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, 1998
[ ] 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
incorporation or organization) (I.R.S. employer identification no.)
One Station Place, Stamford, Connecticut 06902
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (203) 353-5950
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Securities registered pursuant to Section 12(b) of the Exchange Act: None
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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 No X
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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.
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Issuer's revenues for its most recent fiscal year. $873,476
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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
January 14, 1999, was approximately $3,470,900. 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 1,199,787 shares of Common Stock outstanding at January 14, 1999.
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TABLE OF CONTENTS
Part I
Item Page
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1. Description of Business 3
2. Description of Property 8
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 9
Part II
5. Market for Common Equity and Related Stockholder Matters 10
6. Management's Discussion and Analysis or Plan of Operation 13
7. Financial Statements 19
8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 39
Part III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 40
10. Executive Compensation 42
11. Security Ownership of Certain Beneficial Owners and Management 44
12. Certain Relationships and Related Transactions 46
13. Exhibits and Reports on Form 8-K 47
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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
provides online information and transactional services to subscribers through
wireless personal communications systems ("PCS") devices, personal computers
("PCs"), personal digital assistants ("PDAs"), the Internet, interactive voice
response systems, alpha numeric paging devices and screen-based phones.
Effective June 1996, the Company exited the development stage with the
completion of its core application software and communications architecture and
has commenced the implementation of its marketing strategies.
Services
The Company is a single source information provider offering a range of services
designed to meet the varied needs of clients of strategic marketing partners
("Strategic Marketing Partners"). These services include: investment
newsletters, real-time stock quotes, business and financial news, research and
analysis reports, stock trading reports by corporate insiders, online FedEx
package tracking, private labeled electronic mail, sports information, national
weather reports, local news, and other business and entertainment information.
The Company's services are inherently flexible, allowing Strategic Marketing
Partners the opportunity to customize service packages for their specific needs
and providing end users with the ability to manage their information according
to their preferences. The Company provides such services pursuant to
non-exclusive agreements with providers of online information and transactional
services such as: The Weather Channel, The Options Price Reporting Authority,
S&P ComStock, Inc., Comtex, Inc., The Nasdaq Stock Market, Inc., and The New
York Stock Exchange, Inc. The Company is not dependent on one or a few
information providers as such redistribution agreements are generally available
on a non-exclusive basis.
The Company has invested in the development of proprietary applications software
and communications architecture in an attempt to make its services easy to use
and visually appealing and to attempt to take advantage of the different virtues
and capabilities of PCs, wireless PCS devices, PDAs, the Internet, interactive
voice response systems, alpha numeric pagers and screen-based phones. 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 enhancements to
existing 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 application
software and communications architecture represent an important competitive
advantage.
Subscribers can connect to the Company's services using standard phone lines,
the Internet or through a variety of wireless PCS devices. The Company believes
that its application software and communications architecture, which recognize
multiple devices (e.g., PCs, wireless PCS devices, PDAs, interactive voice
response systems, alpha numeric pagers and screen-based phones), format the
information for the particular device and present the information in a
user-friendly manner, make the Company's services "device independent". As new
technologies emerge, the Company anticipates that the flexibility of its
application software and communication architecture will allow its services to
be accessed through these newly developed devices.
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Marketing Strategy
Management believes that the Company's primary source of revenues will
ultimately be derived from end users that purchase the Company's services
through Strategic Marketing Partners with mass distribution capabilities. Thus,
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
package to their clients on wireless PCS devices, PCs, PDAs, interactive voice
response systems, alpha-numeric pagers and screen-based phones. The Company's
strategy of forming alliances with Strategic Marketing Partners that have
established relationships with its potential customers enables the Company to
maximize its market reach at minimal operating costs. The Company's application
software and communications architecture enables the customization of each
information package offered to each Strategic Marketing Partner, and in turn to
their end users. The use of this model has resulted in the distribution of
SmartServ information products by Data Transmission Network Corporation as
"DTNIQ", "TradeNet", and "BrokerNet"; Sprint/United Management Corp. as "Sprint
Information Services"; CIDCO Inc. as "CIDCO Information Services"; and ALLTEL
Communications Company as "ALLTEL Information Services". During the year ended
June 30, 1998, the Company discontinued its efforts to market products to the
retail market via its own direct marketing programs.
The Company continues to develop strategic marketing relationships with key
partners that provide access to large numbers of potential subscribers for its
monthly services. As an early entrant in the dynamic market of distribution of
financial information and trading services via wireless PCS devices, the Company
is developing strategic marketing relationships with the wireless equipment
manufacturers, carriers and potential corporate partners. 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 stock trading. The Company has partnered with and continues to seek
relationships with regional telephone operating companies, such as ALLTEL, long
distance carriers, such as Sprint, telephone equipment manufacturers, such as
Nortel, and others who distribute screen telephone equipment, market local
screen telephone services or otherwise benefit from the increased acceptance of
these devices in the marketplace. To these partners, the Company's services are
perceived as a means of increasing interest in and sales of screen-based
telephones and CLASS services, and there is thus a strong incentive to promote
the Company's services.
The Company is also working with businesses that desire to provide new services,
such as those provided by the Company, to an existing base of clients. As an
example, the Company entered into a contract with Data Transmission Network
Corporation ("DTN") whereby 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
and delivery system. SmartServ Online filled that need. The Company continues to
seek relationships with other brokerage firms and disseminators of financial
information, whose clients can benefit from the efficiency, convenience and
timeliness of the information services provided by the Company. The high quality
of the Company's services and systems' architecture continues to draw interest
from potential partners.
While the Company continues to have discussions about potential marketing
opportunities with major telecommunications and stock brokerage companies, there
can be no assurance that the Company will enter into agreements with any such
companies.
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Marketing Vehicles
The Company intends to continue to work with its current and potential Strategic
Marketing Partners to enhance the efficiency and effectiveness of their
marketing and distribution efforts. Through the use of this model, the customer
is a customer of both SmartServ and its Strategic Marketing Partner.
Accordingly, both parties have an economic incentive to provide the Company's
information services to the Strategic Marketing Partners' customers. While each
Strategic Marketing Partner approaches the market differently depending on its
business strategy, consumer mix and competitive situation, they generally test a
variety of marketing and selling options to determine the most cost effective
technique to obtain the maximum number of customers in the least amount of time.
The Company offers technical and marketing support to enhance the effectiveness
of a potential Strategic Marketing Partner's marketing efforts. For example, the
design and preparation of the specific product offering, collateral and other
promotional materials will be coordinated with a potential Strategic Marketing
Partner to reflect the best overall positioning of the product to the customer.
The Company's services are priced, as determined by the Company and the
Strategic Marketing Partner, based on a pre-negotiated monthly base charge and
transaction fees derived from specific value-added services purchased by
customers.
Competition
The market for online information and transactional services is highly
competitive and subject to rapid innovation and technological change, shifting
consumer preferences and frequent new service introductions. 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 PCs, such as developing transactional services
offered by Checkfree Corporation, Microsoft Corp., Data Broadcasting
Corporation, PC Quote, Inc., Intuit Inc., Electronic Data Systems Corp. and
other software and online companies. Although in its infancy, the wireless arena
too has its competitors, such as DataLink Systems Corporation, Intelligent
Information, Inc. and AirMedia. 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 any one content
provider, existing and potential competitors may enter into agreements with
these and other such providers and thereby acquire the ability to deliver online
information and transactional services substantially similar to those provided
by the Company.
The principal competitive factors in the online services industry include
content, product features and quality, ease of use, access to distribution
channels, brand recognition, reliability and price. Management believes the
strategy of establishing alliances with potential Strategic Marketing Partners,
and its ability to provide what is believed to be unique application software
and communications architecture should enable the Company to compete
effectively.
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Software
The Company has developed a proprietary application software and communications
architecture that it believes makes its services easy to use and visually
appealing, and which utilize the capabilities of wireless PCS devices, PCs,
PDAs, the Internet, interactive voice response systems, alpha-numeric pagers and
screen-based phones.
SmartServ's user-friendly front-end application software is designed to
accommodate instant access to information and to be flexible 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. 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, 1998, 1997 and 1996, the Company incurred
costs of $923,082, $1,150,224 and $1,037,941, respectively, for research and
project development activities.
Proprietary Rights
The Company has designed and developed its own "device independent" information
platform, "SmartServ", based on Sun Microsystems, Inc. computers and Oracle
Corp.'s version 7.X relational database manager, to support a variety of end
user devices. This platform formats information for a particular device and
presents it in a user friendly manner. The Company relies upon a combination of
contract provisions and copyrights, trade secret laws, and a service mark 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.
The Company seeks to protect the source code of its software as a trade secret
and as an unpublished copyrighted work. The Company has obtained an allowance of
its U.S. trademark application for the mark "SmartServ Online" for the computer
software used with its platform services and expects a U.S. trademark
registration for the mark to be granted in the near future. This registration
will have an initial term of 10 years and be renewable indefinitely for
successive 10-year terms upon filing proof of continued use of the mark. The
Company has also filed an intent-to-use application to register "SmartServ
Online" as a service mark for its platform services and as a trademark for
related computer hardware. The Company believes that its software, services,
service mark and other proprietary rights do not infringe on the proprietary
rights of third parties. From time to time, however, the Company may receive
communications from third parties asserting that features or contents of certain
of its services may infringe upon copyrights or other rights of such parties. To
date, the Company has received one such communication, dated May 23, 1995, but
believes that the assertion contained therein is without merit. Since the
receipt of such letter, the Company has not received further correspondence.
There can be no assurance that other third parties will not assert infringement
claims against the Company with respect to current features, content or services
or that any such assertion may not require the Company to enter into royalty
arrangements or result in litigation.
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Government Regulation
The Company is not currently subject to direct regulation other than federal and
state regulation generally applicable to businesses. However, changes in the
regulatory environment relating to the telecommunications and media industry
could have an effect on the Company's business, including regulatory changes
which directly or indirectly affect telecommunication costs or increase the
likelihood or scope of competition from regional telephone companies.
Additionally, legislative proposals from international, federal and state
governmental bodies in the areas of content regulation, intellectual property
and privacy rights, as well as federal and state tax issues could impose
additional regulations and obligations upon all online service providers. The
Company cannot predict the likelihood that any such legislation will pass, or
the financial impact, if any, the resulting regulation or taxation may have.
Moreover, the applicability to online service providers of existing laws
governing issues such as intellectual property ownership, libel and personal
privacy is uncertain. Recent events relating to the use of online services for
illegal activities have increased public focus and could lead to increased
pressure on legislatures to impose regulations on online service providers such
as the Company. The law relating to the liability of online service companies
for information carried on or disseminated through their systems is currently
unsettled and has been the subject of several recent private lawsuits. If
similar actions were to be initiated against the Company, costs incurred as a
result of such actions could have a material adverse effect on the Company's
business.
Employees
The Company employs 21 people, 18 of whom are full-time employees. It is
anticipated that a minimum of 3 to 6 people will be added during the period
ending June 30, 1999, in response to the computer programming requirements of
Strategic Marketing Partners' product offerings and for customer support.
Additionally, management anticipates that 2 to 3 people will join the Company in
sales and marketing positions during the period ending June 30, 1999. 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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On or about December 15, 1997, Steven T. Francesco, then President and Chief
Operating Officer of the Company, filed a complaint against the Company,
Sebastian E. Cassetta (its Chairman of the Board and Chief Executive Officer),
Bruno Guazzoni, Claudio Guazzoni, Zanett Securities, Inc. and Zanett Capital,
Inc. in the Supreme Court of the State of New York, County of New York. On
February 6, 1998 the Board of Directors terminated Mr. Francesco's employment
with the Company as its President and Chief Operating Officer. In a motion for
an amended complaint Mr. Francesco alleged, among other things, that the Company
breached the terms of its employment agreement with him. The proposed amended
complaint seeks damages against the Company and certain of its directors for his
wrongful termination in an amount of at least $50 million and damages for fraud
in an unspecified amount.
By an agreement dated November 11, 1998 ("Agreement"), Mr. Francesco has agreed
to settle this action and to resolve all of his claims against the above
referenced parties. In consideration thereof, Mr. Francesco is due, under the
Agreement, to receive $305,000, payable in two installments: $200,000 on or
before January 31, 1999 and $105,000 on or before February 28, 1999.
Additionally, Mr. Francesco has rceived, under the Agreement, 125,000 shares of
SmartServ Common Stock and warrants to purchase 16,667 shares of Common Stock
exercisable at $5.00 per share until November 11, 2001. However, in the event
that the Company fails to make the above referenced cash payments in a timely
fashion, Mr. Francesco would have the right to pursue this action against the
above referenced parties, except that his sole remedy against the Company would
be to enter judgment against it in the amount of $305,000, less any cash
received pursuant to the Agreement.
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 in the United States District Court for the District of
Connecticut against the Company, Sebastian E. Cassetta, Claudio Guazzoni, Zanett
Securities Co., Zanett Capital Corp. and Zanett Lombardier Ltd. On or about
August 20, 1998, Mr. Fishman served an amended complaint, alleging, among other
things, that (i) he relied on false statements that the Company allegedly made,
in filings with the Securities and Exchange Commission and otherwise, in
accepting a position with the Company and (ii) the Company constructively
discharged him by breaching the terms of its employment agreement with him. The
amended complaint seeks to assert claims for (i) fraud and other violations
under the federal securities laws, (ii) breach of various terms of the Company's
employment agreement with Mr. Fishman, (iii) breach of the implied duty of good
faith and fair dealing, (iv) fraudulent misrepresentation, (v) negligent
misrepresentation, (vi) intentional misrepresentation and (vii) failure to pay
wages. The amended complaint seeks damages against the Company in an unspecified
amount. The Company expects to move to dismiss the amended complaint, and the
Court has issued an order setting a schedule for the briefing of that motion. No
discovery in this action has yet been noticed or taken. Although the Company is
vigorously defending this action, there can be no assurance that it will be
successful.
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 company of which Mr. Francesco allegedly was the
President and a majority 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.
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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% of the Company's equity shares and (iii) restitution against Mr. Francesco
and the Company for unjust enrichment. On his unjust enrichment claim, Mr.
Weiner seeks unspecified damages that he alleges to be at least $250,000. In its
answer to the complaint, the Company has denied the material allegations of the
complaint, 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. No discovery in this
action has yet been taken. Although the Company is vigorously defending this
action and vigorously prosecuting its cross-claims, there can be no assurance
that it will be successful. 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.
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 his
fraudulent inducement and breach of contract claims, Mr. Paschkes seeks
unspecified damages that he alleges to be at least $2,000,000 for each. On his
failure to pay wages claim, Mr. Paschkes seeks unspecified actual and punitive
damages that he alleges to be at least $200,000. 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.
While the Company intends to vigorously defend these actions, the unfavorable
outcome of any such action could have a material adverse effect on the Company's
financial condition, results of operations, and cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
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None.
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Part II
Item 5. Market for Common Equity and Related Stockholder Matters
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SmartServ's $.01 par value common stock ("Common Stock") commenced trading on
March 21, 1996 on the over-the-counter market and is quoted on the National
Association of Securities Dealers' Automated Quotation System ("NASDAQ"). The
Company's Redeemable Common Stock Purchase Warrants ("Public Warrants") also
commenced trading on March 21, 1996 on the NASDAQ SmallCap Market.
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 above mentioned Reverse Stock Split.
Common Stock Warrants
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High Low High Low
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Year Ended June 30, 1998
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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
Year Ended June 30, 1997
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First Quarter $ 45.000 $ 28.500 $ 23.250 $ 15.000
Second Quarter 38.250 25.500 19.500 7.500
Third Quarter 32.250 26.250 12.375 7.875
Fourth Quarter 27.750 11.250 9.000 3.187
As of December 1, 1998, the Company had 1,183,317 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 337,500 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 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.
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On July 14, 1995, the Company sold 4,166 shares of Common Stock for an aggregate
purchase price of $100,000 to John E. Herzog and, for nominal consideration,
issued a warrant to purchase an additional 4,166 shares of Common Stock at an
exercise price of $24.00 per share to Mr. Herzog. No sales commissions were paid
in connection with such offering. The securities were issued in reliance on the
exemption from registration provided by Section 4 (2) of the Securities Act.
On August 24, 1995, the Company sold 2,083 shares of Common Stock for an
aggregate purchase price of $50,000 to each of Emanuel E. Geduld and Andrew
DaPonte and, for nominal consideration, issued a warrant to purchase an
additional 2,083 shares of Common Stock at an exercise price of $24.00 per share
to Mr. Geduld and warrants to purchase 3,750 shares of Common Stock at an
exercise price of $24.00 per share to Mr. DaPonte. On August 24, 1995, the
Company also sold an aggregate of 1,250 shares of Common Stock to Anchung Sammy
Chung and Fong-Chi Alison Tsao for an aggregate purchase price of $30,000 and,
for nominal consideration, issued to them a warrant to purchase an additional
1,250 shares of Common Stock at an exercise price of $24.00 per share. No sales
commissions were paid in connection with such offerings. The securities were
issued in reliance on the exemption from registration provided by Section 4 (2)
of the Securities Act.
Between October 1995 and December 1995, the Company sold 40 Units to 25
investors who subscribed to purchase such Units pursuant to the Confidential
Offering Memorandum dated September 22, 1995, as amended by a letter dated
October 12, 1995, at a price of $25,000 per Unit, each Unit consisting of a
$25,000 promissory note and a warrant to purchase 833 shares of Common Stock at
an exercise price of $24.00 per share. Rickel and Associates, Inc. ("Rickel")
acted as placement agent for the Company for such private placement and received
a commission of $100,000 for its services and a non-refundable, non-accountable
expense allowance of $30,000. The securities were issued in reliance on the
exemption from registration provided by Section 4 (2) of the Securities Act.
On February 1, 1996, the Company issued a $200,000 promissory note and agreed to
issue warrants to purchase 16,667 shares of Common Stock to Henry Snow for
$200,000. The warrants were issued in March 1996 and have an exercise price of
$24.00 per share. Rickel received a commission of $26,000 for its services in
connection with such transaction. The securities were issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act.
On February 28, 1996, the Company issued 2,791 shares of Common Stock to
InterBank Communications, Inc. in accordance with the anti-dilution provisions
of an agreement with it and 19,425 shares of Common Stock to The Strategica
Group in accordance with the terms of a Standby Revolving Credit Agreement
Proposal. No sales commissions were paid in connection with such transactions.
The securities were issued in reliance on the exemption from registration
provided by Section 4 (2) of the Securities Act.
In March 1996, the Company issued 71,289 shares of Common Stock to six holders
of convertible subordinated notes in redemption of $612,500 principal amount of
such notes and accrued interest thereon. No sales commissions were paid in
connection with such transaction. The stock was issued in reliance upon the
exemption from registration provided by Section 3 (a) (9) of the Securities Act.
During April and May 1997, the Company agreed to issue warrants to purchase
33,333 shares of Common Stock to Rickel, the Company's underwriter, for
investment advisory services. Such warrants are exercisable at prices ranging
from $12 to $24 per share and expire in April and May 2002.
On May 29, 1997, the Company issued a $550,000 promissory note and warrants to
purchase 33,333 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 and additional
6,733 shares of Common Stock to ZLL for $111,111. The warrants have exercise
prices of $6.75 and $8.25 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 11,700 shares of Common
Stock. Such warrants have exercise prices of $6.75 and $8.25. 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.
-11-
<PAGE>
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 were $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 100,000 shares of Common Stock at $6.75 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 83,333 warrants to Bruno Guazzoni and,
subject to stockholder approval (which was subsequently obtained), agreed to
issue to him warrants to purchase an additional 509,259 shares of Common Stock.
These additional warrants were issued in April 1998. The warrants have an
exercise price of $6.75 per share. No sales commissions were paid in connection
with such transaction. The warrants were issued in reliance upon the exemption
from registration provided by Section 4 (2) of the Securities Act.
Between January 13, 1998 and November 30, 1998, an aggregate of 1696 Prepaid
Warrants were converted into an aggregate of 392,483 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 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 August 31, 1998, the Company issued 32,953 shares of Common Stock to ZLL and
17,046 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
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 agreed to issue 3,000 common stock purchase
warrants 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.
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.
Between November 20, 1998 and December 3, 1998, the Company issued warrants to
purchase 833,333 shares of Common Stock to investors in connection with the
issuance of $500,000 of convertible notes. Spencer Trask Securities Inc., 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 Securities, Inc. exercisable at $.72 per share. These warrants were issued
in reliance upon the exemption from registration provided by Section 4 (2) of
the Securities Act.
On January 14, 1999, the Company issued 10,000 shares of Common Stock to Arnhold
& S. Bleichroeder, Inc., an investor in the Company's Prepaid Warrants, in
consideration of an agreement to waive certain events of default under such
Prepaid Warrants. No commissions were paid in connection with such transaction.
These shares were issued in reliance upon the exemption from registration
provided by Section 4 (2) of the Securities Act.
-12-
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation
- ------
Plan of Operation
The Company provides online information and transactional services through
wireless PCS devices, PCs, PDAs, the Internet, interactive voice response
systems, alpha-numeric paging devices and screen-based telephones to clients of
potential Strategic Marketing Partners. Effective June 1996, the Company exited
from the development stage with the completion of its core application software
and communications architecture and has commenced the implementation of its
marketing strategies.
The Company's plan of operation includes programs for marketing and developing
strategic marketing relationships with key partners that provide access to large
numbers of potential subscribers for its monthly services. The Company's
strategy of forming alliances with Strategic Marketing Partners that have
established relationships with its potential customers enables the Company to
maximize its market reach at minimal operating costs. The flexibility of the
Company's application software and communications architecture enables the
customization of each information package offered to each Strategic Marketing
Partner, and in turn to their end users. The use of this model has resulted in
the distribution of SmartServ information products by Data Transmission Network
Corporation as "DTNIQ", "TradeNet" and "BrokerNet", Sprint/United Management
Corp. as "Sprint Information Services", CIDCO Inc. as "CIDCO Information
Services" and ALLTEL Communications Company as "ALLTEL Information Services".
As an early entrant in the dynamic market of distribution of financial
information and trading services via wireless devices, the Company is developing
strategic marketing relationships with wireless equipment manufactures, carriers
and potential corporate partners. Management believes the wireless area has
tremendous potential for distribution of the Company's information products and
as source of revenues from "fee based" transactions such as stock trading.
The Company has partnered with and continues to seek relationships with regional
telephone operating companies, such as ALLTEL, long distance carriers, such as
Sprint, telephone equipment manufacturers, such as Nortel, and others who
distribute screen telephone equipment, market local screen telephone services or
otherwise benefit from the increased acceptance of these devices in the
marketplace. To these partners, the Company's services are perceived as a means
of increasing interest in and sales of screen telephones and CLASS services, and
there is thus a strong incentive to promote the Company's services.
The Company is also working with businesses that desire to provide new services,
such as those provided by the Company, to an existing base of clients. By
providing this branding flexibility, the Company has been able to expand the
number of businesses interested in forming relationships with it, and has the
ability to market its services under far more recognizable brand names than its
own.
Management believes that most of the Company's revenues will ultimately be
derived from end users who purchase the Company's services through Strategic
Marketing Partners with mass distribution capabilities. The Company anticipates
that Strategic Marketing Partners will brand the Company's "bundled" information
services with their own private label, promote the packaged offering and then
distribute the Company's information package on wireless PCS devices, PCs, PDAs,
the Internet, interactive voice response systems, alpha-numeric pagers and
screen-based phones to their clients. The Company has the ability to customize
the information package to be offered to each Strategic Marketing Partner, and
in turn to their end users. With the licensing of three of the Company's
Internet products by DTN, the Company has discontinued efforts to develop a
direct subscriber base.
-13-
<PAGE>
Management anticipates that staffing requirements associated with the
implementation of its plan of operation will result in the addition of a minimum
of 3 to 6 personnel during the period ending June 30, 1999. Such personnel will
be added to assist with the programming requirements of Strategic Marketing
Partners' product offerings and for customer support. Additionally, management
anticipates that 2 to 3 people will join the Company in sales and marketing
positions during the period ending June 30, 1999.
Results of Operations
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. 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, 1988, such costs were incurred primarily
for personnel costs ($898,300), facilities ($209,800), marketing costs
($143,300), advertising costs ($97,100), professional fees ($1,051,400),
telecommunications costs ($73,100), and settlement of litigation ($450,750).
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), facilities ($49,500), and settlement of litigation ($450,750).
Such increases were offset by decreases in marketing expenses ($158,400),
advertising expenses ($442,500), and personnel costs ($38,200). 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 issued 220,395 shares of Common Stock in 1998 upon the exercise of
Prepaid Warrants, thereby reducing the per share loss.
-14-
<PAGE>
Fiscal Year Ended June 30, 1997 versus Fiscal Year Ended June 30, 1996
During the year ended June 30, 1997, the Company commenced the implementation of
its marketing plan and recorded revenues of $346,361 from the sale of its
information services and related screen-based telephones. Additionally, the
Company recorded revenues of $342,249 related to enhancement, implementation,
and marketing of services associated with its arrangement with Schroder & Co.,
Inc. As the Company was previously a development stage enterprise, no such
revenues existed during the fiscal year ended June 30, 1996.
During the year ended June 30, 1997, with the Company's departure from the
development stage, it incurred costs of revenues of $1,133,884. Such costs
consisted primarily of information and communication costs ($390,000), personnel
costs ($417,500), computer hardware leases and maintenance ($201,800) and
screenphone purchases ($95,300). Product development costs were $1,150,224 vs.
$1,037,941 for the year ended June 30, 1996. Such costs consisted primarily of
personnel costs ($686,100) and computer system consultants ($454,000). Included
in personnel costs is a non-cash charge of approximately $73,000 for the change
in market value of employee stock options. During the year ended June 30, 1996,
such product development expenses consisted primarily of personnel costs.
Included therein were fees of $103,500 that were received from Strategic
Marketing Partners for the design and development of software applications.
During the year ended June 30, 1997, the Company incurred selling, general and
administrative expenses of $2,861,845 vs. $1,220,340 for the year ended June 30,
1996. Such costs were incurred primarily for personnel costs ($936,500),
facilities ($160,300), marketing costs ($301,700), advertising costs ($540,000),
professional fees ($458,600), and telecommunications costs ($85,900). Included
in personnel costs is a non-cash charge of approximately $115,000 related to the
change in value of employee stock options. Selling, general and administrative
costs increased $1,641,505 over the prior year as a result of the Company's
efforts to build an infrastructure capable of supporting its operations and the
marketing and advertising of its information product offering. Such cost
increases were primarily for advertising ($382,000), marketing and customer
support personnel ($231,000), marketing consultants ($125,000), professional
fees ($235,000), investor and public relations consulting ($102,300), financial
consulting fees ($115,000), and for additional managerial personnel and salaries
($125,000). The necessary funds to support these efforts were provided by the
Company's Initial Public Offering ("IPO") in March 1996 and revenues from
information sales and services.
Interest income for the year ended June 30, 1997 amounted to $74,507 vs. $51,527
for the year ended June 30, 1996. Such amounts were earned primarily from the
Company's investments in highly liquid commercial paper. Interest and financing
costs for the year ended June 30, 1997 were $51,646. Such amounts were incurred
in connection with the issuance of short-term notes payable and associated
common stock purchase warrants. Interest and financing costs for the year ended
June 30, 1996 were incurred in connection with the senior and subordinated
notes, as well as the bridge financing outstanding during the period and
amounted to $759,533.
Capital Resources and Liquidity
Since inception of the Company on August 20, 1993 through March 21, 1996, the
date of the IPO, the Company had funded its operations through a combination of
private debt and equity financings totaling $3,610,000 and $12,877,500
respectively.
The IPO of 282,500 common shares and 287,500 common stock purchase warrants on
March 21, 1996 provided the Company with gross proceeds of $8,647,500. Direct
costs associated with the IPO were approximately $1,589,000. In conjunction with
the IPO, the Company converted one-half of certain
-15-
<PAGE>
convertible subordinated debt and accrued interest thereon into 71,289 shares of
Common Stock at a conversion rate of $9.90 per share. The remainder of the debt
and accrued interest thereon, totaling $705,763, was repaid from the proceeds of
the IPO. Additionally, the Company retired senior notes amounting to $462,502,
as well as the short-term notes amounting to $1,200,000.
In May 1997, the Company arranged a line of credit facility with a financial
institution. Such line of credit was originated for a maximum borrowing amount
of $550,000. In July and September 1997, the facility was amended to allow for
additional borrowings of up to $222,222. In conjunction with the origination of
the line of credit facility, the Company issued 41,666 common stock purchase
warrants to the financial institution. Similarly, the Company issued 8,416
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 108,581 warrants are
exercisable at prices ranging from $4.50 to $8.25 and expire in September 2002.
In accordance with Financial Accounting Standard No. 123 "Accounting for Stock
Based Compensation" the Company has recorded a charge to earnings of $463,567,
representing the value ascribed to such warrants using the Black-Scholes option
pricing methodology.
In May 1997, the Company entered into a 3 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.
In September 1997, the Company entered into a three year agreement with
Sprint/United Management Corp. with respect to the expansion of its services
provided pursuant to a March 1997 agreement. Such agreement provided for the
potential deployment of the Company's services on a nationwide basis. In April
1998, the Company entered into an agreement with DTN, whereby the Company
licensed to DTN the rights to market three of the Company's Internet products.
The Company received $850,000 upon execution of the contract and will receive
minimum monthly payments of $100,000 through April 1999. Thereafter, cash flow
from license fees will be determined as a percentage of revenues earned by DTN
through sales to its customers. Additionally, DTN has agreed to absorb the costs
associated with the expansion of the computer and communications hardware
necessary to support the expansion of the user base. Although the Company
believes that both Sprint and DTN have the experience and the financial ability
to distribute the Company's services to thousands of potential customers, there
can be no assurance that the products and services will be accepted by the
ultimate consumer on a 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") (the
"Letter of Intent") 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 (the "Further Placement"). The Further Placement is conditioned upon the
occurrence of the Reverse Stock Split which was effective on October 26, 1998.
The Letter of Intent provides that the Company will offer a minimum of 50 units
and a maximum of 100 units at a gross purchase price of $100,000, each unit
consisting of shares of convertible preferred stock (the "Preferred Shares").
The number of Preferred Shares will be determined by dividing the unit price of
$100,000 by the conversion price (the "Placement Conversion Price"), which is
anticipated to be equal to 75% of the average closing bid price for the
Company's Common Stock for the 15 days following the effective date of the
Reverse Stock Split, which was $1.019 per share. The Preferred Shares will be
convertible by the holder into
-16-
<PAGE>
shares of Common Stock on a one-to-one basis at any time prior to the expiration
of a 30-day period commencing upon the giving of notice of redemption by the
Company. After two years, the Preferred Shares will be redeemable at the
Company's option at 110% of the purchase price for Preferred Shares in the event
that the average closing price of the Common Stock for the 20 trading days
preceding the notice of redemption exceeds 150% of the Placement Conversion
Price. The Preferred Shares will receive an 8% annual dividend payable
semi-annually, in-kind or in cash at the Company's option. No assurance can be
given that the Further Placement will be consummated. In connection with the
Further Placement, Spencer Trask will receive, in addition to customary fees and
expenses, five (5) year warrants (the "Placement Warrants") to purchase Common
Stock at 120% of the offering price per share in an amount equal to 10% of the
Preferred Shares contained in the units sold in the Further Placement. The
Placement Warrants will contain certain demand and piggyback registration rights
with respect to the shares of Common Stock into which the Placement Warrants are
convertible.
On November 24, 1998, the Company completed an interim financing of $500,000 of
securities of the Company. The Company offered five (5) units, each consisting
of a of a secured convertible note in the principal amount of $100,000 and
warrants to purchase Common Stock of the Company. The notes and the warrants are
convertible and exercisable, respectively, at $.60 per share of Common Stock.
The Convertible Notes, which are secured by all of the Company's assets, will
mature on the earlier to occur of (i) the closing of the Further Placement or
(ii) November 15, 1999. The Convertible Notes may be prepaid without premium or
penalty. Upon the closing of the Further Placement, the holders of the
Convertible Notes will have the right to require the Company to redeem for cash
fifty percent (50%) of the Convertible Notes they own. The remaining Convertible
Notes will be converted into units in the Further Placement. The Convertible
Notes will bear interest at eight percent (8%) per annum, payable semi-annually,
in kind or in cash at the Company's option. The Company has agreed to register
the shares of Common Stock issuable upon exercise of the warrants and conversion
of the notes. In addition to customary fees and expenses, the Placement Agent
has received for nominal consideration, warrants to purchase ten percent (10%)
of the shares of Common Stock of the Company issuable on conversion of the notes
and exercise of the warrants at one hundred twenty percent (120%) of the
conversion price of the notes.
Additionally, the Company entered into agreements with certain warrant holders
pursuant to which, among other things, the Company (i) agreed to acquire on the
date the Further Placement commences warrants to purchase 801,175 shares of
Common Stock from such holders in exchange for the issuance by the Company of an
aggregate of 342,842 shares of Common Stock (the "Warrant Redemption"), which
shares may not be sold (except privately) for a period of eighteen (18) months
following the final closing of the Further Placement or September 1, 2000,
whichever is earlier, and (ii) has issued 50,000 shares of Common Stock to the
holders of $1,669,000 of Prepaid Warrants in consideration of such holders
agreeing to similar restrictions on the exercise of the Prepaid Warrants and the
resale of the shares of Common Stock issuable upon such exercise.
The Company's financial statements for the year ended June 30, 1998 have been
prepared on a going concern basis which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business. The Company incurred net losses of $5,040,009, $4,434,482, and
$2,966,287 for the years ended June 30, 1998, 1997, and 1996 respectively, and
as of June 30, 1998 had an accumulated deficit of $14,821,879. In addition, the
Company has a working capital deficiency of $1,850,287 and a deficiency of net
assets of $1,246,861. Lastly, the Company is a defendant in several legal
proceedings 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 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. Additionally, no
assurance can be given that the Company will consummate the Further Placement.
In the event the Further Placement is not consummated, by February 28, 1999,
Management will be required to seek alternative financing vehicles, consider a
sale or merger of the Company or terminate its operations.
-17-
<PAGE>
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 compliant. As part
of the process to ascertain Year 2000 compliance, the Company has queried its
software vendors and third party information providers and is presently updating
third party software and/or waiting for letters of compliance. The Company has
also queried hardware vendors as to Year 2000 compliance issues associated with
embedded software. In addition, the Company is in the process of reviewing its
proprietary application software for proper compliance.
It is anticipated that the Year 2000 Compliance issue will be substantially
completed by June 1999, at an estimated cost of not to exceed $120,000. The
Company anticipates that extensive testing will continue through 1999.
The Company is working diligently to assure that all systems are Year 2000
compliant because failure to do so could have a material adverse effect on the
Company's ability to offer its financial services software and thus generate
revenue.
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, 1998 and 1997 21
Statements of Operations for the years
ended June 30, 1998, 1997 and 1996 23
Statement of Stockholders' Equity (Deficiency)
for the years ended June 30, 1998, 1997 and 1996 24
Statements of Cash Flow for the years
Ended June 30, 1998, 1997 and 1996 26
Notes to Financial Statements 27
-19-
<PAGE>
Report of Independent Auditors
Stockholders and Board of Directors
SmartServ Online, Inc.
We have audited the accompanying balance sheets of SmartServ Online, Inc. as of
June 30, 1998 and 1997, and the related statements of operations, stockholders'
equity (deficiency), and cash flows for each of the three years in the period
ended June 30, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 1998, 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
December 9, 1998
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<PAGE>
SmartServ Online, Inc.
Balance Sheets
<TABLE>
<CAPTION>
June 30
-----------------------------------------
1998 1997
--------------------- -------------------
<S> <C> <C>
Assets
Current assets
Cash $ 354,225 $ 93,345
Accounts receivable, net of an allowance
for losses of $0 in 1998 and $6,000 in 1997 111,051 149,782
Prepaid expenses 130,603 90,725
--------------------- -------------------
Total current assets 595,879 333,852
--------------------- -------------------
Property and equipment, net 610,537 743,714
Other assets
Deferred charges -- 87,905
Security deposit 70,437 81,218
--------------------- -------------------
70,437 169,123
--------------------- -------------------
Total Assets $ 1,276,853 $ 1,246,689
===================== ===================
</TABLE>
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<PAGE>
SmartServ Online, Inc.
Balance Sheets
<TABLE>
<CAPTION>
June 30
-----------------------------------------
1998 1997
-------------------- --------------------
<S> <C> <C>
Liabilities and Stockholders' Deficiency
Current liabilities
Accounts payable $ 800,545 $ 829,355
Accrued liabilities 736,137 211,813
Accrued interest -- 16,323
Payroll taxes payable 4,294 20,383
Salaries payable 53,014 46,018
Current portion of capital lease obligation 76,127 86,072
Deferred revenues 776,049 24,914
-------------------- --------------------
Total current liabilities 2,446,166 1,234,878
-------------------- --------------------
Long-term portion of capital lease obligation 77,548 160,139
Notes payable -- 550,000
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 - 836,227 at June 30, 1998
and 615,832 shares at June 30, 1997 8,362 6,158
Additional paid-in capital 18,184,580 9,077,384
Unearned compensation (4,617,924) --
Accumulated deficit (14,821,879) (9,781,870)
-------------------- --------------------
Total stockholders' deficiency (1,246,861) (698,328)
-------------------- --------------------
Total Liabilities and Stockholders' Deficiency $ 1,276,853 $ 1,246,689
==================== ====================
</TABLE>
See accompanying notes.
-22-
<PAGE>
SmartServ Online, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Year Ended June 30
-----------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 873,476 $ 688,610 $ --
-----------------------------------------------------------
Costs and expenses
Cost of services (1,216,761) (1,133,884) --
Product development expenses (923,082) (1,150,224) (1,037,941)
Selling, general and administrative
expenses (3,221,940) (2,861,845) (1,220,340)
-----------------------------------------------------------
Total costs and expenses (5,361,783) (5,145,953) (2,258,281)
-----------------------------------------------------------
Loss from operations (4,488,307) (4,457,343) (2,258,281)
-----------------------------------------------------------
Other income (expense):
Interest income 40,788 74,507 51,527
Interest expense (57,485) (20,194) (242,000)
Debt origination costs (535,005) (31,452) (517,533)
-----------------------------------------------------------
(551,702) 22,861 (708,006)
-----------------------------------------------------------
Net loss $ (5,040,009) $ (4,434,482) $ (2,966,287)
===========================================================
Basic and diluted earnings per share $ (7.65) $ (7.20) $ (7.56)
===========================================================
Weighted average shares outstanding 659,034 615,833 392,500
===========================================================
</TABLE>
See accompanying notes.
-23-
<PAGE>
SmartServ Online, Inc.
Statement of Stockholders' Equity (Deficiency)
<TABLE>
<CAPTION>
Common Stock Additional
----------------------------- Paid-in Unearned Accumulated
Shares Par Value Capital Compensation Deficit
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1995 295,833 $ 2,958 $ 333,997 $ -- $ (2,381,101)
Issuance of common stock and warrants to
investors at $24.00 9,583 96 229,904
Issuance of warrants in conjunction with the
$1,200,000 of bridge notes 30,000
Cancellation of 65,589 shares previously issued
to officers (65,589) (655) 655
Issuance of common stock at $30.00 per share and
287,500 warrants at $0.60 per warrant, net of
direct costs of the offering of $1,588,852 282,500 2,825 7,055,823
Issuance of common stock for redemption of the
$612,500, 12% convertible subordinated notes
and accrued interest thereon 71,289 713 705,050
Issuance of common stock to a financing
intermediary for arrangement of a standby
revolving credit proposal 19,425 194 232,906
Issuance of common stock to an investor in
accordance with the terms of the $312,500, 12%
notes 2,791 27 33,473
Other issuances of warrants 1,510
Issuance of employee stock options 165,773
Net loss (2,966,287)
--------------------------------------------------------------------------------
Balances at June 30, 1996 615,832 6,158 8,789,091 -- (5,347,388)
Change in market value of employee options 188,293
Issuance of warrants in connection with
investment advisory services 75,000
Issuance of warrants in connection with
short-term line of credit 25,000
Net loss (4,434,482)
--------------------------------------------------------------------------------
Balances at June 30, 1997 615,832 $ 6,158 $ 9,077,384 $ -- $ (9,781,870)
--------------------------------------------------------------------------------
</TABLE>
(Continued)
See accompanying notes.
-24-
<PAGE>
SmartServ Online, Inc.
Statement of Stockholders' Equity (Deficiency)
<TABLE>
<CAPTION>
(Continued)
Common Stock Additional
------------------------------- Paid-in Unearned Accumulated
Shares Par Value Capital Compensation Deficit
-------------------------------------------------------------------------------
<S> <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 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 over the
term of the agreement -- -- -- 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>
SmartServ Online, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30
-----------------------------------------------------
1998 1997 1996
-----------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net loss $ (5,040,009) $ (4,434,482) $ (2,966,287)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 193,601 149,182 41,285
Provision for losses on and write-off of receivables (1,300) 29,248 --
Noncash charges for interest expense 52,837 -- 94,274
Noncash debt origination costs 475,527 30,449 477,089
Compensation expense -- 188,293 165,773
Consulting services 660,576 75,000 (10,002)
Amortization of unearned revenues (251,058) -- --
Settlement of litigation 145,750 -- --
Other changes that provided (used) cash
Accounts receivable 40,031 (121,040) (57,990)
Inventories -- -- 10,440
Prepaid expenses (25,878) (22,415) (23,641)
Accounts payable and accrued liabilities 349,764 558,317 178,136
Accrued interest (5,323) 16,323 (106,595)
Payroll taxes payable (16,089) 5,482 (73,282)
Salaries payable 6,996 1,364 16,462
Unearned revenue 1,002,193 24,914 --
Security deposit reduction 10,781 -- --
-----------------------------------------------------
Net cash used in operating activities (2,401,601) (3,499,365) (2,254,338)
-----------------------------------------------------
Investing Activities
Purchase of equipment (60,424) (351,786) (190,973)
-----------------------------------------------------
Net cash used in investing activities (60,424) (351,786) (190,973)
-----------------------------------------------------
Financing Activities
Proceeds from the issuance of common stock -- -- 8,705,000
Proceeds from the issuance of warrants 2,643,941 -- 202,510
Repayment of debt -- -- (612,500)
Repayment of notes -- -- (452,500)
Proceeds from the issuance of short-term notes 196,500 493,646 999,000
Repayment of short-term notes -- -- (1,200,000)
Repayment of capital lease obligation (92,536) -- --
Due from officers, net -- -- (38,497)
Deferred charges -- (10,000) (108,000)
Costs of issuing common stock and warrants (25,000) -- (1,588,852)
-----------------------------------------------------
Net cash provided by financing activities 2,722,905 483,646 5,906,161
-----------------------------------------------------
Increase (decrease) in cash and cash equivalents 260,880 (3,367,505) 3,460,850
Cash at beginning of year 93,345 3,460,850 --
=====================================================
Cash at end of year $ 354,225 $ 93,345 $ 3,460,850
=====================================================
</TABLE>
See accompanying notes.
-26-
<PAGE>
SmartServ Online, Inc.
Notes to Financial Statements
1. Nature of Business and Liquidity
SmartServ Online, Inc. (the "Company") commenced operations on August 20, 1993.
The Company makes available online information and transactional services to
subscribers through proprietary application software and communication
architecture to wireless PCS devices, PCs, PDAs, the Internet, interactive voice
response systems, alpha-numeric pagers and screen-based phones. The Company also
offers a range of services designed to meet the varied needs of clients of
potential Strategic Marketing Partners, such as investment newsletters,
real-time stock quotes, business and financial news, sports information,
research and analysis reports, trading activity reports by insiders of
corporations, online FedEx package tracking, private-labeled electronic mail,
national weather reports and other business and entertainment information. The
Company's software architecture and capabilities format information for a
particular device and present the information in a user-friendly manner.
On March 21, 1996, the Company completed an Initial Public Offering of 282,500
shares of $.01 par value common stock at $30.00 per share and 287,500 common
stock purchase warrants at $.60 per warrant. The Company received $7,058,648
from the Offering, net of the costs of issuing these securities of $1,588,852.
The Company's financial statements for the year ended June 30, 1998 have been
prepared on a going concern basis which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business. The Company incurred net losses of $5,040,009, $4,434,482, and
$2,966,287 for the years ended June 30, 1998, 1997, and 1996 respectively, and
as of June 30, 1998 had an accumulated deficit of $14,821,879. In addition, the
Company has a working capital deficiency of $1,850,287 and a deficiency of net
assets of $1,246,861. Lastly, the Company is 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 platform 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
model, the consumer is a customer of both SmartServ and its Strategic Marketing
Partner. The Company also believes that the sale of its information platform
through the cooperative efforts of partners with more recognizable brand names
than its own is important to its success.
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 have 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
-27-
<PAGE>
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 Contract and has an obligation to provide services to the customers of DTN
through April 2001. The Company will also receive minimum monthly payments of
$100,000 through April 1999. The unearned portion of such payment has been
reported in the balance sheet at June 30, 1998 as deferred revenues.
Additionally, the terms of the agreement provide for the Company to receive a
per user licensing fee, as well as for DTN to fund the additional hardware and
communications costs necessary to support the growth of the user base.
The Company continues to market its services to regional telephone operating
companies, long distance carriers and telephone equipment manufacturers which
have an incentive to increase the number of screen phones in service. The
Company believes its information platform to be a value-added service in
connection with the sale of screen phones to the consumer market. In September
1997, the Company signed a 3 year contract with Sprint/United Management Company
("Sprint") for the delivery of the Company's information services into markets
beyond the initial trial city - Las Vegas. The Company anticipates that this
will result in the deployment of the Company's information services in Florida
and other designated markets as part of a national campaign.
The Company is also working with businesses, such as brokerage firms, that need
to disseminate proprietary information more effectively to their existing client
base. The Company's information platform and communications architecture allows
the bundling of its partners' proprietary information with its own value-added
information, and makes this package available to subscribers 24 hours per day,
365 days per year.
The 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 Sprint and 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. Effective June 1996, the Company exited the development
stage.
-28-
<PAGE>
The Company's stockholders approved a one-for-six reverse stock split at a
Special Meeting on October 15, 1998. Such reverse stock split became effective
on October 26, 1998. All applicable financial statement amounts and related
disclosures have been restated to give effect to this transaction.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Revenue Recognition
Revenues are recognized as services are provided. Deferred revenues, resulting
from customer prepayments, are recognized as services are provided throughout
the term of the contract.
Basic and Diluted Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("Statement 128"). Statement
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented, and where necessary, restated
to conform to the Statement 128 requirements. The weighted average shares
outstanding are determined as the mean average of the shares outstanding and
assumed to be outstanding during the period.
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 expense paid during the years ended June 30, 1998, 1997, and 1996 was
$32,536, $9,194, and $327,600, respectively.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of accounts receivable. There is no single
geographic concentration of sales or related accounts receivable in the United
States. At June 30, 1998, accounts receivable consist principally of amounts due
from a stock brokerage firm ($37,500), and a telecommunications company
($64,800). The Company performs periodic credit evaluations of its customers and
provides for credit losses in the financial statements.
Property and Equipment
Property and equipment are stated at cost. 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.
-29-
<PAGE>
Advertising Costs
Advertising costs are expensed as incurred and were approximately $97,100 in
1998 and $540,000 in 1997. No such costs were incurred in 1996.
Stock Based Compensation
The Company maintains a stock option plan for employees and non-employee
directors that provides for the granting of stock options for a fixed number of
shares with an exercise price equal to the fair value of the shares at the date
of grant. The Company accounts for this stock compensation plan in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees".
Accordingly, compensation expense is recognized to the extent that the fair
value of the stock exceeds the exercise price of the option at the measurement
date. In 1997, the Company adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-based
Compensation".
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Comprehensive Income" ("Statement No.
130") which requires companies to report a new, additional measure of income on
the income statement in a full set of general-purpose financial statements.
Comprehensive Income will include foreign currency translation gains and losses
and unrealized gains and losses on equity securities that have been previously
excluded from income and reflected instead in equity. The Company does not
anticipate any differences between net income and comprehensive income upon the
adoption of Statement No. 130 in the first quarter of fiscal 1999.
In December 1998, The Accounting Standards Executive Committee issued Statement
of Position 98-9, " Modification of SOP 97-2, "Software Revenue Recognition"
with respect to certain types of transactions. Such amendment is not expected to
have a matieral impact on the Company's financial position or results from
operations.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, as amended by SOP 98-4, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). The
Company is reviewing the requirements of the SOP and has not determined the
impact, if any, that SOP 98-1 will have on the Company. If applicable, SOP 98-1
is required to be adopted by the Company no later than July 1, 1999.
3. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
June 30
------------------------------------------
1998 1997
------------------- -----------------
<S> <C> <C>
Data processing equipment $ 616,587 $ 564,098
Data processing equipment purchased under a capital lease 246,211 246,211
Office furniture and equipment 70,597 69,196
Display equipment 9,635 9,635
Leasehold improvements 36,678 36,357
------------------- -----------------
979,708 925,497
Accumulated depreciation, including $57,449 and
$8,207 for equipment purchased under a capital lease (369,171) (181,783)
=================== =================
$ 610,537 $ 743,714
=================== =================
</TABLE>
-30-
<PAGE>
During the year ended June 30, 1997, the Company leased computer equipment with
a capitalized cost of $246,211. The recording of such costs and the related
capitalized lease obligation are non-cash transactions for the purposes of the
Statement of Cash Flows.
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 41,666 common stock purchase warrants to the financial institution.
Similarly, the Company issued 8,416 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, 1998, these 108,581 warrants were exercisable at prices ranging from
$4.50 to $8.25. These warrants expire in September 2002. Pursuant to Statement
of Financial Accounting Standard No. 123, "Accounting for Stock Based
Compensation", the Company valued these warrants in accordance with the
Black-Scholes pricing methodology at the time of issuance and recorded such
valuation in the statement of operations as financing costs. Certain of the
warrants contain variable exercise provisions predicated on the price of the
Company's Common Stock upon the occurrence of certain future events or at the
time of exercise. These warrants have been revalued at June 30, 1998 in
accordance with the Black-Scholes pricing methodology giving consideration to
facts and circumstances as they existed at that date. The Company has recorded
financing costs associated with these warrants of $463,567 for the year ended
June 30, 1998.
On November 24, 1998, the Company completed an interim financing of $500,000
securities of the Company. The Company offered five (5) units, each consisting
of a secured convertible note in the principal amount of $100,000 and warrants
to purchase Common Stock of the Company. The notes and the warrants will each be
convertible and exercisable, respectively, at $.60 per share of Common Stock.
The convertible notes are secured by all of the Company's assets and will mature
on the earlier to occur of (i) the closing of the Further Placement (as
described in Note 12 below) or (ii) November 15, 1999. The convertible notes may
be prepaid without premium or penalty. Upon the closing of the Further
Placement, the holders of the notes will have the right to require the Company
to redeem for cash fifty percent (50%) of the notes they own. The remaining
notes will be converted into units in the Further Placement. The notes will bear
interest at eight percent (8%) per annum, payable semi-annually, in kind or in
cash at the Company's option. The Company has agreed to register the shares of
Common Stock issuable upon exercise of the warrants and conversion of the notes.
In addition to customary fees and expenses, the placement agent has received for
nominal consideration, warrants to purchase ten percent (10%) of the shares of
Common Stock of the Company issued on conversion of the notes and exercise of
the warrants at one hundred twenty percent (120%) of the conversion price of the
notes.
5. Equity Transactions
On July 14, 1995, the Company sold 4,166 shares of Common Stock for an aggregate
purchase price of $100,000 to John E. Herzog and, for nominal consideration,
issued a warrant to purchase an additional 4,166 shares of Common Stock at an
exercise price of $24.00 per share to Mr. Herzog. No sales commissions were paid
in connection with such offering. The securities were issued in reliance on the
exemption from registration provided by Section 4 (2) of the Securities Act.
On August 24, 1995, the Company sold 2,083 shares of Common Stock for an
aggregate purchase price of $50,000 to each of Emanuel E. Geduld and Andrew
DaPonte and, for nominal consideration, issued a warrant to purchase an
additional 2,083 shares of Common Stock at an exercise price of $24.00 per share
to Mr. Geduld and warrants to purchase 3,750 shares of Common Stock at an
exercise price of $24.00 per share to Mr. DaPonte. On August 24, 1995, the
Company also sold an aggregate of 1,250 shares of Common Stock to Anchung Sammy
Chung and Fong-Chi Alison Tsao for an aggregate purchase price of $30,000 and,
for nominal consideration, issued to them a warrant to purchase an additional
1,250 shares of Common Stock at an exercise price of $24.00 per share. No sales
commissions were paid in connection with such offerings. The securities were
issued in reliance on the exemption from registration provided by Section 4 (2)
of the Securities Act.
Between October 1995 and December 1995, the Company sold 40 Units to 25
investors who subscribed to purchase such Units pursuant to the Confidential
Offering Memorandum dated September 22, 1995, as amended by a letter dated
October 12, 1995, at a price of $25,000 per Unit, each Unit consisting of a
$25,000 promissory note and a warrant to purchase 833 shares of Common Stock at
an exercise price of $24.00 per share. Rickel and Associates, Inc. ("Rickel")
acted as placement agent for the Company for such private placement and received
a commission of $100,000 for its services and a non-refundable, non-accountable
expense allowance of $30,000. The securities were issued in reliance on the
exemption from registration provided by Section 4 (2) of the Securities Act.
On February 1, 1996, the Company issued a $200,000 promissory note and agreed to
issue warrants to purchase 16,667 shares of Common Stock to Henry Snow for
$200,000. The warrants were issued in March 1996 and have an exercise price of
$24.00 per share. Rickel received a commission of $26,000 for its services in
connection with such transaction. The securities were issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act.
On February 28, 1996, the Company issued 2,791 shares of Common Stock to
InterBank Communications, Inc. in accordance with the anti-dilution provisions
of an agreement with it and 19,425 shares of Common Stock to The Strategica
Group in accordance with the terms of a Standby Revolving Credit Agreement
Proposal. No sales commissions were paid in connection with such transactions.
The securities were issued in reliance on the exemption from registration
provided by Section 4 (2) of the Securities Act.
In March 1996, the Company issued 71,289 shares of Common Stock to six holders
of convertible subordinated notes in redemption of $612,500 principal amount of
such notes and accrued interest thereon. No sales commissions were paid in
connection with such transaction. The stock was issued in reliance upon the
exemption from registration provided by Section 3 (a) (9) of the Securities Act.
On March 21, 1996, the Company completed an Initial Public Offering of 282,500
shares of common stock at $30.00 per share and 287,500 redeemable common stock
purchase warrants for $0.60 per warrant that provided the Company with gross
proceeds of $8,647,500. Each warrant entitles the registered holder thereof to
purchase one share of common stock at an exercise price of $24.00 per share,
subject to adjustments in certain events, at any time during the period
commencing March 21, 1997, and expiring on
-31-
<PAGE>
March 20, 2001. The warrants are subject to redemption by the Company at $0.60
per warrant at any time commencing March 21, 1997, on not less than 30 days
prior notice to the holders of the warrants, provided the average closing bid
quotation of the common stock as reported on The NASDAQ Stock Market or a
national securities exchange, if traded thereon, has been at least 187.5% of the
current exercise price of the warrants (initially $45.00 per share), for 20
consecutive trading days ending on the third day prior to the date on which the
Company gives notice of the redemption.
Also in connection with the Initial Public Offering, the Company sold to the
Underwriter for $10.00 warrants ("Underwriter's Warrants") for the purchase of
25,000 shares of common stock and 25,000 common stock purchase warrants. The
Underwriter may exercise the Underwriter's warrants to purchase the common stock
at $49.50 per share and the warrants at $ .99 per warrant. The warrants provide
for the purchase of common stock at $39.60 per share. The Underwriter's Warrants
expire on March 20, 2001.
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 Regulation D
thereof. Each Prepaid Warrant entitles the holder to purchase that number of
shares of Common Stock that is equal to $1,000 divided by the applicable
exercise price. Such exercise price is determined initially as 70% of the
average closing bid price of the Common Stock for the 10 trading days ending on
the day prior to exercise of the Prepaid Warrants. Additionally, the exercise
discount shall be increased by 1% for each subsequent 60 day period that the
Prepaid Warrants remain unexercised. The exercise price, however, shall never
exceed $8.40. The Prepaid Warrants became exercisable on December 29, 1997 and
expire on September 30, 2000.
Terms of the Placement included the conversion of notes payable in the amount of
$772,222 and accrued interest thereon of $63,837 into Prepaid Warrants. The net
proceeds of the Placement of $2,643,941 have been used for general working
capital requirements.
As compensation for its services, Zanett received a placement fee and an
unaccountable expense allowance of 10% ($400,000) and 3% ($120,000),
respectively, of the gross proceeds of the Placement. Additionally, the Company
issued 100,000 Common Stock Purchase Warrants to Zanett that are exercisable at
$6.750 per share of Common Stock. These warrants expire on September 30, 2002.
Also in conjunction with the Placement, the Company entered into an agreement
with a financial consultant who is an affiliate of Zanett Lombardier, Ltd, an
investor in the Prepaid Warrants. During the five-year term of the agreement
such consultant will provide the Company with advisory services relating to
financial and strategic ventures and alliances, investment banking and general
financial advisory services, and advice and assistance with the Company's market
development activities. As compensation for these services, the Company
authorized the issuance of 592,592 Common Stock Purchase Warrants ("Consulting
Warrants") to this consultant that are exercisable at $6.75 per share of Common
Stock. The issuance of 509,259 of such Consulting Warrants was contingent upon
the approval of the Company's shareholders which was received on April 24, 1998.
However, since the issuance of 509,259 of such Consulting Warrants was uncertain
until April 24, 1998, the Company has revalued these Consulting Warrants in
accordance with Statement of Financial Accounting Standard No. 123, "Accounting
for Stock-Based Compensation", and the Black-Scholes pricing methodology, giving
consideration to the facts and circumstances as they existed at that date.
Accordingly, unearned compensation has been adjusted to $5,145,500 at April 24,
1998. Such amount has been recorded in stockholders' equity as unearned
compensation and will be amortized to income over the
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<PAGE>
five-year term of the agreement. These warrants expire on September 30, 2002.
The Company has recorded consulting expense of $527,576 for the year ended June
30, 1998.
At June 30, 1998, an aggregate of $2,588,355 shares of Common stock were
reserved for future issuance upon exercise of outstanding nonemployee warrants.
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 holders of
the Prepaid Warrants have waived their rights under the Prepaid Warrants and the
related Registration Rights Agreement dated September 29, 1997, subject to the
successful completion of the Further Placement by January 31, 1999.
6. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Year Ended June 30
----------------------------------------------------------------
1998 1997 1996
------------------ -------------------- --------------------
<S> <C> <C> <C>
Numerator:
Net loss $ (5,040,009) $ (4,434,482) $ (2,966,287)
================== ==================== ====================
Denominator:
Weighted average shares 659,034 615,833 392,500
================== ==================== ====================
Basic and diluted earnings
per common share $ (7.65) $ (7.20) $ (7.56)
================== ==================== ====================
</TABLE>
At June 30, 1998 there were, exclusive of the Common Stock Purchase Warrants
issued in connection with the issuance of notes payable (Note 4) and the Prepaid
Warrants (Note 5), 447,916 Common Stock Purchase Warrants outstanding. Such
warrants have exercise prices ranging from $3.75 to $72.00 per share and expire
from March 2001 through March 2003. Additionally, the Company has established an
employee stock option plan for the benefit of directors, employees, and
consultants to the Company. These options are intended to qualify as incentive
stock options within the meaning of Section 422 of the Internal Revenue Code, as
amended, or as nonqualified stock options. The options are partially exercisable
after one year from date of grant and no options may be granted after April 15,
2006. At the Annual Meeting on April 24, 1998, the shareholders approved an
amendment to the Plan authorizing the issuance of up to 250,000 options to
employees and non-employee directors. At June 30, 1998, there are options
outstanding for the purchase of 173,412 shares of the Company's Common Stock.
None of the warrants or options have been included in the computation of diluted
loss per share because their inclusion would be antidilutive.
7. Income Taxes
At June 30, 1998 and 1997, the Company has deferred tax assets as follows:
1998 1997
---- ----
Capitalized Start-up Costs $ 1,112,500 $ 1,486,000
Net Operating Loss Carryforwards 4,126,000 2,054,000
------------- ------------
$ 5,238,500 $ 3,540,000
============= ============
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<PAGE>
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," the Company has established a valuation allowance
to fully reserve the future income tax benefit of these deferred tax assets due
to uncertainty about their future realization. The valuation allowance increased
to $5,238,500 at June 30, 1998 from $3,540,000 at June 30, 1997 and $2,125,000
at June 30, 1996.
At June 30, 1998, the Company has net operating loss carryforwards for Federal
income tax purposes of approximately $9,600,000 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.
Additionally, the Company also leases certain computer equipment under operating
leases which expire through April 2000.
Rent expense amounted to approximately $278,000, $207,000, and $113,000 for the
years ended June 30, 1998, 1997, and 1996, respectively.
Minimum future rental payments at June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Operating Leases
------------------------------------ Capital
Year Ending June 30 Premises Equipment Lease
- ------------------- ----------------- --------------- ------------------
<S> <C> <C> <C>
1999 $ 173,400 $ 25,550 $ 100,500
2000 179,700 13,800 83,700
2001 186,000 -- --
2002 192,300 -- --
2003 67,000 -- --
----------------- --------------- ------------------
$ 798,400 $ 39,350 184,200
================= ===============
Less amounts
representing interest
and executory costs 30,525
------------------
$ 153,675
==================
</TABLE>
-34-
<PAGE>
9. Commitments and Contingencies
On or about December 15, 1997, Steven T. Francesco, then President and Chief
Operating Officer of the Company, filed a complaint against the Company,
Sebastian E. Cassetta (its Chairman of the Board and Chief Executive Officer),
Bruno Guazzoni, Claudio Guazzoni, Zanett Securities, Inc. and Zanett Capital,
Inc. in the Supreme Court of the State of New York, County of New York. On
February 6, 1998 the Board of Directors terminated Mr. Francesco's employment
with the Company as its President and Chief Operating Officer. In a motion for
an amended complaint Mr. Francesco alleged, among other things, that the Company
breached the terms of its employment agreement with him. The proposed amended
complaint seeks damages against the Company and certain of its directors for his
wrongful termination in an amount of at least $50 million and damages for fraud
in an unspecified amount.
By an agreement dated November 11, 1998 ("Agreement"), Mr. Francesco has agreed
to settle this action and to resolve all of his claims against the above
referenced parties. In consideration thereof, Mr. Francesco is due, under the
Agreement, to receive $305,000, payable in two installments: $200,000 on or
before January 31, 1999 and $105,000 on or before February 28, 1999.
Additionally, Mr. Francesco has received, under the Agreement, 125,000 shares of
SmartServ Common Stock and warrants to purchase 16,667 shares of Common Stock
exercisable at $5.00 per share until November 11, 2001. However, in the event
that the Company fails to make the above referenced cash payments in a timely
fashion, Mr. Francesco would have the right to pursue this action against the
above referenced parties, except that his sole remedy against the Company would
be to enter judgment against it in the amount of $305,000, less any cash
received pursuant to the Agreement. The cost of this settlement ($450,750) has
been included in the financial statements for the year ended June 30, 1998. The
Company will use a portion of the proceeds from the Further Placement, as
described in note 12, to settle this obligation.
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 in the United States District Court for the District of
Connecticut against the Company, Sebastian E. Cassetta, Claudio Guazzoni, Zanett
Securities Co., Zanett Capital Corp. and Zanett Lombardier Ltd. On or about
August 20, 1998, Mr. Fishman served an amended complaint, alleging, among other
things, that (i) he relied on false statements that the Company allegedly made,
in filings with the Securities and Exchange Commission and otherwise, in
accepting a position with the Company and (ii) the Company constructively
discharged him by breaching the terms of its employment agreement with him. The
amended complaint seeks to assert claims for (i) fraud and other violations
under the federal securities laws, (ii) breach of various terms of the Company's
employment agreement with Mr. Fishman, (iii) breach of the implied duty of good
faith and fair dealing, (iv) fraudulent misrepresentation, (v) negligent
misrepresentation, (vi) intentional misrepresentation and (vii) failure to pay
wages. The amended complaint seeks damages against the Company in an unspecified
amount. The Company expects to move to dismiss the amended complaint, and the
Court has issued an order setting a schedule for the briefing of that motion. No
discovery in this action has yet been noticed or taken. Although the Company is
vigorously defending this action, there can be no assurance that it will be
successful.
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 company of which Mr. Francesco allegedly was the
President and a majority 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.
-35-
<PAGE>
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. No discovery in this
action has yet been taken. Although the Company is vigorously defending this
action and vigorously prosecuting its cross-claims, there can be no assurance
that it will be successful. 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.
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 his
fraudulent inducement and breach of contract claims, Mr. Paschkes seeks
unspecified damages that he alleges to be at least $2,000,000 for each. On his
failure to pay wages claim, Mr. Paschkes seeks unspecified actual and punitive
damages that he alleges to be at least $200,000. No discovery in this action has
yet been taken nor has the Company estimated the amount of loss, if any,
incurred. Although the Company is vigorously defending this action, there can be
no assurance that it will be successful.
While the Company intends to vigorously defend these actions, the unfavorable
outcome of any such action could have a material adverse effect on the Company's
financial condition, results of operations, and cash flows.
10. Significant Relationships
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. 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
exercise 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 February 23,
1998, the Board of Directors approved amendments to the Plan: (1) to increase
the number of shares of the Company's Common Stock issuable upon the exercise of
stock options granted or to be granted under the Plan from 66,666 to 250,000
shares and (2) to eliminate the mandatory grants of options to members of the
Board of Directors and grant the Compensation Committee of the Board of
Directors the discretionary authority to grant options to both employee and
non-employee directors.
In April 1996, the Board approved the grant of stock options to employees and
officers of the Company for the purchase of 51,925 shares of common stock at
prices ranging from $38.64 to $42.48 per share. The Company recorded a non-cash
charge of $165,773 reflecting the compensatory nature of such issuance in
-36-
<PAGE>
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees."
The Plan had not yet been approved by the Company's stockholders, and therefore,
measurement of compensation varied with the changes in market value of the
underlying stock.
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 per share
and expire on September 23, 2007. On August 7, 1998 and 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. At October 8, 1998, the exercise price of the shares issued
to employees and non-employee directors of the Company is $1.29 per share. Such
options expire on October 7, 2008.
Information concerning stock options for the Company's stock option plan is as
follows:
Average
Exercise
Options Price
-------------------- ----------------------
Balance at July 1, 1995 -- --
Granted 51,925 $ 38.82
Exercised -- --
Cancelled -- --
-------------------- ----------------------
Balance at June 30, 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 202,225 12.00
Exercised -- --
Cancelled 85,204 25.50
==================== ======================
Balance at June 30, 1998 173,413 $ 12.00
==================== ======================
The following table summarizes information about the Company's stock options
outstanding as of June 30, 1998.
<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>
$12.00 173,413 $ 12.00 9.0 22,500 $ 12.00
=========================== ================= =============== =============== ================ ==================
</TABLE>
Supplemental and Pro Forma Disclosure
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." This Statement requires companies to recognize compensation
expense based on the respective fair values of the options at the date of grant.
-37-
<PAGE>
Companies that choose not to adopt the new rules will continue to apply the
existing accounting rules contained in APB No. 25, but are required to disclose
the pro forma effects on net income and earnings per share, as if the fair value
based method of accounting had been applied.
The pro forma information regarding net income and earnings per share required
by Statement 123 has been determined as if the Company had accounted for its
employee stock option plan under the fair value methods described in that
Statement. The fair value of options granted under the Company's employee stock
option plan 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>
1998 1997 1996
------------------- --------------- ------------------
<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 143.9% 70.8% 70.8%
Risk-free interest rate 6.00% 6.5% 6.28%
Weighted average grant date fair value of
options $10.92 $19.80 $24.42
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. As such, the pro forma
net loss and loss per share are not indicative of future years. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
Year Ended June 30
-----------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------
Reported ProForma Reported ProForma Reported ProForma
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loss per Share $7.65 $8.58 $7.20 $8.46 $7.56 $8.22
=============================================================================
</TABLE>
12. Subsequent Events
Subsequent to June 30, 1998, holders of 267 of the Company's Prepaid Warrants
converted such warrants into 172,088 shares of Common Stock at exercise prices
ranging from $.75 to $2.40 per share.
On August 11, 1998, the Company entered into a letter of intent, as amended on
November 24, 1998, with Spencer Trask Securities, Inc. ("Spencer Trask") (the
"Letter of Intent") which provided for the retention of Spencer Trask to act as
exclusive placement agent in connection with a private placement by the Company
of a minimum of $5,000,000 and a maximum of $10,000,000 of securities of the
Company (the "Further
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<PAGE>
Placement"). The Further Placement is conditioned upon the occurrence of the
Reverse Stock Split which was effective on October 26, 1998. The Letter of
Intent provides that the Company will offer a minimum of 50 units and a maximum
of 100 units at a gross purchase price of $100,000, each unit consisting of
shares of convertible preferred stock (the "Preferred Shares"). The number of
Preferred Shares will be determined by dividing the unit price of $100,000 by
the conversion price (the "Placement Conversion Price"), which is anticipated to
be equal to 75% of the average closing bid price for the Company's Common Stock
for the 15 days following the effective date of the Reverse Stock Split which
was $1.019 per share. The Preferred Shares will be convertible by the holder
into shares of Common Stock on a one-to-one basis at any time prior to the
expiration of a 30-day period commencing upon the giving of notice of redemption
by the Company. After two years, the Preferred Shares will be redeemable at the
Company's option at 110% of the purchase price for Preferred Shares in the event
that the average closing price of the Common Stock for the 20 trading days
preceding the notice of redemption exceeds 150% of the Placement Conversion
Price. The Preferred Shares will receive an 8% annual dividend payable
semi-annually, in-kind or in cash at the Company's option. No assurance can be
given that the Further Placement will be consummated.
In connection with the Further Placement, Spencer Trask will receive, in
addition to customary fees and expenses, five (5) year warrants (the "Placement
Warrants") to purchase Common Stock at 120% of the offering price per share in
an amount equal to 10% of the Preferred Shares contained in the units sold in
the Further Placement. The Placement Warrants will contain certain demand and
piggyback registration rights with respect to the shares of Common Stock into
which the Placement Warrants are convertible.
Additionally, the Company entered into agreements with certain warrant holders
pursuant to which, among other things, the Company (i) agreed to acquire on the
date the Further Placement commences warrants to purchase 801,175 shares of
Common Stock from such holders in exchange for the issuance by the Company of an
aggregate of 342,842 shares of Common Stock (the "Warrant Redemption"), which
shares may not be sold (except privately) for a period of fifteen (15) months
following the final closing of the Further Placement or September 1, 2000,
whichever is earlier, and (ii) has issued 50,000 shares of Common Stock to the
holders of $1,669,000 of Prepaid Warrants in consideration of such holders
agreeing to similar restrictions on the exercise of the Prepaid Warrants and the
resale of the shares of Common Stock issuable upon such exercise. The Company
will record appropriate charges for such transactions during the period in
which they are completed.
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.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Sebastian E. Cassetta 50 Chief Executive Officer, Chairman of the Board, Secretary and
Class III Director
Thomas W. Haller, CPA 44 Vice President, Treasurer and Chief Financial Officer
Mario F. Rossi 60 Vice President of Operations and Class II Director
Claudio Guazzoni 35 Class I Director
L. Scott Perry 50 Class I Director
Robert Steele 59 Class II Director
Catherine Cassel Talmadge 46 Class I Director
Charles R. Wood 57 Class III Director
</TABLE>
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
Vice President of Brinks, Incorporated.
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. From June 1991 to December 1992, Mr.
Haller was engaged in the practice of public accounting as a consultant to
certain entrepreneurial companies. From December 1982 to May 1991 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. Mr. Rossi was appointed a director of the Company on February 23,
1998. From January 1989 to December 1994, Mr. Rossi was Vice President of
Operations of MVS Inc., a fiber optic systems company.
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
and Zanett Capital, Inc. providing financial and strategic consulting services
to growth companies. Prior to joining the Zanett organization, Mr. Guazzoni was
a Money Manager with Delphi Capital Management, Inc. (1992) and an associate
with Salomon Brothers, Inc. from 1985 to 1991. Since March 1996, Mr. Guazzoni
has been a member of the Board of Directors of American BioMed, Inc.
L. Scott Perry has been a director of the Company since November 1996. Since
June 1998, Mr. Perry has been Vice President, Strategy /Alliances-ATT Solutions
and Vice President, Strategic Alliance Relationships. From December 1995 to June
1998, Mr. Perry had been Vice President, Advanced Platform Services of AT&T
Corp. From January 1989 to December 1995, Mr. Perry held various positions with
AT&T including Vice President -- Business Multimedia Services, Vice President
(East) -- Business Communications Services and Vice President --
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<PAGE>
Marketing, Strategy and Technical Support for AT&T Data Systems Group. Since
February 1996, Mr. Perry has also been the Chief Executive Officer of GeoSphere
Communications, a networking software company. 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 Savings Bank and a member of the
Board of Directors of Moore Medical Corp., Scan Optics, Inc. Accent Color
Sciences, Inc. and NLC Insurance Companies, Inc.
Catherine Cassel Talmadge has been a director of the Company since March 1996.
Since January 1994, Ms. Talmadge has been Vice President, Cable Programming of
Time Warner Cable, a division of Time Warner Entertainment Company, L.P. ("Time
Warner"). From September 1984 to January 1994, she held various positions with
Time Warner, including Director, Programming Development; 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 1, the Company has entered into an agreement with DTN
whereby DTN will pay the Company a minimum of $2,000,000 during the three year
term of the agreement for the license to market three of the Company's Internet
products.
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, Class II Directors, and Class III Directors will
serve until the annual meeting of the Company's stockholders to be held in 1999,
2000, and 1998, respectively, and until their respective successors are duly
elected and qualified or until their earlier resignation or removal. 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. 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, 1998, each reflecting
one purchase and 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 he became a director. The Company
anticipates that each of such officers and 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 (the "Named
Executive Officer") 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 1998.
<TABLE>
<CAPTION>
Summary Compensation Table (1) (2)
----------------------------------
Securities
Name and Fiscal Other Annual Underlying All Other
Principal Position Year Salary Bonus Compensation (3) Options Compensation
- ------------------ ---- ------ ----- ---------------- ------- ------------
<S> <C> <C> <C> <C>
Sebastian E. Cassetta 1998 $ 125,000 -- $ 9,750 37,500(4) --
Chief Executive Officer 1997 $ 125,000 -- $ 9,750 16,666 --
1996 $ 125,000 -- $ 9,750 16,666(5) --
</TABLE>
(1) The Named Executive Officer did not receive any Restricted Stock Awards or
LTIP Payouts in 1998, 1997, or 1996.
(2) 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 Officer.
(3) Amounts shown consist of a non-accountable expense allowance.
(4) On both August 7, 1998 and October 8, 1998, the Compensation Committee of
the Board of Directors canceled the stock options representing these
underlying shares and granted new options to Mr. Cassetta.
(5) On July 16, 1996, the Compensation Committee of the Board of Directors
canceled the stock options representing the underlying shares and granted
new options to Mr. Cassetta.
Stock Options
The following table sets forth information with respect to stock options granted
to the Named Executive Officer during fiscal year 1998:
<TABLE>
<CAPTION>
Option Grants in Fiscal 1998
(Individual Grants) (1)
----------------------------
Number of % of Total Options
Securities Underlying Granted to Employees Exercise Expiration
Underlying Options Granted in Fiscal 1998 Price Date (2)
-------------------------- ------------------- -------- ----------
Name
- ----
<S> <C> <C> <C> <C>
Sebastian E. Cassetta 37,500(2)(3)(4) 18.54% $12.00 10/7/08
</TABLE>
(1) No stock appreciation rights ("SARs") were granted to the Named
Executive Officer during fiscal 1998.
-42-
<PAGE>
(2) On September 24, 1997, the Compensation Committee granted new stock options
to employees conditional upon cancellation of all of their existing stock
options. As a consequence of this action and upon cancellation of the
options described above, Mr. Cassetta received an option to purchase 16,666
shares of the Company's Common Stock exercisable at a price of $12.00 per
share expiring on September 23, 2007. The option becomes exercisable in
full on the first anniversary of the grant date.
(3) On February 23, 1998, the Compensation Committee of the Board of Directors
granted Mr. Cassetta a new stock option to purchase 20,833 shares of the
Company's Common Stock exercisable at the price of $12.00 per share
expiring on February 22, 2008. The option becomes exercisable to the extent
of 50% on the first anniversary of the date of grant and 50% on the second
anniversary of the date of grant.
(4) On both August 7, 1998 and October 8, 1998, the Compensation Committee
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. As a consequence of this action and upon cancellation of the
options described above, Mr. Cassetta received an option to purchase 37,500
shares of the Company's Common Stock exercisable at a price of $1.29 per
share expiring on October 7, 2008.
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 -- -- 0/37,500 $0/$0
</TABLE>
(1) No SARs were granted to, or exercised by, the Named Executive Officer
during fiscal 1998.
(2) Value is based on the closing price of the Company's Common Stock as
reported by the OTC Bulletin Board on June 30, 1998 ($9.00) less the
exercise price of the option.
-43-
<PAGE>
Employment Agreements
The Company and Sebastian E. Cassetta are parties to an Employment Agreement,
effective January 31, 1994, which expires on January 31, 1999. The Agreement
provides for (i) an annual base salary of $125,000, (ii) a performance bonus for
each fiscal year between June 30, 1995 and June 30, 1998, payable in cash and
Common Stock of the Company, in the event the Company achieves specified levels
of earnings before interest, income taxes, depreciation and amortization
("EBITDA") provided therein and (iii) any additional amount as determined by the
Board or an outside compensation board. The Company did not achieve the
specified EBITDA goals. Mr. Cassetta is also entitled to participate in any
present or future insurance, pension, retirement, profit sharing or bonus plan
or other compensation or incentive plan adopted by the Company for the general
and overall benefit of full-time principal executives of the Company, such
participation to be upon the same terms and conditions as generally relate to
such full-time principal executives. In the event that Mr. Cassetta's employment
is terminated without cause, the Company is obligated to make a severance
payment to Mr. Cassetta in the amount of $250,000 within 30 days following the
date of such termination.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- -------
The following table sets forth, as of January 14, 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 Beneficial Ownership (2) Outstanding Shares (3)
---------------- ------------------------ ----------------------
<S> <C> <C>
Steven T. Francesco
23 Lakeview Avenue
New Canaan, Connecticut 06840 229,241 18.84%
Sebastian E. Cassetta
c/o SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902 62,753 5.23%
The Optimum Fund 59,524 4.96%
c/o U.S. Milestone Corp.
417 Surf Avenue
Staten Island, New York 10307
Claudio Guazzoni 63,013(4) 4.99%
L. Scott Perry 5,833(5) *
Catherine Cassel Talmadge 5,416(5) *
Robert H. Steele 4,166(6) *
Mario F. Rossi 750 *
-44-
<PAGE>
Charles R. Wood 1,000 *
All executive officers and directors
as a group (8 persons) 143,766(7) 11.26%
</TABLE>
* Less than 1%
(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
January 14, 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) Includes 4,166 shares subject to currently exercisable options. Also
includes 58,847 shares subject to currently exercisable warrants owned by
Zanett. Mr. Guazzoni disclaims beneficial ownership of these shares to the
extent they exceed his interest in Zanett. Mr. Guazzoni is a managing
director and principal of Zanett. Zanett has entered into an agreement with
the Company pursuant to which, among other things, the Company will, on the
date of the commencement of the Further Placement, purchase all of the
outstanding warrants owned by Zanett for shares of Common Stock of the
Company. None of such shares will be issued to Mr. Guazzoni or his
affiliates.
(5) Includes 5,000 shares subject to currently exercisable options.
(6) Includes 4,166 shares subject to currently exercisable options.
(7) Includes 77,346 shares subject to currently exercisable warrants and
options.
Changes in Control
The Company and each of Messrs. Cassetta and Francesco have entered into an
agreement with Zanett Capital, Inc. ("ZCI") dated September 29, 1997, as
subsequently amended, which provides, among other things, that for a period of 5
years, if there is an event of default under the Prepaid Warrant, 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 22.95% 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.
The Company has entered into agreements with certain warrant holders pursuant to
which, among other things, the Company (i) agreed to acquire on the date the
Further Placement commences warrants to
-45-
<PAGE>
purchase 801,175 shares of Common Stock from such holders in exchange for the
issuance by the Company of an aggregate of 342,842 shares of Common Stock, which
shares may not be sold (except privately) for a period of eighteen (18) months
following the final closing of the Further Placement or September 1, 2000,
whichever is earlier, and (ii) has issued 50,000 shares of Common Stock to the
holders of $1,669,000 of Prepaid Warrants in consideration of such holders
agreeing to similar restrictions on the exercise of the Prepaid Warrants and the
resale of the shares of Common Stock issuable upon such exercise. Any such
shares sold privately will remain subject to the above restrictions on resale.
One of the holders of Prepaid Warrants has given Sebastian Cassetta (or his
successor as chief executive officer of the Company) an irrevocable proxy
through January 30, 1999 to vote that number of shares of Common Stock to be
issued to such holder as described in this paragraph which exceeds 4.99% of the
outstanding Common Stock.
In addition, ZCI has temporarily waived its rights to designate a majority of
the members of the Board of Directors of the Company and its right to approve
certain corporate expenditures. In the event that the Further Placement is
consummated by January 1, 1999 and the Company's Common Stock is listed on
NASDAQ by March 1, 1999, these waivers will become permanent.
Item 12. Certain Relationships and Related Transactions
- -------
On July 30, 1998, the Company entered into an agreement with, among others, ZCI
and Zanett, pursuant to which the Company agreed to acquire on the date the
Further Placement commences warrants to purchase 111,700 shares of Common Stock
from Zanett in exchange for the issuance by the Company of shares of Common
Stock to certain principals of Zanett. Pursuant to the agreement, ZCI
temporarily waived its rights to designate a majority of the members of the
Board of Directors of the Company under certain circumstances and the right to
approve certain corporate expenditures. In the event the Further Placement is
consummated by January 1, 1999 and the Company's Common Stock is listed on the
NASDAQ by March 1, 1999, these waivers will become permanent. Claudio Guazzoni,
a director of the Company, is a principal of ZCI and Zanett. Mr. Guazzoni will
not receive any of the shares of Common Stock of the Company issuable upon
acquisition by the Company of warrants from Zanett.
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 transaction was
approved by a majority of the independent disinterested directors of the
Company.
-46-
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
- -------
(a) Index to Exhibits
Exhibit Description
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation of the
Company**
3.2 By-laws of the Company, as amended**
4.1 Specimen Certificate of the Company's Common Stock**
4.2 Form of Underwriter's Warrant**
4.3 Form of Warrant Agent Agreement**
4.4 Form of Redeemable Warrant**
4.5 Form of Warrant Agreement used by the Company for warrants
issued to John E. Herzog, Emanuel E. Geduld, Andrew DaPonte
and Anchung Sammy Chung and Fong-Chi Alison Tsao**
4.6 Warrant dated February 1, 1994 issued by the Company to Tri
Cap International**
4.7 Form of Prepaid Common Stock Purchase Warrant****
4.8 Warrant issued to The Zanett Securities Corporation****
4.9 Warrant issued to Bruno Guazzoni****
10.1 Information Distribution License Agreement dated as of July
18, 1994 between the Company and S&P ComStock, Inc.**
10.2 New York Stock Exchange, Inc. Agreement for Receipt and Use of
Market Data dated as of August 11, 1994 between the Company
and the New York Stock Exchange, Inc.**
10.3 The Nasdaq Stock Market, Inc. Vendor Agreement for Level 1
Service and Last Sale Service dated as of September 12, 1994
between the Company and The Nasdaq Stock Exchange, Inc.
("Nasdaq")**
10.4 Amendment to Vendor Agreement for Level 1 Service and Last
Sale Service dated as of October 11, 1994 between the Company
and Nasdaq**
10.5 Non-Exclusive Agency Agreement dated as of November 1, 1994
between the Company and Dun & Bradstreet, Inc.**
10.6 Services Agreement dated as of February 1, 1995, between the
Company and Federal Express Corporation**
10.7 Information Provider Agreement dated as of March 13, 1995
between the Company and The Argus Group, Inc.**
10.8 Metromail National Directory Assistance Reseller Agreement For
Electronic Services Providers dated as of March 13, 1995
between the Company and Metromail Corporation**
10.9 Reuters NewMedia, Inc. On-Line Services Agreement dated as of
November 13, 1995 between the Company and Reuters NewMedia,
Inc.**
10.10 Lease Agreement dated as of March 4, 1994, between the Company
and One Station Place, L.P. regarding the Company's Stamford,
Connecticut, offices**
10.11 Lease Modification and Extension Agreement, dated February 6,
1996, between the Company and One Station Place, L.P.
regarding the Company's Stamford, Connecticut, offices***
10.12 Employment Agreement (the "Cassetta Employment Agreement")
dated of January 31, 1994 by and among the Company and
Sebastian E. Cassetta**
10.13 Amendment No. 1 to the Cassetta Employment Agreement dated as
of June 30, 1994 by and among the Company and Sebastian E.
Cassetta**
10.14 Form of Registration Rights Agreement between the Company and
certain investors**
10.15 Form of Consulting Agreement between the Company and Rickel &
Associates**
10.16 Agreement dated as of January 31, 1996 between the Company and
Henry Snow**
-47-
<PAGE>
10.17 Memorandum of Understanding dated February 7, 1996 between
Northern Telecom Inc. and the Company**
10.18 Subscriber Agreement dated February 16, 1996 between the
Company and the Cunningham Group Inc. dba Lottery USA.com**
10.19 Memorandum of Understanding, dated June 26, 1996, between the
Company and CIDCO Incorporated***
10.20 Form of 1996 Stock Option Plan*****
10.21 Form of Registration Rights Agreement issued to purchasers of
Prepaid Common Stock Purchase Warrants****
10.22 Consulting Agreement with Bruno Guazzoni****
10.23 Agreement between Sprint/United Management Company and
SmartServ Online, Inc. dated September 26, 1997 *
10.24 Asset Purchase Agreement between SmartServ Online, Inc. and
Data Transmission Network Corporation, dated April 23,
1998******
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
-48-
<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, December 1, 1998
- ---------------------------------------
Sebastian E. Cassetta Chief Executive Officer,
Secretary and Director
/s/ Mario F. Rossi Vice President and December 1, 1998
- ---------------------------------------
Mario F. Rossi Director
/s/ Thomas W. Haller Vice President, Treasurer December 1, 1998
- ---------------------------------------
Thomas W. Haller and Chief Financial Officer
/s/ Director December 1, 1998
- --------------------------------------
Claudio Guazzoni
/s/ Robert H. Steele Director December 1, 1998
- ---------------------------------------
Robert H. Steele
/s/ L. Scott Perry Director December 1, 1998
- ---------------------------------------
L. Scott Perry
/s/ Catherine Cassel Talmadge Director December 1, 1998
- ---------------------------------------
Catherine Cassel Talmadge
/s/ Charles R. Wood Director December 1, 1998
- ---------------------------------------
Charles R. Wood
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE JUNE 30, 1998
FINANCIAL STATEMENTS OF SMARTSERV ONLINE, INC. AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001005698
<NAME> SMARTSERV ONLINE, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 354,225
<SECURITIES> 0
<RECEIVABLES> 111,051
<ALLOWANCES> 0
<INVENTORY> 130,603
<CURRENT-ASSETS> 595,879
<PP&E> 979,708
<DEPRECIATION> 369,171
<TOTAL-ASSETS> 1,276,853
<CURRENT-LIABILITIES> 2,446,166
<BONDS> 77,548
0
0
<COMMON> 8,362
<OTHER-SE> (1,255,223)
<TOTAL-LIABILITY-AND-EQUITY> 1,276,853
<SALES> 873,476
<TOTAL-REVENUES> 873,476
<CGS> 1,216,761
<TOTAL-COSTS> 2,139,843
<OTHER-EXPENSES> 3,223,240
<LOSS-PROVISION> (1,300)
<INTEREST-EXPENSE> 592,490
<INCOME-PRETAX> (5,040,009)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,040,009)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,040,009)
<EPS-PRIMARY> (7.65)
<EPS-DILUTED> (7.65)
</TABLE>
