UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1999
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to
___________
Commission file number 0-28008
SmartServ Online, Inc.
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(Exact name of small business issuer as specified in its charter)
Delaware 13-3750708
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
One Station Place, Stamford, Connecticut 06902
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (203) 353-5950
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Title of each class
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Common Stock, $0.01 Par Value
Common Stock Purchase Warrants
Indicate by check mark whether the issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the issuer was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes / X / No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.___
Issuer's revenues for its most recent fiscal year. $1,443,781
The aggregate market value of the voting stock (based on the closing price of
such stock on OTC Bulletin Board) held by non-affiliates of the issuer as of
October 21, 1999 was approximately $1,643,000. All officers and directors of the
issuer have been deemed, solely for the purpose of the foregoing calculation, to
be "affiliates" of the issuer.
There were 1,379,769 shares of Common Stock outstanding at October 21, 1999.
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TABLE OF CONTENTS
Part I
Item Page
1. Description of Business 3
2. Description of Property 7
3. Legal Proceedings 7
4. Submission of Matters to a Vote of Security Holders 8
Part II
5. Market for Common Equity and Related Stockholder Matters 9
6. Management's Discussion and Analysis or Plan of Operation 13
7. Financial Statements 19
8. Changes in and Disagreements with Accountants on Accounting 41
and Financial Disclosure
Part III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 42
10. Executive Compensation 45
11. Security Ownership of Certain Beneficial Owners and Management 48
12. Certain Relationships and Related Transactions 50
13. Exhibits and Reports on Form 8-K 52
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Part I
Item 1. Description of Business
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The Company
SmartServ Online, Inc. ("SmartServ" or the "Company") was organized in 1993 and
delivers Internet-based content and trade order routing solutions, as well as
"Web-to-Wireless" applications that drive transactions. The Company has
developed online financial, transactional and media applications using a unique
"device-independent" delivery solution. The Company has demonstrated proficiency
in developing applications utilizing the wireless application protocol (WAP)
towards enabling information and transactions on PCS handsets and personal
digital assistants.
Services
Recognizing the call for mobility, SmartServ has developed a powerful
infrastructure to integrate and deliver its Internet-based information and to
effectuate e-commerce transactions on wireless networks and devices. SmartServ
is positioned at the forefront of providing Web-based information and
transaction applications and solutions for strategic alliances ("Strategic
Marketing Partners"), including financial institutions, wireless carriers,
device manufacturers and value-added service providers and retailers. The
Company's core competency focuses on providing financial news and reports --
including real-time stock quotes -- with the goal of driving online and wireless
stock trading and other transactions. To complement its financial offerings,
SmartServ also provides 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. The Company plans to build a database of
client interests and preferences towards future e-commerce offerings. The
Company is not dependent on one or a few information providers as such
redistribution agreements are generally available on a non-exclusive basis.
The Company has invested in the development of a transaction engine and a
proprietary application software and communications architecture in an attempt
to make its 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. The
Company believes that its 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. The Company intends to continue to
invest in this area and believes its transaction engine, application software
and communications architecture represent an important competitive advantage.
Marketing Strategy
Management believes the Company's primary source of revenues will ultimately be
derived from the sale of the Company's information and transactional application
services through Strategic Marketing Partners utilizing a "business-to-business"
strategy. Strategic Marketing Partners will brand the Company's "bundled"
services, acquired from the Company's "information platform" with their own
private label, promote the packaged offering, and then distribute the Company's
information and e-commerce services to their clients. Additionally, the
Company's e-commerce platform will enable its Strategic Marketing Partners to
offer transaction services via the Internet and wireless networks. The Company's
strategy of forming alliances with Strategic Marketing Partners enables the
Company to maximize its market reach at minimal operating costs, improve product
and services performance, and grow distribution channels to end-users.
In May 1998, the Company licensed to DTN the rights to market and service three
of its Internet products. DTN, which has over 150,000 subscribers for its
satellite-based information services, lacked an Internet-based product
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and delivery system. SmartServ filled that need. In June 1999, the Company and
DTN entered into an agreement that expanded their relationship. 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) real-time stock quote
product, (ii) an online trading vehicle for customers of small and medium sized
brokerage companies, (iii) an administrative reporting package for brokers of
small and medium sized brokerage companies, and (iv) an order entry/routing
system. The Company will continue to operate and support these products in
exchange for a percentage of the revenues earned by DTN therefrom. None of the
Company's wireless products were included in this transaction. During the year
ended June 30, 1998, the Company discontinued its efforts to sell products
directly to the retail market via its 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, the Company is developing strategic marketing relationships
with the wireless equipment manufacturers, carriers, other value-added service
providers and potential corporate partners. The Company continuously seeks to
increase product performance and widen its distribution by building and
maintaining this network of Strategic Marketing Partners. Combining the
Company's application development and data platform with the core competencies
of its Strategic Marketing Partners the Company is offering a packaged turnkey
solution for application development and extending content and transactions to
the wireless environment. Management believes the wireless area has tremendous
potential for distribution of the Company's 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. The Company's data and communication architecture
adds user functionality and utility to both wired and wireless technology. With
its Web-server platform, application development, and strategic alliances,
SmartServ has the competitive advantage of providing complete end-to-end
solutions.
While the Company continues to have discussions about potential marketing
opportunities with major equipment manufacturers, telecommunications and stock
brokerage companies, there can be no assurance that the Company 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 the Company's
application software and communications architecture makes the services "device
independent", the Company faces increasing competition from other emerging
services delivered through personal computers and wireless devices, such as
developing transactional services offered by Checkfree Corporation, Microsoft
Corp., Data Broadcasting Corporation, PC Quote.com, Intuit Inc., Electronic Data
Systems Corp. and other Web-based software companies. Although in its infancy,
the wireless arena too has its competitors, such as DataLink Systems
Corporation, Intelligent Information, Inc., Aether Technologies, Saraide.com and
W-Trade. The Company expects competition to increase from existing competitors
and from new competitors, possibly including telecommunications companies. Most
of the Company's competitors and potential competitors have substantially
greater financial, marketing and technical resources than the Company. The
Company believes that potential new competitors, including large multimedia and
information system companies, are increasing their focus on transaction
processing. Increased competition in the market for the Company's services could
materially and adversely affect the Company's results of operations through
price reductions and loss of market share.
The information content provided through the Company's application software and
communication architecture is generally purchased through non-exclusive
distribution agreements. While the Company is not dependent on
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any one content provider, existing and potential competitors may enter into
agreements with these and other such providers and thereby acquire the ability
to deliver online information and transactional services substantially similar
to those provided by the Company.
The principal competitive factors in both the online and wireless industries
include content, product features and quality, ease of use, access to
distribution channels, brand recognition, reliability and price. The Company's
strategy of establishing alliances with potential Strategic Marketing Partners,
and its ability to provide what is believed to be unique application software
and communications architecture should enable the Company to compete
effectively.
Software
The Company has developed an application software and communications
architecture that it believes makes its services easy to use and visually
appealing, and which maximize the capabilities of various devices.
SmartServ's user-friendly front-end application software provides instant access
to information and flexiblity 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. The
Company's transaction engine has been designed to facilitate various forms of
e-commerce. SmartServ's 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 its product intuitive to its users.
SmartServ's 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, the Company 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, the Company 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
The Company has designed and developed its 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. The
Company relies upon a combination of contract provisions and copyrights, trade
secret laws, and a service mark to attempt to protect its proprietary rights.
The Company licenses the use of its services to Strategic Marketing Partners
under agreements that contain terms and conditions prohibiting the unauthorized
reproduction of the Company's software and services. Although the Company
intends to protect its rights vigorously, there can be no assurance that any of
the foregoing measures will be successful.
As previously discussed, the Company has granted DTN an exclusive perpetual
worldwide license ("License Agreement") to the Company's Internet-based (i)
real-time stock quote product, (ii) an online trading vehicle for customers of
small and medium sized brokerage companies, (iii) an administrative reporting
package for brokers of small and medium sized brokerage companies, and (iv) an
order entry/routing system. Pursuant to the terms of the License Agreement, the
Company is required to maintain certain systems' performance standards and to
satisfy other general business requirements. The Company's inability to maintain
compliance with the License Agreement could result in a default thereunder, in
which event 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 no
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further obligation to pay the license fees and SmartServ will have no further
obligations under the License Agreement.
The Company believes that its 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 the Company with respect to current features,
content or services or that any such assertion may not require the Company to
enter into royalty arrangements or result in litigation.
Government Regulation
The Company is not currently subject to direct regulation other than federal and
state regulation generally applicable to businesses. However, changes in the
regulatory environment relating to the telecommunications and media industry
could have an effect on the Company's business, including regulatory changes
which directly or indirectly affect telecommunication costs or increase the
likelihood or scope of competition from regional telephone companies.
Additionally, legislative proposals from international, federal and state
governmental bodies in the areas of content regulation, intellectual property
and privacy rights, as well as federal and state tax issues could impose
additional regulations and obligations upon all online service providers. The
Company cannot predict the likelihood that any such legislation will pass, or
the financial impact, if any, the resulting regulation or taxation may have.
Moreover, the applicability to online service providers of existing laws
governing issues such as intellectual property ownership, libel and personal
privacy is uncertain. 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 the Company. 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 the
Company, costs incurred as a result of such action could have a material adverse
effect on the Company's business.
Employees
The Company employs 21 people, 19 of whom are full-time employees. 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 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 the Company's employees
are covered by a collective bargaining agreement, and the Company believes that
its relationship with its employees is satisfactory.
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Item 2. Description of Property
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The Company occupies approximately 6,300 square feet in a leased facility
located in Stamford, Connecticut. The lease expires in October 2002.
Item 3. Legal Proceedings
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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 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
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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.
Item 4. Submission of Matters to a Vote of Security Holders
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None.
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Part II
Item 5. Market for Common Equity and Related Stockholder Matters
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SmartServ's $.01 par value common stock ("Common Stock") commenced trading on
March 21, 1996 on the National Association of Securities Dealers' Automated
Quotation System ("NASDAQ"). The Company's Redeemable Common Stock Purchase
Warrants ("Public Warrants") also commenced trading on March 21, 1996 on the
NASDAQ.
On May 20, 1998, the Company received notification from The Nasdaq Stock Market
that the Company no longer met the net tangible asset/market capitalization/net
income requirements for continued listing of the Company's securities on The
Nasdaq Stock Market. Accordingly, at the close of business on May 20, 1998, the
Company's Common Stock and Public Warrants were delisted from The Nasdaq Stock
Market. Currently, the Company's securities trade on the OTC Bulletin Board as
SSOL and SSOLW.
On October 15, 1998, the Company's stockholders approved a one-for-six reverse
stock split ("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 Form 10-KSB) have been adjusted to
reflect the Reverse Stock Split.
Common Stock Warrants
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High Low High Low
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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
As of October 5, 1999, the Company had 1,379,769 shares of Common Stock
outstanding held by 70 record holders. The Company estimates that its Common
Stock is held by approximately 1,800 beneficial holders. As of such date, the
Company had 1,049,981 Public Warrants outstanding held by 28 record holders.
The Company has never paid a cash dividend on its Common Stock. It is the
present policy of the Company to retain earnings, if any, to finance the
development and growth of its business. Accordingly, the Company does
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not anticipate that cash dividends will be paid until the earnings and financial
condition of the Company justify such dividends, and there can be no assurance
that the Company can achieve such earnings.
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. 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.
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 June 30, 1999, an aggregate of 1,706 Prepaid
Warrants were converted into an aggregate of 398,955 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
investment advisory contracts. The warrants have exercise prices of $3.75 and
$15.75 to $19.50, respectively. 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.
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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 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. 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 warrants were issued in reliance
upon the exemption from registration provided by Section 4 (2) of the Securities
Act.
-11-
<PAGE>
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 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.
No sales commissions were paid in connection with such transaction. These
warrants 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.
-12-
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation
- -------
Plan of Operation
The Company delivers Internet-based content and trade order routing solutions,
as well as "Web-to-Wireless" applications that drive transactions to its
strategic alliances ("Strategic Marketing Partners") and their customers. The
Company has developed online financial, transactional and media applications
using a unique "device-independent" delivery solution.
The Company's plan of operation includes programs for the sale of the Company's
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 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.
As an early entrant in the dynamic market of distribution of financial
information and transaction services via wireless telephones and PDAs, the
Company is developing strategic marketing relationships with the wireless
equipment manufacturers, carriers and other value-added service providers and
potential corporate partners. The Company continuously seeks to increase product
performance and widen its distribution by building and maintaining this network
of Strategic Marketing Partners. Combining the Company's application development
and data platform with the core competencies of its Strategic Marketing
Partners, the Company 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 the Company's
information products and as a source of revenues from "fee based" transactions
such as routing stock order entries.
Management believes that most of the Company's revenues will ultimately be
derived from consumers who purchase the Company's services through Strategic
Marketing Partners. The Company anticipates that Strategic Marketing Partners
will brand the Company's "bundled" information services with their own private
label and promote and distribute the Company's packaged offering to their
clients. The Company has the ability to customize the information package to be
offered to each Strategic Marketing Partner, by device. With the licensing of
four of the Company's Internet products by 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 six to ten people during the period ending June 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.
Results of Operations
Fiscal Year Ended June 30, 1999 versus Fiscal Year Ended June 30, 1998
During the year ended June 30, 1999, the Company recorded revenues of
$1,443,781. Substantially all of such revenues were earned through the Company's
licensing agreement with DTN. During the year ended June 30, 1998, the Company
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.
-13-
<PAGE>
During the year ended June 30, 1999, the Company 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, the Company 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 the Company 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, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed ("Statement 86").
During the year ended June 30, 1999, the Company 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, the Company 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 the
Company'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 the Company'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 the
Company's May 1997 line of credit. Of such amount, $463,600 represents the
non-cash 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
the Company's weighted average shares of Common Stock outstanding in 1999
increased by 446,569 shares, thereby affecting the per share loss.
-14-
<PAGE>
Fiscal Year Ended June 30, 1998 versus Fiscal Year Ended June 30, 1997
During the year ended June 30, 1998, the Company 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 the Company'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, the Company earned revenues from the enhancement, implementation, and
marketing of services to Schroder & Co. Inc. of $342,200.
During the year ended June 30, 1998, the Company 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 the Company's
departure from the development stage, it incurred costs of revenues of
$1,133,884. Such costs consisted primarily of information and communication
costs ($390,000), personnel costs ($417,500), computer hardware leases and
maintenance ($201,800) and screenphone purchases ($95,300). Product development
costs were $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
non-cash charge of approximately $73,000 for the change in market value of
employee stock options.
During the year ended June 30, 1998, the Company 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 non-cash 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 the
Company'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 the Company's May 1997 line of credit. Of
such amount, $463,600 represents the non-cash charges associated with the
revaluation of certain common stock purchase warrants granted to Zanett.
Interest and financing costs for the year ended June 30, 1997 were $54,646. Such
amounts were incurred in connection with the Company'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
the Company's weighted average shares of Common Stock outstanding increased by
43,201 shares, thereby affecting the per share loss.
Capital Resources and Liquidity
Since inception of the Company on August 20, 1993 through March 21, 1996, the
date of the initial public offering of securities ("IPO"), the Company had
funded its operations through a combination of private debt and equity
financings totaling $4,160,000 and $12,877,500, respectively.
In May 1997, the Company arranged a line of credit facility with a financial
institution. Such line of credit was
-15-
<PAGE>
originated for a maximum borrowing amount of $550,000. In July and September
1997, the facility was amended to allow for additional borrowings of up to
$222,222. In conjunction with the origination of the line of credit facility,
the Company issued 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. These warrants are currently exercisable at prices ranging from
$.64 to $6.07 and expire in September 2002.
In May 1997, the Company entered into a three year noncancelable capital lease
for certain computer equipment used to provide information services. The cost of
this equipment ($246,211) is being financed through the manufacturer's finance
division.
On September 30, 1997, Zanett, acting as placement agent for the Company,
completed a private placement ("Placement") of $4 million of the Company's
prepaid common stock purchase warrants ("Prepaid Warrants"). The Prepaid
Warrants expire on September 30, 2000. As part of the Placement, ZLL converted a
note payable of $772,222, issued pursuant to a Line of Credit Agreement dated
May 29, 1997, as amended, and accrued interest thereon of $63,837 into Prepaid
Warrants. The net proceeds of the Placement of $2,643,941 were used for general
working capital requirements.
On April 23, 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
received minimum monthly payments of $100,000 through April 1999. 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.
On June 24, 1999, the Company and DTN entered into the License 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)
real-time stock quote product, (ii) an online trading vehicle for customers of
small and medium sized brokerage companies, (iii) an administrative reporting
package for brokers of small and medium sized brokerage companies, 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. Although the Company believes that DTN has 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 wide spread 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") which
provided for the retention of Spencer Trask to act as exclusive placement agent
in connection with a private placement by the Company of a minimum of $5,000,000
and a maximum of $10,000,000 of securities of the Company.
In anticipation of completing the private placement, the Company completed an
interim financing of $550,000 of securities of the Company. The Company 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 of the
Company. The notes and the warrants are convertible and exercisable,
respectively, at $.60 per share of Common Stock. Such notes were repaid in June
1999.
-16-
<PAGE>
On July 1, 1999, the Company entered into an agreement with ASB to settle the
Company's obligation to ASB pursuant to the default provisions of the Prepaid
Warrants. Accordingly, 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.
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 that could have a material adverse effect on the Company's financial
position, cash flows, 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 management believes that upon the successful implementation of its
marketing plan, sufficient revenues will be generated to meet operating
requirements. Management also believes that the successful execution of its
proposed plan of operations will generate sufficient cash flow from operations
to enable the Company to offer its services on an economically sound basis and
thereby eliminate, within a reasonable time period, the concerns expressed in
the "going concern" paragraph appearing in the Report of Independent Auditors on
page 20 herein. No assurance can be given that such goals will be obtained or
that any expected revenues or cash flows will be achieved.
Year 2000 Compliance
The Company's information services are distributed via a combination of third
party computer hardware and software applications, as well as Company designed
application software and communication networks. The Company has formed a task
force to assure that its products and services are Year 2000 ("Y2K") compliant.
As part of this process, the Company 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, the Company has reviewed and modified its proprietary
application software for compliance.
The Company is currently testing its entire service offerings and anticipates
such testing will be completed by October 31, 1999. The Company anticipates that
the costs of ensuring such compliance will not exceed $150,000.
The Company 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 the Company's systems
to 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 the Company's financial condition, results of
operations, and ability to continue as a going concern. The Company believes
that the probability of this occurrence is minimal as it is currently receiving
and processing Y2K data from its critical information providers.
-17-
<PAGE>
Certain Factors That May Affect Future Results
From time to time, information provided by the Company, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-KSB) may contain statements which
are not historical facts, so-called "forward-looking statements". These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. The Company's actual
future results may differ significantly from those stated in any forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties, including, but not limited to, product demand, pricing, market
acceptance, litigation, intellectual property rights, risks in product and
technology development, product competition, limited number of customers, key
personnel, and other risk factors detailed in this Annual Report on Form 10-KSB
and in the Company's other Securities and Exchange Commission filings.
-18-
<PAGE>
Item 7. Financial Statements
- -------
Page
Report of Independent Auditors 20
Balance Sheets as of June 30, 1999 and 1998 21
Statements of Operations for the years 23
ended June 30, 1999, 1998 and 1997
Statement of Stockholders' Equity (Deficiency) 24
for the years ended June 30, 1999, 1998 and 1997
Statements of Cash Flows for the years 28
ended June 30, 1999, 1998 and 1997
Notes to Financial Statements 29
-19-
<PAGE>
Report of Independent Auditors
Stockholders and Board of Directors
SmartServ Online, Inc.
We have audited the accompanying balance sheets of SmartServ Online, Inc. as of
June 30, 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
-20-
<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
============ ============
See accompanying notes.
-21-
<PAGE>
SmartServ Online, Inc.
Balance Sheets
June 30
-----------------------------
1999 1998
------------- ------------
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 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.
-22-
<PAGE>
SmartServ Online, Inc.
Statements of Operations
<TABLE>
<CAPTION>
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.
-23-
<PAGE>
<TABLE>
<CAPTION>
SmartServ Online, Inc.
Statement of Stockholders' Equity (Deficiency)
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, 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
services -- -- -- -- 75,000 -- --
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)
--------- -------- -------- --------- ---------- --------- ------------
</TABLE>
See accompanying notes.
-24-
<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
Common Stock 220,395 2,204 -- -- (2,204) -- --
Issuance of Common Stock
Purchase Warrants to a
financial consultant in
connection with the
issuance of 4,000 Prepaid
Common Stock Purchase
Warrants -- -- -- -- 5,145,500 (5,145,500) --
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.
-25-
<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
Prepaid Warrants 60,000 600 -- -- 146,713 -- --
Issuance of Common Stock
Purchase Warrants in
connection with
prepayments made by a
marketing partner -- -- -- -- 6,300 -- --
Issuance of Common Stock
Purchase Warrants in
connection with the
issuance of 8%
convertible notes -- -- -- -- 1,573,000 -- --
Beneficial conversion
feature of 8% convertible
notes -- -- -- -- 550,000 -- --
Issuance of Common Stock and
warrants to purchase
Common Stock in partial
settlement of litigation 125,000 1,250 -- -- 144,500 -- --
Amortization of unearned
compensation over the
term of the consulting
agreement -- -- -- -- -- 1,165,020 --
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) -- --
See accompanying notes.
</TABLE>
-26-
<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
licensing agreement -- -- -- -- 324,000 -- --
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.
-27-
<PAGE>
SmartServ Online, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
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.
-28-
<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 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
-29-
<PAGE>
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.
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
-30-
<PAGE>
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 disclosure
provisions of Statement of Financial Accounting Standards No. 123 "Accounting
for Stock-based Compensation".
-31-
<PAGE>
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.
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
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<PAGE>
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 these 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 a financial consultant who is an affiliate of Zanett Lombardier, Ltd, an
investor in the Prepaid Warrants. During the five-year term of the agreement
such consultant will provide the Company with advisory services relating to
financial and strategic ventures and alliances, investment banking and general
financial advisory services, and advice and assistance with the Company's market
development activities. As compensation for these services, the
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<PAGE>
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 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. 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. 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,
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 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 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 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")
-34-
<PAGE>
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 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 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 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.
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>
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<PAGE>
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 Internal
Revenue Code Section 382, the utilization of net operating losses incurred 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.
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<PAGE>
Minimum future rental payments at June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Operating Leases
------------------------------------ Capital
Year Ending June 30 Premises Equipment Lease
----------------- --------------- ---------------
<S> <C> <C> <C>
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 and
executory costs 5,194
--------------
$ 70,147
==============
</TABLE>
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 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
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<PAGE>
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.
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-
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<PAGE>
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. Accordingly, each non-employee
director will receive 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. The Board authorized
the issuance of 300,000 of such options to employees at the fair value of the
Common Stock on that date. The 1999 Plan provides for the issuance of such
options at not less than the fair value of the Common Stock on the date of
grant.
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
=============== ==============
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<PAGE>
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>
$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 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.
-40-
<PAGE>
The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
Year Ended June 30
----------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ---------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Reported ProForma Reported ProForma Reported ProForma
--------------- -------------- ----------------- ---------------- ------------ --------------
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. Accordingly,
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 amended the Company's restricted
stock plan to include Mr. Robert Pearl, Director of Business Development.
Accordingly, Mr. Pearl has been granted 1% (approximately 86,000 shares) of the
fully diluted shares of Common Stock of the Company as of that date at the
purchase price of $.75 per share.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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<PAGE>
Part III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
The following table sets forth information with respect to the executive
officers and directors of SmartServ Online, Inc.
Name Age Position
- ---- --- --------
Sebastian E. Cassetta 51 Chief Executive Officer, Chairman of the
Board, Secretary and Class III Director
Thomas W. Haller, CPA 45 Vice President, Treasurer and Chief
Financial Officer
Mario F. Rossi 61 Vice President of Operations and Class II
Director
Claudio Guazzoni 36 Class I Director
L. Scott Perry 51 Class I Director
Robert Steele 60 Class II Director
Catherine Cassel Talmadge 47 Class I Director
Charles R. Wood 58 Class III Director
Sebastian E. Cassetta has been Chief Executive Officer, Chairman of the Board,
Secretary and a director of the Company since its inception. Mr. Cassetta was
also the Company's Treasurer from its inception until March 1996. From June 1987
to August 1992, Mr. Cassetta was the President of Burns and Roe Securacom Inc.,
an engineering and large-scale systems integration firm. 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.
Thomas W. Haller, CPA joined the Company 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.
Mario F. Rossi has been Vice President of Operations of the Company since
December 1994 and was appointed a director on February 23, 1998. Mr. Rossi has
business and operational management experience in the computer,
telecommunications and securities fields. He has an extensive background in
product development, operations and technical marketing. Prior to joining the
Company, 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 the U.S., as well as the Netherlands, directing the
development - from feasibility to production - of several computer-based medical
devices. He was awarded a Bachelors Degree in Engineering and earned a Masters
Degree from Polytechnic Institute of Brooklyn.
Claudio Guazzoni was appointed a director of the Company on January 11, 1998.
Since 1993, Mr. Guazzoni has been President of The Zanett Securities Corporation
("Zanett") and Zanett Capital, Inc. ("ZCI") 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 the Company since November 1996. Since
June 1998, Mr. Perry has been Vice President, Strategy & Alliances - AT&T
Solutions. From December 1995 to June 1998, Mr.
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<PAGE>
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 the Company on February 23, 1998.
Since February 1998, Mr. Steele has been Vice Chairman of the John Ryan Company
("John Ryan"), an international bank support and marketing company. From 1992 to
February 1998, Mr. Steele was a Senior Vice President with John Ryan. 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 the Company 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 the Company in September 1998. Mr.
Wood has been Senior Vice President of Data Transmission Network Corporation
("DTN") since 1989 and President of its Financial Services Division since 1996.
As described in Item 6, 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 $5.5 million, the Company granted DTN an
exclusive perpetual worldwide license to four of the Company's Internet products
and agreed to issue warrants to purchase 300,000 shares of the Company's Common
Stock at $8.60 per share. The Company will continue to operate and support these
products in exchange for a percentage of the revenues earned by DTN therefrom.
The Board of Directors consists of seven directors divided into three classes of
directors: Class I Directors, Class II Directors, and Class III Directors. The
Company's Class I Directors and Class III Directors will serve until the annual
meeting of the Company's stockholders to be held in 1999 or until their
respective successors are duly elected and qualified or until their earlier
resignation or removal. Similarly, the Class II Directors will serve until the
annual meeting of the Company's stockholders to be held in 2000. Directors of
each Class are elected for a full term of three years (or any lesser period
representing the balance of the previous term of such Class) and until their
respective successors are duly elected and qualified or until their earlier
resignation or removal. Officers are appointed annually and serve at the
discretion of the Board for one year. Mr. Cassetta serves as Chief Executive
Officer, Chairman of the Board, and Secretary of the Company pursuant to an
employment agreement. Mr. Rossi serves as Vice President and Chief Technology
Officer pursuant to an employment agreement.
Mr. Cassetta and Mr. Rossi, each an officer and director of the Company, Mr.
Haller, an officer of the Company, and Ms. Talmadge and Mr. Perry, directors of
the Company, failed to file an Annual Statement of Beneficial Ownership of
Securities on Form 5 for the fiscal year ended June 30, 1999, each reflecting
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<PAGE>
the receipt of certain stock options. Messrs. Guazzoni, Steele and Wood, each a
director of the Company, failed to file an Initial Statement of Beneficial
Ownership Securities on Form 3 when they became directors. On October 25, 1999,
Messrs. Cassetta, Rossi, Haller, Steele and Ms. Talmadge filed the appropriate
Form 3 or Form 5. The Company anticipates that each of such remaining directors
will take such action as may be necessary to promptly file appropriate Forms 3
and 5.
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<PAGE>
Item 10. Executive Compensation
The following table sets forth information concerning annual and long-term
compensation, paid or accrued, for the Chief Executive Officer and for each
other executive officer (the "Named Executive Officers") of the Company whose
compensation exceeded $100,000 in fiscal 1999 for services in all capacities to
the Company during the last three fiscal years. No other executive officer of
the Company received compensation in excess of $100,000 in fiscal 1999.
<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 Restricted Stock Awards or
LTIP Payouts in 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 the Company. Compensation has been
determined as the number of shares awarded to Mr. Cassetta times the
closing price of the Company'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 the Company'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 the Company. Compensation has been determined as
the number of shares awarded to Mr. Rossi times the closing price of the
Company'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 the Company'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 27,250 shares which were cancelled
when repriced options to purchase a like number of shares were granted in
lieu thereof.
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<PAGE>
(8) Amounts represent premiums paid by the Company for life and disability
insurance for the benefit of Mr. Cassetta.
(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 Unexercised
Securities Underlying In-The-Money
Options at Fiscal Options at
Year End Fiscal Year End
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- ------------------------------ ---------------- ---------- ---------------------- ----------------
<S> <C> <C> <C> <C>
Sebastian E. Cassetta -- -- 27,249/27,250 $3,937/$3,937
Mario F. Rossi -- -- 21,124/21,125 $2,651/$2,651
</TABLE>
(1) No SARs were granted to, or exercised by, the Named Executive Officers
during fiscal 1999.
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<PAGE>
(2) Value is based on the closing bid price of the Company's Common Stock as
reported by the OTC Bulletin Board on June 30, 1999 ($1.50) less the
exercise price of the option.
Employment Agreements
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 ($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 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 the Company 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 value of the shares at that date.
The Company and Mr. Rossi have 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 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 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 the Company 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 value of the shares at that date.
-47-
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of October 5, 1999, certain information with
respect to the beneficial ownership of the Common Stock by (i) each person known
by the Company to beneficially own more than 5% of the outstanding shares, (ii)
each director of the Company, (iii) each Named Executive Officer and (iv) all
executive officers and directors of the Company as a group. Except as otherwise
indicated, each person listed below has sole voting and investment power with
respect to the shares of Common Stock set forth opposite such person's name.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of
Beneficial Owner (1) Beneficial Ownership (2) Outstanding Shares (3)
-------------------- -------------------- ------------------
<S> <C> <C>
Kevin Kimberlin 450,000 (4) 24.59%
c/o Spencer Trask Securities, Inc.
535 Madison Avenue
New York, New York 10022
Data Transmission Network Corporation 303,000 (5) 18.01%
9110 West Dodge Road
Omaha, Nebraska 68114
Sebastian E. Cassetta 277,132 (6) 17.47%
c/o SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902
Steven T. Francesco 229,241 (7) 16.42%
23 Lakeview Avenue
New Canaan, Connecticut 06840
Spencer Trask Securities, Inc. 233,333 (8) 14.46%
535 Madison Avenue
New York, New York 10022
Arnhold & S. Bleichroeder 196,470 14.24%
1345 Avenue of the Americas
New York, New York 10105
Steven Rosner 207,500 (9) 13.07%
1220 Mirabeau Lane
Gladwyn, Pennsylvania 19035
Steven Harrington 104,167 (10) 7.02%
GSB Building
One Belmont Avenue, Suite 417
Bala Cynwyd, Pennsylvania 19004
Mario F. Rossi 84,934 (11) 5.80%
c/o SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902
</TABLE>
-48-
<PAGE>
Claudio Guazzoni 70,809 (12) 4.99%
L. Scott Perry 15,833 (13) 1.14%
Catherine Cassel Talmadge 15,416 (13) 1.11%
Charles R. Wood 15,074 (14) 1.08%
Robert H. Steele 14,166 (15) 1.02%
All executive officers and directors
as a group (8 persons) 512,246 (16) 28.54%
(1) Under the rules of the SEC, addresses are only given for holders of 5% or
more of the outstanding Common Stock of the Company.
(2) Under the rules of the SEC, a person is deemed to be the beneficial owner
of a security if such person has or shares the power to vote or direct the
voting of such security or the power to dispose or direct the disposition
of such security. A person is also deemed to be a beneficial owner of any
securities if that person has the right to acquire beneficial ownership
within 60 days of the date hereof. Unless otherwise indicated by footnote,
the named entities or individuals have sole voting and investment power
with respect to the shares of Common Stock beneficially owned.
(3) Represents the number of shares of Common Stock beneficially owned as of
October 5, 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) Represents 303,000 shares of Common Stock subject to currently exercisable
warrants.
(6) Includes 27,249 shares of Common Stock subject to currently exercisable
warrants and 189,181 shares of Common Stock pursuant to a restricted stock
purchase agreement between the Company and Mr. Cassetta. Also includes
2,051 shares held in trust for the benefit of Mr. Cassetta's wife.
(7) Includes 16,667 shares of Common Stock subject to currently exercisable
warrants.
(8) Represents 233,333 shares of Common Stock subject to currently exercisable
warrants.
(9) Represents 207,500 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
warrants and 63,060 shares of Common Stock pursuant to a restricted stock
purchase agreement between the Company and Mr. Rossi.
(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
23,690 shares of Common Stock subject to
-49-
<PAGE>
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 15,000 shares of Common Stock subject to currently exercisable
options.
(14) Includes 14,500 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 23,690 shares of
Common Stock subject to currently exercisable warrants owned by Zanett,
252,241 shares of Common Stock subject 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 the Named Officers and Directors.
Changes in Control
The Company and each of Messrs. Cassetta and Francesco have entered into an
agreement with ZCI 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, the Company will, at the request of ZCI,
appoint such number of designees of ZCI to its Board of Directors so that the
designees of ZCI will constitute a majority of the members of the Board of
Directors of the Company. Further, Messrs. Cassetta and Francesco have agreed to
vote their shares of Common Stock, representing approximately 19.81% of the
outstanding stock of the Company, and any shares they may acquire in the future,
in favor of the designees of ZCI at each Annual Meeting of Stockholders of the
Company at which Directors are elected.
Item 12. Certain Relationships and Related Transactions
On July 30, 1998, the Company 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 the Company
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 the Company,
is a principal of ZCI and Zanett.
On January 26, 1999, the Company and DTN signed a letter of intent whereby the
Company would be merged with a subsidiary of DTN. The transaction was subject to
the execution of a definitive merger agreement. On June 24, 1999, the Company
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, the Company granted DTN an
exclusive perpetual worldwide license to the Company's Internet-based (i)
real-time stock quote product, (ii) an online trading vehicle for customers of
small and medium sized brokerage companies, (iii) an administrative reporting
package for brokers of small and medium sized brokerage companies, 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
-50-
<PAGE>
Company. Charles R. Wood, a director of the Company, is a Senior Vice President
of Data Transmission Network Corporation and President of its Financial Services
Division.
The Company believes that the terms of the transactions described above were no
less favorable to the Company than would have been obtained from a
non-affiliated third party for similar transactions at the time of entering into
such transactions. In accordance with the Company's policy, such transactions
were approved by a majority of the independent disinterested directors of the
Company.
-51-
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Index to Exhibits
Exhibit Description
3.1 Amended and Restated Certificate of Incorporation of the Company**
3.2 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**
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, 1999 +
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, 1999 +
-52-
<PAGE>
25 Financial Data Schedule +
+ Filed herewith
* Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1997
** Filed as an exhibit to the Company's registration statement on Form SB-2
(Registration No. 333-114)
*** Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1996
**** Filed as an exhibit to the Company's Current Report on Form 8-K/A for an
event dated September 30, 1997
***** Filed as an exhibit to the Company's Proxy Statement dated October 10,
1996
****** Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
the period ended March 31, 1998
(b) Reports on Form 8-K
None
-53-
<PAGE>
Exhibit 25 Financial Data Schedule
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE JUNE 30, 1999
FINANCIAL STATEMENTS OF SMARTSERV ONLINE, INC. AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
June 30, 1999
-------------
Cash and cash items $ 2,165,551
Marketable securities 0
Notes and accounts receivable - trade:
Billed 348,278
Unbilled 0
Allowance for doubtful accounts 0
Inventory and prepaid items 50,150
Total current assets 2,563,979
Property, plant and equipment 1,064,157
Accumulated depreciation 565,709
Total assets 3,820,598
Total current liabilities 4,386,319
Bonds, mortgages and similar debt 0
Preferred stock - mandatory redemption 0
Preferred stock - no mandatory redemption 0
Common stock 11,998
Other stockholders' equity (deficit) (4,719,298)
Total liabilities and stockholders' equity 3,820,598
Net sales of information services 1,443,781
Total revenues 1,443,781
Costs of services 994,465
Total costs and expenses of sales 1,187,653
Other costs and expenses 4,006,599
Provision for doubtful accounts and notes 0
Interest and amortization of debt discount 3,378,422
Income/(loss) before taxes (7,124,126)
Income tax expense 0
Income/(loss) from continuing operations (7,124,126)
Discontinued operations 0
Extraordinary items 0
Cumulative effect - changes in accounting principles 0
Net income/(loss) (7,124,126)
Basic earnings/(loss) per share (6.44)
Earnings/(loss) per share - fully diluted (6.44)
-54-
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SMARTSERV ONLINE, INC.
Registrant
By: /s/ Sebastian E. Cassetta
------------------------------------
Sebastian E. Cassetta
Chairman of the Board
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Sebastian E. Cassetta Chairman of the Board, October 27, 1999
- --------------------------------- Chief Executive Officer,
Sebastian E. Cassetta Secretary and Director
/s/ Mario F. Rossi Vice President and October 27, 1999
- --------------------------------- Director
Mario F. Rossi
/s/ Thomas W. Haller Vice President, Treasurer October 27, 1999
- --------------------------------- and Chief Financial Officer
Thomas W. Haller
Director October __, 1999
- ---------------------------------
Claudio Guazzoni
Director October ___, 1999
- ---------------------------------
Robert H. Steele
Director October ___, 1999
- ---------------------------------
L. Scott Perry
/s/ Catherine Cassel Talmadge Director October 27, 1999
- ---------------------------------
Catherine Cassel Talmadge
/s/ Charles R. Wood Director October 27, 1999
- ----------------------------------
Charles R. Wood
</TABLE>
-55-
CERTIFICATE OF AMENDMENT
OF THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
SMARTSERV ONLINE, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation")
is SMARTSERV ONLINE, INC.
2. The certificate of incorporation of the Corporation is hereby
amended by striking out Article "FOUR" thereof and by substituting in lieu of
said Article the following new Article "FOUR":
"FOUR: The aggregate number of shares which the
Corporation shall have authority to issue is 41,000,000,
divided into two classes: (i) 40,000,000 shares of Common
Stock, par value $.01 per share (the "Common Stock"); and (ii)
1,000,000 shares of preferred stock, par value $.01 per share
(the "Preferred Stock").
A. Common Stock
(1) General. The voting, dividend and liquidation
rights of the holders of the Common Stock are subject to and
qualified by the rights of the holders of the Preferred Stock
of any class as may be designated by the Board of Directors
upon any issuance of the Preferred Stock of any class.
(2) Voting. Each holder of Common Stock shall have
one vote in respect of each share of Common Stock held by him
on all matters voted upon by the stockholders.
(3) Dividends. Dividends may be declared and paid on
the Common Stock from funds lawfully available therefor as and
when determined by the Board of Directors and subject to any
preferential dividend rights of any then outstanding Preferred
Stock.
(4) Liquidation. Upon the dissolution or liquidation
of the Company, whether voluntary or involuntary, holders of
Common Stock will be entitled to receive all assets of the
Company available for distribution to its stockholders,
subject to any preferential rights of any then outstanding
Preferred Stock.
<PAGE>
B. Preferred Stock
The Preferred Stock may be issued, from time to time,
in one or more series, with such designations, preferences and
relative, participating, optional or other rights,
qualifications, limitations or restrictions thereof as shall
be stated and expressed in the resolution or resolutions
providing for the issue of such series adopted by the Board of
Directors from time to time, pursuant to the authority herein
given, a copy of which resolution or resolutions shall have
been set forth in a Certificate made, executed, acknowledged,
filed and recorded in the manner required by the laws of the
State of Delaware in order to make the same effective. Each
series shall consist of such number of shares as shall be
stated and expressed in such resolution or resolutions
providing for the issuance of the stock of such series. All
shares of any one series of Preferred Stock shall be alike in
every particular. The authority of the Board of Directors with
respect to each series shall include, but not be limited to,
determination of the following:
(1) the number of shares constituting that
series and the distinctive designation of that
series;
(2) whether the holders of shares of that
series shall be entitled to receive dividends and, if
so, the rates of such dividends, conditions under
which and times such dividends may be declared or
paid, the preference of any such dividends to, in
relation to, the dividends payable on any other class
or classes of stock or any other series of the same
class and whether dividends shall be cumulative or
noncumulative and, if cumulative, from which date or
dates;
(3) whether the holders of shares of that
series shall have voting rights in addition to the
voting rights provided by law and, if so, the terms
of such voting rights;
(4) whether shares of that series shall have
conversion or exchange privileges into or for, at the
option of either the holder or the Corporation or
upon the happening of a specified event, shares of
any other class or classes or of any other series of
the same or other class or classes of stock of the
Corporation and, if so, the terms and conditions of
such conversion or exchange including provision for
adjustment of the conversion or exchange rate in such
events as the Board of Directors shall determine;
(5) whether shares of that series shall be
redeemable and, if so, the terms and conditions of
such redemption, including the date or dates upon or
after which they shall be redeemable and the amount
per share payable in case of redemption, which amount
may vary under different conditions and at different
redemption dates;
(6) whether shares of that series shall be
subject to the operation of a retirement or sinking
fund and, if so subject, the extent to and the manner
in which it shall be applied to the purchase or
redemption of the shares of that series, and the
terms and provisions relative to the operation
thereof;
-2-
<PAGE>
(7) the rights of shares of that series in
the event of voluntary or involuntary liquidation,
dissolution or winding up of the Corporation and any
preference of any such rights to, and the relation
to, the rights in respect thereto of any class or
classes of stock or any other series of the same
class; and
(8) whether shares of that series shall be
subject or entitled to any other preferences, and the
other relative, participating, optional or other
special rights and qualifications, limitations or
restrictions of shares of that series and, if so, the
terms thereof;
provided, however, that if the stated dividends and
amounts payable on liquidation with respect to shares
of any series of Preferred Stock are not paid in
full, then the shares of all series of Preferred
Stock shall share ratably in the payment of dividends
including accumulations, if any, in accordance with
the sums which would be payable on such shares if all
dividends were declared and paid in full, and in any
distribution of assets (other than by way if
dividends) in accordance with the sums which would be
payable on such distribution if all sums payable were
discharged in full."
3. The amendment of the certificate of incorporation herein certified
has been duly adopted in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware.
Signed on May 29, 1998.
/s/ Sebastian E. Cassetta
-------------------------------------------
Sebastian E. Cassetta, Chief
Executive Officer
Attest:
/s/ Thomas Haller
- -----------------------------
Thomas Haller, Vice President
-3-
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
SMARTSERV ONLINE, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation")
is SMARTSERV ONLINE, INC.
2. The certificate of incorporation of the Corporation is hereby
amended by adding the following paragraph to Article "FOUR" thereof to follow
the first paragraph of said Article "FOUR":
Every six issued and outstanding shares of the Common Stock,
par value $0.01 per share (the "Common Stock"), of the
Corporation shall, upon the filing date of this Certificate of
Amendment (which filing date shall also be the effective
date), automatically be combined into one issued and
outstanding share of Common Stock, par value $.01 per share;
provided, however, that fractional shares of Common Stock will
not be issued in connection with such reclassification, and
each holder of a fractional share of Common Stock shall
receive in lieu thereof a cash payment from the Corporation
determined by multiplying six times such fractional share of
Common Stock by the average of the bid and asked price per
share of Common Stock as quoted on the NASD OTC Bulletin Board
for the five trading days immediately preceding the effective
date of this Certificate of Amendment.
Signed on October 16, 1998.
/s/ Sebastian E. Cassetta
--------------------------------------
Sebastian E. Cassetta, Chief
Executive Officer
Attest:
/s/ Thomas Haller
- -----------------------------------
Thomas Haller, Vice President
CONFIDENTIAL TREATMENT HAS BEEN SOUGHT FOR PORTIONS OF THIS EXHIBIT OMITTED
PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED AND
FILED SEPARATELY WITH THE COMMISSION.
AGREEMENT
THIS AGREEMENT is made and entered into and is effective as of May 1,
1999, by and between DATA TRANSMISSION NETWORK CORPORATION, a Delaware
corporation (hereinafter "DTN"), and SMARTSERV ONLINE, INC., a Delaware
corporation (hereinafter "SmartServ").
W I T N E S S E T H:
WHEREAS, SmartServ and DTN previously entered into a Software License
and Service Agreement (the "License Agreement") dated as of May 1, 1998,
pursuant to which SmartServ (i) licensed to DTN certain proprietary software
programs known as the Internet Software (as such term is defined in the License
Agreement) utilized to provide Internet Services (as such term is defined in the
License Agreement) to DTN's customers and (ii) agreed to provide other services
to DTN;
WHEREAS, SmartServ and DTN previously entered into a Source Code Escrow
Agreement (the "Escrow Agreement") dated as of May 1, 1998, pursuant to which
SmartServ agreed to place the source code for the Internet Software in escrow to
be released to DTN upon breach of SmartServ's obligations set forth in the
Escrow Agreement or the License Agreement;
WHEREAS, SmartServ and DTN previously entered into a letter of intent
(the "Letter of Intent") dated January 26, 1999, setting forth the terms and
conditions upon which a wholly owned subsidiary of DTN would merge with
SmartServ;
WHEREAS, the parties hereto desire to (i) amend certain terms and
provisions of the License Agreement as specifically set forth in this Agreement
and terminate the Letter of Intent, (ii) provide for repayment of indebtedness
previously advanced by DTN to SmartServ, (iii) provide for additional
consideration to be given by DTN to SmartServ, (iv) provide for SmartServ's
issuance to DTN of warrants to purchase 300,000 shares of the Common Stock of
SmartServ at an exercise price of $8.60 per share, and (v) agree upon other
matters specifically set forth in this Agreement;
NOW, THEREFORE, in consideration of the above recitals which are made a
contractual part of this Agreement, and in consideration of the mutual
agreements, provisions and covenants set forth in this Agreement, the parties do
hereby agree as follows:
****REPRESENTS MATERIAL REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.
<PAGE>
SECTION 1
CONSIDERATION
1.1 In consideration of the parties entering into this Agreement and
performing the obligations to be performed by them pursuant to the terms and
provisions of this Agreement, (i) SmartServ agrees to repay to DTN in cash
concurrently with the execution of this Agreement the cash advances previously
made to SmartServ in the aggregate amount of $1,958,300 and (ii) DTN agrees to
pay to SmartServ in cash concurrently with the execution of this Agreement the
sum of $5,458,300.
SECTION 2
AMENDMENTS TO LICENSE AGREEMENT
2.1 Defined Terms. The following definitions shall be inserted in
alphabetical order in Section 1.1 of the License Agreement:
"Internet Services means those continuous market quotations
and other financial and news information services offered from time to
time on the internet by DTN, which use the Internet Software to allow
its customers direct internet access (non-wireless) to such services.
Internet Services Revenue means (i) the revenue received by
DTN from the Subscribers for the Internet Services which consist of
initiation fees, installation fees and periodic subscription fees plus
(ii) the transaction revenue received by DTN from Subscribers and third
parties for equities, futures and/or options trading orders executed by
Subscribers using an Order Entry System not owned or licensed by
SmartServ.
Object Code means the form of Internet Software resulting from
the translation or processing of the Source Code by a computer into
machine language or intermediate code in a form that is not convenient
to human understanding but which is appropriate for execution or
interpretation by a computer, together with related user documentation.
Order Entry System means an equities, futures and/or options
trading order entry or routing software application and electronic
network directly connected (non-wireless) to the internet that provides
Subscribers the ability to effect equities, futures and/or options
trades.
****REPRESENTS MATERIAL REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.
-2-
<PAGE>
SmartServ Trading Revenue means the transaction revenue
received by DTN from Subscribers and third parties for equities,
futures and/or options trading orders executed by Subscribers using an
Order Entry System owned or licensed by SmartServ.
Source Code means, with respect to the Internet Software, the
program instructions and codes written by humans with the intention
that the instructions and codes be compiled and interpreted by a
computer, including all existing commentary, explanations, control
procedures, record layouts for all files and program listings-source
codes, design documentation, user manuals, programmers' guides, system
guides, current compilation instructions, and all other user
documentation and programmer documentation, including data flows, data
structures, control logic, flow diagrams, and principles of operation,
useful for design, modification and maintenance of the Source Code by a
programmer.
Subscribers means those customers of DTN who subscribe to
Internet Services.
Y2K Compliant means: (i) the occurrence in or use by the
Internet Software of dates on or after January 1, 2000 ("millennial
dates") will not adversely affect the performance of the Internet
Software with respect to date-dependent data, computations, output or
other functions (including but not limited to calculating, comparing
and sequencing) and that the Internet Software will create, store,
process and output information related to or including millennial dates
without errors or omissions and at no additional cost to DTN."
2.2 Perpetual License. Section 2.1 of the License Agreement is deleted
in its entirety and the following is inserted in its place:
"2.1 The Licensed Software. SmartServ hereby grants to DTN and
its subsidiaries an exclusive, perpetual, worldwide license (the
"License") to use the object code of the Internet Software as part of
DTN's and its subsidiaries' business operations and to allow the
subscribers of DTN and its subsidiaries to use the Internet Software to
access the Internet Services. SmartServ agrees not to license, sell,
convey or otherwise transfer to anyone other than DTN any rights in the
Internet Software except SmartServ may license the "Order Entry FIX
Protocol" software to the **** as provided in this paragraph. In
addition, SmartServ shall not use or allow anyone other than DTN to use
the Internet Software to compete with the Internet Services. If during
any calendar year ending after year 2000 (the "Base Year"), the
aggregate SmartServ Trading Revenue for such calendar year does not
equal or exceed the aggregate SmartServ Trading Revenue for the Base
Year plus **** thereof for each calendar year following the Base Year,
to and including such calendar year, then the exclusivity with respect
to the License shall cease and the License shall become nonexclusive
unless DTN pays to SmartServ the
****REPRESENTS MATERIAL REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.
-3-
<PAGE>
difference within thirty (30) days after the end of such calendar year.
If during any calendar quarter ending after the first twelve months of
the License Term, DTN does not obtain at least **** subscribers to the
Internet Services (exclusive of renewing subscribers, but not net of
terminating subscribers) at an average of at least **** per subscriber
per month, which dollar amount shall be reduced **** each year
thereafter but not below an average of **** per subscriber per month,
then the exclusivity with respect to the License shall cease and the
License shall become nonexclusive; provided, however, in the event of a
sale to any entity listed in Schedule C to this Agreement or to an
affiliate of such entity of (i) all or substantially all of the assets
of DTN or (ii) sufficient stock of DTN to effect a change in control of
DTN, by whatever manner including, without limitation, any merger,
consolidation, sale of assets, sale of capital stock or similar
transaction, the **** subscribers requirement shall temporarily be
raised to **** subscribers for the eighteen (18) month period
immediately following the occurrence of such event. SmartServ is
negotiating an agreement for the license by SmartServ of its "Order
Entry FIX Protocol" software to the **** or its affiliate which is a
permitted exception to the exclusivity of the License as provided
above. If the **** or its affiliate acquires a perpetual right or
license to use the "Order Entry FIX Protocol" software, DTN shall be
entitled to **** of the revenues derived by SmartServ therefrom.
2.3 Object Code. The first sentence of Section 2.2 of the License
Agreement is deleted in its entirety and the following is inserted in its place:
"SmartServ shall deliver the Internet Software to DTN in object code
form for loading and operating by DTN on a back up server at a mutually
agreeable location. SmartServ agrees not to unreasonably object to any
location proposed by DTN."
In addition, the following is added to the end of Section 2.2 of the License
Agreement:
"From and after the occurrence of an Escrow Release Event, DTN shall be
entitled to modify the Internet Software and to develop software
derivatives of or interfacing with the Internet Software. All such
modifications of and software derivatives of the Internet Software
developed by DTN shall be and remain the property of DTN, and SmartServ
shall have no rights or interests therein."
2.4 Source Code Escrow. Subsection (e) of Section 2.3 of the License
Agreement is deleted in its entirety and the following is inserted in its place:
"e. The Source Code Escrow Package shall, upon request of DTN,
be released from escrow to DTN for use by DTN in accordance with this
Agreement upon the occurrence of one or more of the following events
(collectively the "Escrow Release Events" and individually an "Escrow
Release Event"):
****REPRESENTS MATERIAL REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.
-4-
<PAGE>
i. SmartServ is in breach of its obligations under
the Source Code Escrow Agreement with DTN and Escrow Agent;
ii. if SmartServ files a petition for liquidation and
dissolution under Chapter 7 of the Bankruptcy Code of the
United States, or an involuntary petition in bankruptcy is
filed against SmartServ and is not dismissed or converted for
reorganization under Chapter 11 of the Bankruptcy Code of the
United States within sixty (60) days thereafter, or this
Agreement is rejected in a proceeding under Chapter 11 of the
Bankruptcy Code of the United States;
iii. if SmartServ has a negative net worth for any
two consecutive fiscal quarters ending after May 31, 2000;
iv. if DTN elects to provide its own maintenance of
the Internet Software and the Hardware pursuant to the last
sentence of Paragraph 4.3;
v. in the event of a sale to a DTN competitor listed
in Schedule C to this Agreement or to an affiliate of such
competitor of (i) all or substantially all of the assets of
SmartServ or (ii) sufficient stock of SmartServ to effect a
change in control of SmartServ by whatever manner including,
without limitation, any merger, consolidation, sale of assets,
sale of capital stock or similar transaction; or
vi. if SmartServ proves unable or otherwise fails to
cure a breach of this Agreement within the applicable cure
period set forth in this Agreement."
2.5 License Fee. Section 3.1 of the License Agreement is deleted in its
entirety and the following is inserted in its place:
"3.1 License and Maintenance Fee. Except as otherwise provided
in this Agreement, during the License Term, DTN shall pay to SmartServ
a monthly license and maintenance fee (the "License Fee") equal to the
sum of **** of the SmartServ Trading Revenue for such month plus an
amount equal to **** of the first **** of Internet Services Revenue for
such month plus **** of the Internet Services Revenue above **** for
such month. The License Fees shall be paid to SmartServ within twenty
(20) days after the end of the month to which it relates.
Notwithstanding the foregoing, upon the occurrence of one or more of
the Escrow Release Events, DTN may at its sole cost elect to provide
its own maintenance of the Internet Software and the Hardware, in which
case DTN shall have no further obligation to pay the License Fees and
SmartServ shall have no further obligations under Article 4 of this
Agreement. If DTN elects to provide its own maintenance of the Internet
Software pursuant to this paragraph, SmartServ agrees not to compete
with any of the Internet Services for a period of five (5) years
thereafter. The
****REPRESENTS MATERIAL REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.
-5-
<PAGE>
foregoing will not prevent SmartServ from fulfilling its obligations to
the **** as permitted under Section 2.1 of this Agreement."
2.6 Warranties and Indemnification. Sections 6.2 and 6.3 of the License
Agreement are deleted in their entirety and the following are inserted in their
place:
"6.2 Internet Software. SmartServ warrants that the
Documentation faithfully and accurately reflects the functionality
provided by the Internet Software. SmartServ warrants that the Internet
Software (i) is free from known material defects; (ii) materially
performs in accordance with the Documentation and (iii) is or will be
Y2K Compliant by September 30, 1999.
6.3 Services. In the event that the Internet Software does not
perform as warranted in paragraph 6.2 hereof, SmartServ agrees to use
its best efforts to promptly make the Internet Software perform as so
warranted. If SmartServ is unable to make the Internet Software perform
as so warranted upon thirty (30) days' notice, DTN (i) may elect to
provide at its sole cost its own maintenance of the Internet Software
and the Hardware, in which case DTN shall have no further obligation to
pay the License Fees during the remainder of the License Term and
SmartServ shall have no further obligations under Article 4 of this
Agreement or (ii) may elect to terminate this Agreement."
2.7 License Term. Paragraphs 7.1 and 7.2 of the License Agreement are
deleted in their entirety and the following is inserted in their place:
"7.1 Term. The term of this Agreement shall commence upon the
Effective Date and, unless terminated earlier pursuant to Article 7,
shall continue until either party terminates this Agreement by written
notice to the other party given at least ninety (90) days in advance of
such termination, provided such termination may not occur until such
time as there are fewer than **** Subscribers at an average of at least
**** per subscriber per month, which dollar amount shall be reduced
**** each year thereafter but not below an average of **** per
subscriber per month. Such term is referred to in this Agreement as the
"License Term".
7.2 Termination for Cause. DTN shall have the right to
terminate this Agreement upon the violation, breach or default of
SmartServ, its officers or employees, of any material provision of this
Agreement, including but not limited to proprietary rights and
confidentiality obligations. In addition, DTN shall have the right to
terminate this Agreement (i) upon the occurrence of any Escrow Release
Event; or (ii) in accordance with Sections 6.3, 6.6 or 7.1 hereof.
SmartServ shall have the right to terminate this Agreement (i) upon DTN
becoming insolvent, commencing or becoming subject to any proceedings
under any bankruptcy or insolvency law or making any
****REPRESENTS MATERIAL REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.
-6-
<PAGE>
assignment for the benefit of creditors, suffering or permitting the
appointment of a receiver for its business or assets or commencing the
winding up or liquidating its business or affairs, voluntarily or
otherwise; (ii) upon the failure of DTN to pay the License Fees in
accordance with this Agreement for any two (2) month period, subject to
the notice and cure period provided in Section 7.3; or (iii) in
accordance with Section 7.1."
2.8 Termination of Service Agreement. Each and every reference to "this
Agreement and/or the License" contained in Section 7.3 of the License Agreement
shall be changed to "this Agreement". In addition, Section 7.4 of the License
Agreement shall be deleted in its entirety and the following inserted in its
place:
"7.4 Survival of the License. Notwithstanding any provision to
the contrary contained in this Agreement, upon termination of this
Agreement, the License shall continue in perpetuity and the provisions
of Paragraph 2.1 shall survive the termination of this Agreement."
2.9 Schedules. Schedules A and C attached to the License Agreement are
deleted in their entirety and Schedules A and C attached to this Agreement are
inserted in their place.
SECTION 3
OTHER AGREEMENTS
3.1 Termination of The Letter of Intent. The parties agree that,
effective immediately, the Letter of Intent is terminated and is of no further
force or effect.
3.2 Release. SmartServ does hereby fully and absolutely release and
forever discharge DTN and its affiliates, officers, directors, employees and
agents (the "Released Parties") from any and all claims, demands and causes of
action of any kind whatsoever, whether known or unknown at the present time,
which SmartServ may have against any of the Released Parties with respect to or
arising out of the Letter of Intent or the transactions contemplated by the
Letter of Intent. The foregoing release is intended and shall be construed as a
full and complete release of all claims, demands, and causes of action referred
to above. This release shall inure to the benefit of the Released Parties and
their respective heirs, representatives, successors and assigns.
3.3 Escrow Agreement. The parties shall enter into a new Escrow
Agreement pursuant to which SmartServ will place the Source Code for the
Internet Software in escrow to be released to DTN upon the occurrence of one or
more Escrow Release Events. The parties shall complete the new Escrow Agreement
on or before July 23, 1999 with an Escrow Agent
****REPRESENTS MATERIAL REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.
-7-
<PAGE>
mutually agreeable to both parties and upon terms and conditions substantially
the same as the existing Escrow Agreement, with such changes as may be required
by the Escrow Agent or agreed to by both parties. The costs of the escrow shall
be shared by DTN and SmartServ equally.
SECTION 4
SMARTSERV WARRANTS
4.1 Issuance of Warrant. SmartServ agrees to issue to DTN a warrant
(the "Warrant") to purchase from SmartServ 300,000 duly authorized, validly
issued, fully paid and nonassessable shares of Common Stock, par value $.01 per
share, of SmartServ (the "Common Stock") at the purchase price per share of
$8.60, at any time or from time to time prior to April 30, 2003 or the date one
year after the Current Market Price (as hereinafter defined) of the Common Stock
reaches $8.60 per share, whichever is earlier. SmartServ and DTN shall promptly
negotiate in good faith and execute an agreement evidencing the Warrant, which
shall contain such terms, conditions and adjustments as may reasonably be
requested by the parties, including, but not limited to, antidilution
adjustments to the number and kind of securities to be issued upon exercise of
the Warrant and the exercise price. In addition, the Warrant shall contain
registration rights substantially similar to those attached to this Agreement as
Exhibit A. For purposes of this paragraph, "Current Market Price" shall mean, as
of any date, the average daily Market Price (as hereinafter defined) during the
period of the most recent 20 consecutive business days ending on such date. For
purposes of this paragraph, "Market Price" shall mean, as of any date, the
amount per share equal to (x) the last sale price of shares of the Common Stock
on such date or, if no such sale takes place on such date, the average of the
closing bid and asked prices thereof on such date, in each case as officially
reported on the principal national securities exchange on which the Common Stock
is then listed or admitted to trading, or (y) if no shares of Common Stock are
then listed or admitted to trading on any national securities exchange but the
Common Stock is designated as a national market system security by the NASD, the
last trading price of the Common Stock on such date, or if the Common Stock is
not so designated, the average of the reported closing bid and asked prices
thereof on such date as shown by the NASDAQ system or, if no shares thereof are
then quoted in such system, as published by the National Quotation Bureau,
Incorporated or any successor organization, and in either case as reported by
any member firm of the New York Stock Exchange selected by SmartServ.
****REPRESENTS MATERIAL REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.
-8-
<PAGE>
SECTION 5
ADDITIONAL OBLIGATIONS
5.1 Right of First Refusal. SmartServ hereby agrees that, during the
License Term (as defined in the License Agreement), DTN shall have a right of
first refusal to supply content to SmartServ's products and services which is
not provided directly by SmartServ or its subsidiaries or affiliates. If, during
the License Term, SmartServ desires to acquire from third parties content for
its products or services which generally is of a type provided by DTN or its
subsidiaries and affiliates, then SmartServ agrees to purchase such content from
DTN upon the same terms and conditions that SmartServ would purchase such
content from a bona fide and unrelated content provider or vendor; provided,
however, such right of first refusal is subject to SmartServ's reasonable
determination that DTN can provide such content in a manner and of a quality
equal to that of other third party content providers or vendors and on a timely
basis.
5.2 Pending Developments. SmartServ agrees to continue with due
diligence the development of the **** trading software application which has
been discussed with DTN. The compensation arrangements with respect to such ****
trading software application and any other DTN originated trading applications
will be agreed upon by the parties on a case by case basis.
5.3 Administrative Software. SmartServ agrees that the Administrative
Software used to administratively control user accounts is to be included in the
Internet Software; provided, however, that the License as it relates solely to
such Administrative Software is provided on a non-exclusive basis to DTN for its
internal use only.
5.4 Additional Products and Services. The parties agree that SmartServ
is engaged in the business of providing software products and services on the
Internet referred to as "DTN IQ", "Order Entry Review & Release", "Order Entry
FIX Protocol" and "BrokerNet" which are covered by this Agreement. SmartServ's
other business operations (hereinafter the "Excluded Business Operations")
including but not limited to (i) its telephone screen services, (ii) any other
internet products and services not identified above, or (iii) its wireless or
PCS services are not covered by the License granted herein. From time to time,
parts of SmartServ's Excluded Business Operations may be available for licensing
to DTN's customers. Should any of DTN's customers execute a license to utilize
any portion of SmartServ's Excluded Business Operations through DTN, DTN shall
be entitled to **** of the revenues derived therefrom.
5.5 Membership on Board of Directors. During the License Term (as
defined in the License Agreement), SmartServ agrees to nominate a person
designated from time to time by DTN and acceptable to the SmartServ Board of
Directors as a member of the Board of Directors of SmartServ at the appropriate
annual meeting of the shareholders of SmartServ held for the purpose of electing
directors of SmartServ.
****REPRESENTS MATERIAL REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.
-9-
<PAGE>
SECTION 6
MISCELLANEOUS
6.1 Governing Law. This Agreement shall be governed by and interpreted
in accordance with the internal laws of the State of Nebraska, without regard to
principles of conflicts of laws.
6.2 Entire Agreement. This Agreement, including the Schedules hereto,
and the License Agreement constitute the entire agreement between the parties
with respect to the subject matter hereof and supersedes all previous proposals,
both oral and written, negotiations, representations, commitments, writings and
all other communications between the parties. This Agreement may not be
released, discharged, modified or amended except by an instrument in writing
signed by a duly authorized representative of each of the parties.
6.3 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Amendment by signing
any such counterpart.
6.4 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and permitted
assigns.
6.5 Superseding. From and after the date hereof, all references to the
License Agreement (including, but not limited to, such references in the Escrow
Agreement and the Asset Purchase Agreement dated April 23, 1998, between
SmartServ and DTN) shall mean the License Agreement as amended by this
Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement to become
effective as of the day and year first above written.
DATA TRANSMISSION NETWORK SMARTSERV ONLINE, INC.,
CORPORATION, a Delaware a Delaware corporation
corporation
By: /s/ Charles R. Wood By: /s/ Mario Rossi
- --------------------------------- ---------------------------------------
Title: Senior Vice President Title: Vice President - Operations
****REPRESENTS MATERIAL REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.
-10-
<PAGE>
CONFIDENTIAL TREATMENT HAS BEEN SOUGHT FOR PORTIONS OF THIS EXHIBIT WHICH HAVE
BEEN OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED AND FILED SEPARATELY WITH THE COMMISSION.
ADDENDUM
August 26, 1999
Mr. Sebastian E. Cassetta
Chairman, Chief Executive Officer
SmartServ Online, Inc.
One Station Place
Stamford, CT 06902
Dear Sam,
This letter, upon execution by SmartServ Online, Inc. (SmartServ) and Data
Transmission Network Corporation (DTN) will constitute an addendum to the
Software License and Service Agreement (the Agreement) between SmartServ and DTN
dated May 1, 1998 and amended May 1, 1999. All terms defined in the Agreement
have the same meanings when used herein.
For the development, enhancement and maintenance of **** trading application
software, it is hereby agreed:
(1) Software Development Fee
DTN will pay SmartServ a total of **** to develop trading application
software for **** ; and, of this total, DTN will pay **** to SmartServ upon
delivery and proof of performance of the first beta version of the ****
trading application software and the remaining **** within thirty (30) days
after the **** trading application software is installed and commercially
used.
(2) Software Enhancement and Maintenance Fees
SmartServ will enhance and maintain the **** trading Application software
in accordance with the terms and conditions of the Agreement. DTN will pay
SmartServ **** of revenue earned by the use of the **** trading application
software each month within twenty (20) days after the end of the respective
months to which they relate.
**** REPRESENTS MATERIAL REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.
<PAGE>
Mr. Sebastian E. Cassetta
Agreement Addendum
Page 2
This addendum shall remain in effect for so long as the Agreement shall remain
in effect. Except as set forth herein, all terms and conditions of the Agreement
remain in effect. This addendum, together with the Agreement, constitute the
entire understanding of SmartServ and DTN and cannot be modified except in
writing signed by both SmartServ and DTN.
Please signify SmartServ's concurrence with the terms written hereabove by
signing both copies of this addendum where indicated herebelow and return one
copy to me.
Sincerely,
/s/ Charles R. Wood
Charles R. Wood
Sr. Vice President
CRW: co
Accepted and agreed:
SmartServ Online, Inc. Data Transmission Network Corporation
By: /s/ Sebastian E. Cassetta By: /s/ Roger W. Wallace
- ------------------------------------ ------------------------------------
(signature) (signature)
Sebastian E. Cassetta Roger W. Wallace
- ------------------------------------ ------------------------------------
(type or print name) (type or print name)
Title: Chairman & CEO Title: Senior Vice President
Date: 10/3/99 Date: 9/2/99
**** REPRESENTS MATERIAL REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT dated as of the 1st day of January 1999,
between SmartServ Online, Inc., a Delaware Corporation, with its principal
executive offices at Metro Center, One Station Place, Stamford, Connecticut
06902 (the "Company"), and Sebastian E. Cassetta, an individual and resident of
Westport, Connecticut (the "Executive").
WHEREAS, the Executive is and has been employed by the Company and is
currently Chairman, Chief Executive Officer, and Secretary of the Company;
WHEREAS, the Company and Executive have heretofore entered into and
executed an Employment Agreement dated as of January 31, 1994, as amended on
June ____, 1994 (the "Employment Agreement");
WHEREAS, the Company and the Executive desire to amend and restate the
Employment Agreement on the terms and conditions hereafter expressed;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and intending to be legally bound hereby, the Company and the
Executive hereby agree as follows:
1. Position and Duties.
(a) The Company agrees to, and hereby does, continue to employ
the Executive for the term of this Agreement as Chairman, Chief Executive
Officer, and Secretary, and the Executive agrees to perform such duties as the
Executive is now performing and such other duties commensurate with such
positions as the Executive may reasonably be directed to
<PAGE>
perform by the Board of Directors. The Executive will continue to serve in his
present capacity, and in connection therewith, perform such duties as the
Executive is now performing and such other duties, commensurate with such
positions, as the Executive may reasonably be directed to perform by the Board
of Directors of the Company. The Executive shall have the right to devote a
reasonable amount of time to (i) industry, community or charitable
organizations, and (ii) and the management of personal investments so long as
such activities do not interfere or conflict with the performance by the
Executive of his obligations hereunder. Subject to the provisions of Section 9
and Section 10 hereof, the Executive may serve as a director of other companies
with the consent of the Board of Directors of the Company, which consent shall
not be unreasonably withheld.
(b) The Executive hereby accepts such employment and agrees
faithfully to perform to the best of his ability the duties described in Section
l (a).
2. Term. Subject to Section 4 hereof, the term of employment of the
Executive under this Agreement shall commence as of the date first above written
(the "Effective Date") and shall terminate on the last day of the calendar month
which is 36 calendar months after the Effective Date. Commencing on the last day
of the first full calendar month after the Effective Date and on the last day of
each succeeding calendar month, the term of this Agreement shall be
automatically extended without further action by either party for one additional
calendar month unless one party notifies the other in writing that such party
does not wish to extend the term of this Agreement. In the event that such
notice shall have been delivered, the term hereof shall no longer be subject to
automatic extension and the term hereof shall expire on the date which is 36
-2-
<PAGE>
calendar months after the last day of the month in which such written notice is
received. (The last day of the calendar month in which the term hereof, as
extended from time to time, shall end is hereinafter referred to as the
"Expiration Date").
3. Compensation. In consideration for the Executive's agreements
contained herein, and as compensation to the Executive for the performance of
the services required hereunder, the Company shall pay or grant to him the
following salary and other compensation and benefits:
(a) a base salary, payable in equal installments not less
frequently than monthly, at such annual rate not less than $185,000 per year
(the "Base Salary"), and determined from time to time by the Board of Directors
or an appropriate committee thereof, provided, however, that the Executive's
base salary shall be periodically reviewed by the Board of Directors and shall
be increased if the Board of Directors determines that an increase is
appropriate on the basis of the types of factors it generally takes into account
in increasing the salaries of executive officers of the Company, provided that
the Base Salary shall automatically be adjusted annually to reflect the
increase, if any, in the cost of living by adding to the Base Salary an amount
obtained by multiplying the Base Salary by the percentage by which the Consumer
Price Index for All-Urban Consumers, as reported by the Bureau of Labor
Statistics of the United States Department of Labor, has increased over its
level from the previous twelve month period ending December 31st of each year;
(b) the Executive shall have the opportunity to receive an
annual aggregate bonus in the amount of up to One Hundred percent (100%) of the
Base Salary (the
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<PAGE>
"Cash Bonus"). The payment of the Cash Bonus will be dependent upon the yearly
revenue growth of the Company. For the fiscal year ending June 30, 1999 (the
"Initial Year") the amount of the Cash Bonus shall be determined as follows: for
each 10% increase in the revenues of the Company over the fiscal year ending
June 30, 1998 the Executive shall earn a Cash Bonus of 10% of the Base Salary,
up to a maximum Cash Bonus of 100% of the Base Salary. For each fiscal year
following the Initial Year, the amount of the Cash Bonus shall be 5% of the Base
Salary for each 5% increase in revenues, as compared to the preceding fiscal
year, up to a maximum Cash Bonus of 100% of the Base Salary. The Cash Bonus
shall be paid in cash and shall be paid within ninety (90) days of the end of
the fiscal year to which the Cash Bonus relates;
(c) such other awards under the Company's 1996 Employee Stock
Option Plan (the "Plan") or under any other stock option, incentive compensation
or other compensation plan, program or arrangement now existing, or hereafter
adopted and applicable to executive officers of the Company, as the Board of
Directors, or an appropriate committee thereof administering such plan, program
or arrangement, may determine appropriate in light of the duties and
responsibilities of the Executive in respect to other executive officers;
(d) participation on the same terms and conditions as all other
employees in all employee benefit plans, whether or not qualified within the
meaning of Section 401(a) of the Internal Revenue Code of 1986, as may be
amended from time to time (the "Code"), as may be now or hereafter sponsored or
maintained for all employees of the Company, and participation on the same terms
and conditions as other executive officers in such other plan,
-4-
<PAGE>
program or arrangement as may be now or hereafter sponsored or maintained for
executive officers of the Company;
(e) reimbursement of not less than a monthly allowance of
$500.00 for reasonable travel within the New York metropolitan area in
connection with the performance of services under this Agreement, covering a
vehicle allowance for business mileage at the applicable mileage rate as
established by the Internal Revenue Service, maintenance, gas, insurance,
parking and all other related expenses and the Company shall further reimburse
the Executive for all reasonable other travel and other expenses incurred by the
Executive in connection with the performance of services under this Agreement,
upon presentation of expense statements or vouchers and such other support
information as it may from time to time request, provided that such expenses
meet the usual test of being business related in accordance with the Company's
usual procedures in this regard; and
(f) reasonable vacations of not less than four (4) weeks per
year, absences on account of temporary illness and fringe benefits customarily
enjoyed by employees or officers of the Company under the terms and conditions
of the Company's policy in respect thereto.
(g) a yearly budget of not less than $12,000 to pay for dues,
assessments and expenses incurred by the Executive relating to membership or
participation in professional or social groups or organizations which the
Executive determines are useful or necessary for the purpose of promoting and
maintaining the business of the Company.
-5-
<PAGE>
(h) continuation of the Executive's life insurance and disability
insurance policies in existence as of the date of this Agreement.
4. Termination of Employment. This Agreement shall terminate upon the
Expiration Date or upon the death of the Executive. The Company may terminate
this Agreement prior to the Expiration Date (and the Executive's employment
hereunder shall terminate) for "Disability" or "Cause". Termination of this
Agreement by the Company for any reason not set forth in the preceding sentence
shall not be deemed a permitted termination and shall be deemed a breach of this
Agreement. In the event of any termination of this Agreement prior to the
Expiration Date, whether a permitted termination or otherwise, the provisions of
Section 5 of this Agreement shall determine the amount, if any, of any
compensation thereafter due the Executive in respect to such termination.
As used in this Agreement, the following terms shall have the meanings
set forth:
(a) Disability. If, as a result of the Executive's incapacity
due to physical or mental illness, the Executive shall have been absent from his
duties with the Company on a full-time basis for four (4) consecutive months,
and within thirty days after written notice of termination is given by the
Company, the Executive shall not have returned to the full-time daily
performance of his duties, the Executive shall be deemed to have experienced a
Disability and the Company may terminate the Executive's employment. The
Executive shall be entitled to leaves of absence from the Company in accordance
with the Company's policy generally applicable to executives for illness or
other temporary disabilities for a period or periods not exceeding an
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aggregate of four months in any calendar year, and his compensation and status
as an employee hereunder shall continue during any such period or periods.
(b) Cause. Termination by the Company of employment for "Cause"
shall mean termination upon:
(i) the willful and continued failure by the Executive to
substantially perform his duties with the Company (other than
any such failure resulting from his incapacity due to physical
or mental illness), after a written demand for substantial
performance is delivered to the Executive by the Board of
Directors which specifically identifies the manner in which
the Board of Directors believes that the Executive has not
substantially performed his duties, and which failure has not
been cured within thirty days after such written demand; or
(ii) the willful and continued engaging by the Executive in
conduct which is demonstrably and materially injurious to the
Company, monetarily or otherwise.
For purposes of this Subsection (b), no act, or failure to act, on the
Executive's part shall be considered "willful" unless done, or omitted to be
done, by the Executive in bad faith and without reasonable belief that such
action or omission was in the best interest of the Company.
Notwithstanding the foregoing, the Executive shall not be deemed to
have been terminated for Cause unless and until there shall have been delivered
to him a copy of a resolution duly adopted by the affirmative vote of not less
than 51% of the entire membership of the Board
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of Directors at a meeting of the Board of Directors called and held for that
purpose (after reasonable notice to the Executive and an opportunity for the
Executive, together with his counsel, to be heard before the Board of
Directors), finding that in the good faith opinion of the Board of Directors the
Executive was guilty of conduct set forth above in clauses (i) or (ii) of the
first sentence of this Subsection (b) and specifying the particulars thereof in
detail.
(c) Notice of Termination. Any purported termination by the
Company shall be communicated by written Notice of Termination to the other
party hereto in accordance with Section 14 hereof. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice which shall indicate
the specific termination, resignation or retirement provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for such termination, resignation or retirement under
the provision so indicated.
(d) Date of Termination, Etc. "Date of Termination" shall mean
(i) if the Executive's employment is terminated for Disability, thirty days
after Notice of Termination is given (provided that the Executive shall not have
returned to the performance of the Executive's duties on a full-time daily basis
during such thirty-day period), (ii) if the Executive's employment is terminated
for any other reason, the date specified in the Notice of Termination (which
shall not be less than thirty days nor more than sixty days, from the date such
Notice of Termination is given), or (iii) if within thirty days after any Notice
of Termination is given the party receiving such Notice of Termination notifies
the other party that a dispute exists concerning the termination, the Date of
Termination shall be the date on which the dispute is finally determined by
mutual written agreement of the parties, by a binding arbitration award, or by a
final judgment,
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order or decree of a court of competent jurisdiction (the time for appeal
therefrom having expired and no appeal having been perfected). Any party giving
notice of a dispute shall pursue the resolution of such dispute with reasonable
diligence. Notwithstanding the pendency of any such dispute, the Company will
continue to pay the Executive his full compensation in effect when the notice
giving rise to the dispute was given (including, but not limited to, base
salary) and continue the Executive as a participant in all compensation,
employee benefit and insurance plans, programs and arrangements in which the
Executive was participating when the notice giving rise to the dispute was
given, until the dispute is finally resolved in accordance with this Subsection
(d).
5. Compensation Upon Termination.
(a) Death. If the Executive's employment hereunder terminates
by reason of his death, the Company shall be obligated to pay to his surviving
widow, or to his legal representatives if he leaves no surviving widow or if his
surviving widow dies prior to fulfillment of the Company's obligations, (i) the
Executive's then current base salary for a twelve (12) month period commencing
on the first day of the month following the Executive's death, or until the
Expiration Date, whichever shall be the first to occur; and (ii) any benefits to
which the Executive is entitled under any insurance policies on the life of the
Executive, under the Company's insurance programs and other employee benefit
plans, programs and arrangements then in effect and under the Company's pension
plan for salaried employees, if any. In addition to the foregoing, the Company
shall be obligated to continue coverage, to the extent not prohibited by law,
for a period of twelve (12) months from the date of the Executive's death for
the Executive's eligible dependents under all of the Company's benefit plans in
effect and applicable to the Executive's
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eligible dependents as of the date of death, provided that in the event that
such eligible dependents, cannot be covered or fully covered under any or all of
the Company's benefit plans, the Company shall continue to provide such eligible
dependents with the same level of such coverage in effect prior to the
Executive's death, on an unfunded basis if necessary.
(b) Disability. If the Executive's employment hereunder
terminates by reason of his Disability, the Company shall (i) continue to pay to
the Executive, in accordance with the payroll practices of the Company in effect
prior to the Date of Termination, the Executive's then current base salary for
twenty-four (24) months after the Date of Termination, reduced by any benefits
to which the Executive may be entitled under any Company sponsored disability
income or income protection plan, policy or arrangement, the premiums for which
or benefits under which are paid by the Company (ii) for the first year after
the Date of Termination pay an amount equal to the highest annual bonus that the
Executive received in the three years prior to the Date of Termination, payable
in a lump sum at approximately the same time as annual bonuses were paid by the
Company in the year prior to the Date of Termination, and (iii) continue
coverage, to the extent not prohibited by law, for a period of twelve (12)
months from the Date of Termination or until comparable benefits are made
available to the Executive in connection with subsequent employment, whichever
period is shorter, for the Executive and his eligible dependents under all of
the Company's benefit plans in effect and applicable to the Executive and his
eligible dependents as of the Date of Termination, provided that in the event
that the Executive and his eligible dependents, because of the Executive's
terminated status, cannot be
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covered or fully covered under any or all of the Company's benefit plans, the
Company shall continue to provide the Executive and/or his eligible dependents
with the same level of such coverage in effect prior to termination, on an
unfunded basis if necessary. If the Executive dies prior to the date on which
such additional amounts would have ceased to be payable under this Subsection
(b), the amount that would have been payable by the Company had he lived shall
continue to be paid by the Company to his surviving widow, for a period of 12
months following the Executive's death, at the same times and rates as it would
have been payable to him.
(c) Cause. If the Executive's employment hereunder is
terminated by the Company for Cause, the Company shall pay to the Executive his
full base salary through the Date of Termination at the rate in effect at the
time Notice of Termination is given and the Company shall have no further
obligations to the Executive under this Agreement.
(d) Voluntary Resignation or Retirement. In the event the
Executive retires or resigns other than for Good Reason (as defined below), the
Company shall pay to the Executive his full base salary through the Date of
Termination at the rate in effect at the time Notice of Termination is given
and, except as provided in Section 8, the Company shall have no further
obligations to the Executive under this Agreement.
(e) Other. If the Executive's employment hereunder is
terminated by the Company other than for Cause or Disability or by the Executive
for Good Reason (as defined below), then the Executive shall be entitled all to
the benefits provided below :
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(i) the Company shall pay the Executive his full base salary
through the Date of Termination at the rate in effect at the time
Notice of Termination is given;
(ii) in lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination, the Company shall
pay as severance pay to the Executive, not later than the
fifteenth day following the Date of Termination, a lump sum
severance payment equal to the Executive's full base salary for
the then remaining term of this Agreement (without regard to the
date of such Notice of Termination) at the rate then in effect
(the "Lump Sum Payment"), discounted to present value at a
discount rate of 8% per annum applied to each future payment from
the time it would have become payable;
(iii) in lieu of shares of common stock issuable upon exercise of
outstanding stock options ("Options"), if any, or any stock
appreciation rights ("SAR"), if any, whether or not such Options
or SARs are vested or then exercisable pursuant to their
respective terms, granted to the Executive under the Plan or
another of the Company's stock option or stock appreciation
rights plans or otherwise (which Options and SARs shall be
canceled upon the making of the payment referred to below), the
Executive shall receive, not later than the fifteenth day
following the Date of Termination, an amount in cash equal to the
product of (x) the difference (to the extent that such difference
is a positive number) obtained by subtracting the per share
exercise price of each Option and each SAR held by the Executive,
whether or not then fully exercisable, from the closing price of
the Common Stock
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(on the Date of Termination) as reported on the National
Association of Securities Dealers Automatic Quotation
System/National Market System or such quotation system or stock
exchange as the Common Stock is then listed or principally traded
(or if not traded on the Date of Termination, the closing price
on the next preceding business day on which the Common Stock
traded and in the event that there is no established trading
market for the Common Stock, the per share exercise price shall
be subtracted from the fair market value of the Common Stock on
the Date of Termination as determined in good faith by the Board
of Directors of the Company and approved by an independent
accounting firm), and (y) the number of shares of Common Stock
covered by each such Option or SAR;
(iv) the Company shall remove all restrictions on vesting and any
and all forfeiture provisions or repurchase options applicable to
any shares of restricted stock held by the Executive shall
automatically lapse and be of no further force or effect;
(v) the Company shall continue coverage, to the extent not
prohibited by law, for a period of twelve (12) months from the
Date of Termination or the remaining term of this Agreement,
whichever period is shorter, for the Executive and his eligible
dependents under all of the Company's benefit plans in effect and
applicable to the Executive and his eligible dependents as of the
Date of Termination, provided that in the event that the
Executive and his eligible dependents, because of the Executive's
terminated status, cannot be covered or fully covered under any
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or all of the Company's benefit plans, the Company shall continue
to provide the Executive and/or his eligible dependents with the
same level of such coverage in effect prior to termination, on an
unfunded basis, if necessary;
(vi) the Company shall also pay to the Executive all legal fees
and expenses incurred by the Executive in contesting or disputing
any such termination or in seeking to obtain or enforce any right
or benefit provided by this Agreement or in connection with any
tax audit or proceeding to the extent attributable to the
application of Section 4999 of the Code to any payment or benefit
provided hereunder;
(vii) the payments under this Subsection (e) are intended by the
parties to be due and payable under the circumstances of a
termination for the reasons set forth above whether or not such
circumstances are preceded by a change in control of the Company.
If, notwithstanding the intentions of the parties, it is asserted
by any governmental agency, in any tax audit, administrative
proceeding or otherwise, that any payments provided under this
Section 5(e) (the ASeverance Payments@) are or will be subject to
the tax (the "Excise Tax") imposed by Section 4999 of the Code
and/or that a federal income tax deduction for amounts paid as
Severance Payments will not be allowed to the Company for any
year by reason of Section 28OG of the Code, the Executive may
contest or refute such assertion with
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respect to the Excise Tax in any appropriate forum (the
"Executive's Contest") and the Company shall diligently and
vigorously contest or refute such assertion with respect to the
disallowance of such deduction in all administrative proceedings
and in the federal district court or the Tax Court, whichever
shall have jurisdiction (the "Company's Contest"). The
Executive's Contest and the Company's Contest shall be conducted
and presented separately unless the Executive, in his discretion
but with the consent of the Company, joins in the Company's
Contest. In any event, the Executive shall be entitled to retain
attorneys and other experts deemed necessary or appropriate by
the Executive to the proper presentation of the Executive's
Contest and shall not be compelled by the Company to compromise,
settle or otherwise terminate the Executive's Contest without his
written consent thereto. The Company and the Executive shall
cooperate one with the other and each shall provide to the other
copies of all documents relevant to or useful in connection with
either the Executive's Contest or the Company's Contest as may
reasonably be requested by the other. The Executive shall attend
any hearing, deposition or other proceeding at which his
attendance in person is material to the Company's Contest. The
Company shall cause the appropriate authorized officer or
officers of the Company to attend any hearing, deposition or
other matter at which the Company's appearance is requested by
any party. In the event that the Severance Payments are finally
determined to be subject to the Excise Tax, then the Company
shall pay to the Executive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive
of all taxes (including any interest or penalties), including,
without limitation, any income taxes (including any interest or
penalties) and Excise Tax imposed on the Gross-Up
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Payment, the Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Severance Payments; and
(viii) The payments provided for in this Subsection (e), shall be
made not later than the fifteenth day following the Date of
Termination, provided, however, that if the amounts of such
payments cannot be finally determined on or before such day, the
Company shall pay to the Executive on such day an estimate, as
determined in good faith by the Company, of the minimum amount of
such payments and shall pay the remainder of such payments
(together with interest at the rate provided in Section
1274(b)(2)(B) of the Code) as soon as the amount thereof can be
determined but in no event later than the thirtieth day after the
Date of Termination provided that any Gross-Up Payment shall be
made within thirty days of the final determination that the
Severance Payments are subject to the Excise Tax. In the event
that the amount of the estimated payments exceeds the amount
subsequently determined to have been due, such excess shall
constitute a loan by the Company to the Executive payable on the
fifth day after demand by the Company (together with interest at
the rate provided in Section 1274(b)(2)(B) of the Code).
(f) For purposes of this Agreement Good Reason shall mean the
occurrence of any one of the following events:
(i) a material breach by the Company of this Agreement,
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(ii) the Company's assignment to Executive of duties inconsistent
in any material respect with his position (including status and
reporting) or any other diminution of authority, duties or
responsibilities, excluding any isolated action by the Company
not taken in bad faith and which is remedied by the Company
within 15 days after receipt of notice from the Executive,
(iii) a Change of Control (as defined below), other than a Change
of Control Transaction (as defined below) that was approved by a
majority of the Continuing Directors (as defined below), or
(iv) the relocation of the Executive's principal place of
employment to a location more than 50 miles from his principal
place of employment on the date of this Agreement (unless such
relocation is closer to the Executive's principal residence).
(g) For purposes of this Agreement, a Change of Control shall occur
if:
(i) at any time less than 60% of the members of the Board of
Directors shall be individuals who were either (x) Directors on
the effective date of this Agreement or (y) individuals whose
election, or nomination for election, was approved by a vote
(including a vote approving a merger or other agreement providing
for the membership of such individuals on the Board of Directors)
of at least two-thirds of the Directors then still in office who
were Directors on the effective date of this Agreement or who
were so approved (the "Continuing Directors"); or
(ii) the shareholders of the Corporation shall approve an
agreement or plan providing for the Corporation to be merged,
consolidated or otherwise combined with, or for all or
substantially all its assets or stock to be acquired by, another
corporation, as a consequence of which the former shareholders of
the Corporation will own, immediately after such merger,
consolidation, combination or acquisition, less than a majority
of the Voting Power of such surviving or acquiring corporation or
the parent thereof (a "Change of Control Transaction").
(h) The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 5 by seeking other employment or otherwise,
nor shall the amount of any payment provided for in this Section 5 be reduced by
any compensation earned by the Executive as the result of employment by another
employer, or otherwise.
(i) In addition to all other amounts payable to the Executive under
this Section 5, the Executive shall be entitled to receive all benefits payable
to him under the Company's retirement savings plan and pension plan, if any, and
any other plan, program or arrangement relating to retirement, profit sharing,
or other benefits including, without limitation, any employee stock ownership
plan or any plan established as a supplement to any such plans. No amount
payable to the Executive under Subsection 5(e) shall be considered for any
benefit calculation or other purpose under the Company's pension plan, if any.
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6. Change of Control. In the event of a Change of Control, the Company
shall provide the Executive with the following benefits:
(a) in lieu of shares of common stock issuable upon exercise
of outstanding stock options ("Options"), if any, or any stock appreciation
rights ("SAR"), if any, whether or not such Options or SARs are vested or then
exercisable pursuant to their respective terms, granted to the Executive under
the Plan or another of the Company's stock option or stock appreciation rights
plans or otherwise (which Options and SARs shall be canceled upon the making of
the payment referred to below), the Executive shall receive, not later than the
fifteenth day following the date of the Change of Control, an amount in cash
equal to the product of (x) the difference (to the extent that such difference
is a positive number) obtained by subtracting the per share exercise price of
each Option and each SAR held by the Executive, whether or not then fully
exercisable, from the closing price of the Common Stock (on the date of the
Change of Control) as reported on the National Association of Securities Dealers
Automatic Quotation System/National Market System or such quotation system or
stock exchange as the Common Stock is then listed or principally traded (or if
not traded on the date of the Change of Control, the closing price on the next
preceding business day on which the Common Stock traded and in the event that
there is no established trading market for the Common Stock, the per share
exercise price shall be subtracted from the fair market value of the Common
Stock on the date of the Change of Control as determined in good faith by the
Board of Directors of the Company and approved by an independent accounting
firm), and (y) the number of shares of Common Stock covered by each such Option
or SAR;
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(b) the Company shall remove all restrictions on vesting and
any and all forfeiture provisions or repurchase options applicable to any shares
of restricted stock held by the Executive shall automatically lapse and be of no
further force or effect.
7. Retirement. Nothing contained in this Agreement shall be deemed to
limit the Executive's ability to retire for any reason and to receive benefits
under the Company's retirement policies and pension plan for salaried employees,
if any and to thereby receive all benefits for which he is eligible under such
plans and any other plan, program or arrangement relating to retirement.
8. Indemnification.
(a) The Company shall indemnify and hold harmless to the
fullest extent not prohibited by law, as the same exists or may hereinafter be
amended, interpreted or implemented (but, in the case of any amendment, only to
the extent that such amendment permits the Company to provide broader
indemnification rights than are permitted the Company to provide prior to such
amendment), each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in (as a witness or otherwise) any threatened,
pending or completed action, suit, or proceeding, whether civil, criminal,
administrative or investigative and whether or not by or in the right of the
Company or otherwise, (hereinafter, a "proceeding") by reason of the fact that
he or she, or a person of whom he or she is the heir, executor, or
administrator, is or was a director or officer of the Company or is or was
serving at the request of the Company as a director, officer or trustee of
another Company or of a partnership, joint venture, trust or other enterprise
(including, without limitation, service with respect to employee
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benefit plans), or where the basis of such proceeding is any alleged action or
failure to take any action by such person while acting in an official capacity
as a director or officer of the Company or in any other capacity on behalf of
the Company while such person is or was serving as a director or officer of the
Company, against all expenses, liability and loss, including but not limited to
attorneys' fees, judgments, fines, excise taxes or penalties and amounts paid or
to be paid in settlement whether with or without court approval, actually
incurred or paid by such person in connection therewith.
(b) Notwithstanding the foregoing, except as provided in
Section 8(f) below, the Company shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board of Directors of the Company.
(c) Subject to the limitation set forth above concerning
proceedings initiated by the person seeking indemnification, the right to
indemnification conferred in this Section 8 shall be a contract right and shall
include the right to be paid by the Company the expenses incurred in defending
any such proceeding (or part thereof) or in enforcing his or her rights under
this Section 8 in advance of the final disposition thereof promptly after
receipt by the Company of a request therefor stating in reasonable detail the
expenses incurred; provided, however, that to the extent required by law, the
payment of such expenses incurred by a director or officer of the Company in
advance of the final disposition of a proceeding shall be made only upon receipt
of an undertaking, by or on behalf of such person, to repay all amounts so
advanced if and to the extent it shall ultimately be determined by a court that
he or she is not entitled to be indemnified by the Company under this Section 8,
or in the case of a criminal action, the majority
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of the Board of Directors so determines that he or she is not entitled to be
indemnified by the Company, or otherwise.
(d) The right to indemnification and advancement of expenses
provided herein shall continue as to a person who has ceased to be a director or
officer of the Company or to serve in any of the other capacities described
herein, and shall inure to the benefit of the heirs, executors and
administrators of such person.
(e) Any dispute related to the right to indemnification,
contribution or advancement of expenses as provided under this Section 8, except
with respect to indemnification for liabilities arising under the Securities Act
of 1933, that the Company has undertaken to submit to a court for adjudication,
shall be decided only by arbitration as provided in Section 13 of this
Agreement.
(f) The Company shall reimburse an indemnified person or his
representative for the expenses (including attorneys' fees and disbursements)
incurred in successfully prosecuting or defending any arbitration pursuant to
Section 13 of this Agreement.
(g) The right to indemnification and the payment of expenses
incurred in defending a proceeding in advance of a final disposition conferred
in this Section 8 and the right to payment of expenses conferred in Section
12(h) shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses hereunder may be entitled under any
Bylaw, agreement, vote of shareholders, vote of directors or otherwise, both as
to actions in his or her official capacity and as to actions in any other
capacity while holding that office, the Company having the express authority to
enter into such agreements or arrangements as the Board of Directors deems
appropriate for the indemnification of and advancement of
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expenses to present or future directors and officers as well as employees,
representatives or agents of the Company in connection with their status with or
services to or on behalf of the Company or any other Company, partnership, joint
venture, trust or other enterprise, including any employee benefit plan, for
which such person is serving at the request of the Company.
(h) The Company may create a fund of any nature which may,
but need not be, under the control of a trustee, or otherwise secure or insure
in any manner its indemnification obligations, including its obligation to
advance expenses, whether arising under or pursuant to this Section 8 or
otherwise.
(i) The Company may purchase and maintain insurance on behalf
of any person who is or was a director or officer or representative of the
Company, or is or was serving at the request of the Company as a representative
of another Company, partnership, joint venture, trust or other enterprise,
against any liability asserted against such person and incurred by such person
in any such capacity, or arising out of his or her status as such, whether or
not the Company has the power to indemnify such person against such liability
under the laws of this or any other state.
Neither the modification, amendment, alteration or repeal of this
Section 8 or any of its provisions nor the adoption of any provision
inconsistent with this Section 8 or any of its provisions shall adversely affect
the rights of any person to indemnification and advancement of expenses existing
at the time of such modification, amendment, alteration or repeal or the
adoption of such inconsistent provision.
9. Non-Competition. During the term of this Agreement and for two
years after the Date of Termination, the Executive shall refrain from competing
with the Company or
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any subsidiary of the Company except with the Company's prior written consent.
The phrase "refrain from competing with the Company or any subsidiary of the
Company" shall mean that the Executive will not engage, directly or indirectly
(including, by way of example only, as a principal, partner, venturer, employee
or agent) nor have any direct or indirect interest in any enterprise (a
"Competing Enterprise") which competes with the Company or any subsidiary
thereof by engaging in the online informational and transactional services
business or in substantial and direct competition with any other business
operation actively conducted by the Company or its subsidiaries at the Date of
Termination. It is agreed that the foregoing provisions shall not restrict the
Executive from either (i) being a director of or having any investments or other
interests in an enterprise which is not a competing enterprise, or (ii) having
any investments in any competing enterprise the stock of which is listed on a
national securities exchange or traded publicly over-the-counter so long as such
investment does not give the Executive more than five percent (5%) of the voting
stock of such enterprise. Provided further that if the Executive's employment
hereunder is terminated pursuant to Section 5(e) and the Executive provides a
written waiver of the Lump Sum Payment, the Executive shall be automatically
released from the limitations imposed by this Section 9 and this Section shall
be of no force and effect.
10. Non-Solicitation of Customers and Suppliers. Employee agrees that
during his employment with the Company he shall not, directly or indirectly,
solicit the trade of, or trade with, any customer, prospective customer,
supplier, or prospective supplier of the Company for any business purpose other
than for the benefit of the Company. Employee further agrees that for two (2)
years following termination of his employment with the Company, including
without limitation termination by the Company for cause or without cause,
Employee shall not, directly or
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indirectly, solicit the trade of, or trade with, any customers or suppliers, or
prospective customers or suppliers, of the Company. Provided further that if the
Executive's employment hereunder is terminated pursuant to Section 5(e) and the
Executive provides a written waiver of the Lump Sum Payment, the Executive shall
be automatically released from the limitations imposed by this Section 10 and
this Section shall be of no force and effect.
11. Non-Solicitation of Employees. Employee agrees that, during his
employment with the Company and for two (2) years following termination of
Employee's employment with the Company, including without limitation termination
by the Company for cause or without cause, Employee shall not, directly or
indirectly, solicit or induce, or attempt to solicit or induce, any employee of
the Company to leave the Company for any reason whatsoever, or hire any employee
of the Company. Provided further that if the Executive's employment hereunder is
terminated pursuant to Section 5(e) and the Executive provides a written waiver
of the Lump Sum Payment, the Executive shall be automatically released from the
limitations imposed by this Section 11 and this Section shall be of no force and
effect.
12. Confidentiality and Inventions. The Executive agrees:
(a) To keep secret all confidential matters of the Company and its subsidiaries
and affiliates and not to disclose them to anyone outside the Company or its
subsidiaries and affiliates, either during or after his employment with the
Company, except with the Company's prior written consent or as required by law;
(b) To deliver promptly to the Company on termination of
employment of the Executive by the Company all memoranda, notes, records,
reports and other documents (and all copies thereof) with respect to any such
confidential matters and other proprietary
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information (such as customers lists, suppliers lists, etc.) which the Executive
may then possess or have under his control (For purposes of this Section 12, all
information which is not publicly available shall be deemed to be confidential
and covered by the foregoing provisions);
(c) He will promptly and fully disclose to the Company or
such officer or other agent as may be designated by the Company any and all
inventions made or conceived by Executive (whether made solely by Executive or
jointly with others) during employment with the Company (i) which are along the
line of the business, work or investigations of the Company, or (ii) which
result from or are suggested by any work which Executive may do for or on behalf
of the Company; and
(d) He will assist the Company and its nominees during and
subsequent to such employment in every proper way (entirely at its or their
expense) to obtain for its or their own benefit patents for such inventions in
any and all countries; the said inventions, without further consideration other
than such salary as from time to time may be paid to him by the Company as
compensation for his services in any capacity, shall be and remain the sole and
exclusive property of the Company or is nominee whether patented or not; and
(e) He will keep and maintain adequate and current written
records of all such inventions, in the form of but not necessarily limited to
notes, sketches, drawings, or reports relating thereto, which records shall be
and remain the property of and available to the Company at all times.
(f) Promptly upon termination of his employment, he will
disclose to the Company, or to such officer or other agent as may be designated
by the Company, all inventions which have been partly or wholly conceived,
invented or developed by him for which
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applications for patents have not been made and will thereafter execute all such
instruments of the character hereinbefore referred to, and will take such steps
as may be necessary to secure and assign to the Company the exclusive rights in
and to such inventions and any patents that may be issued thereon any expense
therefor to be borne by the Company.
(g) He will not at any time aid in attacking the patentability,
scope, or validity of any invention to which the provisions of subparagraphs (c)
through (f), above, apply.
In the event that (i) Executive institutes any legal action to enforce
his rights under, or to recover damages for breach of this agreement, or (ii)
the Company institutes any action to avoid making any payments due to Executive
under this agreement, Executive, if he is the prevailing party, shall be
entitled to recover from the Company any actual expenses for attorney's fees and
other disbursements incurred by him in relation thereto.
13. Arbitration. Any disputes hereunder shall be settled as follows:
(a) Election Of Arbitration. At the option of either party, any
and all disputes or controversies whether of law or fact and of any nature
whatsoever arising from or respecting this Agreement shall be decided by
arbitration by the American Arbitration Association in accordance with the rules
and regulations of that Association.
(b) Selection Of Arbitrators. The arbitrators shall be selected
as follows: In the event the Company and Executive agree on one arbitrator, the
arbitration shall be conducted by such arbitrator. In the event the Company and
Executive do not so agree, the Company and Executive shall each select one
independent, qualified arbitrator, and the two arbitrators so selected shall
select the third arbitrator. The Company reserves the right to object to any
individual arbitrator who shall be employed by or affiliated with a competing
organization.
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(c) Conduct Of Arbitration. Arbitration shall take place in
Stamford, Connecticut or any other location mutually agreeable to the parties.
Reasonable notice of the time and place of arbitration shall be given to all
persons other than the parties as shall be required by law, and such persons or
their authorized representatives shall have the right to attend and/or
participate in all the arbitration hearings in such manner as the law shall
require.
(d) Secrecy Of Proceedings. At the request of either party,
arbitration proceedings will be conducted in the utmost secrecy; in such case
all documents, testimony and records shall be received, heard and maintained by
the arbitrators in secrecy under seal, available for the inspection only of the
Company or Executive and their respective attorneys and their respective
experts, who shall agree in advance and in writing to receive all such
information confidentially and to maintain such information in secrecy until
such information shall become generally known.
(e) Relief. The arbitrators, who shall act by majority vote,
shall be able to award damages, with or without an accounting and costs. The
decree or judgment of an award rendered by the arbitrators may be entered in any
court having jurisdiction thereof.
14. Notices. All notices and other communications which are required
or may be given under this Agreement shall be in writing and shall be delivered
personally or by registered or certified mail addressed to the party concerned
at the following addresses:
If to the Company:
SmartServ Online, Inc.
Metro Center
One Station Place
Stamford, CT 06902
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If to the Executive:
Mr. Sebastian E. Cassetta
7 Morningside Lane
Westport, CT 06880
With a copy to:
Stephen M. Cohen, Esq.
Buchanan Ingersoll Professional Corporation
Eleven Penn Center, 14th Floor
1835 Market Street
Philadelphia, PA 19103-2985
or to such other address as shall be designated by notice in writing to the
other party in accordance herewith. Notices and other communications hereunder
shall be deemed effectively given when personally delivered, or, if sent by
overnight courier, upon receipt, or, if mailed, 48 hours after deposit in the
United States first class mail, postage prepaid.
15. Miscellaneous.
(a) This Agreement supersedes all prior agreements,
arrangements and understandings, written or oral, relating to the subject matter
hereof, without limitation, including the Employment Agreement.
(i) This Arrangement shall inure to the benefit of the
Executive's heirs, representatives or estate to the extent stated
herein.
(ii) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all
or substantially all of the
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business or assets of the Company, by agreement in form and
substance satisfactory to the Executive, expressly to assume and
agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform if no
such succession had taken place. As used in this Agreement,
"Company" shall mean the Company as defined in the preamble to
this Agreement and any successor to its business or assets which
executes and delivers the agreement provided for in this
Subsection 15 (b) (ii) or which otherwise becomes bound by all
the terms and provisions of this Agreement by operation of law.
(iii) This Agreement may be amended, modified, superseded,
canceled, renewed or extended and the terms or covenants hereof
may be waived, only by a written instrument executed by both of
the parties hereto, or in the case of a waiver, by the party
waiving compliance. The failure of either party at any time or
times to require performance of any provisions hereof shall in no
manner affect the right at a later time to enforce such
provisions thereafter. No waiver by either party of the breach of
any term or covenant contained in this Agreement, whether by
conduct or otherwise, in any one or more instances, shall be
deemed to be, or construed as, a further or continuing waiver of
any such breach or a waiver of the breach of any other term or
covenant contained in this Agreement.
(iv) In the event any one or more of the covenants, terms or
provisions contained in this Agreement shall be invalid, illegal
or unenforceable in any respect,
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<PAGE>
the validity of the remaining covenants, terms and provisions
contained herein shall be in no way affected, prejudiced or
disturbed thereby.
(v) This Agreement is personal in nature and neither of the
parties hereto shall, without the consent of the other, assign or
transfer this Agreement or any rights or obligations hereunder,
except as provided in Subsection 15(b) above. Without limiting
the foregoing, the Executive's right to receive payments
hereunder shall not be assignable or transferable, whether by
pledge, creation of a security interest or otherwise, other than
a transfer by his will or by the laws of descent or distribution,
and in the event of any attempted assignment or transfer contrary
to this Subsection 15(e) the Company shall have no liability to
pay any amount so attempted to be assigned or transferred.
(vi) This Agreement shall be governed by laws of the State of
Connecticut, without regard to its choice of law provisions.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the date first above written.
ATTEST: SMARTSERV ONLINE, INC:
By: ____________________________ By: __________________________________
____________________________ __________________________________
WITNESS: EXECUTIVE:
By: ____________________________ By: __________________________________
____________________________ __________________________________
Sebastian E. Cassetta
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SMARTSERV ONLINE, INC.
RESTRICTED STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made as of December 29, 1998 between SmartServ
Online, Inc., a Delaware corporation (the "Company"), and Sebastian E. Cassetta
("Purchaser").
WHEREAS Purchaser is an employee of the Company whose continued
affiliation with the Company is considered to be important for the Company's
continued growth; and
WHEREAS in order to provide Purchaser an opportunity to acquire an
equity interest in the Company as an incentive for Purchaser to continue to
participate in the affairs of the Company, the Company is willing to sell to
Purchaser and Purchaser desires to purchase shares of Common Stock according to
the terms and conditions hereof;
THEREFORE, the parties agree as follows:
1. PURCHASE AND SALE OF STOCK. Subject to the terms and conditions of
this Agreement, the Company hereby agrees to sell to Purchaser and Purchaser
agrees to purchase from the Company 618,239 shares of the Company's Common Stock
(the "Stock") at a price of $2.19885 per share (the "Per Share Purchase Price"),
for an aggregate purchase price of $1,359,414.83. (The Per Share Purchase Price
being equal to 110% of the fair market value of the Stock as determined by the
average of the high and low sales price for the Stock for the 30 trading days
immediately preceding the date of this Agreement.) The purchase price for the
Stock shall be paid by a non-recourse promissory note (the "Note") in the form
attached hereto as Exhibit A, in the amount of $1,359,414.83. The Note shall be
secured by pledge of the Stock and Purchaser shall be required to execute and
deliver a Security Agreement in the form attached hereto as Exhibit B (the
"Security Agreement"). If during the time that the Note remains outstanding, the
Company sells shares of the Company's Common Stock or other securities
convertible into the Company's Common Stock, pursuant to a Change of Control
Transaction (as defined below) at a price per share less than the Per Share
Purchase Price the aggregate principal amount of the Note shall be automatically
reduced to an amount equal the number of shares of Stock multiplied by the per
share price at which such securities are to be sold in the Change of Control
Transaction (the "Adjusted Principal Amount"). Furthermore, if the Company shall
sell shares of the Company's Common Stock or other securities convertible into
the Company's Common Stock in a private placement, or one or more related
private placements (a "Private Placement"), within six (6) months of this
Agreement for an aggregate purchase price in excess of $1,000,000, then the
number of shares issued pursuant to this Agreement shall automatically be
adjusted (the "Adjustment") in order to ensure that immediately following such
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Private Placement the Purchaser shall retain nine percent (9%) of the
outstanding shares of the Company's Common Stock and other securities
convertible into the Company's Common Stock on a fully diluted basis. The number
of shares of the Company's Common Stock issued pursuant to the Adjustment (the
"Additional Shares") shall be set forth on Schedule 1 attached hereto and shall
be subject to the same terms and conditions as the Stock and each reference
herein to the Stock shall include the Additional Shares, to the extent
appropriate.
2. REPURCHASE OPTION, PUT OPTION AND RELEASE OF SHARES.
(a) REPURCHASE OPTION AND PUT OPTION.
(i) In the event of any voluntary or involuntary
termination of Purchaser's employment with the
Company (including as a result of death but excluding
Purchaser's termination of employment without Cause
(as defined below) or for Good Reason (as defined
below)) before all shares of the Stock are released
from the Company's repurchase option under Section
2(b) below, the Company shall, upon the date of such
termination (as reasonably fixed and determined by
the Company) have an irrevocable, exclusive option
for a period of twelve (12) months from such date to
repurchase all or any portion of the Stock which has
not been released from the repurchase option
described in this Section 2 (the "Repurchase Option")
at the time of such termination at the original
purchase price per share. The Repurchase Option shall
be exercised by the Company by written notice to
Purchaser or his/her executor and, at the Company's
option, (A) by delivery to Purchaser or his/her
executor with such notice of a check in the amount of
the aggregate repurchase price for the Stock being
repurchased, (B) by cancellation by the Company of an
amount of Purchaser's indebtedness to the Company
equal to the aggregate repurchase price for the Stock
being repurchased, or (C) by a combination of (A) and
(B) so that the combined payment and cancellation of
indebtedness equals such aggregate repurchase price.
Upon delivery of such notice and the payment of the
aggregate repurchase price in any of the ways
described above, the Company shall become the legal
and beneficial owner of the Stock being repurchased
and all rights and interests therein or relating
thereto, and the Company shall have the right to
retain and transfer to its own name the number of
shares of the Stock being repurchased by the Company.
(ii) If Purchaser's employment with the Company is
terminated (A) by the Company other than for Cause,
(B) as a result of Purchaser's death or Disability
(as defined below) or (C) by Purchaser for Good
Reason, Purchaser or his/her executor shall have the
right to cause the Company to repurchase all Stock at
the original purchase price per share (the "Put
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<PAGE>
Option"). The Put Option shall be exercised by
Purchaser by written notice to the Company delivered
within sixty (60) days of such termination. The
repurchase price shall be paid at the Company's
option, (A) by delivery to Purchaser or his/her
executor within ninety (90) days a check in the
amount of the aggregate repurchase price for the
Stock being repurchased, (B) by cancellation by the
Company of an amount of Purchaser's indebtedness to
the Company equal to the aggregate repurchase price
for the Stock being repurchased, or (C) by a
combination of (A) and (B) so that the combined
payment and cancellation of indebtedness equals such
aggregate repurchase price. Upon payment of the
aggregate repurchase price in any of the ways
described above, the Company shall become the legal
and beneficial owner of the Stock being repurchased
and all rights and interests therein or relating
thereto, and the Company shall have the right to
retain and transfer to its own name the number of
shares of the Stock being repurchased by the Company.
(b) RELEASE OF SHARES FROM REPURCHASE OPTION.
(i) Subject to Section 2(b)(ii), 1/36th of the Stock
shall be released from the Company's Repurchase
Option on the one-month anniversary of this
Agreement, and an additional 1/36th of the Stock
shall be released on each monthly anniversary of such
date thereafter until all shares of the Stock have
been released; provided in each case that there has
not been any voluntary or involuntary termination
prior to each such date of release.
(ii) Notwithstanding Section 2(b)(i), all of the
stock shall be released from the Company's Repurchase
Option in the event that (A) Purchaser terminates his
employment for Good Reason (as defined below), (B)
the Company terminates the Purchaser's employment
with the Company without cause or (C) there is a
Change of Control (as defined below)..
(c) CERTAIN DEFINITIONS
(i) For purposes of this Agreement, "Cause" shall
mean termination of the Purchaser by the Company
upon:
(A) the willful and continued failure by the
Executive to substantially perform his
duties with the Company (other than any such
failure resulting from his incapacity due to
physical or mental illness), after a written
demand for substantial performance is
delivered to the Executive by the Board of
Directors which specifically identifies the
manner in which the Board of Directors
believes that the Executive has not
substantially performed his
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<PAGE>
duties, and which failure has not been cured
within thirty days after such written
demand; or
(B) the willful and continued engaging by
the Executive in conduct which is
demonstrably and materially injurious to the
Company, monetarily or otherwise.
For purposes of this Subsection (c)(i), no act, or
failure to act, on the Executive's part shall be
considered "willful" unless done, or omitted to be
done, by the Executive in bad faith and without
reasonable belief that such action or omission was in
the best interest of the Company. Notwithstanding the
foregoing, the Executive shall not be deemed to have
been terminated for Cause unless and until there
shall have been delivered to him a copy of a
resolution duly adopted by the affirmative vote of
not less than 51% of the entire membership of the
Board of Directors at a meeting of the Board of
Directors called and held for that purpose (after
reasonable notice to the Executive and an opportunity
for the Executive, together with his counsel, to be
heard before the Board of Directors), finding that in
the good faith opinion of the Board of Directors the
Executive was guilty of conduct set forth above in
clauses (A) or (B) of the first sentence of this
Subsection (c)(i) and specifying the particulars
thereof in detail.
(ii) For purposes of this Agreement "Change of
Control" shall mean Change of Control shall occur if:
(i) at any time less than 60% of the members of the
Board of Directors shall be individuals who were
either (x) Directors on the effective date of this
Agreement or (y) individuals whose election, or
nomination for election, was approved by a vote
(including a vote approving a merger or other
agreement providing for the membership of such
individuals on the Board of Directors) of at least
two-thirds of the Directors then still in office who
were Directors on the effective date of this
Agreement or who were so approved (the "Continuing
Directors"); or (ii) the shareholders of the
Corporation shall approve an agreement or plan
providing for the Corporation to be merged,
consolidated or otherwise combined with, or for all
or substantially all its assets or stock to be
acquired by, another corporation, as a consequence of
which the former shareholders of the Corporation will
own, immediately after such merger, consolidation,
combination or acquisition, less than a majority of
the Voting Power of such surviving or acquiring
corporation or the parent thereof (a "Change of
Control Transaction"). (iii) For purposes of this
Agreement, "Disability" shall mean that Purchaser, at
the time notice of termination is given, has been
unable to substantially perform his/her duties under
this Agreement for a period of
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<PAGE>
not less than four (4) consecutive months as the
result of his/her incapacity due to physical or
mental illness.
(iv) For purposes of this Agreement, "Good Reason"
shall mean the termination of employment by the
Executive upon the occurrence of any one of the
following events: (i) a material breach by the
Company of the Employment Agreement (defined below),
(ii) the Company's assignment to Executive of duties
inconsistent in any material respect with his
position (including status and reporting) or any
other diminution of authority, duties or
responsibilities, excluding an isolated action by the
Company not taken in bad faith and which is remedied
by the Company within 15 days after receipt of notice
from the Executive, (iii) a Change of Control, other
than a Change of Control Transaction that was
approved by a majority of the Continuing Directors,
or (iv) the relocation of the Executive's principal
place of employment to a location more than 50 miles
from his principal place of employment on the date of
the Employment Agreement (defined below)(unless such
relocation is closer to the Executive's Principal
residence).
(v) For the purposes of this Agreement, "Employment
Agreement" shall mean that certain amended and
restated employment agreement by and between the
Purchaser and the Company dated as of January 1,
1999.
(vi) This Agreement shall not confer upon Purchaser
any right with respect to employment by the Company,
nor shall it interfere with or affect in any manner
the right or power of the Company, or a parent or
subsidiary of the Company, to terminate Purchaser's
employment or consulting relationship with the
Company, which right is hereby reserved, subject to
the provisions of the Employment Agreement.
3. STOCK SPLITS, ETC. If, from time to time during the term of this
Agreement: (i) There is any stock dividend or liquidating dividend of cash
and/or property, stock split or other change in the character or amount of any
of the outstanding securities of the Company; or (ii) there is any
consolidation, merger or sale of all, or substantially all, of the assets of the
Company; then, in such event, any and all new, substituted or additional
securities or other property to which Purchaser is entitled by reason of
Purchaser's ownership of the Stock shall be immediately subject to this
Agreement and be included in the word "Stock" for all purposes with the same
force and effect as the shares of Stock currently subject to the Repurchase
Option and other terms of this Agreement. While the aggregate repurchase price
payable upon execution of the Repurchase Option shall remain the same after each
such event, the repurchase price per share of Stock shall be appropriately
adjusted.
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<PAGE>
4. RESTRICTION ON TRANSFER. Purchaser shall not, except as contemplated
by the Security Agreement, sell, transfer, pledge, hypothecate or
otherwise dispose of any shares of the Stock which remain subject to
the Repurchase Option. The Company shall not be required (i) to
transfer on its books any shares of Stock which shall have purportedly
been sold or transferred in violation of any of the provisions set
forth in this Agreement, or (ii) to treat as owner of such shares or to
accord the right to vote as such owner or to pay dividends to any
purported transferee to whom such shares shall have been purportedly
transferred.
5. REGISTRATION RIGHTS
(a) Piggy Back Registration Rights. If at any time the Company
shall determine to register for its own account or the account
of others under the Securities Act of 1933, as amended (the
"Securities Act") any of its equity securities, other than on
Form S-8 or Form S-4 or their then equivalents relating to
shares of Common Stock to be issued solely in connection with
any acquisition of any entity or business or shares of Common
Stock issuable in connection with stock option or other
employee benefit plans, it shall send to the Purchaser written
notice of such determination and, if within 15 days after
receipt of such notice, the Purchaser shall so request in
writing, the Company shall use its best efforts to include in
such registration statement all or any part of the Stock not
then subject to the Repurchase Option the Purchaser requests
to be registered, except that if, in connection with any
offering involving an underwriting of the Company's Common
Stock to be issued by the Company, the managing underwriter
shall impose a limitation on the number of shares of such
Common Stock which may be included in the registration
statement because, in its judgment, such limitation is
necessary to effect an orderly public distribution, then the
Company shall be obligated to include in such registration
statement only such limited portion of the Stock with respect
to which the Purchaser has requested inclusion hereunder. Any
exclusion of the Stock shall be made PRO RATA among the all
holders of the Company's Common Stock with similar
registration rights seeking to include such shares, in
proportion to the number of such shares sought to be included
by such holders. No incidental right under this Section 5(a)
shall be construed to limit any registration required under
Section 5(b). The obligations of the Company under this
Section 5(a) may be waived at any time upon the written
consent of the Purchaser and shall expire on the 6th
anniversary of this Agreement.
(b) S-3 Registration Rights. In addition to the rights
provided the Purchaser and other holders of the Company's
Common Stock with registration rights in Section 5(a) above,
if the registration of the Company's Common Stock under the
Securities Act can be effected on Form S-3 (or any similar
form promulgated by the Commission that permits secondary
offerings of securities), then upon the written request of the
Purchaser, the Company will, as expeditiously as possible,
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use its best efforts to effect qualification and registration
under the Securities Act on Form S-3 of all or such portion of
the Stock as the Purchaser shall specify; provided, however,
that the Company shall not be required to effect more than one
registration during any 12-month period pursuant to this
Section 5(b).
(d) The Company will use its best efforts to maintain the
effectiveness for up to 90 days (or such shorter period of
time as the underwriters need to complete the distribution of
the registered offering, or one year in the case of a "shelf"
registration statement on Form S-3) of any registration
statement pursuant to which any of the Stock is being offered,
and from time to time will amend or supplement such
registration statement and the prospectus contained therein to
the extent necessary to comply with the Securities Act and any
applicable state securities statute or regulation. The Company
will also provide the Purchaser with as many copies of the
prospectus contained in any such registration statement as he
may reasonably request.
6. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
(a) LEGENDS. The share certificate evidencing the Stock issued
hereunder shall be endorsed with the following legends (in
addition to any legends required under applicable state
securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH,
THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION
MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE
SECURITIES ACT OF 1933.
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED
ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE
COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH
THE SECRETARY OF THE COMPANY.
(b) STOP-TRANSFER NOTICES. Purchaser agrees that, in order to
ensure compliance with the restrictions referred to herein,
the Company may issue appropriate "stop transfer" instructions
to its transfer agent, if any, and that, if the Company
transfers its own securities, it may make appropriate
notations to the same effect in its own records.
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7. PURCHASER'S REPRESENTATIONS AND COVENANTS. In connection with the
purchase of the Stock, Purchaser hereby represents and warrants to the Company
as follows:
(a) INVESTMENT INTENT; CAPACITY TO PROTECT INTERESTS.
Purchaser is purchasing the Stock solely for Purchaser's own
account for investment and not with a view to or for sale in
connection with any distribution of the Stock or any portion
thereof and not with any present intention of selling,
offering to sell or otherwise disposing of or distributing the
Stock or any portion thereof. Purchaser also represents that
the entire legal and beneficial interest of the Stock is being
purchased, and will be held, for Purchaser's account only, and
neither in whole or in part for any other person. Purchaser
either (i) has a pre-existing business or personal
relationship with the Company or at least one of its officers,
directors or controlling persons, or (ii) by reason of
Purchaser's business or financial experience (or the business
or financial experience of Purchaser's professional advisors
who are unaffiliated with and who are not compensated by the
Company or any affiliate or selling agent of the Company,
directly or indirectly), can be reasonably assumed to have the
capacity to evaluate the merits and risks of an investment in
the Company and to protect Purchaser's own interests in
connection with this transaction.
(b) RESIDENCE. Purchaser's principal residence is within the
State of Connecticut and is located at the address indicated
beneath Purchaser's signature below.
(c) INFORMATION CONCERNING COMPANY. Purchaser has discussed
the Company and its plans, operations and financial condition
with the Company's officers and has received all such
information as Purchaser has deemed necessary and appropriate
to enable Purchaser to evaluate the financial risk inherent in
making an investment in the Stock. Purchaser has received
satisfactory and complete information concerning the business
and financial condition of the Company in response to all
inquiries in respect thereof.
(d) ECONOMIC RISK. Purchaser realizes that the purchase of the
Stock will be a highly speculative investment and involves a
high degree of risk. Purchaser is able, without impairing
Purchaser's financial condition, to hold the Stock for an
indefinite period of time and to suffer a complete loss on
Purchaser's investment.
(e) RESTRICTED SECURITIES. Purchaser understands and
acknowledges that:
(i) The Stock has not been registered under the
Securities Act of 1933, as amended, in reliance upon
a specific exemption therefrom, which
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exemption depends upon, among other things, the bona
fide nature of Purchaser's investment intent as
expressed herein.
(ii) The Stock must be held indefinitely unless it is
subsequently registered under the Securities Act or
unless an exemption from such registration is
otherwise available. In addition, Purchaser
understands that the certificate evidencing the Stock
will be imprinted with a legend which prohibits the
transfer of the Stock unless it is registered or such
registration is not required in the opinion of
counsel satisfactory to the Company.
(f) DISPOSITION UNDER RULE 144. Purchaser understands that:
(i) The shares of Stock are restricted securities
within the meaning of Rule 144 promulgated under the
Securities Act; that the exemption from registration
under Rule 144 will not be available in any event for
at least one (1)) year from the date of payment of
the Note (or the applicable portion thereof relating
to such shares of Stock), and even then will not be
available unless (i) a public trading market then
exists for the Common Stock of the Company, (ii)
adequate information concerning the Company is then
available to the public, and (iii) other terms and
conditions of Rule 144 are complied with; and that
any sale of the Stock may be made only in limited
amounts in accordance with such terms and conditions
of Rule 144;
(ii) That at the time Purchaser wishes to sell the
Stock there may be no public market upon which to
make such a sale; that, even if such a public market
then exists, the Company may not be satisfying the
current public information requirements of Rule 144;
and that, in such event, Purchaser would be precluded
from selling the Stock under Rule 144 even if the one
(1) year minimum holding period had been satisfied;
and
(iii) In the event all of the requirements of Rule
144 are not satisfied, registration under the
Securities Act or compliance with Regulation A or
another registration exemption will be required;
that, notwithstanding the fact that Rule 144 is not
exclusive, the Staff of the SEC has expressed its
opinion that persons proposing to sell private
placement securities other than in a registered
offering or pursuant to Rule 144 will have a
substantial burden of proof in establishing that an
exemption from registration is available for such
offers or sales; and that such persons and their
respective brokers who participate in such
transactions do so at their own risk.
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(g) FURTHER LIMITATIONS ON DISPOSITION. Without in any way
limiting Purchaser's representations set forth above,
Purchaser further agrees that Purchaser shall in no event make
any disposition of all or any portion of the Stock unless and
until:
(i) Either:
(A) There is then in effect a Registration
Statement under the Securities Act covering
such proposed disposition, and such
disposition is made in accordance with said
Registration Statement; or
(B) (1) Purchaser shall have notified the
Company of the proposed disposition and
shall have furnished the Company with a
detailed statement of the circumstances
surrounding the proposed disposition; (2)
Purchaser shall have furnished the Company
with an opinion of Purchaser's counsel to
the effect that such disposition will not
require registration of such shares under
the Securities Act; and (3) such opinion of
Purchaser's counsel shall have been
concurred in by counsel for the Company, and
the Company shall have advised Purchaser of
such concurrence; and,
(ii) The shares of Stock proposed to be transferred
are no longer subject to the Repurchase Option set
forth in Section 2 hereof.
8. ARBITRATION.
(a) ELECTION OF ARBITRATION. At the option of either party,
any and all disputes or controversies whether of law or fact
and of any nature whatsoever arising from or respecting this
Agreement shall be decided by arbitration by the American
Arbitration Association in accordance with the rules and
regulations of that Association.
(b) SELECTION OF ARBITRATORS. The arbitrators shall be
selected as follows: In the event the Company and Purchaser
agree on one arbitrator, the arbitration shall be conducted by
such arbitrator. In the event the Company and Purchaser do not
so agree, the Company and Purchaser shall each select one
independent, qualified arbitrator, and the two arbitrators so
selected shall select the third arbitrator. The Company
reserves the right to object to any individual arbitrator who
shall be employed by or affiliated with a competing
organization.
(c) CONDUCT OF ARBITRATION. Arbitration shall take place in
Stamford, Connecticut or any other location mutually agreeable
to the parties. Reasonable
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<PAGE>
notice of the time and place of arbitration shall be given
to all persons other than the parties as shall be required
by law, and such persons or their authorized representatives
shall have the right to attend and/or participate in all the
arbitration hearings in such manner as the law shall
require.
(d) SECRECY OF PROCEEDINGS. At the request of either party,
arbitration proceedings will be conducted in the utmost
secrecy; in such case all documents, testimony and records
shall be received, heard and maintained by the arbitrators in
secrecy under seal, available for the inspection only of the
Company or Purchaser and their respective attorneys and their
respective experts, who shall agree in advance and in writing
to receive all such information confidentially and to maintain
such information in secrecy until such information shall
become generally known.
(e) RELIEF. The arbitrators, who shall act by majority vote,
shall be able to decree any and all relief of an equitable
nature (including without limitation such relief as temporary
restraining orders or temporary and/or permanent injunctions),
and shall also be able to award damages, with or without an
accounting and costs. The decree or judgment of an award
rendered by the arbitrators may be entered in any court having
jurisdiction thereof.
9. GOVERNING LAW. This Agreement shall be governed and construed by the
laws of the State of Connecticut without regard to its choice of laws
provisions.
10. MISCELLANEOUS.
(a) RIGHTS AS SHAREHOLDER. Subject to the provisions and
limitations hereof, Purchaser may, during the term of this
Agreement, exercise all rights and privileges of a shareholder
of the Company with respect to the Stock purchased hereby.
(b) FURTHER ASSURANCES. The parties agree to execute such
further instruments and to take such further action as may
reasonably be necessary to carry out the intent of this
Agreement.
(c) NOTICES. Any notice required or permitted hereunder shall
be given in writing and shall be deemed effectively given upon
personal delivery (including by express courier) or upon
deposit in the United States Post Office, by First Class mail
with postage and fees prepaid, addressed to Purchaser at
his/her address shown on the Company's employment records and
to the Company at the address of its principal corporate
offices (attention: President) or at such other address as
such party may designate by ten (10) days' advance written
notice to the other party.
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<PAGE>
(d) ASSIGNMENT. This Agreement shall inure to the benefit of
the successors and assigns of the Company and, subject to the
restrictions on transfer herein set forth, be binding upon
Purchaser, his/her heirs, executors, administrators,
successors and assigns. No party to this Agreement may assign
its rights and obligations under this Agreement without the
prior written consent of the other party.
(e) AUTHORIZATION OF TRANSFER. Purchaser hereby authorizes and
directs the Secretary or transfer agent of the Company to
transfer the Stock as to which the Repurchase Option has been
exercised from Purchaser to the Company or the Company's
assignees.
(f) WAIVER. Either party's failure to enforce any provision or
provisions of this Agreement shall not in any way be construed
as a waiver of any such provision or provisions, nor prevent
that party thereafter from enforcing each and every other
provision of this Agreement. The rights granted both parties
herein are cumulative and shall not constitute a waiver of
either party's right to assert all other legal remedies
available to it under the circumstances.
(g) ADVICE OF COUNSEL. Purchaser has reviewed this Agreement
in its entirety, has had an opportunity to obtain the advice
of counsel prior to executing this Agreement and fully
understands all provisions hereof.
(h) COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be an original and all of
which together shall constitute one instrument.
(i) ENTIRE AGREEMENT. This Agreement, the Employment
Agreement, the Note and the Security Agreement represent the
entire agreement between the parties with respect to the
purchase of Common Stock by Purchaser and the vesting thereof,
supersedes all prior understandings and agreements, written
and oral, with regard thereto, and satisfies all of the
Company's obligations to Purchaser with regard to the issuance
or sale of securities. This Agreement may be modified or
amended only in writing signed by both parties.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
SMARTSERV ONLINE, INC., SEBASTIAN E. CASSETTA
a Delaware corporation
By:__________________________ ____________________________________
Title:_______________________
(Address)
7 Morningside Lane
Westport, CT 06880
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<PAGE>
SCHEDULE 1
Pursuant to Section 1 of the Agreement, the Purchaser received _______
Additional Shares as a result of a Private Placement of _______ shares of
__________ by the Company on _______, 1999.
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<PAGE>
exhibit A
PROMISSORY NOTE
$1,359,414.83 Stamford, Connecticut
December 29, 1998
FOR VALUE RECEIVED, Sebastian E. Cassetta promises to pay to SmartServ
Online, Inc., a Delaware corporation (the "Company"), or order, the principal
sum of One Million Three Hundred Fifty Nine Thousand Four Hundred Fourteen
Dollars and Eighty Three Cents ($1,359,414.83), together with interest on the
unpaid principal hereof from the date hereof at the rate of 6.75% [such interest
equal to one point below the prime rate as of the date of this Note] per annum,
compounded annually. Notwithstanding the foregoing, the principal amount of the
Note shall be subject to an automatic reduction to the Adjustment Principal
Amount pursuant to the terms of the Purchase Agreement (as defined below).
This Note shall be due and payable in full on December 29, 2003 (the
"Due Date"), unless accelerated as provided herein. Upon the termination of the
Executive from the Company for Cause, the whole unpaid balance on this Note of
principal and interest shall become immediately due at the option of the holder
of this Note. In the event that the Executive terminates his employment with the
Company for Good Reason, the whole unpaid balance on this Note of principal and
interest shall be due and payable upon the earlier of the Due Date or six (6)
months from the Date of Termination. Payments of principal and interest shall be
made in lawful money of the United States of America.
The undersigned may at any time prepay without penalty all or any
portion of the principal or interest owing hereunder.
This Note is subject to the terms of that certain Restricted Stock
Purchase Agreement by and between the Company and Sebastian E. Cassetta, dated
as of December 29, 1998 (the "Purchase Agreement") and capitalized terms used
herein which are not otherwise defined shall have the meanings ascribed to them
in the Purchase Agreement. This Note is secured by a pledge of the Company's
Common Stock under the terms of a Security Agreement of even date herewith (the
"Security Agreement") and is subject to all the provisions thereof.
This Note is intended to evidence a non-recourse obligation to secure
the purchase of the Company's Common Stock pursuant to the Purchase Agreement.
Accordingly, this Note shall be without recourse against the Sebastian E.
Cassetta and no person entitled to payment under this Note shall have any right
to his assets other than the collateral given for this Note and earnings
attributable to such collateral or the investment of such collateral, if any.
This Note shall be governed and construed in accordance with the laws
of the State of Connecticut.
----------------------------------------
Sebastian E. Cassetta
<PAGE>
exhibit B
SECURITY AGREEMENT
This Security Agreement is made as of December 29, 1998 between
SmartServ Online, Inc., a Delaware corporation ("Pledgee"), and Sebastian E.
Cassetta ("Pledgor").
Recitals
Pursuant to Pledgor's purchase of Stock under the Restricted Stock
Purchase Agreement dated December 29, 1999, between Pledgor and Pledgee (the
"Purchase Agreement"), and Pledgor's election to pay for such Stock with his
promissory note (the "Note"), Pledgor has purchased 618,239 shares of Pledgee's
Common Stock (the "Shares") at a price of $2.19885 per share, for a total
purchase price of $1,359,414.83. The Note and the obligations thereunder are as
set forth in Exhibit A to the Purchase Agreement.
NOW, THEREFORE, it is agreed as follows:
1. Creation and Description of Security Interest. In consideration of
the transfer of the Shares to Pledgor under the Purchase Agreement, Pledgor,
pursuant to the Connecticut Uniform Commercial Code, hereby pledges all of such
Shares (herein sometimes referred to as the "Collateral") represented by
certificate number ______, duly endorsed in blank or with executed stock powers,
and herewith delivers said certificate to the Pledgee, who shall hold said
certificate subject to the terms and conditions of this Security Agreement.
The pledged stock shall be held by the Pledgee as security for the
repayment of the Note, and the Pledgee shall not encumber or dispose of such
Shares except in accordance with the provisions of this Security Agreement.
2. Pledgor's Representations and Covenants. To induce Pledgee to enter
into this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:
a. Payment of Indebtedness. Pledgor will pay the principal sum
of the Note secured hereby, together with interest thereon, at the time and in
the manner provided in the Note.
b. Encumbrances. The Shares are free of all other
encumbrances, defenses and liens, and Pledgor will not further encumber the
Shares without the prior written consent of Pledgee.
3. Voting Rights. During the term of this pledge and so long as all
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.
4. Stock Adjustments. In the event that during the term of the pledge
any stock dividend, reclassification, readjustment or other changes are declared
or made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgee under the terms of this Security Agreement
in the same manner as the Shares originally pledged hereunder. In the event of
substitution of such securities the Pledgor and the Pledgee shall cooperate and
<PAGE>
execute such documents as are reasonable so as to provide for the substitution
of such Collateral and, upon such substitution, references to "Shares" in this
Security Agreement shall include the substituted shares of capital stock of
Pledgor as a result thereof.
5. Options and Rights. In the event that, during the term of this
pledge, subscription options or other rights or options shall be issued in
connection with the pledged Shares, such rights and options shall be the
property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Shares then held
by Pledgee shall be immediately delivered to Pledgee, to be held under the terms
of this Security Agreement in the same manner as the Shares pledged.
6. Default. Pledgor shall be deemed to be in default of the Note and of
this Security Agreement in the event:
a. Payment of principal or interest on the Note shall be delinquent
for a period of 10 days or more; or
b. Pledgor fails to perform any of the covenants set forth in the
Restricted Stock Purchase Agreement or contained in this Security
Agreement for a period of 10 days after written notice thereof
from Pledgee.
In the case of an event of Default, as set forth above, Pledgee shall have the
right to accelerate payment of the Note upon notice to Pledgor, and Pledgee
shall thereafter be entitled to pursue its remedies under the Connecticut
Uniform Commercial Code.
7. Release of Collateral. There shall be released from this pledge a
portion of the pledged Shares held by Pledgee here under upon payments of the
principal of the Note. The number of the pledged Shares which shall be released
shall be that number of full Shares which bears the same proportion to the
initial number of Shares pledged hereunder as the payment of principal bears to
the initial full principal amount (or in the event that the initial principal
amount on the Note has been adjusted pursuant to Section 1 of the Purchase
Agreement, the Adjusted Principal Amount) of the Note.
8. Withdrawal or Substitution of Collateral. Pledgor shall not sell,
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.
9. Term. The within pledge of Shares shall continue until the payment
of all indebtedness secured hereby, at which time the remaining pledged stock
shall be promptly delivered to Pledgor, subject to the provisions for prior
release of a portion of the Collateral as provided in paragraph 7 above.
10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency
proceeding is instituted by or against it, or if a receiver is appointed for the
property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall become immediately due and
payable, and Pledgee may proceed as provided in the case of default.
11. Invalidity of Particular Provisions. Pledgor and Pledgee agree that
the enforceability or invalidity of any provision or provisions of this Security
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.
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<PAGE>
12. Successors or Assigns. Pledgor and Pledgee agree that all of the
terms of this Security Agreement shall be binding on their respective successors
and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein
shall be deemed to include, for all purposes, the respective designees,
successors, assigns, heirs, executors and administrators.
13. Governing Law. This Security Agreement shall be interpreted and
governed under the laws of the State of Connecticut without regard to its
conflict of laws provisions.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"PLEDGOR" Sebastian E. Cassetta
__________________________________________
(signature)
Address:
7 Morningside Lane
Westport, CT 06880
"PLEDGEE" SMARTSERV ONLINE, INC.
a Delaware corporation
By: _____________________________________
Title:____________________________________
-3-
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT dated as of the 1st day of January 1999,
between SmartServ Online, Inc., a Delaware Corporation, with its principal
executive offices at Metro Center, One Station Place, Stamford, Connecticut
06902 (the "Company"), and Mario F. Rossi, an individual and resident of
Trumbull, Connecticut (the "Executive").
WHEREAS, the Executive is and has been employed by the Company and is
currently Senior Vice President Operations and Chief Technology Officer;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and intending to be legally bound hereby, the Company and the
Executive hereby agree as follows:
1. Position and Duties.
a. The Company agrees to, and hereby does, continue to employ the
Executive for the term of this Agreement as Senior Vice President - Operations
and Chief Technology Officer, and the Executive agrees to perform such duties as
the Executive is now performing and such other duties commensurate with such
positions as the Executive may reasonably be directed to perform by the Board of
Directors. The Executive will continue to serve in his present capacity, and in
connection therewith, perform such duties as the Executive is now performing and
such other duties, commensurate with such positions, as the Executive may
reasonably be directed to perform by the Board of Directors of the Company. The
Executive shall have the right to devote a reasonable amount of time to (i)
industry, community or charitable organizations, and (ii) and the management of
personal investments so long as such activities do
<PAGE>
not interfere or conflict with the performance by the Executive of his
obligations hereunder. Subject to the provisions of Section 9 and Section 10
hereof, the Executive may serve as a director of other companies with the
consent of the Board of Directors of the Company, which consent shall not be
unreasonably withheld.
b. The Executive hereby accepts such employment and agrees
faithfully to perform to the best of his ability the duties described in Section
l(a).
2. Term. Subject to Section 4 hereof, the term of employment of the
Executive under this Agreement shall commence as of the date first above written
(the "Effective Date") and shall terminate on the last day of the calendar month
which is 36 calendar months after the Effective Date. Commencing on the last
day of the first full calendar month after the Effective Date and on the last
day of each succeeding calendar month, the term of this Agreement shall be
automatically extended without further action by either party for one additional
calendar month unless one party notifies the other in writing that such party
does not wish to extend the term of this Agreement. In the event that such
notice shall have been delivered, the term hereof shall no longer be subject to
automatic extension and the term hereof shall expire on the date which is 36
calendar months after the last day of the month in which such written notice is
received. (The last day of the calendar month in which the term hereof, as
extended from time to time, shall end is hereinafter referred to as the
"Expiration Date").
3. Compensation. In consideration for the Executive's agreements
contained herein, and as compensation to the Executive for the performance of
the services required hereunder, the Company shall pay or grant to him the
following salary and other compensation and benefits:
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<PAGE>
a. a base salary, payable in equal installments not less
frequently than monthly, at such annual rate not less than $135,000 per year
(the "Base Salary"), and determined from time to time by the Board of Directors
or an appropriate committee thereof, provided, however, that the Executive's
base salary shall be periodically reviewed by the Board of Directors and shall
be increased if the Board of Directors determines that an increase is
appropriate on the basis of the types of factors it generally takes into account
in increasing the salaries of executive officers of the Company, provided that
the Base Salary shall automatically be adjusted annually to reflect the
increase, if any, in the cost of living by adding to the Base Salary an amount
obtained by multiplying the Base Salary by the percentage by which the Consumer
Price Index for All-Urban Consumers, as reported by the Bureau of Labor
Statistics of the United States Department of Labor, has increased over its
level from the previous twelve month period ending December 31st of each year;
b. the Executive shall have the opportunity to receive an annual
aggregate bonus in the amount of up to One Hundred percent (50%) of the Base
Salary (the "Cash Bonus"). The payment of the Cash Bonus will be dependent upon
the yearly revenue growth of the Company. For the fiscal year ending June 30,
1999 (the "Initial Year") the amount of the Cash Bonus shall be determined as
follows: for each 10% increase in the revenues of the Company over the fiscal
year ending June 30, 1998 the Executive shall earn a Cash Bonus of 5% of the
Base Salary, up to a maximum Cash Bonus of 50% of the Base Salary. For each
fiscal year following the Initial Year, the amount of the Cash Bonus shall be
2.5% of the Base Salary for each 5% increase in revenues, as compared to the
preceding fiscal year, up to a maximum Cash
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<PAGE>
Bonus of 50% of the Base Salary. The Cash Bonus shall be paid in cash and shall
be paid within ninety (90) days of the end of the fiscal year to which the Cash
Bonus relates;
c. such other awards under the Company's 1996 Employee Stock
Option Plan (the "Plan") or under any other stock option, incentive compensation
or other compensation plan, program or arrangement now existing, or hereafter
adopted and applicable to executive officers of the Company, as the Board of
Directors, or an appropriate committee thereof administering such plan, program
or arrangement, may determine appropriate in light of the duties and
responsibilities of the Executive in respect to other executive officers;
d. participation on the same terms and conditions as all other
employees in all employee benefit plans, whether or not qualified within the
meaning of Section 401(a) of the Internal Revenue Code of 1986, as may be
amended from time to time (the "Code"), as may be now or hereafter sponsored or
maintained for all employees of the Company, and participation on the same terms
and conditions as other executive officers in such other plan, program or
arrangement as may be now or hereafter sponsored or maintained for executive
officers of the Company;
e. reimbursement of not less than a monthly allowance of $500.00
for reasonable travel within the New York metropolitan area in connection with
the performance of services under this Agreement, covering a vehicle allowance
for business mileage at the applicable mileage rate as established by the
Internal Revenue Service, maintenance, gas, insurance, parking and all other
related expenses and the Company shall further reimburse the Executive for all
reasonable other travel and other expenses incurred by the Executive in
connection with the performance of services under this Agreement, upon
presentation of expense statements or
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<PAGE>
vouchers and such other support information as it may from time to time request,
provided that such expenses meet the usual test of being business related in
accordance with the Company's usual procedures in this regard; and
f. reasonable vacations of not less than four (4) weeks per year,
absences on account of temporary illness and fringe benefits customarily enjoyed
by employees or officers of the Company under the terms and conditions of the
Company's policy in respect thereto.
g. continuation of the Executive's life insurance and disability
insurance policies in existence as of the date of this Agreement.
4. Termination of Employment. This Agreement shall terminate upon
the Expiration Date or upon the death of the Executive. The Company may
terminate this Agreement prior to the Expiration Date (and the Executive's
employment hereunder shall terminate) for "Disability" or "Cause". Termination
of this Agreement by the Company for any reason not set forth in the preceding
sentence shall not be deemed a permitted termination and shall be deemed a
breach of this Agreement. In the event of any termination of this Agreement
prior to the Expiration Date, whether a permitted termination or otherwise, the
provisions of Section 5 of this Agreement shall determine the amount, if any, of
any compensation thereafter due the Executive in respect to such termination.
As used in this Agreement, the following terms shall have the meanings
set forth:
Disability. If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive shall have been absent from his duties
with the Company
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<PAGE>
on a full-time basis for four (4) consecutive months, and within thirty days
after written notice of termination is given by the Company, the Executive shall
not have returned to the full-time daily performance of his duties, the
Executive shall be deemed to have experienced a Disability and the Company may
terminate the Executive's employment. The Executive shall be entitled to leaves
of absence from the Company in accordance with the Company's policy generally
applicable to executives for illness or other temporary disabilities for a
period or periods not exceeding an aggregate of four months in any calendar
year, and his compensation and status as an employee hereunder shall continue
during any such period or periods.
b. Cause. Termination by the Company of employment for "Cause"
shall mean termination upon:
(i) the willful and continued failure by the Executive to
substantially perform his duties with the Company (other than any
such failure resulting from his incapacity due to physical or
mental illness), after a written demand for substantial
performance is delivered to the Executive by the Board of
Directors which specifically identifies the manner in which the
Board of Directors believes that the Executive has not
substantially performed his duties, and which failure has not
been cured within thirty days after such written demand; or
(ii) the willful and continued engaging by the Executive in
conduct which is demonstrably and materially injurious to the
Company, monetarily or otherwise.
-6-
<PAGE>
For purposes of this Subsection (b), no act, or failure to act, on the
Executive's part shall be considered "willful" unless done, or omitted to be
done, by the Executive in bad faith and without reasonable belief that such
action or omission was in the best interest of the Company. Notwithstanding the
foregoing, the Executive shall not be deemed to have been terminated for Cause
unless and until there shall have been delivered to him a copy of a resolution
duly adopted by the affirmative vote of not less than 51% of the entire
membership of the Board of Directors at a meeting of the Board of Directors
called and held for that purpose (after reasonable notice to the Executive and
an opportunity for the Executive, together with his counsel, to be heard before
the Board of Directors), finding that in the good faith opinion of the Board of
Directors the Executive was guilty of conduct set forth above in clauses (i) or
(ii) of the first sentence of this Subsection (b) and specifying the particulars
thereof in detail.
c. Notice of Termination. Any purported termination by the Company
shall be communicated by written Notice of Termination to the other party hereto
in accordance with Section 14 hereof. For purposes of this Agreement, a "Notice
of Termination" shall mean a notice which shall indicate the specific
termination, resignation or retirement provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for such termination, resignation or retirement under the
provision so indicated.
d. Date of Termination, Etc. "Date of Termination" shall mean (i)
if the Executive's employment is terminated for Disability, thirty days after
Notice of Termination is given (provided that the Executive shall not have
returned to the performance of the Executive's duties on a full-time daily basis
during such thirty-day period), (ii) if the Executive's employment is terminated
for any other reason, the date specified in the Notice of Termination (which
shall not
-7-
<PAGE>
be less than thirty days nor more than sixty days, from the date such Notice of
Termination is given), or (iii) if within thirty days after any Notice of
Termination is given the party receiving such Notice of Termination notifies the
other party that a dispute exists concerning the termination, the Date of
Termination shall be the date on which the dispute is finally determined by
mutual written agreement of the parties, by a binding arbitration award, or by a
final judgment, order or decree of a court of competent jurisdiction (the time
for appeal therefrom having expired and no appeal having been perfected). Any
party giving notice of a dispute shall pursue the resolution of such dispute
with reasonable diligence. Notwithstanding the pendency of any such dispute, the
Company will continue to pay the Executive his full compensation in effect when
the notice giving rise to the dispute was given (including, but not limited to,
base salary) and continue the Executive as a participant in all compensation,
employee benefit and insurance plans, programs and arrangements in which the
Executive was participating when the notice giving rise to the dispute was
given, until the dispute is finally resolved in accordance with this Subsection
(d).
5. Compensation Upon Termination.
a. Death. If the Executive's employment hereunder terminates by
reason of his death, the Company shall be obligated to pay to his surviving
widow, or to his legal representatives if he leaves no surviving widow or if his
surviving widow dies prior to fulfillment of the Company's obligations, (i) the
Executive's then current base salary for a twelve (12) month period commencing
on the first day of the month following the Executive's death, or until the
Expiration Date, whichever shall be the first to occur; and (ii) any benefits to
which the Executive
-8-
<PAGE>
is entitled under any insurance policies on the life of the Executive, under the
Company's insurance programs and other employee benefit plans, programs and
arrangements then in effect and under the Company's pension plan for salaried
employees, if any. In addition to the foregoing, the Company shall be obligated
to continue coverage, to the extent not prohibited by law, for a period of
twelve (12) months from the date of the Executive's death for the Executive's
eligible dependents under all of the Company's benefit plans in effect and
applicable to the Executive's eligible dependents as of the date of death,
provided that in the event that such eligible dependents, cannot be covered or
fully covered under any or all of the Company's benefit plans, the Company shall
continue to provide such eligible dependents with the same level of such
coverage in effect prior to the Executive's death, on an unfunded basis if
necessary.
b. Disability. If the Executive's employment hereunder terminates
by reason of his Disability, the Company shall (i) continue to pay to the
Executive, in accordance with the payroll practices of the Company in effect
prior to the Date of Termination, the Executive's then current base salary for
twenty-four (24) months after the Date of Termination, reduced by any benefits
to which the Executive may be entitled under any Company sponsored disability
income or income protection plan, policy or arrangement, the premiums for which
or benefits under which are paid by the Company (ii) for the first year after
the Date of Termination pay an amount equal to the highest annual bonus that the
Executive received in the three years prior to the Date of Termination, payable
in a lump sum at approximately the same time as annual bonuses were paid by the
Company in the year prior to the Date of Termination, and (iii) continue
coverage, to the extent not prohibited by law, for a period of twelve (12)
months from the Date of Termination or until comparable benefits are made
available to the Executive in connection with subsequent
-9-
<PAGE>
employment, whichever period is shorter, for the Executive and his eligible
dependents under all of the Company's benefit plans in effect and applicable to
the Executive and his eligible dependents as of the Date of Termination,
provided that in the event that the Executive and his eligible dependents,
because of the Executive's terminated status, cannot be covered or fully covered
under any or all of the Company's benefit plans, the Company shall continue to
provide the Executive and/or his eligible dependents with the same level of such
coverage in effect prior to termination, on an unfunded basis if necessary. If
the Executive dies prior to the date on which such additional amounts would have
ceased to be payable under this Subsection (b), the amount that would have been
payable by the Company had he lived shall continue to be paid by the Company to
his surviving widow, for a period of 12 months following the Executive's death,
at the same times and rates as it would have been payable to him.
c. Cause. If the Executive's employment hereunder is terminated by
the Company for Cause, the Company shall pay to the Executive his full base
salary through the Date of Termination at the rate in effect at the time Notice
of Termination is given and the Company shall have no further obligations to the
Executive under this Agreement.
d. Voluntary Resignation or Retirement. In the event the Executive
retires or resigns other than for Good Reason (as defined below), the Company
shall pay to the Executive his full base salary through the Date of Termination
at the rate in effect at the time Notice of Termination is given and, except as
provided in Section 8, the Company shall have no further obligations to the
Executive under this Agreement.
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e. Other. If the Executive's employment hereunder is terminated by
the Company other than for Cause or Disability or by the Executive for Good
Reason (as defined below), then the Executive shall be entitled all to the
benefits provided below:
(i) the Company shall pay the Executive his full base salary
through the Date of Termination at the rate in effect at the time
Notice of Termination is given;
(ii) in lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination, the Company shall
pay as severance pay to the Executive, not later than the
fifteenth day following the Date of Termination, a lump sum
severance payment equal to the Executive's full base salary for
the then remaining term of this Agreement (without regard to the
date of such Notice of Termination) at the rate then in effect
(the "Lump Sum Payment"), discounted to present value at a
discount rate of 8% per annum applied to each future payment from
the time it would have become payable;
(iii) in lieu of shares of common stock issuable upon exercise of
outstanding stock options ("Options"), if any, or any stock
appreciation rights ("SAR"), if any, whether or not such Options
or SARs are vested or then exercisable pursuant to their
respective terms, granted to the Executive under the Plan or
another of the Company's stock option or stock appreciation
rights plans or otherwise (which Options and SARs shall be
canceled upon the making of the payment referred to below), the
Executive shall receive, not later than the fifteenth day
following the Date of Termination, an amount in cash equal to the
product of (x) the difference (to the extent that such difference
is a positive number) obtained by subtracting the
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per share exercise price of each Option and each SAR held by the
Executive, whether or not then fully exercisable, from the
closing price of the Common Stock (on the Date of Termination) as
reported on the National Association of Securities Dealers
Automatic Quotation System/National Market System or such
quotation system or stock exchange as the Common Stock is then
listed or principally traded (or if not traded on the Date of
Termination, the closing price on the next preceding business day
on which the Common Stock traded and in the event that there is
no established trading market for the Common Stock, the per share
exercise price shall be subtracted from the fair market value of
the Common Stock on the Date of Termination as determined in good
faith by the Board of Directors of the Company and approved by an
independent accounting firm), and (y) the number of shares of
Common Stock covered by each such Option or SAR;
(iv) the Company shall remove all restrictions on vesting and any
and all forfeiture provisions or repurchase options applicable to
any shares of restricted stock held by the Executive shall
automatically lapse and be of no further force or effect;
(v) the Company shall continue coverage, to the extent not
prohibited by law, for a period of twelve (12) months from the
Date of Termination or the remaining term of this Agreement,
whichever period is shorter, for the Executive and his eligible
dependents under all of the Company's benefit plans in effect and
applicable to the Executive and his eligible dependents as of the
Date of Termination, provided that in the event that the
Executive and his eligible dependents, because
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of the Executive's terminated status, cannot be covered or fully
covered under any or all of the Company's benefit plans, the
Company shall continue to provide the Executive and/or his
eligible dependents with the same level of such coverage in
effect prior to termination, on an unfunded basis, if necessary;
(vi) the Company shall also pay to the Executive all legal fees
and expenses incurred by the Executive in contesting or disputing
any such termination or in seeking to obtain or enforce any right
or benefit provided by this Agreement or in connection with any
tax audit or proceeding to the extent attributable to the
application of Section 4999 of the Code to any payment or benefit
provided hereunder;
(vii) the payments under this Subsection (e) are intended by the
parties to be due and payable under the circumstances of a
termination for the reasons set forth above whether or not such
circumstances are preceded by a change in control of the Company.
If, notwithstanding the intentions of the parties, it is asserted
by any governmental agency, in any tax audit, administrative
proceeding or otherwise, that any payments provided under this
Section 5(e) (the "Severance Payments") are or will be subject to
the tax (the "Excise Tax") imposed by Section 4999 of the Code
and/or that a federal income tax deduction for amounts paid as
Severance Payments will not be allowed to the Company for any
year by reason of Section 28OG of the Code, the Executive may
contest or refute such assertion with respect to the Excise Tax
in any appropriate forum (the "Executive's Contest") and the
Company shall diligently and vigorously contest or refute such
assertion with
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respect to the disallowance of such deduction in all
administrative proceedings and in the federal district court or
the Tax Court, whichever shall have jurisdiction (the "Company's
Contest"). The Executive's Contest and the Company's Contest
shall be conducted and presented separately unless the Executive,
in his discretion but with the consent of the Company, joins in
the Company's Contest. In any event, the Executive shall be
entitled to retain attorneys and other experts deemed necessary
or appropriate by the Executive to the proper presentation of the
Executive's Contest and shall not be compelled by the Company to
compromise, settle or otherwise terminate the Executive's Contest
without his written consent thereto. The Company and the
Executive shall cooperate one with the other and each shall
provide to the other copies of all documents relevant to or
useful in connection with either the Executive's Contest or the
Company's Contest as may reasonably be requested by the other.
The Executive shall attend any hearing, deposition or other
proceeding at which his attendance in person is material to the
Company's Contest. The Company shall cause the appropriate
authorized officer or officers of the Company to attend any
hearing, deposition or other matter at which the Company's
appearance is requested by any party. In the event that the
Severance Payments are finally determined to be subject to the
Excise Tax, then the Company shall pay to the Executive an
additional payment (a "Gross-Up Payment") in an amount such that
after payment by the Executive of all taxes (including any
interest or penalties), including, without limitation, any income
taxes
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(including any interest or penalties) and Excise Tax imposed on
the Gross-Up Payment, the Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the
Severance Payments; and
(viii) The payments provided for in this Subsection (e), shall be
made not later than the fifteenth day following the Date of
Termination, provided, however, that if the amounts of such
payments cannot be finally determined on or before such day, the
Company shall pay to the Executive on such day an estimate, as
determined in good faith by the Company, of the minimum amount of
such payments and shall pay the remainder of such payments
(together with interest at the rate provided in Section
1274(b)(2)(B) of the Code) as soon as the amount thereof can be
determined but in no event later than the thirtieth day after the
Date of Termination provided that any Gross-Up Payment shall be
made within thirty days of the final determination that the
Severance Payments are subject to the Excise Tax. In the event
that the amount of the estimated payments exceeds the amount
subsequently determined to have been due, such excess shall
constitute a loan by the Company to the Executive payable on the
fifth day after demand by the Company (together with interest at
the rate provided in Section 1274(b)(2)(B) of the Code).
f. For purposes of this Agreement Good Reason shall mean the
occurrence of any one of the following events: (i) a material breach by the
Company of this Agreement, (ii) the Company's assignment to Executive of duties
inconsistent in any material respect with his position (including status and
reporting) or any other diminution of authority,
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<PAGE>
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duties or responsibilities, excluding any isolated action by the Company not
taken in bad faith and which is remedied by the Company within 15 days after
receipt of notice from the Executive, (iii) a Change of Control (as defined
below), other than a Change of Control Transaction (as defined below) that was
approved by a majority of the Continuing Directors (as defined below), or (iv)
the relocation of the Executive's principal place of employment to a location
more than 50 miles from his principal place of employment on the date of this
Agreement (unless such relocation is closer to the Executive's principal
residence).
g. For purposes of this Agreement, a Change of Control shall occur
if: (i) at any time less than 60% of the members of the Board of Directors shall
be individuals who were either (x) Directors on the effective date of this
Agreement or (y) individuals whose election, or nomination for election, was
approved by a vote (including a vote approving a merger or other agreement
providing for the membership of such individuals on the Board of Directors) of
at least two-thirds of the Directors then still in office who were Directors on
the effective date of this Agreement or who were so approved (the "Continuing
Directors"); or (ii) the shareholders of the Corporation shall approve an
agreement or plan providing for the Corporation to be merged, consolidated or
otherwise combined with, or for all or substantially all its assets or stock to
be acquired by, another corporation, as a consequence of which the former
shareholders of the Corporation will own, immediately after such merger,
consolidation, combination or acquisition, less than a majority of the Voting
Power of such surviving or acquiring corporation or the parent thereof (a
"Change of Control Transaction").
h. The Executive shall not be required to mitigate the amount of
any payment provided for in this Section 5 by seeking other employment or
otherwise, nor shall the
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amount of any payment provided for in this Section 5 be reduced by any
compensation earned by the Executive as the result of employment by another
employer, or otherwise.
i. In addition to all other amounts payable to the Executive under
this Section 5, the Executive shall be entitled to receive all benefits payable
to him under the Company's retirement savings plan and pension plan, if any, and
any other plan, program or arrangement relating to retirement, profit sharing,
or other benefits including, without limitation, any employee stock ownership
plan or any plan established as a supplement to any such plans. No amount
payable to the Executive under Subsection 5(e) shall be considered for any
benefit calculation or other purpose under the Company's pension plan, if any.
6. Change of Control
In the event of a Change of Control, the Company shall provide the
Executive with the following benefits:
(i) in lieu of shares of common stock issuable upon exercise of
outstanding stock options ("Options"), if any, or any stock
appreciation rights ("SAR"), if any, whether or not such Options
or SARs are vested or then exercisable pursuant to their
respective terms, granted to the Executive under the Plan or
another of the Company's stock option or stock appreciation
rights plans or otherwise (which Options and SARs shall be
canceled upon the making of the payment referred to below), the
Executive shall receive, not later than the fifteenth day
following the date of the Change of Control, an amount in cash
equal to the product of (x) the difference (to the extent that
such difference is a positive number) obtained by
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subtracting the per share exercise price of each Option and each
SAR held by the Executive, whether or not then fully exercisable,
from the closing price of the Common Stock (on the date of the
Change of Control) as reported on the National Association of
Securities Dealers Automatic Quotation System/National Market
System or such quotation system or stock exchange as the Common
Stock is then listed or principally traded (or if not traded on
the date of the Change of Control, the closing price on the next
preceding business day on which the Common Stock traded and in
the event that there is no established trading market for the
Common Stock, the per share exercise price shall be subtracted
from the fair market value of the Common Stock on the date of the
Change of Control as determined in good faith by the Board of
Directors of the Company and approved by an independent
accounting firm), and (y) the number of shares of Common Stock
covered by each such Option or SAR;
(ii) the Company shall remove all restrictions on vesting and any
and all forfeiture provisions or repurchase options applicable to
any shares of restricted stock held by the Executive shall
automatically lapse and be of no further force or effect.
7. Retirement
Nothing contained in this Agreement shall be deemed to limit the
Executive's ability to retire for any reason and to receive benefits under the
Company's retirement policies and
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<PAGE>
pension plan for salaried employees, if any and to thereby receive all benefits
for which he is eligible under such plans and any other plan, program or
arrangement relating to retirement.
8. Indemnification
a. The Company shall indemnify and hold harmless to the fullest
extent not prohibited by law, as the same exists or may hereinafter be amended,
interpreted or implemented (but, in the case of any amendment, only to the
extent that such amendment permits the Company to provide broader
indemnification rights than are permitted the Company to provide prior to such
amendment), each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in (as a witness or otherwise) any threatened,
pending or completed action, suit, or proceeding, whether civil, criminal,
administrative or investigative and whether or not by or in the right of the
Company or otherwise, (hereinafter, a "proceeding") by reason of the fact that
he or she, or a person of whom he or she is the heir, executor, or
administrator, is or was a director or officer of the Company or is or was
serving at the request of the Company as a director, officer or trustee of
another Company or of a partnership, joint venture, trust or other enterprise
(including, without limitation, service with respect to employee benefit plans),
or where the basis of such proceeding is any alleged action or failure to take
any action by such person while acting in an official capacity as a director or
officer of the Company or in any other capacity on behalf of the Company while
such person is or was serving as a director or officer of the Company, against
all expenses, liability and loss, including but not limited to attorneys' fees,
judgments, fines, excise taxes or penalties and amounts paid or to be
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<PAGE>
paid in settlement whether with or without court approval, actually incurred or
paid by such person in connection therewith.
b. Notwithstanding the foregoing, except as provided in Section
8(f) below, the Company shall indemnify any such person seeking indemnification
in connection with a proceeding (or part thereof) initiated by such person only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Company.
c. Subject to the limitation set forth above concerning
proceedings initiated by the person seeking indemnification, the right to
indemnification conferred in this Section 8 shall be a contract right and shall
include the right to be paid by the Company the expenses incurred in defending
any such proceeding (or part thereof) or in enforcing his or her rights under
this Section 8 in advance of the final disposition thereof promptly after
receipt by the Company of a request therefor stating in reasonable detail the
expenses incurred; provided, however, that to the extent required by law, the
payment of such expenses incurred by a director or officer of the Company in
advance of the final disposition of a proceeding shall be made only upon receipt
of an undertaking, by or on behalf of such person, to repay all amounts so
advanced if and to the extent it shall ultimately be determined by a court that
he or she is not entitled to be indemnified by the Company under this Section 8,
or in the case of a criminal action, the majority of the Board of Directors so
determines that he or she is not entitled to be indemnified by the Company, or
otherwise.
d. The right to indemnification and advancement of expenses
provided herein shall continue as to a person who has ceased to be a director or
officer of the Company or
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to serve in any of the other capacities described herein, and shall inure to the
benefit of the heirs, executors and administrators of such person.
e. Any dispute related to the right to indemnification,
contribution or advancement of expenses as provided under this Section 8, except
with respect to indemnification for liabilities arising under the Securities Act
of 1933, that the Company has undertaken to submit to a court for adjudication,
shall be decided only by arbitration as provided in Section 13 of this
Agreement.
f. The Company shall reimburse an indemnified person or his
representative for the expenses (including attorneys' fees and disbursements)
incurred in successfully prosecuting or defending any arbitration pursuant to
Section 13 of this Agreement.
g. The right to indemnification and the payment of expenses
incurred in defending a proceeding in advance of a final disposition conferred
in this Section 8 and the right to payment of expenses conferred in Section
12(h) shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses hereunder may be entitled under any
Bylaw, agreement, vote of shareholders, vote of directors or otherwise, both as
to actions in his or her official capacity and as to actions in any other
capacity while holding that office, the Company having the express authority to
enter into such agreements or arrangements as the Board of Directors deems
appropriate for the indemnification of and advancement of expenses to present or
future directors and officers as well as employees, representatives or agents of
the Company in connection with their status with or services to or on behalf of
the Company or any other Company, partnership, joint venture, trust or other
enterprise, including any employee benefit plan, for which such person is
serving at the request of the Company.
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h. The Company may create a fund of any nature which may, but need
not be, under the control of a trustee, or otherwise secure or insure in any
manner its indemnification obligations, including its obligation to advance
expenses, whether arising under or pursuant to this Section 8 or otherwise.
i. The Company may purchase and maintain insurance on behalf of
any person who is or was a director or officer or representative of the Company,
or is or was serving at the request of the Company as a representative of
another Company, partnership, joint venture, trust or other enterprise, against
any liability asserted against such person and incurred by such person in any
such capacity, or arising out of his or her status as such, whether or not the
Company has the power to indemnify such person against such liability under the
laws of this or any other state.
Neither the modification, amendment, alteration or repeal of this
Section 8 or any of its provisions nor the adoption of any provision
inconsistent with this Section 8 or any of its provisions shall adversely affect
the rights of any person to indemnification and advancement of expenses existing
at the time of such modification, amendment, alteration or repeal or the
adoption of such inconsistent provision.
9. Non-Competition. During the term of this Agreement and for two
years after the Date of Termination, the Executive shall refrain from competing
with the Company or any subsidiary of the Company except with the Company's
prior written consent. The phrase "refrain from competing with the Company or
any subsidiary of the Company" shall mean that the Executive will not engage,
directly or indirectly (including, by way of example only, as a principal,
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partner, venturer, employee or agent) nor have any direct or indirect interest
in any enterprise (a "Competing Enterprise") which competes with the Company or
any subsidiary thereof by engaging in the online informational and transactional
services business or in substantial and direct competition with any other
business operation actively conducted by the Company or its subsidiaries at the
Date of Termination. It is agreed that the foregoing provisions shall not
restrict the Executive from either (i) being a director of or having any
investments or other interests in an enterprise which is not a competing
enterprise, or (ii) having any investments in any competing enterprise the stock
of which is listed on a national securities exchange or traded publicly
over-the-counter so long as such investment does not give the Executive more
than five percent (5%) of the voting stock of such enterprise. Provided further
that if the Executive's employment hereunder is terminated pursuant to Section
5(e) and the Executive provides a written waiver of the Lump Sum Payment, the
Executive shall be automatically released from the limitations imposed by this
Section 9 and this Section shall be of no force and effect.
10. Non-Solicitation of Customers and Suppliers. Employee agrees that
during his employment with the Company he shall not, directly or indirectly,
solicit the trade of, or trade with, any customer, prospective customer,
supplier, or prospective supplier of the Company for any business purpose other
than for the benefit of the Company. Employee further agrees that for two (2)
years following termination of his employment with the Company, including
without limitation termination by the Company for cause or without cause,
Employee shall not, directly or indirectly, solicit the trade of, or trade with,
any customers or suppliers, or prospective customers or suppliers, of the
Company. Provided further that if the Executive's employment hereunder is
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terminated pursuant to Section 5(e) and the Executive provides a written waiver
of the Lump Sum Payment, the Executive shall be automatically released from the
limitations imposed by this Section 10 and this Section shall be of no force and
effect.
11. Non-Solicitation of Employees. Employee agrees that, during his
employment with the Company and for two (2) years following termination of
Employee's employment with the Company, including without limitation termination
by the Company for cause or without cause, Employee shall not, directly or
indirectly, solicit or induce, or attempt to solicit or induce, any employee of
the Company to leave the Company for any reason whatsoever, or hire any employee
of the Company. Provided further that if the Executive's employment hereunder is
terminated pursuant to Section 5(e) and the Executive provides a written waiver
of the Lump Sum Payment, the Executive shall be automatically released from the
limitations imposed by this Section 11 and this Section shall be of no force and
effect.
12. Confidentiality and Inventions. The Executive agrees:
a. To keep secret all confidential matters of the Company and its
subsidiaries and affiliates and not to disclose them to anyone outside the
Company or its subsidiaries and affiliates, either during or after his
employment with the Company, except with the Company's prior written consent or
as required by law;
b. To deliver promptly to the Company on termination of employment
of the Executive by the Company all memoranda, notes, records, reports and other
documents (and all copies thereof) with respect to any such confidential matters
and other proprietary information (such as customers lists, suppliers lists,
etc.) which the Executive may then possess or
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have under his control (For purposes of this Section 12, all information which
is not publicly available shall be deemed to be confidential and covered by the
foregoing provisions);
c. He will promptly and fully disclose to the Company or such
officer or other agent as may be designated by the Company any and all
inventions made or conceived by Executive (whether made solely by Executive or
jointly with others) during employment with the Company (i) which are along the
line of the business, work or investigations of the Company, or (ii) which
result from or are suggested by any work which Executive may do for or on behalf
of the Company; and
d. He will assist the Company and its nominees during and
subsequent to such employment in every proper way (entirely at its or their
expense) to obtain for its or their own benefit patents for such inventions in
any and all countries; the said inventions, without further consideration other
than such salary as from time to time may be paid to him by the Company as
compensation for his services in any capacity, shall be and remain the sole and
exclusive property of the Company or is nominee whether patented or not; and
e. He will keep and maintain adequate and current written records
of all such inventions, in the form of but not necessarily limited to notes,
sketches, drawings, or reports relating thereto, which records shall be and
remain the property of and available to the Company at all times.
f. Promptly upon termination of his employment, he will disclose
to the Company, or to such officer or other agent as may be designated by the
Company, all inventions which have been partly or wholly conceived, invented or
developed by him for which applications for patents have not been made and will
thereafter execute all such instruments of the
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character hereinbefore referred to, and will take such steps as may be necessary
to secure and assign to the Company the exclusive rights in and to such
inventions and any patents that may be issued thereon any expense therefor to be
borne by the Company.
g. He will not at any time aid in attacking the patentability,
scope, or validity of any invention to which the provisions of subparagraphs (c)
through (f), above, apply.
In the event that (i) Executive institutes any legal action to
enforce his rights under, or to recover damages for breach of this agreement, or
(ii) the Company institutes any action to avoid making any payments due to
Executive under this agreement, Executive, if he is the prevailing party, shall
be entitled to recover from the Company any actual expenses for attorney's fees
and other disbursements incurred by him in relation thereto.
13. Arbitration. Any disputes hereunder shall be settled as follows:
a. Election Of Arbitration. At the option of either party, any and
all disputes or controversies whether of law or fact and of any nature
whatsoever arising from or respecting this Agreement shall be decided by
arbitration by the American Arbitration Association in accordance with the rules
and regulations of that Association.
b. Selection Of Arbitrators. The arbitrators shall be selected as
follows: In the event the Company and Executive agree on one arbitrator, the
arbitration shall be conducted by such arbitrator. In the event the Company and
Executive do not so agree, the Company and Executive shall each select one
independent, qualified arbitrator, and the two arbitrators so selected shall
select the third arbitrator. The Company reserves the right to object to any
individual arbitrator who shall be employed by or affiliated with a competing
organization.
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c. Conduct Of Arbitration. Arbitration shall take place in
Stamford, Connecticut or any other location mutually agreeable to the parties.
Reasonable notice of the time and place of arbitration shall be given to all
persons other than the parties as shall be required by law, and such persons or
their authorized representatives shall have the right to attend and/or
participate in all the arbitration hearings in such manner as the law shall
require.
d. Secrecy Of Proceedings. At the request of either party,
arbitration proceedings will be conducted in the utmost secrecy; in such case
all documents, testimony and records shall be received, heard and maintained by
the arbitrators in secrecy under seal, available for the inspection only of the
Company or Executive and their respective attorneys and their respective
experts, who shall agree in advance and in writing to receive all such
information confidentially and to maintain such information in secrecy until
such information shall become generally known.
e. Relief. The arbitrators, who shall act by majority vote, shall
be able to award damages, with or without an accounting and costs. The decree or
judgment of an award rendered by the arbitrators may be entered in any court
having jurisdiction thereof.
14. Notices. All notices and other communications which are required or
may be given under this Agreement shall be in writing and shall be delivered
personally or by registered or certified mail addressed to the party concerned
at the following addresses:
If to the Company:
SmartServ Online, Inc.
Metro Center
One Station Place
Stamford, CT 06902
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If to the Executive:
Mr. Mario F. Rossi
22 Split Rock Road
Trumbull, CT 06611
With a copy to:
Stephen M. Cohen, Esq.
Buchanan Ingersoll Professional Corporation
Eleven Penn Center
14th Floor
1835 Market Street
Philadelphia, PA 19103-2985
or to such other address as shall be designated by notice in writing to the
other party in accordance herewith. Notices and other communications hereunder
shall be deemed effectively given when personally delivered, or, if sent by
overnight courier, upon receipt, or, if mailed, 48 hours after deposit in the
United States first class mail, postage prepaid.
15. Miscellaneous.
a. This Agreement supersedes all prior agreements, arrangements
and understandings, written or oral, relating to the subject matter hereof,
without limitation, including the Employment Agreement.
b. (i) This Arrangement shall inure to the benefit of the
Executive's heirs, representatives or estate to the extent stated herein.
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(ii) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, by agreement in form
and substance satisfactory to the Executive, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform if no such succession had taken place. As
used in this Agreement, "Company" shall mean the Company as defined in the
preamble to this Agreement and any successor to its business or assets which
executes and delivers the agreement provided for in this Subsection 15 (b) (ii)
or which otherwise becomes bound by all the terms and provisions of this
Agreement by operation of law.
c. This Agreement may be amended, modified, superseded, canceled,
renewed or extended and the terms or covenants hereof may be waived, only by a
written instrument executed by both of the parties hereto, or in the case of a
waiver, by the party waiving compliance. The failure of either party at any time
or times to require performance of any provisions hereof shall in no manner
affect the right at a later time to enforce such provisions thereafter. No
waiver by either party of the breach of any term or covenant contained in this
Agreement, whether by conduct or otherwise, in any one or more instances, shall
be deemed to be, or construed as, a further or continuing waiver of any such
breach or a waiver of the breach of any other term or covenant contained in this
Agreement.
d. In the event any one or more of the covenants, terms or
provisions contained in this Agreement shall be invalid, illegal or
unenforceable in any respect, the validity of the remaining covenants, terms and
provisions contained herein shall be in no way affected, prejudiced or disturbed
thereby.
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e. This Agreement is personal in nature and neither of the parties
hereto shall, without the consent of the other, assign or transfer this
Agreement or any rights or obligations hereunder, except as provided in
Subsection 15(b) above. Without limiting the foregoing, the Executive's right to
receive payments hereunder shall not be assignable or transferable, whether by
pledge, creation of a security interest or otherwise, other than a transfer by
his will or by the laws of descent or distribution, and in the event of any
attempted assignment or transfer contrary to this Subsection 15(e) the Company
shall have no liability to pay any amount so attempted to be assigned or
transferred.
This Agreement shall be governed by laws of the State of
Connecticut, without regard to its choice of law provisions.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the date first above written.
ATTEST: SMARTSERV ONLINE, INC:
By:________________________ By:_________________________________
________________________ _________________________________
WITNESS: EXECUTIVE:
___________________________ ____________________________________
Mario F. Rossi
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SMARTSERV ONLINE, INC.
RESTRICTED STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made as of December 29, 1998 between SmartServ
Online, Inc., a Delaware corporation (the "Company"), and Mario F. Rossi
("Purchaser").
WHEREAS Purchaser is an employee of the Company whose continued
affiliation with the Company is considered to be important for the Company's
continued growth; and
WHEREAS in order to provide Purchaser an opportunity to acquire an
equity interest in the Company as an incentive for Purchaser to continue to
participate in the affairs of the Company, the Company is willing to sell to
Purchaser and Purchaser desires to purchase shares of Common Stock according to
the terms and conditions hereof;
THEREFORE, the parties agree as follows:
1. PURCHASE AND SALE OF STOCK. Subject to the terms and
conditions of this Agreement, the Company hereby agrees to sell to Purchaser and
Purchaser agrees to purchase from the Company 206,080 shares of the Company's
Common Stock (the "Stock") at a price of $2.19885 per share (the "Per Share
Purchase Price"), for an aggregate purchase price of $453,139.01. (The Per Share
Purchase Price being equal to 110% of the fair market value of the Stock as
determined by the average of the high and low sales price for the Stock for the
30 trading days immediately preceding the date of this Agreement.) The purchase
price for the Stock shall be paid by a non-recourse promissory note (the "Note")
in the form attached hereto as Exhibit A, in the amount of $453,139.01. The Note
shall be secured by pledge of the Stock and Purchaser shall be required to
execute and deliver a Security Agreement in the form attached hereto as Exhibit
B (the "Security Agreement"). If during the time that the Note remains
outstanding, the Company sells shares of the Company's Common Stock or other
securities convertible into the Company's Common Stock, pursuant to a Change of
Control Transaction (as defined below) at a price per share less than the Per
Share Purchase Price the aggregate principal amount of the Note shall be
automatically reduced to an amount equal the number of shares of Stock
multiplied by the per share price at which such securities are to be sold in the
Change of Control Transaction (the "Adjusted Principal Amount"). Furthermore, if
the Company shall sell shares of the Company's Common Stock or other securities
convertible into the Company's Common Stock in a private placement, or one or
more related private placements (a "Private Placement"), within six (6) months
of this Agreement for an aggregate purchase price in excess of $1,000,000, then
the number of shares issued pursuant to this Agreement shall automatically be
adjusted (the "Adjustment") in order to ensure that
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immediately following such Private Placement the Purchaser shall retain three
percent (3%) of the outstanding shares of the Company's Common Stock and other
securities convertible into the Company's Common Stock on a fully diluted basis.
The number of shares of the Company's Common Stock issued pursuant to the
Adjustment (the "Additional Shares") shall be set forth on Schedule 1 attached
hereto and shall be subject to the same terms and conditions as the Stock and
each reference herein to the Stock shall include the Additional Shares, to the
extent appropriate.
2. REPURCHASE OPTION, PUT OPTION AND RELEASE OF SHARES.
(a) REPURCHASE OPTION AND PUT OPTION.
(i) In the event of any voluntary or involuntary
termination of Purchaser's employment with the
Company (including as a result of death but excluding
Purchaser's termination of employment without Cause
(as defined below) or for Good Reason (as defined
below)) before all shares of the Stock are released
from the Company's repurchase option under Section
2(b) below, the Company shall, upon the date of such
termination (as reasonably fixed and determined by
the Company) have an irrevocable, exclusive option
for a period of twelve (12) months from such date to
repurchase all or any portion of the Stock which has
not been released from the repurchase option
described in this Section 2 (the "Repurchase Option")
at the time of such termination at the original
purchase price per share. The Repurchase Option shall
be exercised by the Company by written notice to
Purchaser or his/her executor and, at the Company's
option, (A) by delivery to Purchaser or his/her
executor with such notice of a check in the amount of
the aggregate repurchase price for the Stock being
repurchased, (B) by cancellation by the Company of an
amount of Purchaser's indebtedness to the Company
equal to the aggregate repurchase price for the Stock
being repurchased, or (C) by a combination of (A) and
(B) so that the combined payment and cancellation of
indebtedness equals such aggregate repurchase price.
Upon delivery of such notice and the payment of the
aggregate repurchase price in any of the ways
described above, the Company shall become the legal
and beneficial owner of the Stock being repurchased
and all rights and interests therein or relating
thereto, and the Company shall have the right to
retain and transfer to its own name the number of
shares of the Stock being repurchased by the Company.
(ii) If Purchaser's employment with the Company is
terminated (A) by the Company other than for Cause,
(B) as a result of Purchaser's death or Disability
(as defined below) or (C) by Purchaser for Good
Reason, Purchaser or his/her executor shall have the
right to cause the Company to
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repurchase all Stock at the original purchase price
per share (the "Put Option"). The Put Option shall be
exercised by Purchaser by written notice to the
Company delivered within sixty (60) days of such
termination. The repurchase price shall be paid at
the Company's option, (A) by delivery to Purchaser
or his/her executor within ninety (90) days a check
in the amount of the aggregate repurchase price for
the Stock being repurchased, (B) by cancellation by
the Company of an amount of Purchaser's indebtedness
to the Company equal to the aggregate repurchase
price for the Stock being repurchased, or (C) by a
combination of (A) and (B) so that the combined
payment and cancellation of indebtedness equals such
aggregate repurchase price. Upon payment of the
aggregate repurchase price in any of the ways
described above, the Company shall become the legal
and beneficial owner of the Stock being repurchased
and all rights and interests therein or relating
thereto, and the Company shall have the right to
retain and transfer to its own name the number of
shares of the Stock being repurchased by the Company.
(b) RELEASE OF SHARES FROM REPURCHASE OPTION.
(i) Subject to Section 2(b)(ii), 1/36th of the Stock
shall be released from the Company's Repurchase
Option on the one-month anniversary of this
Agreement, and an additional 1/36th of the Stock
shall be released on each monthly anniversary of such
date thereafter until all shares of the Stock have
been released; provided in each case that there has
not been any voluntary or involuntary termination
prior to each such date of release.
(ii) Notwithstanding Section 2(b)(i), all of the
stock shall be released from the Company's Repurchase
Option in the event that (A) Purchaser terminates his
employment for Good Reason (as defined below), (B)
the Company terminates the Purchaser's employment
with the Company without cause or (C) there is a
Change of Control (as defined below)..
(c) CERTAIN DEFINITIONS
(i) For purposes of this Agreement, "Cause" shall
mean termination of the Purchaser by the Company
upon:
(A) the willful and continued failure by the
Executive to substantially perform his
duties with the Company (other than any such
failure resulting from his incapacity due to
physical or mental illness), after a written
demand for substantial performance is
delivered to the Executive by the Board of
Directors which specifically identifies the
manner in which the Board of Directors
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believes that the Executive has not
substantially performed his duties, and
which failure has not been cured within
thirty days after such written demand; or
(B) the willful and continued engaging by
the Executive in conduct which is
demonstrably and materially injurious to the
Company, monetarily or otherwise.
For purposes of this Subsection (c)(i), no act, or
failure to act, on the Executive's part shall be
considered "willful" unless done, or omitted to be
done, by the Executive in bad faith and without
reasonable belief that such action or omission was in
the best interest of the Company. Notwithstanding the
foregoing, the Executive shall not be deemed to have
been terminated for Cause unless and until there
shall have been delivered to him a copy of a
resolution duly adopted by the affirmative vote of
not less than 51% of the entire membership of the
Board of Directors at a meeting of the Board of
Directors called and held for that purpose (after
reasonable notice to the Executive and an opportunity
for the Executive, together with his counsel, to be
heard before the Board of Directors), finding that in
the good faith opinion of the Board of Directors the
Executive was guilty of conduct set forth above in
clauses (A) or (B) of the first sentence of this
Subsection (c)(i) and specifying the particulars
thereof in detail.
(ii) For purposes of this Agreement "Change of
Control" shall mean Change of Control shall occur if:
(i) at any time less than 60% of the members of the
Board of Directors shall be individuals who were
either (x) Directors on the effective date of this
Agreement or (y) individuals whose election, or
nomination for election, was approved by a vote
(including a vote approving a merger or other
agreement providing for the membership of such
individuals on the Board of Directors) of at least
two-thirds of the Directors then still in office who
were Directors on the effective date of this
Agreement or who were so approved (the "Continuing
Directors"); or (ii) the shareholders of the
Corporation shall approve an agreement or plan
providing for the Corporation to be merged,
consolidated or otherwise combined with, or for all
or substantially all its assets or stock to be
acquired by, another corporation, as a consequence of
which the former shareholders of the Corporation will
own, immediately after such merger, consolidation,
combination or acquisition, less than a majority of
the Voting Power of such surviving or acquiring
corporation or the parent thereof (a "Change of
Control Transaction"). (iii) For purposes of this
Agreement, "Disability" shall mean that Purchaser, at
the time notice of termination is given, has been
unable to
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substantially perform his/her duties under this
Agreement for a period of not less than four (4)
consecutive months as the result of his/her
incapacity due to physical or mental illness.
(iv) For purposes of this Agreement, "Good Reason"
shall mean the termination of employment by the
Executive upon the occurrence of any one of the
following events: (i) a material breach by the
Company of the Employment Agreement (defined below),
(ii) the Company's assignment to Executive of duties
inconsistent in any material respect with his
position (including status and reporting) or any
other diminution of authority, duties or
responsibilities, excluding an isolated action by the
Company not taken in bad faith and which is remedied
by the Company within 15 days after receipt of notice
from the Executive, (iii) a Change of Control, other
than a Change of Control Transaction that was
approved by a majority of the Continuing Directors,
or (iv) the relocation of the Executive's principal
place of employment to a location more than 50 miles
from his principal place of employment on the date of
the Employment Agreement (defined below)(unless such
relocation is closer to the Executive's Principal
residence).
(v) For the purposes of this Agreement, "Employment
Agreement" shall mean that certain employment
agreement by and between the Purchaser and the
Company dated as of January 1, 1999.
(vi) This Agreement shall not confer upon Purchaser
any right with respect to employment by the Company,
nor shall it interfere with or affect in any manner
the right or power of the Company, or a parent or
subsidiary of the Company, to terminate Purchaser's
employment or consulting relationship with the
Company, which right is hereby reserved, subject to
the provisions of the Employment Agreement.
3. STOCK SPLITS, ETC. If, from time to time during the term of
this Agreement: (i) There is any stock dividend or liquidating dividend of cash
and/or property, stock split or other change in the character or amount of any
of the outstanding securities of the Company; or (ii) there is any
consolidation, merger or sale of all, or substantially all, of the assets of the
Company; then, in such event, any and all new, substituted or additional
securities or other property to which Purchaser is entitled by reason of
Purchaser's ownership of the Stock shall be immediately subject to this
Agreement and be included in the word "Stock" for all purposes with the same
force and effect as the shares of Stock currently subject to the Repurchase
Option and other terms of this Agreement. While the aggregate repurchase price
payable upon execution of the Repurchase Option shall remain the same after each
such event, the repurchase price per share of Stock shall be appropriately
adjusted.
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4. RESTRICTION ON TRANSFER. Purchaser shall not, except as
contemplated by the Security Agreement, sell, transfer, pledge, hypothecate or
otherwise dispose of any shares of the Stock which remain subject to the
Repurchase Option. The Company shall not be required (i) to transfer on its
books any shares of Stock which shall have purportedly been sold or transferred
in violation of any of the provisions set forth in this Agreement, or (ii) to
treat as owner of such shares or to accord the right to vote as such owner or to
pay dividends to any purported transferee to whom such shares shall have been
purportedly transferred.
5. REGISTRATION RIGHTS
(a) Piggy Back Registration Rights. If at any time
the Company shall determine to register for its own
account or the account of others under the Securities
Act of 1933, as amended (the "Securities Act") any of
its equity securities, other than on Form S-8 or Form
S-4 or their then equivalents relating to shares of
Common Stock to be issued solely in connection with
any acquisition of any entity or business or shares
of Common Stock issuable in connection with stock
option or other employee benefit plans, it shall send
to the Purchaser written notice of such determination
and, if within 15 days after receipt of such notice,
the Purchaser shall so request in writing, the
Company shall use its best efforts to include in such
registration statement all or any part of the Stock
not then subject to the Repurchase Option the
Purchaser requests to be registered, except that if,
in connection with any offering involving an
underwriting of the Company's Common Stock to be
issued by the Company, the managing underwriter shall
impose a limitation on the number of shares of such
Common Stock which may be included in the
registration statement because, in its judgment, such
limitation is necessary to effect an orderly public
distribution, then the Company shall be obligated to
include in such registration statement only such
limited portion of the Stock with respect to which
the Purchaser has requested inclusion hereunder. Any
exclusion of the Stock shall be made PRO RATA among
the all holders of the Company's Common Stock with
similar registration rights seeking to include such
shares, in proportion to the number of such shares
sought to be included by such holders. No incidental
right under this Section 5(a) shall be construed to
limit any registration required under Section 5(b).
The obligations of the Company under this Section
5(a) may be waived at any time upon the written
consent of the Purchaser and shall expire on the 6th
anniversary of this Agreement.
(b) S-3 Registration Rights. In addition to the
rights provided the Purchaser and other holders of
the Company's Common Stock with registration rights
in Section 5(a) above, if the registration of the
Company's Common Stock under the Securities Act can
be effected on
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Form S-3 (or any similar form promulgated by the
Commission that permits secondary offerings of
securities), then upon the written request of
the Purchaser, the Company will, as expeditiously
as possible, use its best efforts to effect
qualification and registration under the Securities
Act on Form S-3 of all or such portion of the
Stock as the Purchaser shall specify; provided,
however, that the Company shall not be required to
effect more than one registration during any 12-month
period pursuant to this Section 5(b).
(d) The Company will use its best efforts to maintain
the effectiveness for up to 90 days (or such shorter
period of time as the underwriters need to complete
the distribution of the registered offering, or one
year in the case of a "shelf" registration statement
on Form S-3) of any registration statement pursuant
to which any of the Stock is being offered, and from
time to time will amend or supplement such
registration statement and the prospectus contained
therein to the extent necessary to comply with the
Securities Act and any applicable state securities
statute or regulation. The Company will also provide
the Purchaser with as many copies of the prospectus
contained in any such registration statement as he
may reasonably request.
6. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
(a) LEGENDS. The share certificate evidencing the
Stock issued hereunder shall be endorsed with the
following legends (in addition to any legends
required under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO
SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR
AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE
SECURITIES ACT OF 1933.
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN
AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A
COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE
COMPANY.
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(b) STOP-TRANSFER NOTICES. Purchaser agrees that, in
order to ensure compliance with the restrictions
referred to herein, the Company may issue appropriate
"stop transfer" instructions to its transfer agent,
if any, and that, if the Company transfers its own
securities, it may make appropriate notations to the
same effect in its own records.
7. PURCHASER'S REPRESENTATIONS AND COVENANTS. In connection
with the purchase of the Stock, Purchaser hereby represents and warrants to the
Company as follows:
(a) INVESTMENT INTENT; CAPACITY TO PROTECT INTERESTS.
Purchaser is purchasing the Stock solely for
Purchaser's own account for investment and not with a
view to or for sale in connection with any
distribution of the Stock or any portion thereof and
not with any present intention of selling, offering
to sell or otherwise disposing of or distributing the
Stock or any portion thereof. Purchaser also
represents that the entire legal and beneficial
interest of the Stock is being purchased, and will be
held, for Purchaser's account only, and neither in
whole or in part for any other person. Purchaser
either (i) has a pre-existing business or personal
relationship with the Company or at least one of its
officers, directors or controlling persons, or (ii)
by reason of Purchaser's business or financial
experience (or the business or financial experience
of Purchaser's professional advisors who are
unaffiliated with and who are not compensated by the
Company or any affiliate or selling agent of the
Company, directly or indirectly), can be reasonably
assumed to have the capacity to evaluate the merits
and risks of an investment in the Company and to
protect Purchaser's own interests in connection with
this transaction.
(b) RESIDENCE. Purchaser's principal residence is
within the State of Connecticut and is located at the
address indicated beneath Purchaser's signature
below.
(c) INFORMATION CONCERNING COMPANY. Purchaser has
discussed the Company and its plans, operations and
financial condition with the Company's officers and
has received all such information as Purchaser has
deemed necessary and appropriate to enable Purchaser
to evaluate the financial risk inherent in making an
investment in the Stock. Purchaser has received
satisfactory and complete information concerning the
business and financial condition of the Company in
response to all inquiries in respect thereof.
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(d) ECONOMIC RISK. Purchaser realizes that the
purchase of the Stock will be a highly speculative
investment and involves a high degree of risk.
Purchaser is able, without impairing Purchaser's
financial condition, to hold the Stock for an
indefinite period of time and to suffer a complete
loss on Purchaser's investment.
(e) RESTRICTED SECURITIES. Purchaser understands and
acknowledges that:
(i) The Stock has not been registered under the
Securities Act of 1933, as amended, in reliance upon
a specific exemption therefrom, which exemption
depends upon, among other things, the bona fide
nature of Purchaser's investment intent as expressed
herein.
(ii) The Stock must be held indefinitely unless it is
subsequently registered under the Securities Act or
unless an exemption from such registration is
otherwise available. In addition, Purchaser
understands that the certificate evidencing the Stock
will be imprinted with a legend which prohibits the
transfer of the Stock unless it is registered or such
registration is not required in the opinion of
counsel satisfactory to the Company.
(f) DISPOSITION UNDER RULE 144. Purchaser understands
that:
(i) The shares of Stock are restricted securities
within the meaning of Rule 144 promulgated under the
Securities Act; that the exemption from registration
under Rule 144 will not be available in any event for
at least one (1)) year from the date of payment of
the Note (or the applicable portion thereof relating
to such shares of Stock), and even then will not be
available unless (i) a public trading market then
exists for the Common Stock of the Company, (ii)
adequate information concerning the Company is then
available to the public, and (iii) other terms and
conditions of Rule 144 are complied with; and that
any sale of the Stock may be made only in limited
amounts in accordance with such terms and conditions
of Rule 144;
(ii) That at the time Purchaser wishes to sell the
Stock there may be no public market upon which to
make such a sale; that, even if such a public market
then exists, the Company may not be satisfying the
current public information requirements of Rule 144;
and that, in such event, Purchaser would be precluded
from selling the Stock under Rule 144 even if the one
(1) year minimum holding period had been satisfied;
and
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(iii) In the event all of the requirements of Rule
144 are not satisfied, registration under the
Securities Act or compliance with Regulation A or
another registration exemption will be required;
that, notwithstanding the fact that Rule 144 is not
exclusive, the Staff of the SEC has expressed its
opinion that persons proposing to sell private
placement securities other than in a registered
offering or pursuant to Rule 144 will have a
substantial burden of proof in establishing that an
exemption from registration is available for such
offers or sales; and that such persons and their
respective brokers who participate in such
transactions do so at their own risk.
(g) FURTHER LIMITATIONS ON DISPOSITION. Without in
any way limiting Purchaser's representations set
forth above, Purchaser further agrees that Purchaser
shall in no event make any disposition of all or any
portion of the Stock unless and until:
(i) Either:
(A) There is then in effect a Registration
Statement under the Securities Act covering
such proposed disposition, and such
disposition is made in accordance with said
Registration Statement; or
(B) (1) Purchaser shall have notified the
Company of the proposed disposition and
shall have furnished the Company with a
detailed statement of the circumstances
surrounding the proposed disposition; (2)
Purchaser shall have furnished the Company
with an opinion of Purchaser's counsel to
the effect that such disposition will not
require registration of such shares under
the Securities Act; and (3) such opinion of
Purchaser's counsel shall have been
concurred in by counsel for the Company, and
the Company shall have advised Purchaser of
such concurrence; and,
(ii) The shares of Stock proposed to be transferred
are no longer subject to the Repurchase Option set
forth in Section 2 hereof.
8. ARBITRATION.
(a) ELECTION OF ARBITRATION. At the option of either
party, any and all disputes or controversies whether
of law or fact and of any nature whatsoever arising
from or respecting this Agreement shall be decided by
arbitration by the American Arbitration Association
in accordance with the rules and regulations of that
Association.
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(b) SELECTION OF ARBITRATORS. The arbitrators shall
be selected as follows: In the event the Company and
Purchaser agree on one arbitrator, the arbitration
shall be conducted by such arbitrator. In the event
the Company and Purchaser do not so agree, the
Company and Purchaser shall each select one
independent, qualified arbitrator, and the two
arbitrators so selected shall select the third
arbitrator. The Company reserves the right to object
to any individual arbitrator who shall be employed by
or affiliated with a competing organization.
(c) CONDUCT OF ARBITRATION. Arbitration shall take
place in Stamford, Connecticut or any other location
mutually agreeable to the parties. Reasonable notice
of the time and place of arbitration shall be given
to all persons other than the parties as shall be
required by law, and such persons or their authorized
representatives shall have the right to attend and/or
participate in all the arbitration hearings in such
manner as the law shall require.
(d) SECRECY OF PROCEEDINGS. At the request of either
party, arbitration proceedings will be conducted in
the utmost secrecy; in such case all documents,
testimony and records shall be received, heard and
maintained by the arbitrators in secrecy under seal,
available for the inspection only of the Company or
Purchaser and their respective attorneys and their
respective experts, who shall agree in advance and in
writing to receive all such information
confidentially and to maintain such information in
secrecy until such information shall become generally
known.
(e) RELIEF. The arbitrators, who shall act by
majority vote, shall be able to decree any and all
relief of an equitable nature (including without
limitation such relief as temporary restraining
orders or temporary and/or permanent injunctions),
and shall also be able to award damages, with or
without an accounting and costs. The decree or
judgment of an award rendered by the arbitrators may
be entered in any court having jurisdiction thereof.
9. GOVERNING LAW. This Agreement shall be governed and
construed by the laws of the State of Connecticut without regard to its choice
of laws provisions.
10. MISCELLANEOUS.
(a) RIGHTS AS SHAREHOLDER. Subject to the provisions
and limitations hereof, Purchaser may, during the
term of this Agreement,
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exercise all rights and privileges of a shareholder
of the Company with respect to the Stock purchased
hereby.
(b) FURTHER ASSURANCES. The parties agree to execute
such further instruments and to take such further
action as may reasonably be necessary to carry out
the intent of this Agreement.
(c) NOTICES. Any notice required or permitted
hereunder shall be given in writing and shall be
deemed effectively given upon personal delivery
(including by express courier) or upon deposit in the
United States Post Office, by First Class mail with
postage and fees prepaid, addressed to Purchaser at
his/her address shown on the Company's employment
records and to the Company at the address of its
principal corporate offices (attention: President) or
at such other address as such party may designate by
ten (10) days' advance written notice to the other
party.
(d) ASSIGNMENT. This Agreement shall inure to the
benefit of the successors and assigns of the Company
and, subject to the restrictions on transfer herein
set forth, be binding upon Purchaser, his/her heirs,
executors, administrators, successors and assigns. No
party to this Agreement may assign its rights and
obligations under this Agreement without the prior
written consent of the other party.
(e) AUTHORIZATION OF TRANSFER. Purchaser hereby
authorizes and directs the Secretary or transfer
agent of the Company to transfer the Stock as to
which the Repurchase Option has been exercised from
Purchaser to the Company or the Company's assignees.
(f) WAIVER. Either party's failure to enforce any
provision or provisions of this Agreement shall not
in any way be construed as a waiver of any such
provision or provisions, nor prevent that party
thereafter from enforcing each and every other
provision of this Agreement. The rights granted both
parties herein are cumulative and shall not
constitute a waiver of either party's right to assert
all other legal remedies available to it under the
circumstances.
(g) ADVICE OF COUNSEL. Purchaser has reviewed this
Agreement in its entirety, has had an opportunity to
obtain the advice of counsel prior to executing this
Agreement and fully understands all provisions
hereof.
(h) COUNTERPARTS. This Agreement may be executed in
any number of counterparts, each of which shall be an
original and all of which together shall constitute
one instrument.
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(i) ENTIRE AGREEMENT. This Agreement, the Employment
Agreement, the Note and the Security Agreement
represent the entire agreement between the parties
with respect to the purchase of Common Stock by
Purchaser and the vesting thereof, supersedes all
prior understandings and agreements, written and
oral, with regard thereto, and satisfies all of the
Company's obligations to Purchaser with regard to the
issuance or sale of securities. This Agreement may be
modified or amended only in writing signed by both
parties.
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first above written.
SMARTSERV ONLINE, INC., MARIO F. ROSSI
a Delaware corporation
By:___________________________ __________________________________
Title:________________________
(Address)
22 Split Rock Road
Trumbull, CT 06611
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SCHEDULE 1
Pursuant to Section 1 of the Agreement, the Purchaser received _______
Additional Shares as a result of a Private Placement of _______ shares of
__________ by the Company on _______, 1999.
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exhibit A
PROMISSORY NOTE
$453,139.01 Stamford, Connecticut
December 29, 1998
FOR VALUE RECEIVED, Mario F. Rossi promises to pay to SmartServ
Online, Inc., a Delaware corporation (the "Company"), or order, the principal
sum of Four Hundred Fifty Three Thousand One Hundred Thirty Nine Dollars and One
Cent ($453,139.01), together with interest on the unpaid principal hereof from
the date hereof at the rate of 6.75% [such interest equal to one point below the
prime rate as of the date of this Note] per annum, compounded annually.
Notwithstanding the foregoing, the principal amount of the Note shall be subject
to an automatic reduction to the Adjustment Principal Amount pursuant to the
terms of the Purchase Agreement (as defined below).
This Note shall be due and payable in full on December 29, 2003 (the
"Due Date"), unless accelerated as provided herein. Upon the termination of the
Executive from the Company for Cause, the whole unpaid balance on this Note of
principal and interest shall become immediately due at the option of the holder
of this Note. In the event that the Executive terminates his employment with the
Company for Good Reason, the whole unpaid balance on this Note of principal and
interest shall be due and payable upon the earlier of the Due Date or six (6)
months from the Date of Termination. Payments of principal and interest shall be
made in lawful money of the United States of America.
The undersigned may at any time prepay without penalty all or any
portion of the principal or interest owing hereunder.
This Note is subject to the terms of that certain Restricted Stock
Purchase Agreement by and between the Company and Mario F. Rossi, dated as of
December 29, 1998 (the "Purchase Agreement") and capitalized terms used herein
which are not otherwise defined shall have the meanings ascribed to them in the
Purchase Agreement. This Note is secured by a pledge of the Company's Common
Stock under the terms of a Security Agreement of even date herewith (the
"Security Agreement") and is subject to all the provisions thereof.
This Note is intended to evidence a non-recourse obligation to secure
the purchase of the Company's Common Stock pursuant to the Purchase Agreement.
Accordingly, this Note shall be without recourse against Mario F. Rossi and no
person entitled to payment under this Note shall have any right to his assets
other than the collateral given for this Note and earnings attributable to such
collateral or the investment of such collateral, if any.
This Note shall be governed and construed in accordance with the laws
of the State of Connecticut.
___________________________________
Mario F. Rossi
<PAGE>
exhibit B
SECURITY AGREEMENT
This Security Agreement is made as of December 29, 1998 between
SmartServ Online, Inc., a Delaware corporation ("Pledgee"), and Mario F. Rossi
("Pledgor").
Recitals
Pursuant to Pledgor's purchase of Stock under the Restricted Stock
Purchase Agreement dated December 29, 1998, between Pledgor and Pledgee (the
"Purchase Agreement"), and Pledgor's election to pay for such Stock with his
promissory note (the "Note"), Pledgor has purchased 206,080 shares of Pledgee's
Common Stock (the "Shares") at a price of $2.19885 per share, for a total
purchase price of $453,139.01. The Note and the obligations thereunder are as
set forth in Exhibit A to the Purchase Agreement.
NOW, THEREFORE, it is agreed as follows:
1. Creation and Description of Security Interest. In consideration of
the transfer of the Shares to Pledgor under the Purchase Agreement, Pledgor,
pursuant to the Connecticut Uniform Commercial Code, hereby pledges all of such
Shares (herein sometimes referred to as the "Collateral") represented by
certificate number ______, duly endorsed in blank or with executed stock powers,
and herewith delivers said certificate to the Pledgee, who shall hold said
certificate subject to the terms and conditions of this Security Agreement.
The pledged stock shall be held by the Pledgee as security for the
repayment of the Note, and the Pledgee shall not encumber or dispose of such
Shares except in accordance with the provisions of this Security Agreement.
2. Pledgor's Representations and Covenants. To induce Pledgee to enter
into this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:
a. Payment of Indebtedness. Pledgor will pay the principal sum of
the Note secured hereby, together with interest thereon, at the time and in the
manner provided in the Note.
b. Encumbrances. The Shares are free of all other encumbrances,
defenses and liens, and Pledgor will not further encumber the Shares without the
prior written consent of Pledgee.
3. Voting Rights. During the term of this pledge and so long as all
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.
4. Stock Adjustments. In the event that during the term of the pledge
any stock dividend, reclassification, readjustment or other changes are declared
or made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
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<PAGE>
delivered to and held by the Pledgee under the terms of this Security Agreement
in the same manner as the Shares originally pledged hereunder. In the event of
substitution of such securities the Pledgor and the Pledgee shall cooperate and
execute such documents as are reasonable so as to provide for the substitution
of such Collateral and, upon such substitution, references to "Shares" in this
Security Agreement shall include the substituted shares of capital stock of
Pledgor as a result thereof.
5. Options and Rights. In the event that, during the term of this
pledge, subscription options or other rights or options shall be issued in
connection with the pledged Shares, such rights and options shall be the
property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Shares then held
by Pledgee shall be immediately delivered to Pledgee, to be held under the terms
of this Security Agreement in the same manner as the Shares pledged.
6. Default. Pledgor shall be deemed to be in default of the Note and of
this Security Agreement in the event:
a. Payment of principal or interest on the Note shall be
delinquent for a period of 10 days or more; or
b. Pledgor fails to perform any of the covenants set forth in the
Restricted Stock Purchase Agreement or contained in this
Security Agreement for a period of 10 days after written
notice thereof from Pledgee.
In the case of an event of Default, as set forth above, Pledgee shall have the
right to accelerate payment of the Note upon notice to Pledgor, and Pledgee
shall thereafter be entitled to pursue its remedies under the Connecticut
Uniform Commercial Code.
7. Release of Collateral. There shall be released from this pledge a
portion of the pledged Shares held by Pledgee here under upon payments of the
principal of the Note. The number of the pledged Shares which shall be released
shall be that number of full Shares which bears the same proportion to the
initial number of Shares pledged hereunder as the payment of principal bears to
the initial full principal amount (or in the event that the initial principal
amount on the Note has been adjusted pursuant to Section 1 of the Purchase
Agreement, the Adjusted Principal Amount) of the Note.
8. Withdrawal or Substitution of Collateral. Pledgor shall not sell,
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.
9. Term. The within pledge of Shares shall continue until the payment
of all indebtedness secured hereby, at which time the remaining pledged stock
shall be promptly delivered to Pledgor, subject to the provisions for prior
release of a portion of the Collateral as provided in paragraph 7 above.
10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency
proceeding is instituted by or against it, or if a receiver is appointed for the
property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall become immediately due and
payable, and Pledgee may proceed as provided in the case of default.
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<PAGE>
11. Invalidity of Particular Provisions. Pledgor and Pledgee agree that
the enforceability or invalidity of any provision or provisions of this Security
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.
12. Successors or Assigns. Pledgor and Pledgee agree that all of the
terms of this Security Agreement shall be binding on their respective successors
and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein
shall be deemed to include, for all purposes, the respective designees,
successors, assigns, heirs, executors and administrators.
13. Governing Law. This Security Agreement shall be interpreted and
governed under the laws of the State of Connecticut without regard to its
conflict of laws provisions.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"PLEDGOR" Mario F. Rossi
____________________________________________
(signature)
Address:
22 Split Rock Road
Trumbull, CT 06611
"PLEDGEE" SMARTSERV ONLINE, INC.
a Delaware corporation
By:________________________________________
Title:_____________________________________
