFORMATION.
The Company shall cooperate with the Consultant in supplying such
publicly available information as may be reasonably necessary for the Consultant
to complete and file any information reporting forms.
6. INDEMNIFICATION.
The Company shall indemnify the Consultant from and against any and all
expenses (including attorneys' fees), judgments, fines, claims, causes of
action, liabilities and other amounts paid (whether in settlement or otherwise
actually and reasonably incurred) by the Consultant arising out of the
consulting services contemplated by this agreement in connection with such
action, suit or proceeding if (i) the Consultant was made a party to any action,
suit or proceeding by reason of the fact that the Consultant rendered advice or
services pursuant to this
6
<PAGE>
Agreement, and (ii) the Consultant acted in good faith and in a manner
reasonably believed by the Consultant to be in or not opposed to the interests
of the Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the Consultant did not act in good faith and in a manner
reasonably believed by the Consultant to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
Notwithstanding the foregoing, the Company shall not indemnify the Consultant
with respect to any claim, issue or matter as to which the Consultant shall have
been adjudged to be liable for gross negligence or willful misconduct in the
performance of his duties pursuant to this Agreement unless and only to the
extent that the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability, but in view of all
the circumstances of the case, the Consultant is fairly and reasonably entitled
to indemnity for such expenses and which such court shall deem proper.
7. INDEPENDENT CONTRACTOR STATUS.
It is expressly understood and agreed that this is a consulting
agreement only and does not constitute an employer-employee relationship.
Accordingly, the Consultant agrees that the Consultant shall be solely
responsible for payment of his own taxes or sums due to the federal, state or
local governments, overhead, workmen's compensation, fringe benefits, pension
contributions and other expenses. It is further understood and agreed that the
Consultant is an independent contractor and that the Company shall have no right
to control the activities of the Consultant other than during the express period
of time in which the Consultant is performing services hereunder, and that such
control by the Company is solely predicated upon the consulting services
provided hereunder and not because of any presumed employer-employee
relationship. The Consultant shall have no authority to bind the Company.
The parties further acknowledge that the Consultant's services
hereunder are not exclusive, but that the Consultant shall be performing
services, and undertaking other responsibilities, for and with other entities or
persons, which may directly or indirectly compete with the Company. Accordingly,
the services of the Consultant hereunder are on a part-time basis only, and the
Company shall have no direction, control of, or interest in, the Consultant's
services which are not covered by the terms of this Agreement. The Company
hereby waives any conflict of interest which now exists or may hereafter arise
with respect to the Consultant's current or future relationship.
8. NOTICE.
All notices provided by this Agreement shall be in writing and shall be
given by facsimile transmission, overnight courier, by registered mail or by
personal delivery, by one party to the other, addressed to such other party at
the applicable address set forth below, or to such other address as may be given
for such purpose by such other party by notice duly given hereunder. Notice
shall be deemed properly given on the date of delivery.
6
<PAGE>
To Consultant:
Steven Rosner
The GSB Building
One Belmont Avenue
Suite 417
Bala Cynwyd, PA 19004
Facsimile: (610) 660-5905
To the Company:
SmartServ Online, Inc.
Metro Center
One Station Place
Stamford, CT 06902
ATTENTION: Sebastian Cassetta
9. MISCELLANEOUS.
(a) WAIVER. Any term or provision of this Agreement may be waived at
any time by the party entitled to the benefit thereof by a written instrument
duly executed by such party.
(b) ENTIRE AGREEMENT. This Agreement contains the entire understanding
between the parties hereto with respect to the transactions contemplated hereby,
and may not be amended, modified, or altered except by an instrument in writing
signed by the party against whom such amendment, modification, or alteration is
sought to be enforced.
(c) GOVERNING LAW. This Agreement shall be construed and interpreted in
accordance with the laws of the State of Pennsylvania.
(d) BINDING EFFECT. This Agreement shall bind and inure to the benefit
of the parties hereto and their respective heirs, executors, administrators,
successors and assigns.
(e) CONSTRUCTION. The captions and headings contained herein are
inserted for convenient reference only, are not a part hereof and the same shall
not limit or construe the provisions to which they apply. References in this
Agreement to "paragraphs" are to the paragraphs in this Agreement, unless
otherwise noted.
(f) EXPENSES. Each party shall pay and be responsible for the costs and
expenses, including, without limitation, attorneys' fees, incurred by such party
in connection with the negotiation, preparation and execution of this Agreement
and the transactions contemplated hereby.
(g) ASSIGNMENT. No party hereto may assign any of its rights or
delegate any of its obligations under this Agreement without the express written
consent of the other party hereto.
7
<PAGE>
(h) NO RIGHTS TO OTHERS. Nothing herein contained or implied is
intended or shall be construed to confer upon or give rights to any person, firm
or corporation, other than the parties hereto.
(i) COUNTERPART. This Agreement may be executed simultaneously in two
counterparts, each of which shall be deemed an original, but both of which
together shall constitute one and the same agreement, binding upon both parties
hereto, notwithstanding that both parties are not signatories to the original or
the same counterpart.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date and
year first above written.
SMARTSERV ONLINE, INC.
By:
--------------------------------
Sebastian E. Cassetta, Chairman/CEO
-----------------------------------
Steven Rosner
EXHIBIT 4.7
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES MAY NOT
BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER THE ACT OR APPLICABLE BLUE SKY LAWS.
THE REGISTERED HOLDER OF THIS WARRANT, BY ITS ACCEPTANCE HEREOF, AGREES
THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS WARRANT EXCEPT AS HEREIN
PROVIDED.
No.
COMMON STOCK PURCHASE WARRANT
For the Purchase of _____ Shares of Common Stock
of
SMARTSERV ONLINE, INC.
(a Delaware corporation)
1. WARRANT.
--------
THIS CERTIFIES THAT, in exchange for due consideration, the
sufficiency of which is hereby acknowledged, paid by or on behalf of Steven
Rosner (the "Holder"), as registered owner of this Warrant, to SMARTSERV ONLINE,
INC. (the "Company"), the Holder is entitled, at any time and from time to time
during the five (5) year period commencing on ___________ and expiring on and
after 5:00 p.m., New York time on ________ (the "Exercise Period"), to subscribe
for, purchase and receive, in whole or in part, up to ____________ (_______)
shares of Common Stock, $.01 par value (the "Common Stock"), of the Company.
This Warrant is initially exercisable as to each share of Common Stock covered
thereby at $_____ per share (the "Exercise Price"). The term "Exercise Price"
shall mean the initial exercise price or such exercise price, as adjusted in the
manner provided herein, depending on the context.
2. EXERCISE.
--------
In order to exercise this Warrant, the exercise form attached
hereto must be duly executed, completed and delivered to the Company, together
with this Warrant and payment of the Exercise Price for the shares of the Common
Stock being purchased. If the rights represented hereby
<PAGE>
shall not be exercised on or before the end of the Exercise Period, this Warrant
shall become and be void and without further force or effect and all rights
represented hereby shall cease and expire.
3. RESTRICTIONS ON TRANSFER; REGISTRATION OF TRANSFERS.
----------------------------------------------------
3.1 RESTRICTIONS ON TRANSFER. The registered Holder of this
Warrant, by its acceptance hereof, agrees that prior to any proposed transfer of
any Warrants or any securities purchased upon exercise of the Warrants, if such
transfer is not made pursuant to an effective registration statement under the
Securities Act of 1933, as amended (the "Act"), the Warrant holder will, if
requested by the Company, deliver to the Company:
(i) an opinion of counsel reasonably satisfactory in form and
substance to the Company that the Warrants or the securities
purchased upon exercise of the Warrants may be transferred
without registration under the Act;
(ii) an agreement by the proposed transferee to the impression
of the restrictive investment legend set forth below on the
Warrant or the securities to be received;
(iii) an agreement by such transferee that the Company may
place a notation in the stock books of the Company or a "stop
transfer order" with any transfer agent or registrar with
respect to the securities purchased upon exercise of the
Warrants; and
(iv) an agreement by such transferee to be bound by the
provisions of this Section 3 relating to the transfer of such
Warrant or the securities purchased upon exercise of such
Warrant.
Each Warrant holder agrees that each Warrant and each
certificate representing securities purchased upon exercise of this Warrant
shall bear a legend as follows unless such securities have been registered under
the Act:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Act"). The securities may not be offered for sale, sold or
otherwise transferred except pursuant to an effective
registration statement under the Act, or pursuant to an
exemption from registration under the Act or applicable blue
sky laws."
3.2 REGISTRATION OF TRANSFERS. In order to make any permitted
assignment, the Holder must deliver to the Company the assignment form attached
hereto duly executed and completed, together with this Warrant and payment of
all transfer taxes, if any, payable in connection therewith. The Company shall
immediately transfer the number of Warrants specified in the assignment form on
the books of the Company and shall execute and deliver a new warrant or warrants
of like tenor to the appropriate assignee(s) expressly evidencing the right to
purchase the number of shares of Common Stock purchasable hereunder or such
portion of such number as shall be contemplated by such assignment.
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<PAGE>
4. NEW WARRANTS TO BE ISSUED.
--------------------------
4.1 PARTIAL EXERCISE OR TRANSFER. Subject to the restrictions
in Section 3 hereof, this Warrant may be exercised or assigned in whole or in
part. In the event of the exercise or assignment hereof in part only, upon
surrender of this Warrant for cancellation, together with the duly executed
exercise or assignment form and funds sufficient to pay any required transfer
tax, the Company shall cause to be delivered to the Holder without charge a new
warrant or new warrants of like tenor with this Warrant in the name of the
Holder evidencing the right to purchase, in the aggregate, the remaining number
of underlying shares of Common Stock purchasable hereunder after giving effect
to any such partial exercise or assignment.
4.2 LOST CERTIFICATE. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this Warrant
and of an indemnification in favor of the Company, reasonably satisfactory to
it, the Company shall execute and deliver a new warrant of like tenor and date.
Any such new warrants executed and delivered as a result of such loss, theft,
mutilation or destruction shall constitute an additional contractual obligation
on the part of the Company.
5. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SECURITIES.
-------------------------------------------------------
5.1 SUBDIVISION AND COMBINATION. In case the Company shall at
any time subdivide or combine the outstanding shares of Common Stock, the
Exercise Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination.
5.2 ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of
the Exercise Price pursuant to the provisions of this Section 5, the number of
shares of Common Stock issuable upon the exercise of this Warrant shall be
adjusted to the nearest full number obtained by multiplying the Exercise Price
in effect immediately prior to such adjustment by the number of shares of Common
Stock issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product so obtained by the adjusted Exercise Price.
5.3 RECAPITALIZATION. For the purpose of this Warrant, the
term "Common Stock" shall also mean any other class of stock resulting from
successive changes or reclassifications of Common Stock consisting solely of
changes in par value, or from par value to no par value, or from no par value to
par value.
5.4 MERGER OR CONSOLIDATION. In case of any consolidation of
the Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder(s) a supplemental warrant providing that the holder of each warrant
then outstanding or to be outstanding shall have the right thereafter (until the
stated expiration of such warrant) to receive, upon exercise of such warrant,
the kind and amount of shares of stock and other securities and property
receivable upon such consolidation or merger, by a holder of the number of
shares of Common Stock of the Company for which such warrants might have been
exercised immediately
-3-
<PAGE>
prior to such consolidation, merger, sale or transfer. Such supplemental
warrants shall provide for adjustments which shall be identical to the
adjustments provided in Section 5. The above provision of this Section shall
similarly apply to successive consolidations or mergers.
5.5 REDEMPTION OF WARRANTS. This Warrant cannot be redeemed by
the Company without the prior written consent of the Holder.
5.6 DIVIDENDS AND OTHER DISTRIBUTIONS. In the event that the
Company shall at any time prior to the exercise in full of this Warrant declare
a non-cash dividend (other than a dividend consisting solely of shares of Common
Stock) or otherwise distribute to its stockholders any assets, property, rights,
evidences of indebtedness, securities (other than shares of Common Stock),
whether issued by the Company or by another, or any other thing of value other
than cash, the Holder of this Warrant shall thereafter be entitled, in addition
to the shares of Common Stock or other securities and property receivable upon
the exercise thereof, to receive, upon the exercise of such Warrant, the same
property, assets, rights, evidences of indebtedness, securities or any other
thing of value that it would have been entitled to receive at the time of such
dividend or distribution as if the Warrant had been exercised immediately prior
to such dividend or distribution. At the time of any such dividend or
distribution, the Company shall make appropriate reserves to ensure the timely
performance of the provisions of this Section 5.6.
5.7 ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not
be required to issue certificates representing fractions of shares of Common
Stock upon the exercise of the Warrant, nor shall it be required to issue scrip
or pay cash in lieu of any fractional interests, it being the intent of the
parties that all fractional interests shall be eliminated by rounding any
fraction up to the nearest whole number of shares of Common Stock or other
securities, properties or rights as shall be issuable upon the exercise thereof.
6. RESERVATION.
The Company shall at all times reserve and keep available out
of its authorized shares of Common Stock, solely for the purpose of issuance
upon exercise of the Warrant, such number of shares of Common Stock or other
securities, properties or rights as shall be issuable upon the exercise thereof.
The Company covenants and agrees that, upon exercise of the Warrant and payment
of the Exercise Price therefor, all shares of Common Stock and other securities
issuable upon such exercise shall be duly and validly issued, fully paid and
nonassessable.
7. CERTAIN NOTICE REQUIREMENTS.
7.1 HOLDER'S RIGHT TO RECEIVE NOTICE. Nothing herein shall be
construed as conferring upon the Holder the right to vote or consent or to
receive notice as a stockholder for the election of directors or any other
matter, or as having any rights whatsoever as a stockholder of the Company. If,
however, at any time prior to the expiration of the Warrant and its exercise,
any of the events described in Section 7.2 shall occur, then, in one or more of
said events, the Company shall give written notice of such event at least
fifteen (15) days prior to the date fixed as a record date or the date of
closing the transfer books for the determination of the stockholders entitled to
such
-4-
<PAGE>
dividend, distribution, conversion or exchange of securities or subscription
rights, or entitled to vote on such proposed dissolution, liquidation, winding
up or sale. Such notice shall specify such record date or the date of the
closing of the transfer books, as the case may be.
7.2 EVENTS REQUIRING NOTICE. The Company shall be required to
give the notice described in this Section 7 upon one or more of the following
events: (i) if the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or distribution
payable otherwise than out of retained earnings, as indicated by the accounting
treatment of such dividend or distribution on the books of the Company, or (ii)
a dissolution, liquidation or winding up of the Company (other than in
connection with a consolidation or merger) or a sale of all or substantially all
of its property, assets and business shall be proposed.
7.3 NOTICE OF CHANGE IN EXERCISE PRICE. The Company shall,
promptly after an event requiring a change in the Exercise Price pursuant to
Section 5 hereof, send notice to the Holders of such event and change (the
"Price Notice"). The Price Notice shall describe the event causing the change
and the method of calculating same and shall be certified as being true and
accurate by the Company's Chief Executive Officer and Treasurer.
7.4 TRANSMITTAL OF NOTICES. All notices, requests, consents
and other communications under this Warrant shall be in writing and shall be
deemed to have been duly given or made when hand delivered, or when delivered by
responsible overnight courier:
(i) If to the registered Holder of this Warrant, to:
Steven Rosner
The GSB Building
One Belmont Avenue, Suite 417
Bala Cynwyd, PA 19004
(ii) if to the Company, to:
SmartServ Online, Inc.
Metro Center
One Station Place
Stamford, CT 06902
Attention: Chief Executive Officer
Either of the Holder or the Company may change the foregoing address by notice
given pursuant to this Section 7.4.
8. MISCELLANEOUS.
8.1 AMENDMENTS. The Company and the Holder may from time to
time supplement or amend this Warrant without the approval of any other Holder
in order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or
-5-
<PAGE>
inconsistent with any other provisions herein, or to make any other provisions
in regard to matters or questions arising hereunder which the Company may deem
necessary or desirable and which the Company deems shall not adversely affect
the interest of the Holder. All other modifications or amendments shall require
the written consent of the party against whom enforcement of the modification or
amendment is sought.
8.2 HEADINGS. The headings contained herein are for the sole
purpose of convenience of reference, and shall not in any way limit or affect
the meaning or interpretation of any of the terms or provisions of this Warrant.
8.3 ENTIRE AGREEMENT. This Warrant (together with the other
agreements and documents being delivered pursuant to or in connection with this
Warrant) constitute the entire agreement of the parties hereto with respect to
the subject matter hereof, and supersede all prior agreements and understandings
of the parties, oral and written, with respect to the subject matter hereof.
8.4 BINDING EFFECT. This Warrant shall inure solely to the
benefit of and shall be binding upon, the Holder and the Company and their
permitted assignees, respective successors, legal representatives and assigns,
and no other person shall have or be construed to have any legal or equitable
right, remedy or claim under or in respect of or by virtue of this Warrant or
any provisions herein contained.
8.5 GOVERNING LAW; SUBMISSION TO JURISDICTION. This Warrant
shall be governed by and construed and enforced in accordance with the laws of
the State of Connecticut, without giving effect to principles of conflicts of
laws. Any action, proceeding or claim against the Company or the Holder arising
out of, or relating in any way to this Warrant shall be brought and enforced in
the courts of the State of Connecticut or of the United States of America for
the Federal District of Connecticut, and the Company and the Holder irrevocably
submit to such jurisdiction, which jurisdiction shall be exclusive. The parties
hereto waive any objection to such exclusive jurisdiction and that such courts
represent an inconvenient forum. The prevailing party in any such action shall
be entitled to recover from the other party all of its reasonable attorneys'
fees and expenses relating to such action or proceeding and/or incurred in
connection with the preparation therefore.
8.6 WAIVER, ETC. The failure of the Company or the Holder to
at any time enforce any of the provisions of this Warrant shall not be deemed or
construed to be a waiver of any such provision, nor in any way to affect the
validity of this Warrant or any provision hereof or the right of the Company or
any Holder to thereafter enforce each and every provision of this Warrant. No
waiver of any breach, noncompliance or nonfulfillment of any of the provisions
of this Warrant shall be effective unless set forth in a written instrument
executed by the party or parties against whom or which enforcement of such
waiver is sought; and no waiver of any such breach, noncompliance or
nonfulfillment shall be construed or deemed to be a waiver of any other or
subsequent breach,
-6-
<PAGE>
noncompliance or nonfulfillment.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer on the __ day of _____, 199__.
SMARTSERV ONLINE, INC.
By:______________________________
Name:
Title:
-7-
<PAGE>
Form to be used to exercise Warrant:
SMARTSERV ONLINE, INC.
Metro Center
One Station Place
Stamford, CT 06902
Date: __________________
The Undersigned hereby elects irrevocably to exercise the
within Warrant and to purchase __________ shares of Common Stock of SmartServ
Online, Inc. and hereby makes payment of $_____________ (at the rate of
$______________ per share) in payment of the Exercise Price pursuant thereto.
Please issue the shares as to which this Warrant is exercised in accordance with
the instructions given below.
---------------------------------
Signature
---------------------------------
Signature Guaranteed
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name
----------------------------------------------------------------------------
(Print in Block Letters)
Address
-------------------------------------------------------------------------
NOTICE: The signature to this form must correspond with the
name as written upon the face of the within Warrant in every particular without
alteration or enlargement or any change whatsoever, and must be guaranteed by a
bank, other than a savings bank, or by a trust company or by a firm having
membership on a registered national securities exchange.
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<PAGE>
Form to be used to assign Warrant:
ASSIGNMENT
(To be executed by the registered Holder to effect a transfer
of the within Warrant):
FOR VALUE RECEIVED, ________________________________ does
hereby sell, assign and transfer unto __________________________ the right to
purchase ____________ shares of Common Stock of SmartServ Online, Inc. (the
"Company") evidenced by the within Warrant and does hereby authorize the Company
to transfer such right on the books of the Company.
Dated:___________________
--------------------------
Signature
--------------------------
Signature Guaranteed
NOTICE: The signature to this form must correspond with the
name as written upon the face of the within Warrant in every particular without
alteration or enlargement or any change whatsoever, and must be guaranteed by a
bank, other than a savings bank, or by a trust company or by a firm having
membership on a registered national securities exchange.
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EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated October 13,1999 in the Registration Statement (Form
SB-2) and related Prospectus of SmartServ Online, Inc. for the registration of
1,453,970 shares of its common stock.
Stamford, Connecticut /s/ Ernst & Young LLP
December 10, 1999
