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FORM 10-QSB
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
Commission file number 0-28008
SmartServ Online, Inc.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 13-3750708
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Metro Center, One Station Place, Stamford, Connecticut 06902
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(Address of principal executive offices) (Zip code)
(203) 353-5950
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
Transitional Small Business Disclosure Format (check one)
Yes ______ No X
The number of shares of common stock, $.01 par value, outstanding as of February
24, 1999 was 1,199,787.
<PAGE>
SmartServ Online, Inc.
Form 10-QSB
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - June 30, 1998 and December 31, 1998 (unaudited).....2
Statements of Operations - three months ended December 31, 1998 and
1997 and six months ended December 31, 1998 and 1997 (unaudited).....3
Statement of Changes in Stockholders' Deficiency - six months
ended December 31, 1998 (unaudited)..................................4
Statements of Cash Flows - three months ended December 31, 1998 and
1997 and six months ended December 31, 1998 and 1997 (unaudited).....5
Notes to Unaudited Financial Statements..............................6
Item 2. Management's Discussion and Analysis or Plan of Operation...........12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................18
Item 2. Changes in Securities and Use of Proceeds...........................18
Item 6. Exhibits and Reports on Form 8-K....................................19
Signatures..........................................................20
<PAGE>
<TABLE>
<CAPTION>
SmartServ Online, Inc.
Balance Sheets
December 31, June 30,
1998 1998
-------------------- -------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash $ 36,564 $ 354,225
Accounts receivable, net of an allowance for losses
of $-0- at December 31, 1998 and June 30, 1998 76,240 111,051
Prepaid expenses 120,315 130,603
-------------------- -------------------
Total current assets 233,119 595,879
-------------------- -------------------
Property and equipment - net 535,750 610,537
Other assets
Capitalized software development costs - net 476,396 --
Deferred financing costs 92,780 --
Security deposits 70,437 70,437
-------------------- -------------------
639,613 70,437
-------------------- -------------------
Total Assets $ 1,408,482 $ 1,276,853
==================== ===================
Liabilities and Stockholders' Deficiency
Current liabilities
Notes payable $ 641,794 --
Accounts payable 1,286,395 $ 800,545
Accrued liabilities 501,793 736,137
Accrued interest payable 3,776 --
Payroll taxes payable 2,182 4,294
Salaries payable 20,216 53,014
Current portion of capital lease obligation 81,459 76,127
Deferred revenues 958,032 776,049
-------------------- -------------------
Total current liabilities 3,495,647 2,446,166
-------------------- -------------------
Long-term portion of capital lease obligation 31,863 77,548
Stockholders' Deficiency
Common stock - $.01 par value
Authorized - 40,000,000 shares
Issued and outstanding - 836,227 shares at June 30, 1998
and 1,189,787 shares at December 31, 1998 11,898 8,362
Common stock subscribed 1,812,554 --
Notes receivable from officers (1,812,554) --
Additional paid-in capital 20,384,969 18,184,580
Deferred financing costs (1,271,150) --
Unearned compensation (4,035,414) (4,617,924)
Accumulated deficit (17,209,331) (14,821,879)
-------------------- -------------------
Total stockholders' deficiency (2,119,028) (1,246,861)
-------------------- -------------------
Total Liabilities and Stockholders' Deficiency $ 1,408,482 $ 1,276,853
==================== ===================
</TABLE>
See accompanying notes.
2
<PAGE>
<TABLE>
<CAPTION>
SmartServ Online, Inc.
Statements of Operations
(Unaudited)
Three Months Six Months
Ended December 31 Ended December 31
--------------------------------------- -------------------------------------
1998 1997 1998 1997
------------------ ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Revenues $ 344,024 $ 181,594 $ 693,729 $ 381,787
------------------ ----------------- ---------------- -----------------
Costs and expenses:
Costs of revenues 182,437 340,713 389,521 718,685
Product development expenses 24,170 222,632 51,216 427,705
Selling, general and administrative
expenses 1,001,697 630,764 1,832,555 1,160,227
------------------ ----------------- ---------------- -----------------
Total costs and expenses 1,208,304 1,194,109 2,273,292 2,306,617
------------------ ----------------- ---------------- -----------------
Loss from operations (864,280) (1,012,515) (1,579,563) (1,924,830)
------------------ ----------------- ---------------- -----------------
Other income (expense):
Interest income 706 21,544 2,908 22,631
Interest expense and other
financing costs (669,701) (68,769) (810,797) (675,081)
------------------ ----------------- ---------------- -----------------
(668,995) (47,225) (807,889) (652,450)
------------------ ----------------- ---------------- -----------------
Net loss $ (1,533,275) $ (1,059,740) $ (2,387,452) $ (2,577,280)
================== ================= ================ =================
Comprehensive loss $ (1,533,275) $ (1,059,740) $ (2,387,452) $ (2,577,280)
================== ================= ================ =================
Basic common share
and diluted earnings per common share
$ (1.41) $ (1.72) $ (2.36) $ (4.19)
================== ================= ================ =================
Weighted average shares outstanding 1,089,881 615,833 1,010,487 615,833
================== ================= ================ =================
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
<CAPTION>
SmartServ Online, Inc.
Statement of Changes in Stockholders' Deficiency
Six Months Ended December 31, 1998
(Unaudited)
Notes
Common Stock Common Receivable Additional Deferred
Par Stock from Paid-in Financing Unearned Accumulated
Shares Value Subscribed Officers Capital Costs Compensation Deficit
------------------- ----------- ------------ ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance 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 50,000 500 -- -- 121,375 -- -- --
Issuance of Common Stock
Purchase Warrants in
connection with
prepayments made by a
marketing partner -- -- -- -- 6,300 -- -- --
Issuance of 1,000,000
Common Stock Purchase
Warrants in connection
with the issuance of 8%
convertible note -- -- -- -- 1,430,000 $(1,430,000) -- --
Beneficial conversion
feature of 8%
convertible notes -- -- -- -- 500,000 -- -- --
Issuance of Common Stock in
partial settlement of
litigation 125,000 1,250 -- -- 131,500 -- -- --
Issuance of Common Stock
Purchase Warrants in
partial settlement of
litigation -- -- -- -- 13,000 -- -- --
Amortization of unearned
compensation over the
term of the agreement -- -- -- -- -- -- $582,510 --
Amortization of deferred
financing costs in
connection with the
issuance of convertible
notes -- -- -- -- -- 158,850 -- --
Common Stock subscriptions
and notes receivable in
connection with
officers' employment
agreements -- -- $1,812,554 $(1,812,554) -- -- -- --
Net loss for the period -- -- -- -- -- -- -- (2,387,452)
---------- -------- ----------- ------------ ------------- ------------- -------------- --------------
Balance at December 31, 1998 1,189,787 $11,898 $1,812,554 $(1,812,554) $20,384,969 $(1,271,150) $(4,035,414) $(17,209,331)
========== ======== =========== ============ ============= ============= ============== ==============
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
<CAPTION>
SmartServ Online, Inc.
Statements of Cash Flows
(Unaudited)
Three Months Six Months
Ended December 31 Ended December 31
------------------------------------ -------------------------------------
1998 1997 1998 1997
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Operating Activities
Net loss $ (1,533,275) $ (1,059,740) $ (2,387,452) $ (2,577,280)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization of property
and equipment 49,779 47,264 97,482 93,337
Non-cash interest expense and other
financing costs 666,070 66,000 794,245 681,564
Amortization of consulting costs 335,004 80,975 665,425 80,975
Amortization of unearned revenues (15,534) (2,377) (31,068) (4,667)
Amortization and write-off of deferred charges -- -- -- 63,000
Amortization of capitalized software costs 19,419 -- 19,419 --
Other changes that provided (used) cash
Accounts receivable 816 53,764 34,811 22,620
Prepaid expenses 11,009 7,920 (72,627) 13,082
Accounts payable and accrued liabilities 377,988 (388,198) 539,050 107,279
Accrued interest payable 3,776 -- 3,776 (16,323)
Payroll taxes payable (14,934) (107,524) (2,112) (23,801)
Salaries payable (19,981) 51,657 (32,798) 39,866
Unearned revenues 13,051 3,377 213,051 15,855
Security deposit reduction -- -- -- 14,253
----------------- ---------------- ----------------- -----------------
Net cash used for operating activities (106,812) (1,246,882) (158,798) (1,490,240)
----------------- ---------------- ----------------- -----------------
Investing Activities
Purchase of equipment (11,057) (31,245) (22,695) (42,876)
Capitalization of software development costs (262,810) -- (495,815) --
----------------- ---------------- ----------------- -----------------
Net cash used for investing activities (273,867) (31,245) (518,510) (42,876)
----------------- ---------------- ----------------- -----------------
Financing Activities
Repayment of capital lease obligation (20,516) (17,935) (40,353) (54,811)
Proceeds from the issuance of notes 435,000 -- 435,000 196,500
Proceeds from the issuance of warrants, net -- -- -- 2,643,941
Deferred financing costs (35,000) -- (35,000) (25,000)
Proceeds from officers' loans -- -- -- 37,500
Repayment of officers' loans -- (12,500) -- (37,500)
----------------- ---------------- ----------------- -----------------
Net cash provided by (used for) financing
activities 379,484 (30,435) 359,647 2,760,630
----------------- ---------------- ----------------- -----------------
Increase (decrease) in cash (1,195) (1,308,562) (317,661) 1,227,514
Cash - beginning of period 37,759 2,629,421 354,225 93,345
----------------- ---------------- ----------------- -----------------
Cash - end of period $ 36,564 $ 1,320,859 $ 36,564 $ 1,320,859
================= ================ ================= =================
</TABLE>
See accompanying notes.
5
<PAGE>
SmartServ Online, Inc.
Notes to Unaudited Financial Statements
December 31, 1998
1. Organization
SmartServ Online, Inc. (the "Company") commenced operations on August 20, 1993.
The Company makes available online information and transactional services to
subscribers through proprietary application software and communication
architecture to wireless PCS devices, PCs, PDAs, the Internet, interactive voice
response systems, alpha-numeric pagers and screen-based phones. The Company also
offers a range of services designed to meet the varied needs of clients of
potential strategic marketing partners, such as real-time stock quotes, business
and financial news, sports information, research and analysis reports,
private-labeled electronic mail, national weather reports, local news and other
business and entertainment information. The Company's software architecture and
capabilities format information for a particular device and present the
information in a user-friendly manner.
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, 1998 has been
derived from the audited financial statements at that date, but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial statements should be
read in conjunction with the Company's Annual Report on Form 10-KSB for the year
ended June 30, 1998. 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 six months ended December 31, 1998 are not
necessarily indicative of those expected for the year ending June 30, 1999.
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 six months ended December 31, 1998 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 $5,040,009, $4,434,482, and $2,966,287 for the years
ended June 30, 1998, 1997, and 1996 respectively, and as of December 31, 1998
had an accumulated deficit of $17,209,331. In addition, the Company has a
working capital deficiency of $3,262,528 and a deficiency of net assets of
$2,119,028. 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 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
6
<PAGE>
amounts and related disclosures have been restated to give effect to this
transaction.
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 six
month periods ended December 31, 1998 and 1997.
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.
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
Company is reviewing the requirements of the SOP and has not determined the
impact, if any, that SOP 98-1 will have on the Company. If applicable, SOP 98-1
is required to be adopted by the Company no later than July 1, 1999.
7
<PAGE>
<TABLE>
<CAPTION>
3. Property and Equipment
Property and equipment consist of the following:
December 31, June 30,
1998 1998
------------------- -----------------
<S> <C> <C>
Data processing equipment $ 638,456 $ 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
------------------- -----------------
1,002,403 979,708
Accumulated depreciation, including $82,070 and $57,449 at December 31, 1998
and June 30, 1998, respectively, for equipment purchased
under a capital lease (466,653) (369,171)
-----------------
===================
$ 535,750 $ 610,537
=================== =================
</TABLE>
4. Notes Payable
In December 1998, the Company sold five (5) units, each consisting of a secured
convertible note in the principal amount of $100,000 and warrants to purchase
Common Stock of the Company. The notes and the warrants are convertible and
exercisable, respectively, at $.60 per share of Common Stock. The convertible
notes are secured by all of the Company's assets, mature on November 15, 1999,
and are classified as a current liability in the accompanying balance sheet. The
notes bear interest at eight percent (8%) per annum, payable semi-annually, in
kind or in cash at the Company's option and may be prepaid without premium or
penalty. The Company has agreed to register the shares of Common Stock issuable
upon exercise of the warrants and conversion of the notes. 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 $0.72 per share. The
issuance to the noteholders of warrants to purchase 833,333 shares of Common
Stock, as well as those issued to Spencer Trask for the purchase of 166,667
shares of Common Stock have been valued in accordance with the Black-Scholes
pricing methodology and recorded in stockholders' equity as deferred financing
costs. All costs associated with the issuance of the convertible notes are being
amortized to interest expense and other financing costs using the interest
method. Also in connection with the 8% convertible notes, the Company has
recorded a non-cash charge to interest expense and other financing costs
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 ($500,000) and has been recorded in
interest expense 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 note payable. The note bears interest at twelve percent (12%)
per annum, is payable on demand and has been classified as a current liability
in the accompanying balance sheet.
Interest paid during the six months ended December 31, 1998 and 1997 was $20,762
and $18,943, respectively.
8
<PAGE>
5. Equity Transactions
During the period July 1, 1998 through December 31, 1998, 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.
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.
On September 8, 1998, the Company issued warrants to purchase 3,000 shares of
Common Stock to Data Transmission Network Corporation ("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.
On December 29, 1998, the Board approved a plan to compensate non-employee
directors for their service to the Company. The Company will pay them $1,000 per
meeting attended, as well as reimbursement for all travel related expenses and
will grant to each non-employee director warrants to purchase 10,000 shares of
the Company's Common Stock at the commencement of each calendar year.
On December 29, 1998, the Board of Directors approved the terms of employment
contracts for Messrs. Cassetta and Rossi. Accordingly, the Company and Mr.
Cassetta have entered into an employment agreement ("Cassetta Agreement"),
effective January 1, 1999 and expiring on December 31, 2001, providing for (i)
base compensation of $185,000 per annum, (ii) additional compensation of up to
100% of base compensation, (iii) continuation of existing life and disability
insurance policies, (iv) all benefits available to other employees and (v) the
sale to him of 618,239 shares of restricted stock representing 9% of the fully
diluted shares of Common Stock of the Company. 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 of the restricted stock is equal to
110% of fair market value of the Company's Common Stock for the 30 days
preceding the purchase ($2.20 per share). The purchase price will be paid with a
5 year, non-recourse promissory note, secured by the stock, at an interest rate
of 1% below the prime rate on the date of the stock purchase agreement
("Cassetta Stock Purchase Agreement") contemplated by the Cassetta Agreement.
The Cassetta Stock Purchase Agreement contains certain repurchase options for
the Company's behalf, as well as a put option for Mr. Cassetta's behalf 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.
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 (i) base compensation of $135,000 per annum, (ii) additional
compensation of up to 50% of base compensation, (iii) continuation of existing
life and disability insurance policies, (iv) all benefits available to other
employees and (v) the sale to him of 206,080 shares of restricted stock
representing 3% of the fully diluted shares of Common Stock of the Company. Mr.
Rossi's additional compensation will be equal to 5% of his base compensation for
each 10% increase in sales during year 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
9
<PAGE>
of the restricted stock is equal to 110% of fair market value for the 30 days
preceding the purchase ($2.20 per share). The purchase price will be paid with a
5 year, non-recourse promissory note, secured by the stock, at an interest rate
of 1% below the prime rate on the date of the stock purchase agreement ("Rossi
Stock Purchase Agreement") contemplated by the Rossi Agreement. The Rossi Stock
Purchase Agreement contains certain repurchase options for the Company's behalf,
as well as a put option for Mr. Rossi's behalf 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.
6. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended December 31 Six Months Ended December 31
--------------------------------------- --------------------------------------
1998 1997 1998 1997
------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (1,533,275) $ (1,059,740) $ (2,387,452) $ (2,577,280)
================== ================= ================== ==================
Denominator:
Weighted-average shares 1,089,881 615,833 1,010,487 615,833
================== ================= ================== ==================
Basic and diluted earnings per
common share $ (1.41) $ (1.72) $ (2.36) $ (4.19)
================== ================= ================== ==================
</TABLE>
At December 31, 1998, there were 3,003,750 common stock purchase warrants
outstanding. Such warrants have exercise prices ranging from $0.60 to $72.00 per
share and expire from March 2001 through December 2003. 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 December 31, 1998, there are options
outstanding for the purchase of 236,267 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.
7. 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 others in the
United States District Court for the District of Connecticut. On or about August
20, 1998, Mr. Fishman served a first amended complaint. On December 11, 1998,
the Court dismissed the first amended complaint. By motion dated January 7,
1999, Mr. Fishman moved for leave to serve a second amended complaint. On
February 16, 1999, the Company filed papers in opposition to Mr. Fishman's
motion for leave to serve a second amended complaint. That motion is currently
pending.
10
<PAGE>
In his proposed second amended complaint, Mr. Fishman alleges, among other
things, that (i) he relied on false statements that the Company allegedly made,
in filings with the Securities and Exchange Commission and otherwise, in
accepting a position with the Company and (ii) the Company constructively
discharged him by breaching the terms of its employment agreement with him. The
proposed second amended complaint seeks to assert claims against the Company for
(i) fraud under the federal securities laws, (ii) breach of various terms of the
Company's employment agreement with Mr. Fishman, (iii) breach of the implied
duty of good faith and fair dealing, (iv) fraudulent misrepresentation, (v)
negligent misrepresentation, (vi) intentional misrepresentation and (vii)
failure to pay wages.
In his proposed second amended complaint, Mr. Fishman seeks judgment for damages
in amounts to be determined at trial on each of his claims and he seeks
unspecified punitive damages on his claims for fraudulent misrepresentation and
failure to pay wages. He also seeks reimbursement for the costs, including
attorneys' fees, that he incurs in prosecuting the action.
No discovery in this action has yet been noticed or taken. Although the Company
is vigorously defending this action, there can be no assurance that it will be
successful.
8. Subsequent Events
On January 26, 1999, the Company and the holders of a majority of the Company's
Common Stock (on a fully diluted basis) signed a Letter of Intent with DTN,
whereby the Company would be merged with a subsidiary of DTN. The transaction is
subject to the execution of a definitive merger agreement which the parties
anticipate will be executed no later than March 31, 1999. Under the terms of the
proposed transaction, the holders of the Company's Common Stock will receive
shares of DTN Common Stock having an aggregate market value equal to the lesser
of $14,850,000 or the amount determined by multiplying $3.20 by the number of
shares of the Company's Common Stock outstanding on an as if and fully diluted
basis. The market value of a share of DTN Common Stock for purposes of the
proposed transaction would be based upon the average of its closing prices on
the Nasdaq Stock Market for each of the 10 trading days ending on the third
trading day prior to the date of the closing of the proposed transaction;
however, the value would not be lower than $28.35 or higher than $34.65. The
Letter of Intent provides that DTN will file a registration statement with the
Securities and Exchange Commission prior to the closing of the transaction
covering all of the DTN Common Shares to be issued to the Company's
stockholders. While effective, this registration statement will permit the
Company's stockholders to sell in the public market the DTN Common Stock
received upon consummation of the merger.
On February 22, 1999, the Company, DTN and Spencer Trask Securities, Inc.
entered into an agreement providing for the settlement of the Company's
obligation under a Letter Agreement, dated August 11, 1998, to pay Spencer Trask
5% of the consideration received in a merger. At the closing of the merger
transaction with DTN, in lieu of any other rights it may have under the Letter
Agreement, Spencer Trask will receive (i) $250,000, (ii) 5,000 registered shares
of DTN Common Stock, and (iii) registered shares of DTN Common Stock sufficient
to affect the cashless exercise of certain common stock purchase warrants held
by Spencer Trask. If the closing of the merger transaction shall not occur
before June 30, 1999, or if the merger is otherwise abandoned, the Letter
Agreement shall be reinstated.
On January 28, 1999, the Company completed an additional financing of $50,000 of
securities of the Company with Bruno Guazzoni, an investor in the Company's
Prepaid Warrants. Such securities, consisting of convertible notes and warrants,
contain terms identical to those offered to investors in the interim financing
described in Note 4 above.
11
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
Plan of Operation
The Company provides online information and transactional services through
wireless PCS devices, PCs, PDAs, the Internet, interactive voice response
systems, alpha-numeric paging devices and screen-based telephones to clients of
potential strategic marketing partners. Effective June 1996, the Company exited
from the development stage with the completion of its core application software
and communications architecture and has commenced the implementation of its
marketing strategies.
The Company's plan of operation includes programs for marketing and developing
strategic marketing relationships with key partners that provide access to large
numbers of potential subscribers for its monthly services. The Company's
strategy of forming alliances with strategic marketing partners that have
established relationships with its potential customers enables the Company to
maximize its market reach at minimal operating costs. The flexibility of the
Company'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. The use of this model has resulted in
the distribution of SmartServ information products by DTN as "DTNIQ", "TradeNet"
and "BrokerNet", by Sprint/United Management Corp. as "Sprint Information
Services", by CIDCO Inc. as "CIDCO Information Services" and by ALLTEL
Communications Company as "ALLTEL Information Services".
As an early entrant in the dynamic market for distribution of financial
information and trading services via wireless devices, the Company is developing
strategic marketing relationships with wireless equipment manufactures, carriers
and potential corporate partners. Management believes the wireless area has
tremendous potential for distribution of the Company's information products and
as source of revenues from "fee based" transactions such as stock trading.
The Company has partnered with and continues to seek relationships with regional
telephone operating companies, such as ALLTEL, long distance carriers, such as
Sprint, telephone equipment manufacturers, such as Nortel, and others who
distribute screen telephone equipment, market local screen telephone services or
otherwise benefit from the increased acceptance of these devices in the
marketplace. To these partners, the Company's services are perceived as a means
of increasing interest in and sales of screen telephones and CLASS services, and
there is thus a strong incentive to promote the Company's services.
The Company is also working with businesses that desire to provide new services,
such as those provided by the Company, to an existing base of clients. By
providing this branding flexibility, the Company has been able to expand the
number of businesses interested in forming relationships with it, and has the
ability to market its services under far more recognizable brand names than its
own.
Management believes that most of the Company's revenues will ultimately be
derived from end users that purchase the Company's services through strategic
marketing partners with mass distribution capabilities. The Company anticipates
that strategic marketing partners will brand the Company's "bundled" information
services with their own private label, promote the packaged offering and then
distribute the Company's information package on wireless PCS devices, PCs, PDAs,
the Internet, interactive voice response systems, alpha-numeric pagers and
screen-based phones to their clients. The Company has the ability to customize
the information package to be offered to each strategic marketing partner, and
in turn to their end users. With the licensing of three of the Company's
Internet products to DTN, the Company 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 3 to 6 personnel during the period ending June 30, 1999. Such
12
<PAGE>
personnel will be added to assist with the programming requirements of strategic
marketing partners' product offerings and for customer support. Additionally,
management anticipates that 2 to 3 people will join the Company in sales and
marketing positions during the period ending June 30, 1999.
Results of Operations
As discussed above, the Company has discontinued its efforts to market products
to the retail market via its own direct marketing programs. Currently, the
Company is working with businesses that desire to provide new services, such as
those provided by the Company, to an existing base of clients. Additionally, the
Company continues to seek relationships with brokerage firms and disseminators
of financial information, whose clients can benefit from the efficiency,
convenience and timeliness of the information services provided by the Company.
The high quality of the Company's services and systems' architecture continues
to draw interest from potential partners and while the Company continues to have
discussions about potential marketing opportunities with major
telecommunications and stock brokerage companies, there can be no assurance that
the Company will enter into agreements with any such companies.
Quarter Ended December 31, 1998 vs. Quarter Ended December 31, 1997
During the quarter ended December 31, 1998, the Company earned revenues of
$344,024, primarily from the sale of its products to customers of DTN. During
the quarter ended December 31, 1997, total revenues amounted to $181,594,
consisting primarily of subscription fees for the SmartServ Online "Pro"
real-time stock quote service ($136,800) and sales generated from the Company's
relationships with Sprint ($24,500) and Schroder ($17,500). At December 31, 1998
and 1997, the Company recorded deferred revenues of approximately $958,000 and
$36,100, respectively. Such amounts arise from customer prepayments and are
recognized into income as services are provided throughout the term of the
contract.
During the quarter ended December 31, 1998, the Company incurred cost of
revenues of $182,437. These costs consist primarily of information and
communication costs ($69,162), personnel costs ($32,826), and computer hardware
leases, depreciation and maintenance costs ($79,970). During the quarter ended
December 31, 1997, the Company incurred costs of revenues of $340,713. Such
costs consisted primarily of information and communication costs ($132,600),
personnel costs ($92,300), and computer hardware leases, depreciation and
maintenance costs ($102,800). Information and communication costs decreased in
the quarter ended December 31, 1998, compared to the prior year as a result of
the licensing agreement entered into between the Company and DTN. In accordance
with the terms of the agreement, DTN has assumed responsibility for such costs
related to the delivery of information and the growth of the infrastructure
relative to support the customers of DTN. Personnel costs decreased in the
quarter ended December 31, 1998 compared to the prior year as a result of the
migration of personnel resources into product development areas in 1998. Product
development costs were $24,170 and $222,632 for the quarters ended December 31,
1998 and 1997, respectively. Such costs consisted primarily of personnel costs
($1,494 in 1998 and $130,600 in 1997) and computer system consultants ($2,309 in
1998 and $78,800 in 1997). The decrease in the product development costs for the
quarter ended December 31, 1998 compared to the quarter ended December 31, 1997
results from the capitalization of 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 quarter ended
December 31, 1998, the Company capitalized approximately $262,810 of development
costs in accordance with Statement 86. No such costs were capitalized during the
quarter ended December 31, 1997. Amortization expense relating to capitalized
software development costs for the quarter ended December 31, 1998 was $19,419.
During the quarter ended December 31, 1998, the Company incurred selling,
general and administrative expenses of $1,001,697 compared to $630,764 for the
quarter ended December 31, 1997. In 1998, selling, general and administrative
expenses consisted primarily of personnel costs ($210,302), marketing and
13
<PAGE>
advertising costs ($94,834), professional fees ($574,274), facilities ($65,417)
and telecommunications costs ($18,973). Included in professional fees are
non-cash charges of $335,004 resulting from the issuance of common stock
purchase warrants to financial consultants. Such common stock purchase warrants
were recorded in accordance with the Black-Scholes pricing methodology. For
1997, selling, general and administrative expenses were incurred primarily for
personnel costs ($266,200), facilities ($50,200), marketing and advertising
costs ($41,700) and professional fees ($210,302). Included in professional fees
is an $80,975 non-cash charge for the amortization of unearned compensation
associated with the issuance of Common Stock Purchase Warrants to a financial
consultant.
Interest income for the quarters ended December 31, 1998 and 1997 amounted to
$706 and $21,544, respectively. During the quarter ended December 31, 1998, such
amounts were earned primarily from the Company's cash balances. During the
quarter ended December 31, 1997, such amounts were earned from the Company's
investments in highly rated bank certificates of deposit. During the quarters
ended December 31, 1998 and 1997, interest and financing costs were $669,701 and
$68,769. During the quarter ended December 31, 1998, such costs were incurred in
connection with the $500,000 interim financing in December 1998, and 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. Interest and
financing costs for 1997 included a non-cash charge of $66,000 for the
revaluation of certain Common Stock Purchase Warrants issued in connection with
the Company's May 1997 line of credit facility.
Six Months Ended December 31, 1998 vs. Six Months Ended December 31, 1997
During the six months ended December 31, 1998, the Company earned revenues of
$693,729, primarily from the sale of its products to customers of DTN. During
the six months ended December 31, 1997, the Company recorded revenues of
$381,787, consisting of $261,700 from the sale of subscriptions to its
information services, $55,000 from enhancement, implementation, and marketing
services associated with its arrangement with Schroder, and $53,700 from the
Company's relationship with Sprint.
During the six months ended December 31, 1998, the Company incurred cost of
revenues of $389,521. These costs consist primarily of information and
communication costs ($164,847), personnel costs ($61,913), and computer hardware
leases, depreciation and maintenance costs ($160,754). During the six months
ended December 31, 1997, the Company incurred costs of revenues of $718,685.
Such costs consisted primarily of information and communication costs
($323,100), personnel costs ($183,800), and computer hardware leases,
depreciation and maintenance costs ($182,600). Information and communication
costs decreased in the six months ended December 31, 1998, compared to the prior
year as a result of the licensing agreement entered into between the Company and
DTN. Personnel costs decreased in the six months ended December 31, 1998
compared to the prior year as a result of the migration of personnel resources
into product development areas in 1998. Product development costs were $51,216
and $427,705 for the six months ended December 31, 1998 and 1997, respectively.
Such costs consisted primarily of personnel costs ($4,482 in 1998 and $275,000
in 1997) and computer system consultants ($18,785 in 1998 and $132,700 in 1997).
The decrease in the product development costs for the six months ended December
31, 1998 compared to the six months ended December 31, 1997 results from the
capitalization of software development costs related to certain product
enhancements in accordance with Statement 86. During the six months ended
December 31, 1998, the Company capitalized approximately $495,815 of development
costs in accordance with Statement 86. No such costs were capitalized during the
six months ended December 31, 1997. Amortization expense relating to capitalized
software development costs for the six months ended December 31, 1998 was
$19,419.
During the six months ended December 31, 1998, the Company incurred selling,
general and administrative expenses of $1,832,555. Such expenses were incurred
primarily for personnel costs ($395,282), marketing and
14
<PAGE>
advertising costs ($156,622), professional fees ($1,062,675), facilities
($115,576) and telecommunication costs ($33,697). Included in professional fees
are non-cash charges of $665,425 resulting from the issuance of common stock
purchase warrants to financial consultants. Such common stock purchase warrants
were recorded in accordance with the Black-Scholes pricing methodology. During
the six months ended December 31, 1997, the Company incurred selling, general
and administrative expenses of $1,160,227, primarily for personnel costs
($478,200), facilities ($98,800), marketing and advertising costs ($78,900), and
professional fees ($336,200). Included in professional fees is a non-cash charge
of $63,000 for the write-off of prepaid consulting fees incurred in connection
with the Company's Initial Public Offering of securities and an $80,975 non-cash
charge for the amortization of unearned compensation associated with the
issuance of Common Stock Purchase Warrants to a financial consultant.
Interest income for the six months ended December 31, 1998 and 1997 amounted to
$2,908 and $22,631, respectively. During the six months ended December 31, 1998,
interest income was earned primarily from the Company's cash balances. During
the six months ended December 31, 1997, such amounts were earned from the
Company's investments in highly rated bank certificates of deposit. Interest and
financing costs for the six months ended December 31, 1998 and 1997 were
$810,797 and $675,081, respectively. During the six months ended December 31,
1998, such costs were incurred in connection with the $500,000 interim financing
in December 1998, and 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. During the six months ended December 31, 1997, such amounts were
incurred primarily in connection with the issuance of short-term notes payable
and associated Common Stock Purchase Warrants. The Common Stock Purchase
Warrants have been recorded in the financial statements in accordance with the
Black-Scholes pricing methodology.
Capital Resources and Liquidity
Since inception of the Company on August 20, 1993 through March 21, 1996, the
date of the Initial Public Offering ("IPO"), the Company had funded its
operations through a combination of private debt and equity financings totaling
$3,610,000 and $12,877,500 respectively.
On September 30, 1997, Zanett Securities Corporation ("Zannett"), acting as
placement agent for the Company, completed a private placement (" 1997
Placement") of $4 million of the Company's prepaid common stock purchase
warrants ("Prepaid Warrants"). The Prepaid Warrants expire on September 30,
2000. As part of the 1997 Placement, Zanett Lombardier, Ltd converted a note
payable of $772,222, issued pursuant to a Line of Credit Agreement dated May 29,
1997, as amended, and accrued interest thereon of $63,837 into Prepaid Warrants.
The net proceeds of the 1997 Placement of $2,643,941 were used for general
working capital requirements.
In September 1997, the Company entered into a three year agreement with
Sprint/United Management Corp. with respect to the expansion of its services
provided pursuant to a March 1997 agreement. Such agreement provided for the
potential deployment of the Company's services on a nationwide basis.
In April 1998, the Company entered into an agreement with DTN, whereby the
Company licensed to DTN the rights to market three of the Company's Internet
products. The Company received $850,000 upon execution of the contract and will
receive minimum monthly payments of $100,000 through April 1999. Thereafter,
cash flow from license fees will be determined as a percentage of revenues
earned by DTN through sales to its customers. Additionally, DTN has agreed to
absorb the costs associated with the expansion of the computer and
communications hardware necessary to support the expansion of the user base.
15
<PAGE>
In September 1998, DTN advanced the Company the last 2 payments under its
licensing agreement to enhance the Company's cash flow. In addition to a 12%
discount for the cost of money, DTN received warrants to purchase 3,000 shares
of Common Stock exercisable at $3.00 per share.
Although the Company believes that both Sprint and DTN have the experience and
the financial ability to distribute the Company's 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, the Company entered into a letter of intent, as amended on
November 24, 1998, with Spencer Trask Securities, Inc. ("Spencer Trask") (the
"Letter of Intent") which provided for the retention of Spencer Trask to act as
exclusive placement agent in connection with a private placement ("Placement")
by the Company of a minimum of $5,000,000 and a maximum of $10,000,000 of
securities of the Company. The Placement was conditioned upon the occurrence of
a 1 for 6 reverse stock split which was effective on October 26, 1998. The
Letter of Intent provided that the Company would offer a minimum of 50 units and
a maximum of 100 units at a gross purchase price of $100,000, each unit
consisting of shares of convertible preferred stock (the "Preferred Shares").
The number of Preferred Shares was to be determined by dividing the unit price
of $100,000 by $1.019 which was 75% of the average closing bid price for the
Company's Common Stock for the 15 days following the effective date of the
Reverse Stock Split. Thus the proposed private placement would have resulted in
the issuance of approximately 4,907,000 shares of Common Stock at the minimum
offering and approximately 9,813,500 shares at the maximum offering.
In anticipation of completing the Placement, the Company completed an interim
financing of $500,000 of securities of the Company. The Company sold five (5)
units, each consisting of a secured convertible note in the principal amount of
$100,000 and warrants to purchase Common Stock of the Company. The notes and the
warrants are convertible and exercisable, respectively, at $.60 per share of
Common Stock. The convertible notes are secured by all of the Company's assets,
mature on November 15, 1999, and may be prepaid without premium or penalty. The
notes bear interest at eight percent (8%) per annum, payable semi-annually, in
kind or in cash at the Company's option. The Company has agreed to register the
shares of Common Stock issuable upon exercise of the warrants and conversion of
the notes. In addition to customary fees and expenses, the placement agent has
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.
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 note payable. The note bears interest at twelve percent (12%)
per annum and is payable on demand.
On January 26, 1999, the Company and the holders of a majority of the Company's
Common Stock (on a fully diluted basis) signed a Letter of Intent with DTN ,
whereby the Company would be merged with a subsidiary of DTN. The transaction is
subject to the execution of a definitive merger agreement which the parties
anticipate will be executed no later than March 31, 1999. Under the terms of the
proposed transaction, the holders of the Company's Common Stock will receive
shares of DTN Common Stock having an aggregate market value equal to the lesser
of $14,850,000 or the amount determined by multiplying $3.20 by the number of
shares of the Company's Common Stock outstanding on an as if and fully diluted
basis. The market value of a share of DTN Common Stock for purposes of the
proposed transaction would be based upon the average of its closing prices on
the Nasdaq Stock Market for each of the 10 trading days ending on the third
trading day prior to the date of the closing of the proposed transaction;
however, the value would not be lower than $28.35 or higher than $34.65. The
Letter of Intent provides that DTN will file a registration statement with the
Securities and Exchange Commission prior to the closing of the transaction
covering all of the DTN Common Shares to be issued to the Company's
stockholders. While effective, this registration statement will permit the
Company's stockholders to sell in the public market the DTN Common Stock
received upon consummation of the merger.
16
<PAGE>
On January 28, 1999, the Company completed an additional financing of $50,000 of
securities of the Company with Bruno Guazzoni, an investor in the Company's
Prepaid Warrants. Such securities, consisting of convertible notes and warrants,
contain terms identical to those offered to investors in the interim financing
described above.
DTN has agreed to provide the Company with liquidity sufficient to support its
operations. Such funds are being advanced against future revenues to be earned
pursuant to the Software Licensing Agreement between the Company and DTN.
The Company's management believes that upon the successful implementation of its
marketing plan, sufficient revenues will be generated to meet operating
requirements. Management also believes that the successful execution of its
proposed plan of operations will generate sufficient cash flow from operations
to enable the Company to offer its services on an economically sound basis. No
assurance can be given that such goals will be obtained or that any expected
revenues or cash flows will be achieved. Additionally, no assurance can be given
that the Company will consummate either the financing arrangement or the merger
with DTN.
Certain Factors That May Affect Future Results
From time to time, information provided by the Company, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-QSB) may contain statements which
are not historical facts, so-called "forward-looking statements". These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. The Company's actual
future results may differ significantly from those stated in any forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties, including, but not limited to, product demand, pricing, market
acceptance, litigation, intellectual property rights, risks in product and
technology development, product competition, limited number of customers, key
personnel, potential transactions and other risk factors detailed in this
Quarterly Report on Form 10-QSB and in the Company's other Securities and
Exchange Commission filings.
17
<PAGE>
PART II. OTHER INFORMATION
SmartServ Online, Inc.
Item 1. Legal Proceedings
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 others in the
United States District Court for the District of Connecticut. On or about August
20, 1998, Mr. Fishman served a first amended complaint. On December 11, 1998,
the Court dismissed the first amended complaint. By motion dated January 7,
1999, Mr. Fishman moved for leave to serve a second amended complaint. On
February 16, 1999, the Company filed papers in opposition to Mr. Fishman's
motion for leave to serve a second amended complaint. That motion is currently
pending.
In his proposed second amended complaint, Mr. Fishman alleges, among other
things, that (i) he relied on false statements that the Company allegedly made,
in filings with the Securities and Exchange Commission and otherwise, in
accepting a position with the Company and (ii) the Company constructively
discharged him by breaching the terms of its employment agreement with him. The
proposed second amended complaint seeks to assert claims against the Company for
(i) fraud under the federal securities laws, (ii) breach of various terms of the
Company's employment agreement with Mr. Fishman, (iii) breach of the implied
duty of good faith and fair dealing, (iv) fraudulent misrepresentation, (v)
negligent misrepresentation, (vi) intentional misrepresentation and (vii)
failure to pay wages.
In his proposed second amended complaint, Mr. Fishman seeks judgment for damages
in amounts to be determined at trial on each of his claims and he seeks
unspecified punitive damages on his claims for fraudulent misrepresentation and
failure to pay wages. He also seeks reimbursement for the costs, including
attorneys' fees, that he incurs in prosecuting the action.
No discovery in this action has yet been noticed or taken. Although the Company
is vigorously defending this action, there can be no assurance that it will be
successful.
Item 2. Changes in Securities and Use of Proceeds
Between July 1, 1998 and December 31, 1998, 276.67 Prepaid Warrants were
converted into an aggregate of 178,560 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 of 1933, as amended (the "Securities Act").
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 for their agreeing to certain restrictions on the exercise of
Prepaid Warrants held by them and the resale of the shares of Common Stock
issuable on exercise thereof. No 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 3,000 common stock purchase
warrants to DTN for prepayment of certain guaranteed payments in accordance with
the Software License and Service Agreement
18
<PAGE>
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.
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 Mr. 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. These shares and warrants
were issued in reliance upon the exemption from registration provided by Section
4 (2) of the Securities Act.
Between November 20, 1998 and December 3, 1998, the Company issued warrants to
purchase 833,333 shares of Common Stock to investors in connection with the
issuance of $500,000 of convertible notes. The notes are convertible into Common
stock at $.60 per share and mature on November 15, 1999. The warrants are
exercisable at $.60 per share and expire on the fifth anniversary of the date of
issuance. Spencer Trask received a commission of $50,000 and an unaccountable
expense allowance of $15,000 in connection with this transaction. Additionally,
the Company issued warrants to purchase 166,667 shares of Common Stock to
Spencer Trask exercisable at $.72 per share. These 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., an investor in the Company's Prepaid Warrants, in
consideration of an agreement to waive certain events of default under such
Prepaid Warrants. No 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 at
arranging the Company's relationship with Spencer Trask. Such warrants will
expire on January 20, 2004. These warrants will be issued in reliance upon the
exemption from registration provided by Section 4 (2) of the Securities Act.
On January 28, 1999, the Company issued warrants to purchase 83,333 shares of
Common Stock to Mr. Bruno Guazzoni, an investor in the Company's Prepaid
Warrants, in connection with the issuance of $50,000 of convertible notes. The
notes are convertible into Common stock at $.60 per share and mature on November
15, 1999. The warrants are exercisable at $.60 per share and expire on the fifth
anniversary of the date of issuance. Spencer Trask, the placement agent,
received a commission of $5,000 and an unaccountable expense allowance of $1,500
in connection with this transaction. These notes and warrants were issued in
reliance upon the exemption from registration provided by Section 4 (2) of the
Securities Act
Item 6. Exhibits and Reports on Form 8 - K
(a) The following exhibit is included herein:
Exhibit 27 - Financial Data Schedule
(b) Reports of Form 8-K
The Company did not file any reports on Form 8-K during the six
months ended December 31, 1998.
19
<PAGE>
SmartServ Online, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SmartServ Online, Inc.
(Registrant)
By:
Date: March 1, 1999 /S/ SEBASTIAN E. CASSETTA
----------------- ---------------------------
Sebastian E. Cassetta
Chairman of the Board,
Chief Executive Officer
Date: March 1, 1999 /S/ THOMAS W. HALLER
----------------- ---------------------------
Thomas W. Haller
Chief Financial Officer,
Treasurer
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the December
31, 1998 financial statments of SmartServ Online, Inc. and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 36,564
<SECURITIES> 0
<RECEIVABLES> 76,240
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 233,119
<PP&E> 1,002,403
<DEPRECIATION> 466,653
<TOTAL-ASSETS> 1,408,482
<CURRENT-LIABILITIES> 3,495,647
<BONDS> 31,863
0
0
<COMMON> 11,898
<OTHER-SE> (2,130,926)
<TOTAL-LIABILITY-AND-EQUITY> 1,408,482
<SALES> 693,729
<TOTAL-REVENUES> 693,729
<CGS> 440,737
<TOTAL-COSTS> 440,737
<OTHER-EXPENSES> 1,832,555
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 810,797
<INCOME-PRETAX> (2,387,452)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,387,452)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,387,452)
<EPS-PRIMARY> (2.36)
<EPS-DILUTED> (2.36)
</TABLE>
