+As filed with the Securities and Exchange Commission on April 17, 2000.
REGISTRATION NO.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
SMARTSERV ONLINE, INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 7375 13-3750708
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
ONE STATION PLACE
STAMFORD, CT 06902
(203) 353-5950
</TABLE>
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
SEBASTIAN E. CASSETTA
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
SMARTSERV ONLINE, INC.
ONE STATION PLACE
STAMFORD, CT 06902
(203) 353-5950
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies of communications to:
MICHAEL J. SHEF, ESQ.
PARKER CHAPIN LLP
THE CHRYSLER BUILDING
405 LEXINGTON AVENUE
NEW YORK, NEW YORK 10174
TELEPHONE NO.: (212) 704-6000
FACSIMILE NO.: (212) 704-6288
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
========================================== ========================== ============================== ============================
TITLE OF EACH CLASS OF AMOUNT TO BE REGISTERED PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE
------------------------------------------ -------------------------- ------------------------------ ----------------------------
<S> <C> <C> <C>
Common Stock, par value $.01 per share 351,640 $22,351,118(1) $5,901
------------------------------------------ -------------------------- ------------------------------ ----------------------------
</TABLE>
(1) Estimated pursuant to Rule 457(c) under the Securities Act of 1933
solely for the purpose of computing the amount of the registration fee.
The fee for the common stock was based on the average of the closing
bid and asked price of the common stock reported on the
Over-the-Counter (OTC) Bulletin Board on April 11, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
PROSPECTUS
SMARTSERV ONLINE, INC.
351,640 SHARES OF COMMON STOCK
o The selling stockholders are offering to sell 351,640 shares
of common stock.
o We will not receive any proceeds from the offering of common
stock. Of the 351,640 shares of common stock, 18,640 represent
shares of common stock underlying warrants to purchase common
stock. We will receive approximately $279,600 if all of the
warrants are exercised. These proceeds will be used for our
general corporate purposes.
o Our common stock is traded and quoted on the Over-the-Counter
(OTC) Bulletin Board under the symbol "SSOL". On April 11,
2000, the last reported bid price of our common stock was $62
and the last reported asked price was $65.125.
THE SECURITIES OFFERED IN THIS PROSPECTUS INVOLVE A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY CONSIDER THE FACTORS DESCRIBED UNDER THE HEADING "RISK FACTORS"
BEGINNING ON PAGE 3.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------------------
The date of this prospectus is April __, 2000
- 1-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PROSPECTUS SUMMARY..................................................................................3
ABOUT OUR COMPANY...................................................................................3
SUMMARY FINANCIAL DATA..............................................................................3
RISK FACTORS........................................................................................4
SPECIAL INFORMATION REGARDING FORWARD LOOKING STATEMENTS............................................8
USE OF PROCEEDS.....................................................................................8
MARKET PRICE OF OUR COMMON STOCK AND PUBLIC WARRANTS................................................9
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..........................................10
BUSINESS...........................................................................................15
MANAGEMENT.........................................................................................20
PRINCIPAL STOCKHOLDERS.............................................................................26
SELLING STOCKHOLDERS...............................................................................28
PLAN OF DISTRIBUTION...............................................................................30
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................................................31
DESCRIPTION OF CAPITAL STOCK.......................................................................32
DELAWARE BUSINESS COMBINATION PROVISIONS...........................................................33
INDEMNIFICATION OF DIRECTORS AND OFFICERS..........................................................34
WHERE YOU CAN FIND MORE INFORMATION................................................................35
TRANSFER AGENT.....................................................................................35
LEGAL MATTERS......................................................................................35
EXPERTS............................................................................................35
INDEX TO FINANCIAL STATEMENTS.....................................................................F-1
</TABLE>
- 2-
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information included elsewhere in this
document. You should carefully review the more detailed information and
financial statements included in this document. The summary is not complete
and may not contain all of the information you may need to consider before
investing in our common stock. We urge you to carefully read this document,
including the "Risk Factors" section beginning on page 4 and the Financial
Statements and notes to those statements beginning on page F-1 of this
document.
ABOUT OUR COMPANY
Please note that throughout this prospectus, the words "we", "our" or
"us" refer to SmartServ Online, Inc. and not to the selling stockholders.
SmartServ Online, Inc. was organized in 1993. We offer a range of
services based on a business-to-business model designed to facilitate
web-to-wireless e-commerce by providing transactional and information
services to our alliance partners. We have developed online financial,
transactional and media applications using a unique "device independent"
delivery solution and make these services available to wireless telephones
and personal digital assistants, personal computers and the Internet
through our application software and communications architecture. Our
services facilitate stock trading and disseminate real-time stock quotes,
business and financial news, sports information, private-labeled electronic
mail, national weather reports and other business and entertainment
information.
Our executive offices are located at One Station Place, Stamford,
Connecticut 06902 and our telephone number is (203) 353-5950.
SUMMARY FINANCIAL DATA
This summary financial data is derived from our financial statements
for the fiscal years ended June 30, 1999, June 30, 1998 and June 30, 1997,
and for the fiscal quarters ended December 31, 1999 and December 31, 1998
certain of which are included elsewhere herein. You should read the
following summary financial data in conjunction with the financial
statements and notes to those statements.
<TABLE>
<CAPTION>
Six Months Ended
December 31 Years Ended June 30
----------------------------------------- ------------------------------------------------
STATEMENT OF OPERATIONS 1998 1999 1997 1998 1999
------------ -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 693,729 $ 1,720,913 688,610 $ 873,476 $ 1,443,781
Loss from Operations (1,579,563) (21,769,714)* (4,457,343) (4,488,307) (3,750,471)
Net Loss (2,387,452) (21,096,231)* (4,434,482) (5,040,009) (7,124,126)
Basic and Diluted Loss per
Share (2.36) (15.19) (7.20) (7.65) (6.44)
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET At December 31 At June 30
---------------------------------------- ---------------------------------------------------
1999 1997 1998 1999
------------------ ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents $ 371,581 $ 93,345 $ 354,225 $ 2,165,551
Working Capital Deficiency (2,163,957) (901,026) (1,850,287) (1,822,340)
Total Assets 2,459,843 1,246,689 1,276,853 3,820,598
Total Liabilities and
Deferred Revenues 6,286,589 1,945,017 2,523,714 8,527,898
Shareholders' Deficiency (3,826,746) (698,328) (1,246,861) (4,707,300)
</TABLE>
* Included in such amount are noncash charges for stock-based compensation
costs of $21,635,019.
- 3-
<PAGE>
RISK FACTORS
An investment in our common stock is highly speculative and involves a
high degree of risk. Therefore, you should consider all of the risk factors
discussed below, as well as the other information contained in this document.
You should not invest in our common stock unless you can afford to lose your
entire investment and you are not dependent on the funds you are investing.
WE HAVE A HISTORY OF LOSSES AND IF WE DO NOT ACHIEVE PROFITABILITY WE
MAY NOT BE ABLE TO CONTINUE OUR BUSINESS
We have incurred net losses of $7,124,126 for the year ended June 30,
1999, $5,040,009 for the year ended June 30, 1998, $4,434,482 for the year ended
June 30, 1997 and $2,966,287 for the year ended June 30, 1996. Additionally, we
have incurred a net loss of $21,096,231 for the six month period ended December
31, 1999. However, included in the December 31, 1999 operating results were
noncash charges for stock-based compensation of $21,635,019. At December 31,
1999, we had an accumulated deficit of $43,042,236 and a deficiency of net
assets of $3,826,746. These conditions raise substantial doubt about our ability
to continue as a going concern. Losses have resulted principally from costs
incurred in connection with activities aimed at developing our software,
information and transactional services and from costs associated with our
marketing and administrative activities. We have incurred substantial expenses
and commitments and continue to operate at a deficit on a monthly basis. No
assurance can be provided that we will be able to develop revenues sufficient to
support our operations.
WE DEPEND ON ONE CUSTOMER, AND THE LOSS OF THIS CUSTOMER COULD
ADVERSELY AFFECT OUR OPERATING RESULTS
Currently, substantially all of our revenues are generated through our
licensing arrangement with Data Transmission Network Corporation, or DTN. Our
results of operations will depend upon numerous factors including sustained
revenues from our arrangement with DTN, the regulatory environment, introduction
and market acceptance of new services, establishing alliances with strategic
marketing partners and competition. If we default under the license agreement,
DTN may at its sole cost elect to provide its own maintenance to both the system
software and related hardware. Under these circumstances, DTN will have the
right to own the system software, including the source codes, and related
hardware, and DTN will have no further obligation to pay us licensing fees which
we currently rely on for a significant part of our revenues. We anticipate that
our results of operations for the immediate future will continue to depend to a
significant extent upon revenues from DTN and a small number of customers. In
order to increase our revenues, we will need to attract and retain additional
customers. Our failure to obtain a sufficient number of additional customers
could adversely affect our results of operations.
OUR CAPITAL REQUIREMENTS MAY REQUIRE ADDITIONAL FINANCING WHICH MAY NOT
BE AVAILABLE TO US
Based on our current operations, we estimate that we have sufficient
cash resources to fund operations through March 2001. We have retained Chase
Securities, Inc. as our investment banking firm to assist us with raising
additional capital for continued development of our technology and expansion.
Should we be unable to raise additional capital during the near future, there is
no assurance that any additional debt or equity financing will be available to
us prior to March 2001.
OUR INDEPENDENT AUDITORS HAVE ISSUED A REPORT WHICH MAY HURT OUR
ABILITY TO RAISE ADDITIONAL FINANCING AND THE PRICE OF OUR COMMON STOCK
- 4-
<PAGE>
The report of our independent auditors on our financial statements for
the years ended June 30, 1999 and 1998 contains an explanatory paragraph which
indicates that we have had recurring operating losses and a working capital
deficiency which raise substantial doubt about our ability to continue as a
going concern. This report may make it more difficult for us to raise additional
debt or equity financing needed to run our business and is not viewed favorably
by analysts of, or investors in, our common stock. We urge potential investors
to review this report before making a decision to invest in our company.
OUR SECURITIES WERE DELISTED FROM QUOTATION AND TRADING ON THE NASDAQ
SMALLCAP MARKET WHICH MAY HURT OUR ABILITY TO RAISE CAPITAL, THE PRICE OF OUR
COMMON STOCK AND AN INVESTOR'S ABILITY TO SELL OUR COMMON STOCK
At the close of business on May 20, 1998, our common stock and public
warrants were delisted from quotation and trading on the Nasdaq SmallCap Market.
At present, trading of our securities is conducted on the NASD's
Over-the-Counter (OTC) Bulletin Board. As a result, an investor will likely find
it more difficult to dispose of our shares in the open market. Also, since we do
not have the liquidity and marketability associated with a Nasdaq listing, it
may be more difficult to raise capital from accredited and institutional
investors and our common stock price may be volatile.
OUR BUSINESS DEPENDS UPON STRATEGIC MARKETING PARTNERSHIPS WHICH MAY
NOT MATERIALIZE
We intend to sell our services primarily by entering into non-exclusive
agreements with strategic marketing partners who would brand our "bundled"
information and transaction services with their own private label, promote the
packaged offering and then distribute our information and e-commence services to
their clients. Our success will depend on:
o our ability to enter into agreements with strategic marketing
partners;
o the ultimate success of these strategic marketing partners;
and
o the ability of the strategic marketing partners to
successfully market our services.
Our failure to complete our strategic alliance strategy or the failure
of the strategic marketing partners to develop and sustain a market for our
services would have a material adverse affect on our overall performance.
Although we view strategic marketing alliances as a major factor in the
successful commercialization of our services, there can be no assurance that the
strategic marketing partners would view an alliance with us as significant to
their businesses and any potential benefits from these arrangements may not
materialize.
THE MARKET FOR OUR BUSINESS IS DEVELOPING AND MAY NOT ACHIEVE THE
GROWTH WE EXPECT
Online information and transactional services, as well as the
convergence of wireless and Internet technologies, are developing markets. Our
future growth and profitability will depend, in part, upon consumer acceptance
of online information and transactional services in general and a significant
expansion in the consumer market for the delivery of such services via wireless
telephones and personal digital assistants, and personal computers. Even if
these markets experience substantial growth, there can be no assurance that our
services will be commercially successful or will benefit from such growth.
Further, even if initially successful, any continued development and expansion
of a market for our services will depend in part upon our ability to create and
develop additional services and adjust existing services in accordance with
- 5-
<PAGE>
changing consumer preferences, all at competitive prices. Our failure to develop
new services and generate revenues could have a material adverse effect on our
financial condition and operating results.
WE COMPETE AGAINST LARGER, WELL KNOWN COMPANIES WITH GREATER RESOURCES
THAN WE HAVE
The market for Web-based information and transactional services is
highly competitive and involves rapid innovation and technological change,
shifting consumer preferences and frequent new service introductions. Most of
our competitors and potential competitors have substantially greater financial,
marketing and technical resources than we have. Increased competition in the
market for our services could limit our ability to expand and materially and
adversely affect our results of operations.
The principal competitive factors in both the Internet-based and
wireless services industry include content, product features and quality, ease
of use, access to distribution channels, brand recognition, reliability and
price. We believe that potential new competitors, including large multimedia and
information system companies, are increasing their focus on transaction
processing. We face increasing competition from other emerging services
delivered through personal computers and wireless devices such as developing
transactional services offered by Data Broadcasting Corporation, Electronic Data
Systems Corp. and other Web-based software and online companies. Established
online information services including those offered by America Online, Inc.,
offer competing services delivered through personal computers. Although in its
infancy, the wireless arena too has its competitors, such as Datalink Systems
Corporation, I 3 Mobile, Inc., Aether Systems, Inc. (a/k/a Aether Technologies),
724 Solutions, Inc. and W-Trade Technologies, Inc. We expect competition to
increase from existing competitors and from new competitors, including
telecommunications companies.
The information content provided through our software and communication
architecture is generally purchased through non-exclusive distribution
agreements. While we are not dependent on any single content provider, existing
and potential competitors may enter into agreements with these and other such
providers and thereby acquire the ability to deliver online information and
transactional services substantially similar to those provided by us.
WE ARE HIGHLY DEPENDENT ON OUR EXECUTIVE OFFICERS AND SEVERAL TECHNICAL
EMPLOYEES, THE LOSS OF ANY OF WHOM COULD HAVE AN ADVERSE IMPACT ON OUR FUTURE
OPERATIONS
We believe that due to the rapid pace of innovation within our
industry, factors such as the technological and creative skills of our personnel
are more important in establishing and maintaining a leadership position within
the industry than legal protections of our technology. We are dependent on our
ability to recruit, retain and motivate high quality personnel. However,
competition for such personnel is intense and the inability to attract and
retain additional qualified employees or the loss of current key employees could
materially and adversely affect our business, operating results and financial
condition. We maintain and are the sole beneficiary of a key-person life
insurance policy on the life of (1) Mr. Sebastian E. Cassetta, our Chief
Executive Officer, in the amount of $1,000,000 and (2) Mr. Mario F. Rossi, our
Senior Vice President of Technology, in the amount of $500,000. The loss of the
services of either Mr. Cassetta or Mr. Rossi would have a material adverse
effect upon our business, financial condition and results of operations.
PROVISIONS IN OUR CHARTER MAY MAKE IT MORE DIFFICULT FOR A PERSON TO
ACQUIRE US AT A PREMIUM TO OUR CURRENT MARKET VALUE
Our charter restricts the ability of our stockholders to call a
stockholders meeting and provides that our stockholders may not act by written
consent or change the number of directors and classes of our board
- 6-
<PAGE>
of directors. These provisions may have the effect of deterring or delaying
certain transactions involving an actual or potential change in control of
SmartServ, including transactions in which our stockholders might otherwise
receive a premium for their shares over then current market prices, and may
limit the ability of our stockholders to approve transactions that they may deem
to be in their best interests.
YOUR OWNERSHIP INTEREST, VOTING POWER AND THE MARKET PRICE OF OUR
COMMON STOCK MAY DECREASE BECAUSE WE HAVE ISSUED, AND MAY CONTINUE TO ISSUE, A
SUBSTANTIAL NUMBER OF SECURITIES CONVERTIBLE OR EXERCISABLE INTO OUR COMMON
STOCK
We have issued common stock, options and warrants to purchase our
common stock, and in the future we may issue additional shares of common stock,
options, warrants, preferred stock or other securities exercisable for or
convertible into our common stock. A substantial number of shares of common
stock are already available for sale in, or have been sold into, the public
market pursuant to a registration statement covering 2,558,082 shares of common
stock. We also have obligations to the holders of warrants representing
1,747,000 shares, to register such shares for resale. Additional shares are
available for sale under Rule 144 of the Securities Act. In addition, 351,640
shares of our common stock will be registered under this document and will be
freely saleable by the selling stockholders. Sales of these shares or the
market's perception that these sales could occur may cause the market price of
our common stock to fall and may make it more difficult for us to sell equity
securities in the future at a time and price that we deem appropriate or to use
equity securities as consideration for future acquisitions. In addition, we have
outstanding prepaid warrants convertible into common stock at a discount to the
market price of our common stock. Such prepaid warrants are currently
convertible into 437,142 shares of our common stock; however, the number of
shares of common stock issuable upon such conversion could increase
significantly in the event of a decrease in the trading price of the common
stock below $2.30 per share. Holders of common stock could potentially
experience significant dilution upon conversion of these prepaid warrants.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS
We have designed and developed our own information platform,
"SmartServ", based on Sun Microsystems, Inc. computers and Oracle Corp.'s
version 7.X relational database manager, to support a variety of end user
devices. Although we intend to protect our rights vigorously, there can be no
assurance that any of the measures to protect our proprietary rights explained
below will be successful. In an effort to protect our proprietary rights, we
rely upon a combination of contract provisions and copyrights, trade secret laws
and a service mark. We license the use of our services to our strategic
marketing partners under agreements that contain terms and conditions
prohibiting the unauthorized reproduction of our software and services. We seek
to protect the source code of our application software and communications
architecture as a trade secret and as an unpublished copyrighted work.
We believe that our service mark "SmartServ Online" has significant
value and is important to the marketing of our services. There can be no
absolute assurance, however, that our mark does not or will not violate the
proprietary rights of others, that our mark would be upheld if challenged or
that we would not be prevented from using our mark, any of which could have an
adverse effect on us. In addition, there can be no assurance that we will have
the financial resources necessary to enforce or defend our mark. We believe that
our software, services, service mark and other proprietary rights do not
infringe on the proprietary rights of third parties. However, there can be no
assurance that third parties will not assert infringement claims against us with
respect to current features, content or services or that any such assertion may
not require us to enter into royalty arrangements or result in litigation.
OUR LICENSE ARRANGEMENT WITH DTN CONTAINS PROVISIONS WHICH ALLOW DTN TO
TERMINATE OUR RELATIONSHIP AND TAKE OWNERSHIP OF CERTAIN OF OUR PROPRIETARY
TECHNOLOGY UNDER CERTAIN CIRCUMSTANCES
- 7-
<PAGE>
We granted DTN an exclusive perpetual worldwide license to our
Internet-based (1) real-time stock quote product, (2) online trading vehicle for
customers of small and medium sized brokerage companies, (3) administrative
reporting package for brokers of small and medium sized brokerage companies and
(4) order entry/routing system. Under the license agreement, we are required to
maintain certain systems' performance standards and to satisfy other general
business requirements. Our inability to maintain compliance with the license
agreement could result in a default thereunder. In addition, a change of control
of SmartServ is an event of default under the license agreement. A change of
control includes a change in the majority of the members on our board of
directors. Under a letter agreement with Zanett Capital, Inc., Zanett Capital
may elect a majority of the board under certain circumstances, including the
failure of our common stock to be listed on Nasdaq.
If an event of default occurs under the license agreement, DTN may at
its sole cost elect to provide its own maintenance to both the system software
and related hardware. Under these circumstances, DTN will have the right to own
the system software, including the source codes, and related hardware, and DTN
will have no further obligation to pay us licensing fees which we currently rely
on for a significant part of our revenues.
WE ARE INVOLVED IN SEVERAL PENDING LEGAL PROCEEDINGS WHICH, IF RESOLVED
AGAINST US, COULD CAUSE DILUTION TO OUR STOCKHOLDERS AND HAVE A MATERIAL
NEGATIVE IMPACT ON OUR OPERATIONS
From time to time we have been, and expect to continue to be, a party
to legal proceedings and claims in the ordinary course of our business. Our
ongoing legal proceedings with Michael Fishman, Ronald G. Weiner and
Commonwealth Associates, L.P. have been set forth in the Business section of
this document under the heading "Legal Proceedings". In addition to unspecified
damages of at least $250,000, Mr. Weiner seeks 10% of our outstanding equity
securities. Commonwealth seeks 13,333 shares of our common stock or damages of
at least $1,770,000. While we expect to contest these matters vigorously,
litigation is inherently uncertain and an adverse judgment on any of these
claims could cause dilution to our stockholders as well as harm our business.
Even if not meritorious, any of these current and future matters could require
the expenditure of significant financial and managerial resources.
SPECIAL INFORMATION REGARDING FORWARD LOOKING STATEMENTS
Some of the statements in this prospectus or in the documents we
incorporate by reference are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve certain known and unknown risks, uncertainties and other
factors which may cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by these forward-looking statements. These factors include,
among others, the factors set forth above under "Risk Factors." The words
"believe," "expect," "anticipate," "intend" and "plan" and similar expressions
identify forward-looking statements. We caution you not to place undue reliance
on these forward-looking statements. We undertake no obligation to update or
revise any forward-looking statements or to publicly announce the result of any
revisions to any of the forward-looking statements in this document to reflect
future events or developments.
USE OF PROCEEDS
We will not receive any proceeds from the sale by the selling
stockholders of the common stock offered by this prospectus. The shares of
common stock will be sold from time to time by the selling stockholders at
prevailing market prices. We will receive up to $279,600 upon exercise of the
warrants to purchase 18,640 shares of common stock.
- 8-
<PAGE>
MARKET PRICE OF OUR COMMON STOCK AND PUBLIC WARRANTS
SmartServ's $.01 par value common stock commenced trading on March 21,
1996 on the National Association of Securities Dealers' Automated Quotation
System. Our Redeemable Common Stock Purchase Warrants, or public warrants, also
commenced trading on March 21, 1996 on the Nasdaq.
On May 20, 1998, we received notification from The Nasdaq Stock Market
that we no longer met the net tangible asset/market capitalization/net income
requirements for continued listing of our securities on The Nasdaq SmallCap
Market. Accordingly, at the close of business on May 20, 1998, our common stock
and public warrants were delisted from The Nasdaq SmallCap Market. Currently,
our securities trade on the OTC Bulletin Board as SSOL and SSOLW.
On October 15, 1998, our stockholders approved a one-for-six reverse
stock split which became effective on October 26, 1998.
The following table sets forth the high and low prices for the common
stock and public warrants during the periods indicated as reported by the Nasdaq
SmallCap Market and the OTC Bulletin Board, as applicable. Such amounts (and all
other share and price information contained in this document) have been adjusted
to reflect the reverse stock split.
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
------------ --------
HIGH LOW HIGH LOW
---- --- ---- ---
Year Ending June 30, 2000
- -------------------------
<S> <C> <C> <C> <C>
First Quarter $ 1.531 $ .719 $ .156 $ .063
Second Quarter 24.625 .719 6.500 .070
Third Quarter 186.000 17.625 64.000 5.000
Fourth Quarter 129.000 48.500 47.031 16.000
(through April 10, 2000)
Year Ended June 30, 1999
- ------------------------
First Quarter $ 4.313 $ 1.875 $ 2.250 $ .375
Second Quarter 4.125 1.031 .531 .063
Third Quarter 4.875 1.500 .625 .063
Fourth Quarter 2.500 1.500 .250 .100
Year Ended June 30, 1998
- ------------------------
First Quarter $ 18.750 $ 6.750 $ 4.500 $ .750
Second Quarter 21.000 4.128 5.250 .750
Third Quarter 19.125 3.750 6.563 .938
Fourth Quarter 22.500 3.000 9.188 1.688
</TABLE>
As of March 22, 2000, we had 4,033,754 shares of common stock
outstanding held by 106 shareholders of record. We estimate that our common
stock is held by approximately 2,000 beneficial holders. As of such date, we had
1,725,000 public warrants outstanding held by 20 warrant holders of record.
- 9-
<PAGE>
DIVIDENDS
We have never paid a cash dividend on our common stock. It is our
present policy to retain earnings, if any, to finance the development and growth
of our business. Accordingly, we do not anticipate that cash dividends will be
paid until our earnings and financial condition justify such dividends, and
there can be no assurance that we can achieve such earnings.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PLAN OF OPERATION
SmartServ delivers Internet-based and wireless content and trade order
routing solutions that enable the processing of transactions for its strategic
alliances, or Strategic Marketing Partners, and their customers. SmartServ has
developed online financial, transactional and media applications using a unique
"device-independent" delivery solution.
SmartServ's plan of operation includes programs for the sale of its
information and transactional application services through Strategic Marketing
Partners utilizing a "business-to-business" strategy. Such a strategy provides
access to a large number of potential subscribers and allows SmartServ to
maximize its market reach at minimal operating costs. The flexibility of
SmartServ's application software and communications architecture enables the
customization of each information package offered to each Strategic Marketing
Partner, and in turn to their end users.
As an early entrant in the dynamic market for the distribution of
financial information and transaction services via wireless telephones and
personal digital assistants, or PDAs, SmartServ is developing strategic
marketing relationships with wireless equipment manufacturers, carriers and
other value-added service providers and potential corporate partners. SmartServ
continuously seeks to increase product performance and widen its distribution by
building and maintaining this network of Strategic Marketing Partners. Combining
SmartServ's application development and data platform with the core competencies
of its Strategic Marketing Partners, SmartServ is offering a packaged turnkey
solution for extending content and transactions to the wireless environment.
Management believes the wireless area has tremendous potential for distribution
of SmartServ's information products and as a source of revenues from "fee based"
transactions such as routing stock order entries; however, we have yet to derive
any revenues from such efforts.
Management believes that most of SmartServ's revenues will continue to
be derived from consumers who purchase its services through Strategic Marketing
Partners. SmartServ anticipates that Strategic Marketing Partners will brand its
bundled information services with their own private label and promote and
distribute SmartServ's packaged offering to their clients. SmartServ has the
ability to customize the information package to be offered to each Strategic
Marketing Partner, by device. With the licensing of four of its Internet
products by DTN in 1998, SmartServ has discontinued efforts to develop a direct
subscriber base.
Management anticipates that staffing requirements associated with the
implementation of its plan of operation will result in the addition of a minimum
of six to ten people during the period ending June 30, 2000. Such personnel will
be added to assist with the programming requirements of Strategic Marketing
Partners' product offerings, for customer support and sales and marketing.
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RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1999 VS. SIX MONTHS ENDED DECEMBER 31, 1998
During the six months ended December 31, 1999 and 1998, SmartServ
recorded revenues of $1,720,913 and $693,729. Substantially all of such revenues
were earned through SmartServ's licensing agreement with DTN.
During the six months ended December 31, 1999, SmartServ incurred costs
of revenues of $445,412. Such costs consisted primarily of information and
communication costs ($87,300), personnel costs ($123,500), and computer hardware
leases, depreciation and maintenance costs ($161,300). During the six months
ended December 31, 1998, SmartServ incurred costs of revenues of $389,521. These
costs consist primarily of information and communication costs ($164,800),
personnel costs ($62,000), and computer hardware leases, depreciation and
maintenance costs ($160,800). Product development expenses were $134,222 and
$51,216 for the six months ended December 31, 1999 and 1998, respectively. In
1999 such costs consisted primarily of personnel costs of $13,500 and
amortization expense relating to capitalized software development costs of
$120,700. In 1998 such costs consisted primarily of personnel costs ($4,500),
amortization expense relating to capitalized software development costs
($19,400) and computer system consultants ($18,800). During the six months ended
December 31, 1999 and 1998, SmartServ capitalized $553,295 and $495,815,
respectively, of development costs in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed", or Statement 86.
During the six months ended December 31, 1999, SmartServ incurred
selling, general and administrative expenses of $1,302,974, primarily for
personnel costs ($613,500), facilities ($97,100), marketing and advertising
costs ($159,400) and professional fees ($347,800). During the six months ended
December 31, 1998, SmartServ incurred selling, general and administrative
expenses of $1,167,130. Such expenses were incurred primarily for personnel
costs ($395,300), marketing and advertising costs ($156,600), professional fees
($397,300), facilities ($115,600) and telecommunication costs ($33,700).
During the six months ended December 31, 1999, SmartServ incurred
noncash compensation costs of $21,635,019 in connection with the grant of stock
options, warrants and other compensation arrangements. Certain of the stock
option arrangements are subject to adjustment based on changes in the fair value
of SmartServ's common stock. SmartServ recorded noncash compensation costs of
$664,425 during the six months ended December 31, 1998.
Interest income for the six months ended December 31, 1999 and 1998
amounted to $13,033 and $2,908, respectively. During the six months ended
December 31, 1999 and 1998, interest income was earned primarily from
SmartServ's cash balances. Interest and financing costs for the six months ended
December 31, 1999 and 1998 were $30,250 and $810,797, respectively. At December
31, 1999, SmartServ received a waiver of certain events of default under its
prepaid warrants, and accordingly, reversed previously recorded penalties
amounting to $717,700. During the six months ended December 31, 1998, such costs
were incurred in connection with the $500,000 interim financing in December
1998, and the issuance of 50,000 shares of common stock to holders of $1,669,000
of prepaid warrants, in consideration of such holders agreeing to restrictions
on the exercise of the prepaid warrants and the resale of the shares of common
stock issuable upon such exercise.
FISCAL YEAR ENDED JUNE 30, 1999 VERSUS FISCAL YEAR ENDED JUNE 30, 1998
During the year ended June 30, 1999, SmartServ recorded revenues of
$1,443,781. Substantially all of such revenues were earned through its licensing
agreement with DTN. During the year ended June 30, 1998, SmartServ earned
revenues of $873,476. Of such amount, $210,000 was earned through the
relationship with DTN, while $454,000 was earned from the sale of the SmartServ
Pro stock quote services.
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During the year ended June 30, 1999, SmartServ incurred costs of
services of $994,465. Such costs consisted primarily of information and
communication costs ($267,600), personnel costs ($290,100), computer hardware
leases and maintenance ($339,400) and systems consultants ($97,300). During the
year ended June 30, 1998, SmartServ incurred costs of revenues of $1,216,761.
Such costs consisted primarily of information and communication costs
($551,700), personnel costs ($310,600), and computer hardware leases and
maintenance ($339,300). Information and communication costs decreased in 1999
compared to 1998 as a result of the licensing agreement entered into between
SmartServ and DTN. Personnel costs decreased in 1999 compared to 1998 as a
result of the migration of personnel resources into product development areas in
1999. Product development costs were $193,188 vs. $923,082 for the year ended
June 30, 1998. The decrease in the product development costs resulted from the
capitalization of software development costs related to certain product
enhancements in accordance with Statement of Financial Accounting Standards No.
86. During the year ended June 30, 1999, SmartServ capitalized $765,000 of
development costs in accordance with Statement 86. No such costs were
capitalized during the year ended June 30, 1998. During the year ended June 30,
1999, product development costs consisted primarily of the amortization of
capitalized software development costs. During the year ended June 30, 1998,
product development costs consisted primarily of personnel costs ($541,400) and
computer system consultants ($335,000).
During the year ended June 30, 1999, SmartServ incurred selling,
general and administrative expenses of $4,006,599 vs. $3,221,940 for the year
ended June 30, 1998. During the year ended June 30, 1999, such costs were
incurred primarily for personnel costs ($1,148,400), facilities ($240,500),
marketing and advertising costs ($263,100), professional fees ($2,150,000), and
telecommunications costs ($69,500). During the year ended June 30, 1998, such
costs were incurred primarily for personnel costs ($1,349,000), facilities
($216,000), marketing and advertising costs ($240,400), professional fees
($1,051,400) and telecommunications costs ($73,100). Included in professional
fees are noncash charges of $1,349,020 in 1999 and $660,576 in 1998 representing
the amortization of deferred costs in connection with the issuance of warrants
to financial consultants.
Interest income for the year ended June 30, 1999 amounted to $4,767 vs.
$40,788 for the year ended June 30, 1998. Such amounts were earned primarily
from SmartServ's investments in highly liquid commercial paper. Interest and
financing costs for the year ended June 30, 1999 were $3,378,422. Such costs
were incurred primarily in connection with the issuance of the 8% convertible
notes ($2,254,700) and SmartServ's default pursuant to the prepaid warrants
($1,095,700). Of such amounts, $2,593,800 were noncash charges for the issuance
of common stock or warrants to purchase common stock as settlement of such
obligations. Interest and financing costs for the year ended June 30, 1998 were
$592,490. These costs were incurred in connection with the origination of
SmartServ's May 1997 line of credit. Of such amount, $463,600 represents the
noncash charges associated with the issuance of certain common stock purchase
warrants.
Loss per share was $6.44 per share for the year ended June 30, 1999 vs.
$7.65 per share for the year ended June 30, 1998. While the net loss increased
by $2,084,117, SmartServ's weighted average shares of common stock outstanding
in 1999 increased by 446,569 shares, thereby affecting the per share loss.
FISCAL YEAR ENDED JUNE 30, 1998 VERSUS FISCAL YEAR ENDED JUNE 30, 1997
During the year ended June 30, 1998, SmartServ recorded revenues of
$873,476 from the sale of its information services vs. $688,610 during the year
ended June 30, 1997. Included in revenues for the year ended June 30, 1998 was
$210,000 resulting from SmartServ's licensing agreement with DTN and $454,000
from the sale of the SmartServ Pro stock quote services. During the year ended
June 30, 1997, SmartServ earned revenues from the enhancement, implementation
and marketing of services to Schroder & Co. Inc. of $342,200.
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During the year ended June 30, 1998, SmartServ incurred costs of
services of $1,216,761. Such costs consisted primarily of information and
communication costs ($551,700), personnel costs ($310,600) and computer hardware
leases and maintenance ($339,300). During the year ended June 30, 1997, with
SmartServ's departure from the development stage, it incurred costs of revenues
of $1,133,884. Such costs consisted primarily of information and communication
costs ($390,000), personnel costs ($417,500), computer hardware leases and
maintenance ($201,800) and screenphone purchases ($95,300). Product development
costs were $923,082 vs. $1,150,224 for the year ended June 30, 1997. During the
year ended June 30, 1998, such costs consisted primarily of personnel costs
($541,400) and computer system consultants ($335,000). During the year ended
June 30, 1997 such costs consisted primarily of personnel costs ($686,100) and
computer system consultants ($454,000). Included in personnel costs in 1997 is a
noncash charge of approximately $73,000 for the change in market value of
employee stock options.
During the year ended June 30, 1998, SmartServ incurred selling,
general and administrative expenses of $3,221,940 vs. $2,861,845 for the year
ended June 30, 1997. During the year ended June 30, 1998, such costs were
incurred primarily for personnel costs ($1,349,000), facilities ($216,000),
advertising and marketing costs ($240,400), professional fees ($1,051,400) and
telecommunications costs ($73,100). During the year ended June 30, 1998,
selling, general and administrative costs increased $360,095 from the prior year
as a result of increases in professional fees ($593,000), personnel costs
($403,500) and facilities costs ($55,700). Such increases were offset by a
decrease in advertising and marketing expenses of $600,900. Professional fees
includes a noncash charge of $527,576, representing amortization of deferred
compensation in connection with the issuance of 592,592 common stock purchase
warrants to a financial consultant.
Interest income for the year ended June 30, 1998 amounted to $40,788
vs. $74,507 for the year ended June 30, 1997. Such amounts were earned primarily
from SmartServ's investments in highly liquid commercial paper. Interest and
financing costs for the year ended June 30, 1998 were $592,490. These costs were
incurred in connection with the origination of SmartServ's May 1997 line of
credit. Of such amount, $463,600 represents the noncash charges associated with
the revaluation of certain common stock purchase warrants granted to Zanett
Securities Corporation. Interest and financing costs for the year ended June 30,
1997 were $54,646. Such amounts were incurred in connection with SmartServ's May
1997 line of credit.
Loss per share was $7.65 per share for the year ended June 30, 1998 vs.
$7.20 per share for the year ended June 30, 1997. While the net loss increased
by $605,527, SmartServ's weighted average shares of common stock outstanding
increased by 43,201 shares, thereby affecting the per share loss.
CAPITAL RESOURCES AND LIQUIDITY
Since SmartServ's inception on August 20, 1993 through March 21, 1996,
the date of the initial public offering of securities ("IPO"), SmartServ funded
its operations through a combination of private debt and equity financings
totaling $4,160,000 and $12,877,500, respectively.
In May 1997, SmartServ arranged a line of credit facility with Zanett
Lombardier, Ltd. Such line of credit was originated for a maximum borrowing
amount of $550,000. In July and September 1997, the facility was amended to
allow for additional borrowings of up to $222,222. In conjunction with the
origination of the line of credit facility, SmartServ issued 56,627 common stock
purchase warrants to Zanett Lombardier, Ltd. Similarly, SmartServ issued 11,438
warrants for each of the July and September amendments.
In May 1997, SmartServ entered into a three year noncancelable capital
lease for certain computer equipment used to provide information services. The
cost of this equipment ($246,211) is being financed through the manufacturer's
finance division.
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On September 30, 1997, Zanett Securities Corporation, now known as
Planet Zanett Internet Incubator, acting as placement agent for SmartServ,
completed a private placement of $4 million of its prepaid common stock purchase
warrants. The prepaid warrants expire on September 30, 2000. As part of the
placement, Zanett Lombardier, Ltd. converted a note payable of $772,222, issued
pursuant to the line of credit facility dated May 29, 1997, as amended, and
accrued interest thereon of $63,837 into prepaid warrants. The net proceeds of
the placement of $2,643,941 were used for general working capital requirements.
On April 23, 1998, SmartServ entered into a Software License and
Service Agreement with DTN, whereby SmartServ licensed to DTN the rights to
market three of SmartServ's Internet products. SmartServ received $850,000 upon
execution of the agreement and received minimum monthly payments of $100,000
through April 1999.
On June 24, 1999, SmartServ and DTN entered into a License Agreement
that amended the Software License and Service Agreement dated April 23, 1998. In
consideration of the receipt of $5.175 million, SmartServ granted DTN an
exclusive perpetual worldwide license to its Internet-based (1) real-time stock
quote product, (2) online trading vehicle for customers of small and medium
sized brokerage companies, (3) administrative reporting package for brokers of
small and medium sized brokerage companies and (4) order entry/routing system.
Additionally, SmartServ received $324,000 in exchange for an agreement to issue
warrants to purchase 300,000 shares of its common stock at an exercise price of
$8.60 per share. SmartServ has agreed to continue to operate these products and
provide maintenance and enhancement services in exchange for a percentage of the
revenues earned by DTN therefrom. The cost of the SmartServ's commitment to
provide such maintenance and enhancement services is limited to a maximum of 20%
of the revenues earned by SmartServ. If SmartServ defaults under the license
agreement, DTN may at its sole cost elect to provide its own maintenance to both
the system software and related hardware. Under these circumstances, DTN will
have the right to own the system software, including the source codes, and
related hardware, and DTN will have no further obligation to pay SmartServ
licensing fees which SmartServ currently relies on for a significant part of its
revenues. None of SmartServ's wireless products were included in this
transaction. Although SmartServ believes that DTN has the experience and the
financial ability to distribute its services to thousands of potential
customers, there can be no assurance that the products and services will be
accepted by the ultimate consumer on a widespread basis.
In November 1998, SmartServ completed a financing of $550,000 of its
securities. SmartServ sold five and one-half (5.5) units, each consisting of a
secured convertible 8% note in the principal amount of $100,000 and warrants to
purchase common stock. The notes and the warrants were initially convertible and
exercisable, respectively, at $.60 per share of common stock. Such notes were
repaid in June 1999.
On July 1, 1999, SmartServ entered into an agreement with Arnhold & S.
Bleichroeder, Inc. to settle SmartServ's obligation to Arnhold & S. Bleichroeder
under the default provisions of the prepaid warrants. In accordance with that
agreement, SmartServ paid Arnhold & S. Bleichroeder $325,000 to redeem the
prepaid warrants and issued 180,000 shares of common stock in full settlement of
all obligations.
In January 2000, SmartServ issued 306,667 shares of common stock to
certain investors in the November 1998 interim financing upon the exercise of
warrants to purchase such shares. Proceeds from the exercise of these warrants
were $184,000.
On January 18, 2000, America First Associates Corp., acting as
placement agent for SmartServ, completed a private placement of 233,000 shares
of common stock at $15.00 a share. The net proceeds of the placement of
$3,215,400 were used for general working capital requirements. In addition, on
January 18, 2000, SmartServ completed a private placement of an additional
100,000 shares of common stock at $15.00 a
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share. There was no placement agent for these shares. The net proceeds of the
placement of $1,500,000 were used for general working capital requirements.
SmartServ's financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. SmartServ incurred
net losses of $7,124,126, $5,040,009, and $4,434,482 for the years ended June
30, 1999, 1998 and 1997, respectively. Additionally, we have incurred a net loss
of $21,096,231 for the six month period ended December 31, 1999. Included in
such amount were noncash charges for stock-based compensation costs of
$21,635,019. At December 31, 1999, we had an accumulated deficit of $43,042,236
and a deficiency of net assets of $3,826,746. However, giving effect to the
January 2000 private placements, SmartServ had stockholders' equity at December
31, 1999, on a pro-forma basis, of approximately $863,700. SmartServ is also a
defendant in several legal proceedings that could have a material adverse effect
on its financial position, cash flows and results of operations. The Company's
operating history and environment raise substantial doubt about its 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.
Based on its current operations, SmartServ estimates that it has
sufficient cash resources to fund operations through March 2001. SmartServ has
retained Chase Securities, Inc. as its investment banking firm to assist it with
raising additional capital for continued development of its technology and
expansion. Should SmartServ be unable to raise additional capital during the
near future, there is no assurance that any additional debt or equity financing
will be available to SmartServ prior to March 2001.
Management believes that upon the successful implementation of its
marketing plan, sufficient revenues will be generated to meet operating
requirements. Management also believes that the successful execution of its
proposed plan of operations will generate sufficient cash flow from operations
to enable SmartServ to offer its services on an economically sound basis. No
assurance can be given that such goals will be obtained or that any expected
revenues or cash flows will be achieved.
BUSINESS
THE COMPANY
SmartServ Online, Inc. was organized in 1993. We deliver Internet-based
content and trade order routing solutions, as well as "Web-to-Wireless"
applications designed to facilitate transactions. We have developed online
financial, transactional and media applications using a unique
"device-independent" delivery solution. We have demonstrated ability in
developing applications utilizing the wireless application protocol (WAP)
towards enabling information and transactions on wireless telephones and
personal digital assistants.
SERVICES
Recognizing the call for mobility, we have developed an infrastructure
to integrate and deliver our Internet-based information and to effectuate
e-commerce transactions on wireless networks and devices. We are well positioned
to provide Web-based information and transaction applications and solutions for
Strategic Marketing Partners such as financial institutions, wireless carriers,
device manufacturers and value-added service providers and retailers. Our core
competency focuses on providing financial news and reports -- including
real-time stock quotes -- with the goal of facilitating online and wireless
stock trading and other transactions. To complement our financial offerings, we
also provide a host of personalized information services from local news, sports
and weather to traffic and entertainment services that can be accessed on demand
or as an alert. We plan to build a database of client interests and preferences
towards future e-
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commerce offerings. We are not dependent on one or a few information providers
as such redistribution agreements are generally available on a non-exclusive
basis.
We have invested in the development of a transaction engine and an
application software and communications architecture in an attempt to make our
services easy to use and visually appealing, as well as to take advantage of the
different virtues and capabilities of established and emerging devices capable
of interacting with Web-based and Web-to-Wireless applications. We believe that
our application software and communications architecture, which recognize
multiple devices, format the information for the particular device and present
the information in a user-friendly manner, will be attractive in the
marketplace. Product development efforts are focused on providing enhancements
to the current information and transaction services, format modifications for
emerging devices, content and features improvements and customizations based on
market requirements. We intend to continue to invest in this area and believe
our transaction engine, application software and communications architecture
represent an important competitive advantage.
MARKETING STRATEGY
We believe our primary source of revenues will ultimately be derived
from the sale of our information and transactional application services through
Strategic Marketing Partners utilizing a "business-to-business" strategy.
Strategic Marketing Partners will brand our information and transaction services
with their own private label, promote the packaged offering, and then distribute
these information and e-commerce services to their clients. Additionally, our
e-commerce platform will enable our Strategic Marketing Partners to offer
transaction services via the Internet and wireless networks. Our strategy of
forming alliances with Strategic Marketing Partners enables us to maximize our
market reach at minimal operating costs, improve product and services
performance and grow distribution channels to end-users.
In May 1998, we licensed to DTN the rights to market and service three
of our Internet products. DTN, which has over 150,000 subscribers for its
satellite-based information services, lacked an Internet-based product and
delivery system. We filled that need. In June 1999, we entered into an agreement
with DTN that expanded our relationship. In consideration of the receipt of
$5.175 million, we granted DTN an exclusive perpetual worldwide license to our
Internet-based (1) real-time stock quote product, (2) online trading vehicle for
customers of small and medium sized brokerage companies, (3) administrative
reporting package for brokers of small and medium sized brokerage companies and
(4) order entry/routing system. We will continue to operate and support these
products in exchange for a percentage of the revenues earned by DTN therefrom.
None of our wireless products were included in these transactions. During the
year ended June 30, 1998, we discontinued our efforts to sell products directly
to the retail market via our own marketing programs.
As an early entrant in the dynamic market of distribution of financial
information and transaction services via wireless telephones and personal
digital assistants, we are developing strategic marketing relationships with the
wireless equipment manufacturers, carriers, other value-added service providers
and potential corporate partners. We continuously seek to increase product
performance and widen our distribution by building and maintaining this network
of Strategic Marketing Partners. Combining our application development and data
platform with the core competencies of our Strategic Marketing Partners we are
offering a packaged turnkey solution for extending content and transactions to
the wireless environment. Management believes the wireless area has tremendous
potential for distribution of our information products and as a source of
revenues from "fee based" transactions such as routing stock order entries and
other e-commerce offerings.
The market for wireless services is exploding alongside the market for
Internet access, and Management believes that these markets are about to
converge. The majority of wireless data penetration will result from the
distribution of telephones and other PCS devices equipped with wireless modems
and
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Web browsers for accessing the Internet. Our data and communication architecture
adds user functionality and utility to both wired and wireless technology. With
our Web-server platform, application development and strategic alliances, we
have the competitive advantage of providing complete end-to-end solutions.
While we continue to have discussions about potential marketing
opportunities with major equipment manufacturers, telecommunications and stock
brokerage companies, there can be no assurance that we will enter into
agreements with any such companies.
COMPETITION
The market for Web-based information and transactional services is
highly competitive and subject to rapid innovation and technological change,
shifting consumer preferences and frequent new service introductions. While our
application software and communications architecture makes the services "device
independent", we face increasing competition from other emerging services
delivered through personal computers and wireless devices, such as developing
transactional services offered by Data Broadcasting Corporation, Electronic Data
Systems Corp. and other Web-based software companies. Established online
information services including those offered by America Online, Inc., offer
competing services delivered through personal computers. Although in its
infancy, the wireless arena too has its competitors, such as DataLink Systems
Corporation, I 3 Mobile, Inc., Aether Systems, Inc. (a/k/a Aether Technologies),
724 Solutions, Inc. and W-Trade Technologies, Inc. We expect competition to
increase from existing competitors and from new competitors, possibly including
telecommunications companies. Most of our competitors and potential competitors
have substantially greater financial, marketing and technical resources than we
have. We believe that potential new competitors, including large multimedia and
information system companies, are increasing their focus on transaction
processing. Increased competition in the market for our services could limit our
ability to expand and materially and adversely affect our results of operations.
The information content provided through our application software and
communication architecture is generally purchased through non-exclusive
distribution agreements. While we are not dependent on any one content provider,
existing and potential competitors may enter into agreements with these and
other such providers and thereby acquire the ability to deliver online
information and transactional services substantially similar to those provided
us.
The principal competitive factors in both the online and wireless
industries include content, product features and quality, ease of use, access to
distribution channels, brand recognition, reliability and price. Our strategy of
establishing alliances with potential Strategic Marketing Partners and our
ability to provide what we believe to be unique software applications and
communications architecture should enable us to compete effectively.
SOFTWARE
We have developed an application software and communications
architecture that we believe makes our services easy to use and visually
appealing, and which maximize the capabilities of various devices.
Our user-friendly front-end application software provides instant
access to information and flexibility to the varying needs of multiple users.
Subscribers are empowered to create their own groupings of information they
routinely request and are able to navigate directly to the information they seek
with the software's easy to read menu systems and search capabilities. Our
transaction engine has been designed to facilitate various forms of e-commerce.
Our application software employs common user interface techniques, such as
icons, pull-down menus, spreadsheet formats, tree structures and the use of
"key" words,
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to make our product intuitive to our users. Our software is notable for its
visually appealing formats, which we have standardized across different types of
information. Subscribers are provided with several display options, including
text and graphics, according to their preferences.
During the fiscal years ended June 30, 1999, 1998 and 1997, we incurred
costs of $193,188, $923,082 and $1,150,224, respectively, for research and
project development activities. Additionally, during the fiscal year ended June
30, 1999, we capitalized software development costs amounting to $765,000; no
such costs were capitalized in either of the years ended June 30, 1998 or 1997.
PROPRIETARY RIGHTS
We have designed and developed our own "device independent" information
and transaction platform, "SmartServ", based on Sun Microsystems, Inc. computers
and Oracle Corp.'s version 7.X relational database manager, to support a variety
of end user devices. This platform formats information and the services'
interface for a particular device and presents it in a user friendly manner. We
rely upon a combination of contract provisions, trade secret laws and a service
mark to attempt to protect our proprietary rights. We license the use of our
services to Strategic Marketing Partners under agreements that contain terms and
conditions prohibiting the unauthorized reproduction of our software and
services. Although we intend to protect our rights vigorously, there can be no
assurance that any of the foregoing measures will be successful.
We granted DTN an exclusive perpetual worldwide license to our
Internet-based (1) real-time stock quote product, (2) online trading vehicle for
customers of small and medium sized brokerage companies, (3) administrative
reporting package for brokers of small and medium sized brokerage companies and
(4) order entry/routing system. Under the license agreement, we are required to
maintain certain systems' performance standards and to satisfy other general
business requirements. Our inability to maintain compliance with the license
agreement could result in a default thereunder. In addition, a change of control
of SmartServ is an event of default under the license agreement. A change of
control includes a change in the majority of the members on our board of
directors. Under a letter agreement with Zanett Capital, Inc., Zanett Capital
may elect a majority of the board under certain circumstances, including the
failure of our common stock to be listed on Nasdaq.
If we default under the license agreement, DTN may at its sole cost
elect to provide its own maintenance to both the system software and related
hardware. Under these circumstances, DTN will have the right to own the system
software, including the source codes, and related hardware, and DTN will have no
further obligation to pay us licensing fees which we currently rely on for a
significant part of our revenues.
We believe that our software, services, service mark and other
proprietary rights do not infringe on the proprietary rights of third parties.
However, there can be no assurance that third parties will not assert
infringement claims against us with respect to current features, content or
services or that any such assertion may not require us to enter into royalty
arrangements or result in litigation.
GOVERNMENT REGULATION
We are not currently subject to direct regulation other than federal
and state regulation generally applicable to businesses. However, changes in the
regulatory environment relating to the telecommunications and media industry
could have an effect on our business, including regulatory changes which
directly or indirectly affect telecommunication costs or increase the likelihood
or scope of competition from regional telephone companies. Additionally,
legislative proposals from international, federal and state governmental bodies
in the areas of content regulation, intellectual property and privacy rights, as
well as
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<PAGE>
federal and state tax issues could impose additional regulations and obligations
upon all online service providers. We cannot predict the likelihood that any
such legislation will pass, or the financial impact, if any, the resulting
regulation or taxation may have.
Moreover, the applicability to online service providers of existing
laws governing issues such as intellectual property ownership, libel and
personal privacy is uncertain. The use of the Internet for illegal activities
and the dissemination of pornography have increased public focus and could lead
to increased pressure on legislatures to impose regulations on online service
providers such as ourselves. The law relating to the liability of online service
companies for information carried on or disseminated through their systems is
currently unsettled. If an action were to be initiated against us, the costs
incurred as a result of such action could have a material adverse effect on our
business.
EMPLOYEES
We employ 27 people, 26 of whom are full-time employees. We anticipate
that staffing requirements associated with the implementation of our plan of
operation will result in the addition of a minimum of six to ten people during
the period ending June 30, 2000. Such personnel will be added to assist with the
programming requirements of Strategic Marketing Partners' product offerings, for
customer support and sales and marketing. None of our employees are covered by a
collective bargaining agreement, and we believe that our relationship with our
employees is satisfactory.
DESCRIPTION OF PROPERTY
We occupy approximately 6,300 square feet in a leased facility located
in Stamford, Connecticut. The lease expires in October 2002.
LEGAL PROCEEDINGS
By letter dated April 10, 1998, Michael Fishman, then our Vice
President of Sales, resigned his position. On or about April 24, 1998, Mr.
Fishman filed a complaint against us, Sebastian E. Cassetta and four other
defendants in the United States District Court for the District of Connecticut.
The complaint asserted claims under Sections 10(b) and 18 of the Securities
Exchange Act of 1934, as well as several state law claims, including breach of
contract, fraud and misrepresentation. Mr. Fishman alleged that we (1) failed to
pay him the benefits and compensation to which he was entitled and (2) made
material misrepresentations in our filings with the Securities and Exchange
Commission. On December 11, 1998, the Court granted our motion to dismiss Mr.
Fishman's action without prejudice to the plaintiff to seek leave to file an
amended complaint within 30 days. On May 12, 1999, the Court denied the
plaintiff's subsequent motion for leave to file a substituted complaint on the
basis that the federal securities law claim, the only federal claim alleged by
the plaintiff, was still deficient. Accordingly, the federal securities claim
was dismissed with prejudice. On or about June 4, 1999, Mr. Fishman commenced an
action against the same defendants and added as a seventh defendant, our former
President, Steven Francesco, in the Connecticut Superior Court for the Judicial
District of Stamford/Norwalk at Stamford alleging breach of contract, breach of
duty of good faith and fair dealing, fraudulent misrepresentation, negligent
misrepresentation, intentional misrepresentation and failure to pay wages. The
defendants have answered the complaint and filed counterclaims for fraudulent
inducement and breach of contract. Plaintiff has responded to the counter-claim,
and discovery is proceeding. By pleading dated February 29, 2000, Mr. Fishman
filed an application with the Court seeking entry of a prejudgment remedy in
the amount of $19,250,000. To date, Mr. Fishman's application has not been acted
on by the Court and no hearing date has been set. Although we are vigorously
defending this action, there can be no assurance that we will be successful.
On or about May 11, 1998, Ronald G. Weiner filed a complaint against
Mr. Francesco and us in the Supreme Court of the State of New York, County of
New York. The complaint alleges, among other things, that in May 1993, by letter
from Mr. Francesco, Mr. Weiner was offered a 10% equity stake in Smart Phone
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<PAGE>
Services, Inc. ("SPS"), a Subchapter S company of which Mr. Francesco allegedly
was the President and sole shareholder, in exchange for his active involvement
in, among other things, raising capital and managing the financial aspects of
SPS. The complaint alleges that, in November 1993, Mr. Francesco sent a letter
to Mr. Weiner in which he (1) represented that SPS had failed to attract a
single investor and (2) withdrew his offer to Mr. Weiner of a 10% equity
position in SPS. The complaint further alleges that, in conversations with Mr.
Weiner beginning in November 1993, Mr. Francesco represented that he was ceasing
all efforts to capitalize SPS. The complaint alleges, among other things, that
Mr. Francesco and SPS breached their agreement with Mr. Weiner by withdrawing
their offer to him of a 10% equity stake in SPS, and that, at the time Mr.
Francesco represented that he was ceasing efforts to capitalize SPS, he had
actually formed SmartServ and was actively seeking investors for it. The
complaint further alleges that we are a successor entity to SPS and that,
therefore, we are liable for SPS' and Mr. Francesco's alleged conduct in
derogation of their alleged agreement with Mr. Weiner. The complaint seeks,
among other things, (1) a declaratory judgment declaring Mr. Weiner a 10% equity
shareholder of the Company, (2) a constructive trust in Mr. Weiner's favor for
10% of our equity shares and (3) restitution against Mr. Francesco and us for
unjust enrichment. On his unjust enrichment claim, Mr. Weiner seeks unspecified
damages that he alleges to be at least $250,000. In our answer to the complaint,
we denied the material allegations of the complaint and asserted affirmative
defenses. No discovery in this action has yet been taken. Although we are
vigorously defending this action there can be no assurance that we will be
successful.
On or about February 29, 2000, Commonwealth Associates, L.P. filed a
complaint against us in the Supreme Court of the State of New York, County of
New York. The complaint alleges that on or about August 19, 1999 Commonwealth
and SmartServ entered into an engagement letter pursuant to which Commonwealth
was to provide financial advisory and investment banking services to SmartServ
in connection with a possible combination between SmartServ and Data Link
Systems Corporation. The engagement letter provided for a nonrefundable fee of
$15,000 payable in cash or common stock at SmartServ's option. The complaint
alleges that notwithstanding the terms of the engagement letter the fee was to
be paid in stock and seeks 13,333 shares of common stock or at least $1,770,000
together with interest and costs. In our answer to the complaint, we denied the
material allegations of the complaint. No discovery in this action has yet been
taken. Although we are vigorously defending this action there can be no
assurance that we will be successful.
While we intend to vigorously defend these actions, the unfavorable
outcome of either such action could have a material adverse effect on our
financial condition, results of operations and cash flows.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to the
executive officers and directors of SmartServ Online, Inc.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Sebastian E. Cassetta 51 Chief Executive Officer, Chairman of the Board,
Secretary and Class III Director
Mario F. Rossi (4) 61 Vice President of Operations and Class II Director
Thomas W. Haller, CPA 45 Vice President, Treasurer and Chief Financial Officer
Claudio Guazzoni (3) 36 Class I Director
Stephen Lawler (4) 36 Class III Director
L. Scott Perry (2) 51 Class I Director
Robert Steele (1) (2) (3) 60 Class II Director
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Catherine Cassel Talmadge (2) (3) 47 Class I Director
Charles R. Wood (1) 58 Class III Director
</TABLE>
- ---------------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Member of the Finance Committee
(4) Member of the Technology Advisory Committee
SEBASTIAN E. CASSETTA has been Chief Executive Officer, Chairman of the
Board, Secretary and a director of SmartServ since its inception. Mr. Cassetta
was also SmartServ's Treasurer from its inception until March 1996. From June
1987 to August 1992, Mr. Cassetta was the President of Burns and Roe Securacom
Inc., an engineering and large-scale systems integration firm. He is also a
former Director, Managing Director and Vice President of Brinks Inc. At Brinks,
he expanded international operations in over 15 countries and became the
youngest person to be appointed Vice President in Brinks' 150 year history.
Appointed by President Reagan and Department of Commerce Secretary Malcolm
Baldridge, he served on both the U.S. Export Council and The Industry Sector
Advisory Committee (ISAC) regarding GATT negotiations. He is a former member of
the Board of Directors of The Young President's Organization and the former
Chairman of the New York Chapter.
MARIO F. ROSSI has been Vice President of Operations of SmartServ since
December 1994 and was appointed a director on February 23, 1998. Mr. Rossi has
business and operational management experience in the computer,
telecommunications and securities fields. He has an extensive background in
product development, operations and technical marketing. Prior to joining
SmartServ, Mr. Rossi was Vice President of Operations for MVS Inc., a fiber
optic company specializing in wireless technology. He also worked 17 years for
Philips Medical Systems, in both the U.S. and the Netherlands, directing the
development - from feasibility to production - of several computer-based medical
devices.
THOMAS W. HALLER, CPA joined SmartServ as Vice President, Treasurer and
Chief Financial Officer in March 1996. From December 1992 to March 1996, Mr.
Haller was a Senior Manager at Kaufman Greenhut Forman, LLP, a public accounting
firm in New York City, where he was responsible for technical advisory services
and the firm's quality assurance program. Prior thereto, he was a Senior Manager
with Ernst & Young LLP, an international public accounting and consulting firm,
where he had responsibility for client services and new business development in
the firm's financial services practice.
CLAUDIO GUAZZONI became a director of SmartServ on January 11, 1998.
Since 1993, Mr. Guazzoni has been President of The Zanett Securities Corporation
(now known as the Planet Zanett Internet Incubator) 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.
STEPHEN LAWLER was elected a director of SmartServ on December 28,
1999. He has been the Group Product Manager for the Mobile Internet Business
Unit at Microsoft Corporation since April 1999. Mr. Lawler's experience includes
all aspects of engineering including software development, program management,
quality assurance and documentation. Additionally, he has directed product
marketing teams, program management teams and engineering teams. From 1992 to
April 1999, he worked for MapInfo Corporation where he was a member of the
Executive Team, the Managing Director of Product Marketing and Product
Management and the Managing Director of Software Development and Product
Development.
L. SCOTT PERRY has been a director of SmartServ since November 1996.
Since June 1998, Mr. Perry has been Vice President, Strategy & Alliances - AT&T
Solutions. From December 1995 to June 1998, Mr. Perry
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<PAGE>
had been Vice President, Advanced Platform Services of AT&T Corp. From January
1989 to December 1995, Mr. Perry held various positions with AT&T including Vice
President -- Business Multimedia Services, Vice President (East) -- Business
Communications Services and Vice President -- Marketing, Strategy and Technical
Support for AT&T Data Systems Group. Mr. Perry serves on the Board of Directors
of Junior Achievement of New York, is a member of the Cornell University
Engineering College Advisory Council and serves on the Board of INEA, a private
financial planning software company based in Toronto, Canada.
ROBERT STEELE was appointed a director of SmartServ on February 23,
1998. Since February 1998, Mr. Steele has been Vice Chairman of the John Ryan
Company, an international bank support and marketing company. From 1992 to
February 1998, Mr. Steele was a Senior Vice President of the John Ryan Company.
Mr. Steele is the former President of Dollar Dry Dock Bank and a member of the
Board of Directors of Moore Medical Corp., Scan Optics, Inc. Accent Color
Sciences, Inc., NLC Insurance Companies, Inc. and the New York Mercantile
Exchange.
CATHERINE CASSEL TALMADGE has been a director of SmartServ since March
1996. Since May 1999, Ms. Talmadge has been Senior Vice President of Business
Development for High Speed Access Corporation. From September 1984 to May 1999,
she held various positions with Time Warner Cable, a division of Time Warner
Entertainment Company, L.P., including Vice President, Cable Programming;
Director, Programming Development; Director, Operations; Director, Financial
Analyses; and Manager, Budget Department.
CHARLES R. WOOD was appointed a director of SmartServ in September
1998. Mr. Wood was Senior Vice President of DTN and President of its Financial
Services Division, from 1989 and 1986, respectively, until February 28, 2000.
BOARD OF DIRECTORS
The Board of Directors consists of eight directors divided into three
classes: Class I Directors, Class II Directors and Class III Directors. The
Class I and Class III Directors will serve until the 1999 annual meeting and the
Class II Directors will serve until the 2000 annual meeting or, in each case,
until their respective successors are duly elected and qualified or until their
earlier resignation or removal. Upon such annual meetings of stockholders, the
Class III Directors will serve until the annual meeting of SmartServ's
stockholders to be held in 2001, the Class I Directors will serve until the
annual meeting of SmartServ's stockholders to be held in 2002 and the Class II
Directors will serve until the annual meeting of SmartServ's stockholders to be
held in 2003. Directors of each Class are elected for a full term of three years
(or any lesser period representing the balance of the previous term of such
Class) and until their respective successors are duly elected and qualified or
until their earlier resignation or removal. Officers are appointed annually and
serve at the discretion of the Board for one year. As a result of the delisting
of SmartServ's common stock, Zanett Capital has the right to elect a majority of
the Board of Directors. Mr. Cassetta serves as Chief Executive Officer, Chairman
of the Board, and Secretary of SmartServ pursuant to an employment agreement.
Mr. Rossi serves as Vice President and Chief Technology Officer pursuant to an
employment agreement.
BOARD COMMITTEES
The Compensation Committee, currently composed of Messrs. Wood and
Steele, has authority over officer compensation and administers our Amended and
Restated Stock Option Plan.
The Audit Committee, currently composed of Messrs. Steele and Perry and
Ms. Talmadge, serves as the Board's liaison with our auditors.
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<PAGE>
The Finance Committee, currently composed of Mr. Guazzoni, Mr. Steele
and Ms. Talmadge, reviews expenditures of SmartServ.
The Technology Advisory Committee, currently composed of Messrs. Lawler
and Rossi, is responsible for identifying new technologies and markets therefor.
COMPENSATION OF DIRECTORS
Each director who is not an officer or employee of SmartServ is
reimbursed for his or her out-of-pocket expenses incurred in connection with
attendance at meetings or other company business. Commencing December 29, 1998,
each non-employee director receives a $1,000 fee for each meeting he or she
attends during the year.
Between November 4, 1996 and April 24, 1998, each person who was not a
salaried employee of SmartServ was granted, on the date he or she became a
director, an option to purchase 5,000 shares of common stock and immediately
following each annual meeting of stockholders at which directors were elected,
each such person elected to serve as a director at that annual meeting or who
remained a director following that annual meeting was granted an option to
purchase 5,000 shares of common stock. Subsequent to April 24, 1998, the
Compensation Committee has had the discretionary authority to grant options to
non-employee directors. Pursuant to such authority, on December 28, 1998 and
October 13, 1999 it granted options to purchase 10,000 shares of common stock at
a price of $2.35 and $.9375, respectively, to each non-employee director. The
exercise price of each share of common stock under any option granted to a
director was equal to the fair market value of a share of common stock on the
date the option was granted.
EXECUTIVE COMPENSATION
The following table sets forth information concerning annual and
long-term compensation, paid or accrued, for the Chief Executive Officer and for
each other executive officer (the "Named Executive Officers") of SmartServ whose
compensation exceeded $100,000 in fiscal 1999 for services in all capacities to
SmartServ during the last three fiscal years.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------------------- ------------------------------
RESTRICTED SECURITIES
NAME AND PRINCIPAL FISCAL OTHER ANNUAL STOCK AWARDS UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION (1) (2) OPTIONS COMPENSATION
- -------------------------- -------- ------------- ---------- ------------------ --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sebastian E. Cassetta 1999 $ 155,000 $ 5,414 $ 9,750 $ 185,471(3) 92,000 (5) $24,416(8)
Chief Executive 1998 125,000 -- 9,750 -- 37,500 (6) -- (9)
Officer 1997 125,000 -- 9,750 -- 16,666 (6) -- (9)
Mario F. Rossi 1999 122,500 3,249 6,000 61,824(4) 67,500 (7) -- (9)
Vice President 1998 92,400 -- 6,000 -- 20,834 (6) -- (9)
of Operations 1997 75,000 -- 6,000 -- 4,416 (6) -- (9)
</TABLE>
(1) Amounts shown consist of a non-accountable expense allowance.
(2) The Named Executive Officers did not receive any LTIP Payouts in 1999, 1998
or 1997.
(3) On December 29, 1998, the Board of Directors approved the sale to Mr.
Cassetta of 618,239 shares of restricted stock representing 9% of the fully
diluted shares of common stock of SmartServ.
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<PAGE>
Compensation has been determined as the number of shares awarded to Mr.
Cassetta times the closing price of SmartServ's common stock on December
29, 1998 ($2.50) less the consideration to be paid by Mr. Cassetta. At June
30, 1999, based upon the closing bid price ($1.50) of SmartServ's common
stock, the value of Mr. Cassetta's shares was $0. On October 13, 1999, the
Board of Directors agreed to reprice the shares granted to Mr. Cassetta to
$.75 per share, the fair value of the shares at that date. Through
December 31, 1999, the purchase of this restricted stock was recorded as a
variable award pursuant to Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". In accordance therewith,
SmartServ's results of operations for the six months ended December 31,
1999 includes a noncash compensation charge of $11,727,000 for the change
in the fair value of its common stock at December 31, 1999.
(4) On December 29, 1998, the Board of Directors approved the sale to Mr. Rossi
of 206,080 shares of restricted stock representing 3% of the fully diluted
shares of common stock of SmartServ. Compensation has been determined as
the number of shares awarded to Mr. Rossi times the closing price of
SmartServ's common stock on December 29, 1998 ($2.50) less the
consideration to be paid by Mr. Rossi. At June 30, 1999, based upon the
closing bid price ($1.50) of SmartServ's common stock, the value of Mr.
Rossi's shares was $0. On October 13, 1999, the Board of Directors agreed
to reprice the shares granted to Mr. Rossi to $.75 per share, the fair
value of the shares at that date. Through December 31, 1999, the purchase
of this restricted stock was recorded as a variable award pursuant to
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". In accordance therewith, SmartServ's results of operations for
the six months ended December 31, 1999 includes a noncash compensation
charge of $3,909,000 for the change in the fair value of its common stock
at December 31, 1999.
(5) Includes options for the purchase of 37,500 shares which were cancelled
when repriced options to purchase a like number of shares were granted in
lieu thereof.
(6) Such options were cancelled when repriced options were granted in lieu
thereof in fiscal 1999.
(7) Includes options for the purchase of 25,250 shares which were cancelled
when repriced options to purchase a like number of shares were granted in
lieu thereof.
(8) Amounts represent premiums paid by SmartServ for life and disability
insurance for the benefit of Mr. Cassetta.
(9) The aggregate amount of personal benefits not included in the Summary
Compensation Table does not exceed the lesser of either $50,000 or 10% of
the total annual salary and bonus paid to the Named Executive Officers.
STOCK OPTIONS
The following table sets forth information with respect to stock
options granted to the Named Executive Officers during fiscal year 1999:
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL 1999
(INDIVIDUAL GRANTS) (1)
-----------------------
NUMBER OF % OF TOTAL OPTIONS
SECURITIES UNDERLYING GRANTED TO EMPLOYEES IN EXERCISE EXPIRATION
NAME OPTIONS GRANTED FISCAL 1999 PRICE DATE
- -------------------------- ----------------------- ------------------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
Sebastian E. Cassetta 17,000 3.66% $ 1.625 11/19/08
37,500 8.08 1.290 10/07/08
37,500 (2) 8.08 2.530 8/06/08
Mario F. Rossi 17,000 3.66 1.625 11/19/08
25,250 5.44 1.290 10/07/08
25,250 (2) 5.44 2.530 8/06/08
</TABLE>
(1) No stock appreciation rights ("SARs") were granted to the Named Executive
Officers during fiscal 1999.
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<PAGE>
(2) Cancelled on October 8, 1998.
The following table sets forth information as to the number of unexercised
shares of common stock underlying stock options and the value of unexercised
in-the-money stock options at fiscal year end:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUE (1)(2)
-----------------------------------
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
SECURITIES UNDERLYING OPTIONS AT
OPTIONS AT FISCAL FISCAL YEAR END
SHARES ACQUIRED VALUE YEAR END EXERCISABLE/
ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE UNEXERCISABLE
- ------------------------------ -------------------- ----------------- -------------------------- ---------------------
<S> <C> <C>
Sebastian E. Cassetta -- -- 0/54,499 $0/$7,874
Mario F. Rossi -- -- 0/42,249 $0/$5,302
</TABLE>
(1) No SARs were granted to, or exercised by, the Named Executive Officers
during fiscal 1999.
(2) Value is based on the closing bid price of SmartServ's common stock as
reported by the OTC Bulletin Board on June 30, 1999 ($1.50) less the
exercise price of the option.
EMPLOYMENT AGREEMENTS
SmartServ and Mr. Cassetta have entered into an employment agreement
("Cassetta Agreement"), effective January 1, 1999 and expiring on December 31,
2001, providing for (1) base compensation of $185,000 per annum, (2) additional
compensation of up to 100% of base compensation, (3) continuation of existing
life and disability insurance policies, (4) all benefits available to other
employees and (5) the sale to him of 618,239 shares of restricted stock
representing 9% of the fully diluted shares of common stock of SmartServ. Mr.
Cassetta's additional compensation will be equal to 10% of his base compensation
for each 10% increase in sales during the first year of the Cassetta Agreement,
subject to a maximum of 100% of base compensation. In each subsequent year of
the Cassetta Agreement, Mr. Cassetta will receive additional compensation equal
to 5% of his base compensation for each 5% increase in sales, subject again to a
maximum of 100% of base compensation. The purchase price ($2.20 per share) of
the restricted stock was equal to 110% of the fair market value of SmartServ's
common stock for the 30 days preceding the date of the stock purchase agreement
("Cassetta Stock Purchase Agreement") contemplated by the Cassetta Agreement. On
October 13, 1999, the Board of Directors agreed to reprice the shares granted to
Mr. Cassetta to $.75 per share, the fair market value of the shares at that
date. $6,182.39 of the purchase price has been paid in cash and the balance by a
5 year, non-recourse promissory note, secured by the stock, at an interest rate
of 6.75%, which is 1% below the prime rate on the date of the Cassetta Stock
Purchase Agreement. The Cassetta Stock Purchase Agreement provides SmartServ
with certain repurchase options and provides Mr. Cassetta with a put option in
the event of the termination of his employment. In the event that Mr. Cassetta's
employment is terminated without cause, Mr. Cassetta will receive a lump sum
severance payment equal to his full base salary for the remaining term of the
Cassetta Agreement, discounted to the present value using an 8% discount rate
and continuing benefit coverage for the lesser of 12 months or the remaining
term of the Cassetta Agreement. On December 28, 1999, the Board of Directors of
the Company approved the payment to Mr. Cassetta in stock of the bonus payable
to him for 1999 under his employment agreement. Pursuant thereto, in March 2000
the Company issued 148,000 shares of common stock to Mr. Cassetta.
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<PAGE>
SmartServ and Mr. Rossi have entered into an employment agreement
("Rossi Agreement"), effective January 1, 1999 and expiring on December 31,
2001, providing for (1) base compensation of $135,000 per annum, (2) additional
compensation of up to 50% of base compensation, (3) continuation of existing
life and disability insurance policies, (4) all benefits available to other
employees and (5) the sale to him of 206,080 shares of restricted stock
representing 3% of the fully diluted shares of common stock of SmartServ. Mr.
Rossi's additional compensation will be equal to 5% of his base compensation for
each 10% increase in sales during the first year of the Rossi Agreement, subject
to a maximum of 50% of base compensation. In each subsequent year of the Rossi
Agreement, Mr. Rossi will receive additional compensation equal to 2.5% of base
compensation for each 5% increase in sales, subject again to a maximum of 50% of
base compensation. The purchase price ($2.20 per share) of the restricted stock
was equal to 110% of the fair market value for the 30 days preceding the date of
the stock purchase agreement ("Rossi Stock Purchase Agreement") contemplated by
the Rossi Agreement. On October 13, 1999, the Board of Directors agreed to
reprice the shares granted to Mr. Rossi to $.75 per share, the fair market value
of the shares at that date. $2,060.80 of the purchase price has been paid in
cash and the balance by a 5 year, non-recourse promissory note, secured by the
stock, at an interest rate of 6.75%, which is 1% below the prime rate on the
date of the Rossi Stock Purchase Agreement. The Rossi Stock Purchase Agreement
provides SmartServ with certain repurchase options and provides Mr. Rossi with a
put option in the event of the termination of his employment. In the event that
Mr. Rossi's employment is terminated without cause, Mr. Rossi will receive a
lump sum severance payment equal to his full base salary for the remaining term
of the Rossi Agreement, discounted to the present value using an 8% discount
rate and continuing benefit coverage for the lesser of 12 months or the
remaining term of the Rossi Agreement. On December 28, 1999, the Board of
Directors of the Company approved the payment to Mr. Rossi in stock of the bonus
payable to him for 1999 under his employment agreement. Pursuant thereto, in
March 2000 the Company issued 54,000 shares of common stock to Mr. Rossi.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of March 21, 2000, certain
information with respect to the beneficial ownership of the common stock by (1)
each person known by SmartServ to beneficially own more than 5% of the
outstanding shares, (2) each director of SmartServ, (3) each Named Executive
Officer and (4) all executive officers and directors of SmartServ as a group.
Except as otherwise indicated, each person listed below has sole voting and
investment power with respect to the shares of common stock set forth opposite
such person's name.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP (2) OUTSTANDING SHARES (3)
-------------------- ------------------------ ----------------------
<S> <C> <C>
Sebastian E. Cassetta 856,241 (4) 21.07%
c/o SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902
Kevin Kimberlin Partners, L.P. 427,500 (5) 9.58%
c/o Spencer Trask Securities, Inc.
535 Madison Avenue
New York, New York 10022
Steven Rosner 398,833 (6) 9.42%
1220 Mirabeau Lane
Gladwyn, Pennsylvania 19035
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Data Transmission Network Corporation 303,000 (7) 6.99%
9110 West Dodge Road
Omaha, Nebraska 68114
Mario F. Rossi 281,954 (8) 6.95%
c/o SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902
Claudio Guazzoni 88,004 (9) 2.14%
Charles R. Wood 28,874 *
L. Scott Perry 25,833 (10) *
Catherine Cassel Talmadge 25,416 (10) *
Stephen Lawler 20,000 (11) *
Robert H. Steele 14,166 (12) *
All executive officers and directors
as a group (9 persons) 1,358,154 (13) 31.93%
- -----------
</TABLE>
* Less than 1% of the outstanding common stock
(1) Under the rules of the Securities and Exchange Commission (SEC),
addresses are only given for holders of 5% or more of the outstanding
common stock of SmartServ.
(2) Under the rules of the SEC, a person is deemed to be the beneficial owner
of a security if such person has or shares the power to vote or direct
the voting of such security or the power to dispose or direct the
disposition of such security. A person is also deemed to be a beneficial
owner of any securities if that person has the right to acquire
beneficial ownership within 60 days of the date hereof. Unless otherwise
indicated by footnote, the named entities or individuals have sole voting
and investment power with respect to the shares of common stock
beneficially owned.
(3) Represents the number of shares of common stock beneficially owned as of
March 21, 2000 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 27,249 shares of common stock subject to currently exercisable
options. Also includes 2,051 shares held in trust for the benefit of Mr.
Cassetta's wife.
(5) Represents 427,500 shares of common stock subject to currently
exercisable warrants.
(6) Includes 200,000 shares of common stock subject to currently exercisable
warrants.
(7) Represents 303,000 shares of common stock subject to currently
exercisable warrants.
- 27-
<PAGE>
(8) Includes 21,124 shares of common stock subject to currently exercisable
options.
(9) Includes 24,166 shares of common stock subject to currently exercisable
options. Also includes 63,838 shares of common stock subject to currently
exercisable warrants.
(10) Includes 25,000 shares of common stock subject to currently exercisable
options.
(11) Represents 20,000 shares of common stock subject to currently exercisable
options.
(12) Represents 10,000 shares of common stock subject to currently exercisable
options.
(13) Includes 2,051 shares held in trust for the benefit of Mr. Cassetta's
wife and 217,377 shares of common stock subject to currently exercisable
options and warrants issued to all executive officers and directors.
CHANGES IN CONTROL
SmartServ and each of Messrs. Cassetta and Francesco have entered into
an agreement with Zanett Capital, Inc. dated September 29, 1997, as subsequently
amended, which provides, among other things, that for a period of 5 years, upon
an event of default under the prepaid warrants, SmartServ will, at the request
of Zanett Capital, Inc., appoint such number of designees of Zanett Capital,
Inc. to its Board of Directors so that the designees of Zanett Capital, Inc.,
will constitute a majority of the members of the Board of Directors of
SmartServ. Further, Messrs. Cassetta and Francesco have agreed to vote their
shares of common stock, representing approximately 22.23% of the outstanding
stock of SmartServ at March 21, 2000, in favor of the designees of Zanett
Capital, Inc., at each Annual Meeting of Stockholders of SmartServ at which
directors are elected. Although an event of default has occurred under the
prepaid warrants, Zanett Capital, Inc. has not at this time requested SmartServ
to appoint additional designees of Zanett Capital, Inc. to the Board of
Directors of SmartServ.
SELLING STOCKHOLDERS
The shares being offered for resale by the selling stockholders consist
of the shares of common stock held by the selling stockholders listed below as
of March 21, 2000, which were acquired by them in private placements consummated
on January 18, 2000 and shares of common stock underlying warrants to purchase
common stock received by America First Associates Corp as agent in one of such
private placements. The shares being offered hereby are being registered to
permit public secondary trading, and the selling stockholders may offer all or
part of the shares for resale from time to time. However, the selling
stockholders are under no obligation to sell all or any portion of such shares
nor are the selling stockholders obligated to sell any shares immediately under
this prospectus. All information with respect to share ownership has been
furnished by the selling stockholders. Because the selling stockholders may sell
all or part of their shares, no estimates can be given as to the number of
shares of common stock that will be held by the selling stockholders upon
termination of any offering made hereby. Other than a consulting arrangement
with Steven Rosner and an investment advisory relationship with America First
Associates Corp., none of the selling stockholders has, and, within the past
three years, none has had, any position, office or other material relationship
with us or any of our predecessors or affiliates.
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<PAGE>
<TABLE>
<CAPTION>
Shares of Common Stock Shares of Common Beneficial Ownership After
Beneficially Stock to be Offering If All Shares Are
Selling Stockholders Owned Sold Sold
-------------------- ------------ ------------ ---------------
<S> <C> <C> <C>>
Cassandra Appleman 2,000 2,000 0
BC Capital LLC 4,000 4,000 0
Howard & Shari Borenstein 4,000 4,000 0
Edward A. Borrelli 1,500 1,500 0
John D. Byram 20,000 20,000 0
Carlisle Capital LLC 5,000 5,000 0
Bernard Cohen 2,333 2,333 0
Jeff Conry 2,000 2,000 0
Marc Cornstein 5,000 5,000 0
DDL Corp. 31,333 31,333 0
Hilary Edson, SSB as IRA Custodian 15,000 15,000 0
Richard Faieta 2,000 2,000 0
Faucetta Family Partnership 7,500 7,500 0
Mark Fisher 4,000 4,000 0
Bruce M. Ginsburg 10,000 10,000 0
Daniel A. Gooze 4,000 4,000 0
DLJSC as IRA Custodian 20,000 20,000 0
FBO Walter S. Grossman
Stephen P. Harrington 105,833 21,666 84,167
Hathaway Partners Investment LP 5,000 5,000 0
Sam Katzman 7,500 7,500 0
Kevin McCaffrey 25,000 25,000 0
Marvin Mermelstein 2,335 2,335 0
James Metzger, SSB as IRA Custodian 5,000 5,000 0
Alan B. Miller Living Trust 4,000 4,000 0
</TABLE>
- 29-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
John A. Moore 7,500 7,500 0
E. James Mulcahy 3,000 3,000 0
Ronald and Carolyn Nilsen 1,500 1,500 0
Paul Packer 2,000 2,000 0
Richard Pizitz 3,500 3,500 0
Frank Lyon Polk III 10,000 10,000 0
Lara June Purchase 2,000 2,000 0
Susan Ribman 2,000 2,000 0
Steven B. Rosner 398,833 8,333 390,500
Robert H. Savage 5,000 5,000 0
Wayne Wilkey 5,000 5,000 0
Glen D. Witt 3,000 3,000 0
John H. Willmoth 5,000 5,000 0
ZeroDotNet, Inc. 65,000 65,000 0
Joseph A. Genzardi 7,000 7,000 0
Joseph R. Ricupero 7,000 7,000 0
America First Associates Corp. 4,640 4,640 0
----- ----- ----
Total 826,307 351,640 474,667
- ----- ======= ======= =======
</TABLE>
We agreed to file a registration statement, of which this prospectus is
a part, within 90 days after the closing of the two private placements on
January 18, 2000 and to use our best efforts to cause such registration
statement to be declared effective by the Securities and Exchange Commission as
soon as practical thereafter. In the event that we fail to file the registration
statement on or before April 18, 2000, or any stop order or other suspension of
the effectiveness of the registration statement occurs as a result of our
failure to have current filings under the Securities and Exchange Act of 1934,
the holders of the shares will be entitled to receive an additional number of
shares equal to 10% of the shares purchased in the private placement.
PLAN OF DISTRIBUTION
The shares may be sold or distributed from time to time by the selling
stockholders or by pledgees, donees or transferees of, or successors in interest
to, the selling stockholders, directly to one or more purchasers (including
pledgees) or through brokers, dealers or underwriters who may act solely as
agents or
- 30-
<PAGE>
may acquire shares as principals, at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at negotiated prices
or at fixed prices, which may be changed. The distribution of the shares may be
effected in one or more of the following methods:
o ordinary brokers transactions, which may include long or short sales,
o transactions involving cross or block trades or otherwise on the OTC
Bulletin Board,
o purchases by brokers, dealers or underwriters as principal and resale by
such purchasers for their own accounts pursuant to this prospectus,
o "at the market" to or through market makers or into an existing market
for the common stock,
o in other ways not involving market makers or established trading markets,
including direct sales to purchasers or sales effected through agents,
o through transactions in options, swaps or other derivatives (whether
exchange listed or otherwise), or
o any combination of the foregoing, or by any other legally available
means.
In addition, the selling stockholders may enter into hedging
transactions with broker-dealers who may engage in short sales of shares in the
course of hedging the positions they assume with the selling stockholders. The
selling stockholders may also enter into option or other transactions with
broker-dealers that require the delivery by such broker-dealers of the shares,
which shares may be resold thereafter pursuant to this prospectus.
Brokers, dealers, underwriters or agents participating in the
distribution of the shares may receive compensation in the form of discounts,
concessions or commissions from the selling stockholders and/or the purchasers
of shares for whom such broker-dealers may act as agent or to whom they may sell
as principal, or both (which compensation as to a particular broker-dealer may
be in excess of customary commissions). The selling stockholders and any
broker-dealers acting in connection with the sale of the shares hereunder may be
deemed to be underwriters within the meaning of Section 2(11) of the Securities
Act of 1933, and any commissions received by them and any profit realized by
them on the resale of shares as principals may be deemed underwriting
compensation under the Securities Act of 1933. Neither SmartServ nor the selling
stockholders can presently estimate the amount of such compensation. SmartServ
knows of no existing arrangements between the selling stockholders and any other
stockholder, broker, dealer, underwriter or agent relating to the sale or
distribution of the shares.
SmartServ will not receive any proceeds from the sale of the shares
pursuant to this prospectus. SmartServ has agreed to bear the expenses of the
registration of the shares, including legal and accounting fees, and such
expenses are estimated to be approximately $47,000.
SmartServ has informed the selling stockholders that certain
anti-manipulative rules contained in Regulation M under the Securities Exchange
Act of 1934 may apply to their sales in the market and has furnished the selling
stockholders with a copy of such rules and has informed them of the need for
delivery of copies of this prospectus.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 24, 1999, SmartServ and DTN entered into an agreement that
amended the Software License and Service Agreement dated April 23, 1998. In
consideration of the receipt of $5.175 million,
- 31-
<PAGE>
SmartServ granted DTN an exclusive perpetual worldwide license to SmartServ's
Internet-based (1) real-time stock quote product, (2) online trading vehicle for
customers of small and medium sized brokerage companies, (3) administrative
reporting package for brokers of small and medium sized brokerage companies and
(4) order entry/routing system. Additionally, SmartServ received $324,000 in
exchange for an agreement to issue warrants to purchase 300,000 shares of
SmartServ's common stock at an exercise price of $8.60 per share. SmartServ has
agreed to continue to operate these products and provide maintenance and
enhancement services in exchange for a percentage of the revenues earned by DTN
therefrom. The cost of SmartServ's commitment to provide such maintenance and
enhancement services is limited to a maximum of 20% of the revenues earned by
SmartServ. Charles R. Wood, a director of SmartServ, was until February 28,
2000, Senior Vice President of DTN and President of its Financial Services
Division.
SmartServ believes that the terms of the transactions described above
were no less favorable to SmartServ than would have been obtained from a
non-affiliated third party for similar transactions at the time of entering into
such transactions. In accordance with SmartServ's policy, such transactions were
approved by a majority of the independent disinterested directors of SmartServ.
DESCRIPTION OF CAPITAL STOCK
The following is a summary description of our capital stock and certain
provisions of our Amended and Restated Certificate of Incorporation and By-Laws,
copies of which have been incorporated by reference as exhibits to the
registration statement of which this prospectus forms a part. The following
discussion is qualified in its entirety by reference to such exhibits. We have
also included a summary description of only those warrants held by one of the
selling stockholders and we have not described any of our other outstanding
warrants.
GENERAL
Our authorized capital stock consists of 40,000,000 shares of common
stock, par value $.01 per share, and 1,000,000 shares of preferred stock, par
value $.01 per share. As of March 21, 2000, we had 4,033,754 shares of common
stock issued and outstanding. No shares of preferred stock are issued and
outstanding. We have reserved 4,843,627 shares of common stock for issuance
pursuant to outstanding options and warrants.
COMMON STOCK
The holders of the common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders. Our Amended
and Restated Certificate of Incorporation and By-Laws do not provide for
cumulative voting rights in the election of directors. Accordingly, holders of a
majority of the shares of common stock entitled to vote in any election of
directors may elect all of the directors standing for election. Holders of
common stock are entitled to receive ratably such dividends as may be declared
by the Board out of funds legally available therefor. In the event of our
liquidation, dissolution or winding up, holders of common stock are entitled to
share ratably in the assets remaining after payment of liabilities. Holders of
common stock have no preemptive, conversion or redemption rights. All of the
outstanding shares of common stock are fully-paid and nonassessable.
PREFERRED STOCK
Our Board of Directors may, without stockholder approval, establish and
issue shares of one or more classes or series of preferred stock having the
designations, number of shares, dividend rates, liquidation preferences,
redemption provisions, sinking fund provisions, conversion rights, voting rights
and other rights, preferences and limitations that our Board may determine. The
Board may authorize the issuance of
- 32-
<PAGE>
preferred stock with voting, conversion and economic rights senior to the common
stock so that the issuance of preferred stock could adversely affect the market
value of the common stock. The creation of one or more series of preferred stock
may adversely affect the voting power or other rights of the holders of common
stock. The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes could, among
other things and under some circumstances, have the effect of delaying,
deferring or preventing a change in control without any action by stockholders.
WARRANTS
On January 18, 2000, America First Associates Corp., acting as our
placement agent, completed a private placement of 233,000 shares of common stock
at $15.00 a share. In connection with this private placement, we issued warrants
to purchase 18,640 shares to America First Associates Corp. at an exercise price
of $15.00 per share. The warrants expire January 18, 2005. The exercise price
and number of shares into which such warrants are exercisable are subject to
adjustment under certain circumstances including a stock split of, or stock
dividend on, or a reclassification of the common stock. We agreed to file a
registration statement with the Securities and Exchange Commission to register
the shares within 90 days after the closing of the offering and to use our best
efforts to have such registration statement declared effective. We have also
granted certain piggyback rights to America First Associates Corp.
The warrants may be exercised in whole or in part, subject to the
limitations provided in the warrants. Any warrant holders who do not exercise
their warrants prior to the conclusion of the exercise period will forfeit the
right to purchase the shares of common stock underlying the warrants and any
outstanding warrants will become void and be of no further force or effect.
Holders of the warrants have no voting, preemptive, liquidation or
other rights of a stockholder, and no dividends will be declared on the
warrants.
We have agreed to pay all registration expenses incurred in connection
with the registration of the common stock issuable upon exercise of the
warrants.
DELAWARE BUSINESS COMBINATION PROVISIONS
We are governed by the provisions of Section 203 of the Delaware
General Corporation Law ("DGCL"). In general, this statute prohibits a publicly
held Delaware corporation from engaging, under certain circumstances, in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder unless:
o prior to the date at which the stockholder became an interested
stockholder, the Board of Directors approved either the business
combination or the transaction in which the person became an interested
stockholder;
o the stockholder acquired more than 85% of the outstanding voting stock of
the corporation (excluding shares held by directors who are officers and
shares held in certain employee stock plans) upon consummation of the
transaction in which the stockholder became an interested stockholder; or
o the business combination is approved by the Board of Directors and by at
least 66-2/3% of the outstanding voting stock of the corporation (excluding
shares held by the interested stockholder) at a meeting of stockholders
(and not by written consent) held on or after the date such stockholder
became an interested stockholder.
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<PAGE>
An "interested stockholder" is a person who, together with affiliates
and associates, owns (or at any time within the prior three years did own) 15%
or more of the corporation's voting stock. Section 203 defines a "business
combination" to include, without limitation, mergers, consolidations, stock
sales and asset-based transactions and other transactions resulting in a
financial benefit to the interested stockholder.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102(b)(7) of the DGCL enables a corporation in its original
certificate of incorporation or an amendment thereto to eliminate or limit the
personal liability of a director to a corporation or its stockholders for
violations of the director's fiduciary duty, except:
o for any breach of a director's duty of loyalty to the corporation or its
stockholders,
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
o pursuant to Section 174 of the DGCL (providing for liability of directors
for unlawful payment of dividends or unlawful stock purchases or
redemptions), or
o for any transaction from which a director derived an improper personal
benefit.
The Amended and Restated Certificate of Incorporation of SmartServ provides in
effect for the elimination of the liability of directors to the extent permitted
by the DGCL.
Section 145 of the DGCL provides, in summary, that directors and
officers of Delaware corporations are entitled, under certain circumstances, to
be indemnified against all expenses and liabilities (including attorney's fees)
incurred by them as a result of suits brought against them in their capacity as
a director or officer, if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, if they had
no reasonable cause to believe their conduct was unlawful; provided, that no
indemnification may be made against expenses in respect of any claim, issue or
matter as to which they shall have been adjudged to be liable to the
corporation, unless and only to the extent that the court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, they
are fairly and reasonably entitled to indemnity for such expenses which the
court shall deem proper. Any such indemnification may be made by the corporation
only as authorized in each specific case upon a determination by the
stockholders or disinterested directors that indemnification is proper because
the indemnitee has met the applicable standard of conduct. SmartServ's By-Laws
entitle officers and directors of SmartServ to indemnification to the fullest
extent permitted by the DGCL.
SmartServ has agreed to indemnify each of its directors and certain
officers against certain liabilities, including liabilities under the Securities
Act of 1933. In addition, SmartServ maintains an insurance policy with respect
to potential liabilities of its directors and officers, including potential
liabilities under the Securities Act of 1933.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
SmartServ pursuant to the provisions described above, or otherwise, SmartServ
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by SmartServ of
expenses incurred or paid by a director, officer or controlling person of
SmartServ in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person
- 34-
<PAGE>
in connection with the securities being registered, SmartServ will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the
Securities and Exchange Commission. You may read and copy any report, proxy
statement or other information we file with the Commission at the Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's Regional Offices at 75 Park Place, Room 1400, New York, New York
10007 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You may obtain information on the operation of the Public
Reference Room by calling the Commission at 1-800-SEC-0330. In addition, we file
electronic versions of these documents on the Commission's Electronic Data
Gathering Analysis and Retrieval, or EDGAR, System. The Commission maintains a
website at http.//www.sec.gov that contains reports, proxy statements and other
information filed with the Commission.
We have filed a registration statement on Form SB-2 with the Commission
to register the shares of our common stock to be sold by the selling
stockholders. This prospectus is part of that registration statement and, as
permitted by the Commission's rules, does not contain all of the information set
forth in the registration statement. For further information with respect to us
or our common stock, you may refer to the registration statement and to the
exhibits and schedules filed as part of the registration statement. You can
review a copy of the registration statement and its exhibits and schedules at
the public reference room maintained by the Commission, and on the Commission's
web site, as described above. You should note that statements contained in this
prospectus that refer to the contents of any contract or other document are not
necessarily complete. Such statements are qualified by reference to the copy of
such contract or other document filed as an exhibit to the registration
statement.
TRANSFER AGENT
The Transfer Agent and Registrar for the common stock is Continental
Stock Transfer & Trust Company, Two Broadway, New York, New York 10004. Its
telephone number is (212) 509-4000.
LEGAL MATTERS
The validity of the shares of common stock offered in this prospectus
has been passed upon for us by Parker Chapin LLP, The Chrysler Building, 405
Lexington Avenue, New York, New York 10174. Its telephone number is (212)
704-6000.
EXPERTS
The financial statements of SmartServ Online, Inc. at June 30, 1999 and
1998, and for each of the three years in the period ended June 30, 1999,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
(which contains an explanatory paragraph describing conditions that raise
substantial doubt about the Company's ability to continue as a going concern as
described in Note 1 to the financial statements) appearing elsewhere herein, and
are included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
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<PAGE>
- --------------------------------------------------------------------------------
[LOGO]
SMARTSERV ONLINE, INC.
351,640
Shares
of
Common Stock
PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THAT WE
HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS IS NOT AN OFFER TO SELL COMMON
STOCK AND IS NOT SOLICITING AN OFFER TO BUY COMMON STOCK IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
April __, 2000
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.
Section 145 of the General Corporation Law of Delaware ("DGCL")
provides that directors, officers, employees or agents of Delaware corporations
are entitled, under certain circumstances, to be indemnified against expenses
(including attorneys' fees) and other liabilities actually and reasonably
incurred by them in connection with any suit brought against them in their
capacity as a director, officer, employee or agent, if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, if they had no reasonable cause to believe their conduct was
unlawful. Section 145 also provides that directors, officers, employees and
agents may also be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by them in connection with a derivative suit
bought against them in their capacity as a director, if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification may be made without
court approval if such person was adjudged liable to the corporation.
Article Tenth of the registrant's Certificate of Incorporation provides
that the registrant shall indemnify any and all persons whom it shall have power
to indemnify to the fullest extent permitted by the DGCL. Article VI of the
registrant's by-laws provides that the registrant shall indemnify authorized
representatives of the registrant to the fullest extent permitted by the DGCL.
The registrant's by-laws also permit the registrant to purchase insurance on
behalf of any such person against any liability asserted against such person and
incurred by such person in any capacity, or out of such person's status as such,
whether or not the registrant would have the power to indemnify such person
against such liability under the foregoing provision of the by-laws.
The registrant maintains a directors and officers liability insurance
policy with National Union Fire Insurance Company of Pittsburgh, PA. The policy
insures the directors and officers of the registrant against loss arising from
certain claims made against such directors or officers by reason of certain
wrongful acts.
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with the
issuance and distribution of the securities being registered hereby. All such
expenses will be borne by the registrant; none shall be borne by any selling
stockholders.
Securities and Exchange
Commission registration fee $ 5,901
Legal fees and expenses (1) $20,000
Accounting fees and expenses (1) $20,000
Miscellaneous (1) $ 1,099
Total $47,000
- -------------------------------
(1) Estimated.
II-1
<PAGE>
Item 26. RECENT SALES OF UNREGISTERED SECURITIES.
On May 29, 1997, the Company issued a $550,000 promissory note and
warrants to purchase 45,302 shares of common stock to Zanett Lombardier, Ltd.
("ZLL") for $550,000. On each of July 21, 1997 and September 16, 1997, the
Company issued an additional $111,111 promissory note and warrants to purchase
an additional 9,151 shares of common stock to ZLL for $111,111. The warrants are
subject to antidilution provisions and have exercise prices of $4.97 and $6.07
per share. Zanett Securities Corporation ("Zanett") received fees of $78,576 for
its services in connection with such transactions. Additionally, Zanett received
warrants to purchase 15,899 shares of common stock. Such warrants are subject to
antidilution provisions and have exercise prices of $4.97 and $6.07. The
promissory notes and warrants were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On September 16, 1997, the Company issued warrants to purchase 50,083
shares of common stock to ZLL as a default penalty under the ZLL notes. The
warrants have an exercise price of 50% of the closing price of the Company's
common stock on the exercise date. On November 16, 1999, ZLL exercised on a
cashless basis all of such warrants in exchange for 25,042 shares of common
stock. No sales commissions were paid in connection with such transactions. The
warrants were issued in reliance upon the exemption from registration provided
by Section 4 (2) of the Securities Act. The shares were issued in reliance upon
the exemption from registration provided by Section 3 (a) (9) of the Securities
Act.
On September 29, 1997, the Company issued 4,000 prepaid common stock
purchase warrants ("Prepaid Warrants") to 12 investors for $4,000,000. Included
in such amount was $772,222 of the promissory notes issued to ZLL and $63,837 of
accrued interest thereon which were cancelled in connection with this
transaction. The Prepaid Warrants are convertible into a number of shares of
common stock of the Company that is equal to $1,000 divided by the applicable
exercise price. The exercise price is 70% of the average closing bid price of
the common stock for the 10 trading days ending on the day prior to exercise of
such warrants, reduced by 1% for each 60 day period the Prepaid Warrants remain
unexercised, but in no event above $8.40 per share. Zanett received a commission
of $400,000, an unaccountable expense allowance of $120,000, and warrants to
purchase 135,906 shares, subject to antidilution provisions, of common stock at
$4.97 per share in connection with such transaction. The Prepaid Warrants, and
the warrants issued to Zanett, were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On September 29, 1997, the Company issued 113,250 warrants to Bruno
Guazzoni and, subject to stockholder approval, agreed to issue to him warrants
to purchase an additional 692,120 shares of common stock. These additional
warrants were approved by the stockholders and issued in April 1998. The
warrants are subject to antidilution provisions and have an exercise price of
$4.97 per share. No sales commissions were paid in connection with such
transaction. The warrants were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
Between January 13, 1998 and March 21, 2000 an aggregate of 3,388
Prepaid Warrants were converted into an aggregate of 1,209,738 shares of common
stock of the Company. No sales commissions were paid in connection with such
conversions. The shares were issued in reliance upon the exemption from
registration provided by Section 3 (a) (9) of the Securities Act.
On January 2, 1998 and March 3, 1998, the Company issued warrants to
purchase 16,666 and 20,833 shares of common stock, respectively, in connection
with consulting contracts. The warrants have exercise prices of $3.75 and $15.75
to $19.50, respectively. No sales commissions were paid in
II-2
<PAGE>
connection with such transactions. The warrants were issued in reliance upon the
exemption from registration provided by Section 4 (2) of the Securities Act.
On August 31, 1998, the Company issued 32,953 shares of common stock to
ZLL and 17,047 shares of common stock to Bruno Guazzoni in consideration for
their agreeing to certain restrictions on the exercise of the Prepaid Warrants
and the resale of the shares of common stock issuable on exercise thereof. No
sales commissions were paid in connection with such transaction. The shares were
issued in reliance upon the exemption from registration provided by Section 4
(2) of the Securities Act.
On September 8, 1998, the Company issued warrants to purchase 3,000
shares of common stock to DTN for prepayment of certain guaranteed payments in
accordance with the Software License and Service Agreement between the parties
dated April 23, 1998. Such warrants are exercisable at $3.00 per share of common
stock. These warrants were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act. No sales
commissions were paid in connection with such transaction.
On November 17, 1998, the Company issued 125,000 shares of common stock
and warrants to purchase 16,667 shares of common stock, exercisable at $5.00 per
share until November 11, 2001, to Steven Francesco, a former officer of the
Company, as partial consideration for the settlement of his claims against the
Company and certain of its officers and directors. The shares and warrants were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act. No sales commissions were paid in connection with such
transaction.
Between November 20, 1998 and December 3, 1998, the Company issued
convertible promissory notes in the amount of $500,000 and warrants to purchase
833,333 shares of common stock to 6 investors for $500,000. Such warrants are
exercisable at $.60 per share and expire on November 19, 2003. Spencer Trask
Securities, Inc. ("Spencer Trask"), the placement agent, received a commission
of $50,000 and an unaccountable expense allowance of $15,000 in connection with
such transaction. Additionally, the Company issued warrants to purchase 166,667
shares of common stock to Spencer Trask exercisable at $.72 per share through
November 29, 2003. These promissory notes and warrants were issued in reliance
upon the exemption from registration provided by Section 4 (2) of the Securities
Act.
On January 14, 1999, the Company issued 10,000 shares of common stock
to Arnhold & S. Bleichroeder, Inc. ("ASB"), an investor in the Company's Prepaid
Warrants, in consideration of an agreement to waive certain events of default
under such Prepaid Warrants. No sales commissions were paid in connection with
such transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On January 20, 1999, the Company agreed to cancel warrants to purchase
20,833 shares of common stock exercisable at $15.75 and $19.50 per share to Mr.
Steven Rosner, a financial advisor to the Company, and to grant Mr. Rosner
warrants to purchase 40,833 shares of common stock at $.60 per share for his
efforts in arranging the Company's relationship with Spencer Trask. These
warrants expire on March 4, 2003 and January 19, 2004 and were issued in
reliance upon the exemption from registration provided by Section 4 (2) of the
Securities Act.
On January 28, 1999, the Company issued a convertible promissory note
in the amount of $50,000 and warrants to purchase 83,333 shares of common stock
to Mr. Bruno Guazzoni, an investor in the Company's Prepaid Warrants, for
$50,000. Such warrants are exercisable at $.60 per share and expire on November
19, 2003. Spencer Trask, the placement agent, received a commission of $5,000,
an unaccountable expense allowance of $1,500 and warrants to purchase 16,667
shares of common stock at $.72 per share through January 26, 2004 in connection
with this transaction. The promissory note and the
II-3
<PAGE>
warrants were issued in reliance upon the exemption from registration provided
by Section 4 (2) of the Securities Act.
On July 6, 1999, the Company issued 180,000 shares of common stock to
ASB to settle the Company's obligation to ASB pursuant to the default provisions
of the Prepaid Warrants. No sales commissions were paid in connection with such
transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On December 28, 1999, the Board of Directors of the Company approved
the payment to Sebastian E. Cassetta and Mario F. Rossi in stock of the bonus
payable to them for 1999 under their employment agreements. Pursuant thereto, in
March 2000 the Company issued 148,000 shares of common stock to Mr. Cassetta and
54,000 shares to Mr. Rossi. No sales commissions were paid in connection with
such transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On January 4, 2000, the Company issued 618,239 and 206,080 shares of
common stock to Sebastian E. Cassetta and Mario F. Rossi, respectively, pursuant
to Stock Purchase Agreements dated December 29, 1998 between the Company and
each of them. No sales commissions were paid in connection with such
transactions. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On January 18, 2000, the Company issued 233,000 shares of common stock
to 24 investors. America First Associates Corp., the placement agent, received a
commission of 8% of the aggregate purchase price of the shares purchased in the
offering, an unaccountable expense allowance of $25,000 in connection with such
transaction and warrants to purchase 18,640 shares. These shares and warrants
were issued in reliance upon the exemption from registration provided by Section
4 (2) of the Securities Act.
On January 18, 2000, the Company issued an additional 100,000 shares of
common stock to 14 investors. No sales commissions were paid in connection with
such transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On January 20, 2000, the Company issued to DTN a warrant for the
purchase of 300,000 shares of the Company's common stock at $8.60 per share in
exchange for $324,000. The warrant will expire on November 17, 2000. No sales
commissions were paid in connection with such transaction. The warrant was
issued in reliance upon the exemption from registration provided by Section 4
(2) of the Securities Act.
Item 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
-------------------------------------------
(a) Exhibits:
The following exhibits are filed as part of this registration
statement:
EXHIBIT DESCRIPTION
------- -----------
3.1 Amended and Restated Certificate of Incorporation of the
Company***
3.2 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation filed on June 1, 1998 *
3.3 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation filed on October 16, 1998*
II-4
<PAGE>
3.4 By-laws of the Company, as amended***
4.1 Specimen Certificate of the Company's Common Stock***
4.2 Placement Agent Agreement dated as of January 11, 2000 between
the Company and America First Associates Corp.+
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP+
10.1 Information Distribution License Agreement dated as of July
18, 1994 between the Company and S&P ComStock, Inc.***
10.2 New York Stock Exchange, Inc. Agreement for Receipt and Use of
Market Data dated as of August 11, 1994 between the Company
and the New York Stock Exchange, Inc.***
10.3 The Nasdaq Stock Market, Inc. Vendor Agreement for Level 1
Service and Last Sale Service dated as of September 12, 1994
between the Company and The Nasdaq Stock Exchange, Inc.
("Nasdaq")***
10.4 Amendment to Vendor Agreement for Level 1 Service and Last
Sale Service dated as of October 11, 1994 between the Company
and Nasdaq***
10.5 Lease Agreement dated as of March 4, 1994, between the Company
and One Station Place, L.P. regarding the Company's Stamford,
Connecticut offices***
10.6 Lease Modification and Extension Agreement, dated February 6,
1996, between the Company and One Station Place, L.P.
regarding the Company's Stamford, Connecticut offices****
10.7 Form of 1996 Stock Option Plan*****
10.8 Asset Purchase and Software License and Service Agreements
between SmartServ Online, Inc. and Data Transmission Network
Corporation, dated April 23, 1998******
10.9 Amendment to the Software and License Agreement between
SmartServ Online, Inc. and Data Transmission Network
Corporation, dated June 24, 1999. Portions of this exhibit
(indicated by asterisks) have been omitted pursuant to an
order by the Securities and Exchange Commission dated December
2, 1999, granting confidential treatment under the Securities
Exchange Act of 1934 and the omitted portions have been filed
separately with the Securities and Exchange Commission *
10.10 Letter agreement dated August 26, 1999, amending the Amendment
to the Software and License Agreement between SmartServ
Online, Inc. and Data Transmission Network Corporation, dated
June 24, 1999. Portions of this exhibit (indicated by
asterisks) have been omitted pursuant to an order by the
Securities and Exchange Commission dated December 2, 1999,
granting confidential treatment under the Securities Exchange
Act of 1934 and the omitted portions have been filed
separately with the Securities and Exchange Commission *
10.11 Amended and Restated Employment Agreement between SmartServ
Online, Inc. and Sebastian E. Cassetta, dated January 1, 1999*
10.12 Restricted Stock Purchase Agreement between SmartServ Online,
Inc. and Sebastian E. Cassetta, dated December 29, 1998*
10.13 Employment Agreement between SmartServ Online, Inc. and Mario
F. Rossi, dated January 1, 1999*
10.14 Restricted Stock Purchase Agreement between SmartServ Online,
Inc. and Mario F. Rossi, dated December 29, 1998*
23.1 Consent of Ernst & Young LLP+
23.2 Consent of Parker Chapin Flattau & Klimpl, LLP (Included in
Exhibit 5.1)
24.1 Power of Attorney of certain directors and officers of
SmartServ (Included as part of the signature page beginning on
page II-7 of this filing)
- ------------
II-5
<PAGE>
+ Filed herewith
* Filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1999
** Filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1997
*** Filed as an exhibit to the Company's registration statement on
Form SB-2 (Registration No. 333-114)
**** Filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1996
***** Filed as an exhibit to the Company's 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
Item 28. UNDERTAKINGS.
-------------
(A) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement to:
(i) Include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental
change in the information set forth in the
registration statement; and
(iii) Include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering therein, and
the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(B) Undertaking Required by Regulation S-B, Item 512(e).
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or controlling persons
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel that the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-6
<PAGE>
(C) Undertaking Required by Regulation S-B, Item 512(f)
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at the time
shall be deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on the 17th day of April, 2000.
SmartServ Online, Inc.
By: /s/ Sebastian E. Cassetta
------------------------------
Sebastian E. Cassetta
Chairman of the Board, Chief Executive
Officer and Secretary
POWER OF ATTORNEY
The undersigned directors and officers of SmartServ Online, Inc. hereby
constitute and appoint Sebastian E. Cassetta, Mario F. Rossi and Thomas W.
Haller and each of them, with full power to act without the other and with full
power of substitution and resubstitution, our true and lawful attorneys-in-fact
with full power to execute in our name and behalf in the capacities indicated
below any and all amendments (including post-effective amendments and amendments
thereto) to this registration statement under the Securities Act of 1933 and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and hereby ratify and
confirm each and every act and thing that such attorneys-in-fact, or any them,
or their substitutes, shall lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Sebastian E. Cassetta Chairman of the Board, April 17, 2000
- --------------------------------------- Chief Executive Officer,
Sebastian E. Cassetta Secretary and Director
/s/ Mario F. Rossi Vice President and April 17, 2000
- --------------------------------------- Director
Mario F. Rossi
/s/ Thomas W. Haller Vice President, Treasurer April 17, 2000
- --------------------------------------- (Chief Financial Officer and Chief
Thomas W. Haller Accounting Officer)
Director April __, 2000
- ---------------------------------------
Claudio Guazzoni
Director April __, 2000
- ---------------------------------------
Stephen Lawler
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Robert H. Steele Director April 17, 2000
- ---------------------------------------
Robert H. Steele
/s/ L. Scott Perry Director April 17, 2000
- ---------------------------------------
L. Scott Perry
/s/ Catherine Cassel Talmadge Director April 17, 2000
- ---------------------------------------
Catherine Cassel Talmadge
/s/ Charles R. Wood Director April 17, 2000
- ---------------------------------------
Charles R. Wood
</TABLE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
UNAUDITED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS AND SIX
MONTHS ENDED DECEMBER 31, 1999
<S> <C>
Balance Sheets as of June 30, 1999 and December 31, 1999 (unaudited) F-2
Statements of Operations for the three month and the six month periods
ended December 31, 1999 and 1998 (unaudited) F-4
Statement of Changes in Stockholders' Deficiency
for the six months ended December 31, 1999 (unaudited) F-5
Statements of Cash Flows for the three month and the six month periods
ended December 31, 1999 and 1998 (unaudited) F-6
Notes to Unaudited Financial Statements F-7
FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDING JUNE 30, 1999 AND JUNE 30,
1998 AND JUNE 30, 1997
Report of Independent Auditors F-13
Balance Sheets as of June 30, 1999 and 1998 F-14
Statements of Operations for the years
ended June 30, 1999, 1998 and 1997 F-16
Statement of Stockholders' Equity (Deficiency)
for the years ended June 30, 1997, 1998 and 1999 F-17
Statements of Cash Flows for the years
ended June 30, 1999, 1998 and 1997 F-21
Notes to Financial Statements F-22
</TABLE>
F-1
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
-------------------- -------------------
(UNAUDITED)
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 371,581 $ 2,165,551
Accounts receivable 386,007 348,278
Prepaid expenses 51,777 50,150
-------------------- -------------------
Total current assets 809,365 2,563,979
-------------------- -------------------
Property and equipment, net 461,198 498,448
Other assets
Capitalized software development costs,
net of accumulated amortization of $202,834 at
December 31, 1999 and $82,108 at June 30, 1999 1,115,906 683,337
Security deposits 73,374 74,834
-------------------- -------------------
1,189,280 758,171
-------------------- -------------------
Total Assets $ 2,459,843 $ 3,820,598
==================== ===================
</TABLE>
F-2
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
-------------------- -------------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
<S> <C> <C>
Accounts payable $ 886,196 $ 780,543
Accrued liabilities 358,359 474,189
Accrued liabilities to warrant holders -- 1,311,365
Salaries payable 48,193 93,443
Capital lease obligation 23,942 70,147
Deferred revenues - current portion 1,656,632 1,656,632
------------------- -------------------
Total current liabilities 2,973,322 4,386,319
------------------- -------------------
Deferred revenues - long-term portion 3,313,267 4,141,579
COMMITMENTS AND CONTINGENCIES - NOTE 7
STOCKHOLDERS' DEFICIENCY
Preferred stock - $0.01 par value
Authorized - 1,000,000 shares
Issued and outstanding - None
Common stock - $.01 par value
Authorized - 40,000,000 shares
Issued and outstanding - 1,199,787 shares at June 30, 1999
and 1,460,215 shares at December 31, 1999 14,601 11,998
Common stock subscribed 675,853 1,812,554
Notes receivable from officers (675,853) (1,812,554)
Additional paid-in capital 42,121,283 20,679,611
Unearned compensation (2,920,394) (3,452,904)
Accumulated deficit (43,042,236) (21,946,005)
-------------------- -------------------
Total stockholders' deficiency (3,826,746) (4,707,300)
-------------------- -------------------
Total Liabilities and Stockholders' Deficiency $ 2,459,843 $ 3,820,598
==================== ===================
</TABLE>
See accompanying notes.
F-3
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED DECEMBER 31 ENDED DECEMBER 31
--------------------------------------- -------------------------------------
1999 1998 1999 1998
------------------- ----------------- ----------------- -----------------
Revenues $ 912,621 $ 344,024 $ 1,720,913 $ 693,729
------------------- ----------------- ----------------- -----------------
Costs and expenses:
<S> <C> <C> <C> <C>
Costs of revenues 207,779 182,437 445,412 389,521
Product development expenses 87,377 24,170 134,222 51,216
Selling, general and administrative
expenses 725,427 666,693 1,302,974 1,167,130
Stock-based compensation 21,362,068 335,004 21,635,019 665,425
------------------- ----------------- ----------------- -----------------
Total costs and expenses 22,382,651 1,208,304 23,517,627 2,273,292
------------------- ----------------- ----------------- -----------------
Loss from operations (21,470,030) (864,280) (21,796,714) (1,579,563)
------------------- ----------------- ----------------- -----------------
Other income (expense):
Interest income 2,016 706 13,033 2,908
Interest expense and other
financing costs (30,250) (669,701) (30,250) (810,797)
Prepaid warrant costs 717,700 -- 717,700 --
------------------- ----------------- ----------------- -----------------
689,466 (668,995) 700,483 (807,889)
------------------- ----------------- ----------------- -----------------
Net loss $ (20,780,564) $ (1,533,275) $ (21,096,231) $ (2,387,452)
=================== ================= ================= =================
Basic and diluted earnings per
common share $ (14.75) $ (1.41) $ (15.19) $ (2.36)
=================== ================= ================= =================
Weighted average shares outstanding 1,409,046 1,089,881 1,388,546 1,010,487
=================== ================= ================= =================
</TABLE>
See accompanying notes.
F-4
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
SIX MONTHS ENDED DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK COMMON RECEIVABLE ADDITIONAL
PAR STOCK FROM PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED OFFICERS CAPITAL COMPENSATION DEFICIT
---------- ----------- ------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1999 1,199,787 $11,998 $1,812,554 $(1,812,554) $20,679,611 $(3,452,904) $(21,946,005)
Issuance of Common Stock in
connection with the
settlement of obligations
to a Prepaid Warrant holder 180,000 1,800 -- -- 266,895 -- --
Issuance of Common Stock upon
exercise of employee stock
options 8,195 81 -- -- 10,494 -- --
Issuance of warrants to
purchase 200,000 shares of
Common Stock in connection
with investment advisory -- -- -- -- 60,000 (60,000) --
services
Conversion of 87.8 Prepaid
Common Stock Purchase
Warrants into Common Stock 30,525 305 -- -- (305) -- --
Revaluation of subscriptions
for 824,319 shares of
Common Stock and notes
receivable in connection
with officers' employment -- -- (1,194,315) 1,194,315 -- -- --
contracts
Subscriptions for 76,818
shares of Common Stock and
notes receivable in
connection with restricted
stock purchase agreement -- -- 57,614 (57,614) -- -- --
Issuance of Common Stock upon
exercise of warrants to
purchase Common Stock 41,708 417 -- -- 62,079 -- --
Amortization of unearned
compensation over the term
of consulting agreements -- -- -- -- -- 592,510 --
Change in market value of
employee stock options -- -- -- -- 2,224,709 -- --
Authorization of the issuance
of 202,000 shares of Common
Stock in connection with
officers' employment -- -- -- -- 3,181,500 -- --
contracts
Change in market value of
Common Stock subscriptions -- -- -- -- 15,636,300 -- --
Net loss for the period -- -- -- -- -- -- (21,096,231)
---------- ----------- ------------- ------------- ------------- -------------- --------------
Balances at December 31, 1999 1,460,215 $14,601 $ 675,853 $(675,853) $42,121,283 $(2,920,394) $(43,042,236)
========== =========== ============= ============= ============= ============== ==============
</TABLE>
See accompanying notes.
F-5
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED DECEMBER 31 ENDED DECEMBER 31
------------------------------------- --------------------------------------
1999 1998 1999 1998
------------------ ---------------- ------------------ -----------------
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net loss $ (20,780,564) $ (1,533,275) $ (21,096,231) $ (2,387,452)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization 125,080 69,198 221,346 116,901
Noncash interest expense and other
financing costs -- 666,070 -- 794,245
Noncash compensation costs 21,060,813 -- 21,042,509 --
Noncash consulting costs 301,255 335,004 592,510 665,425
Amortization of unearned revenues (414,156) (15,534) (828,312) (31,068)
Changes in operating assets and liabilities
Accounts receivable (117,156) 816 (37,729) 34,811
Prepaid expenses (11,112) 11,009 (1,627) (72,627)
Accounts payable and accrued liabilities (576,689) 377,988 (1,052,847) 539,050
Accrued interest payable -- 3,776 -- 3,776
Salaries payable (20,854) (34,915) (45,250) (34,910)
Unearned revenues -- 13,051 -- 213,051
Security deposit -- -- 1,460 --
----------------- ---------------- ------------------ -----------------
Net cash used for operating activities (433,383) (106,812) (1,204,171) (158,798)
----------------- ---------------- ------------------ -----------------
INVESTING ACTIVITIES
Purchase of equipment (38,985) (11,057) (63,370) (22,695)
Capitalization of software development costs (309,070) (262,810) (553,295) (495,815)
----------------- ---------------- ------------------ -----------------
Net cash used for investing activities (348,055) (273,867) (616,665) (518,510)
----------------- ---------------- ------------------ -----------------
FINANCING ACTIVITIES
Repayment of capital lease obligation (23,495) (20,516) (46,205) (40,353)
Proceeds from the issuance of notes -- 435,000 -- 435,000
Proceeds from the issuance of common stock 73,071 -- 73,071 --
Deferred financing costs -- (35,000) -- (35,000)
----------------- ---------------- ------------------ -----------------
Net cash provided by financing activities 49,576 379,484 26,866 359,647
----------------- ---------------- ------------------ -----------------
Decrease in cash (731,862) (1,195) (1,793,970) (317,661)
Cash - beginning of period 1,103,443 37,759 2,165,551 354,225
----------------- ---------------- ------------------ -----------------
Cash - end of period $ 371,581 $ 36,564 $ 371,581 $ 36,564
================= ================ ================== =================
</TABLE>
See accompanying notes.
F-6
<PAGE>
SMARTSERV ONLINE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION
SmartServ Online, Inc. (the "Company") commenced operations on August 20, 1993.
The Company offers a range of services designed to facilitate e-commerce by
providing transactional and information services to its alliance partners
("Strategic Marketing Partners"). The Company has developed online financial,
transactional and media applications using a unique "device independent"
delivery solution and makes these services available through its application
software and communication architecture to wireless telephones and personal
digital assistants, personal computers and the Internet. The Company's services
include stock trading, real-time stock quotes, business and financial news,
sports information, private-labeled electronic mail, national weather reports
and other business and entertainment information.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
- ---------------------
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information,
the instructions of Form 10-QSB and Rule 310 of Regulation SB and, therefore, do
not include all information and notes necessary for a presentation of results of
operations, financial position and cash flows in conformity with generally
accepted accounting principles. The balance sheet at June 30, 1999 has been
derived from the audited financial statements at that date, but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial statements should be
read in conjunction with the Company's audited financial statements for the year
ended June 30, 1999 included herein. In the opinion of the Company, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation have been made. Results of operations for the six months ended
December 31, 1999 are not necessarily indicative of those expected for the year
ending June 30, 2000.
The Company has completed development of its core applications software and
communications architecture; however, it has yet to generate revenues in an
amount sufficient to support its operations. The Company has incurred recurring
operating losses and its operations have not produced a positive cash flow.
Additionally, there is no assurance that the Company will generate future
revenues or cash flow from operations. The Company's financial statements for
the period ended December 31, 1999 have been prepared on a going concern basis
which contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business. The Company incurred net
losses of $7,124,126, $5,040,009 and $4,434,482 for the years ended June 30,
1999, 1998 and 1997, respectively, and as of December 31, 1999 had an
accumulated deficit of $43,042,236 and a deficiency of net assets of $3,826,746.
The Company is also a defendant in several legal proceedings (see Note 7) which
could have a material adverse effect on the Company's financial position, cash
flow, and results of operations. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of these uncertainties.
F-7
<PAGE>
The Company's stockholders approved a one-for-six reverse stock split at a
Special Meeting on October 15, 1998. Such reverse stock split became effective
on October 26, 1998. All applicable financial statement amounts and related
disclosures have been restated to give effect to this transaction.
USE OF ESTIMATES
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
REVENUE RECOGNITION
- -------------------
Revenues are recognized as services are provided. Deferred revenues, resulting
from customer prepayments, are recognized as services are provided throughout
the term of the agreement. Deferred revenues resulting from the Company's
agreements with Data Transmission Network Corporation ("DTN") are being
amortized over the term of the anticipated future revenue stream, a period of 42
months.
BASIC AND DILUTED EARNINGS PER SHARE
- ------------------------------------
The weighted average shares outstanding are determined as the mean average of
the shares outstanding and assumed to be outstanding during the period.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
- --------------------------------------
In connection with certain contracts entered into between the Company and its
Strategic Marketing Partners, the Company has capitalized software development
costs related to certain product enhancements in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed", effective July 1, 1998.
STOCK BASED COMPENSATION
- ------------------------
The Company maintains stock option plans for employees and non-employee
directors that provide 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 these stock compensation plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). Certain options are subject to the variable plan
requirements of APB No. 25 which requires the Company to record compensation
expense for changes in the fair value of the Company's Common Stock.
SUPPLEMENTAL CASH FLOW DATA
- ---------------------------
Interest, debt origination and other financing costs paid during the six months
ended December 31, 1999 and 1998 were $-0- and $20,762, respectively.
F-8
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
-------------------- -----------------
<S> <C> <C>
Data processing equipment $ 763,580 $ 700,210
Data processing equipment purchased under a capital lease 246,211 246,211
Office furniture and equipment 71,423 71,423
Display equipment 9,635 9,635
Leasehold improvements 36,678 36,678
-------------------- -----------------
1,127,527 1,064,157
Accumulated depreciation, including $131,312 and $106,691 at
December 31, 1999 and June 30, 1999, respectively, for
equipment purchased under a capital lease (666,329) (565,709)
-------------------- -----------------
$ 461,198 $ 498,448
==================== =================
</TABLE>
4. EQUITY TRANSACTIONS
On July 1, 1999, the Company entered into an agreement with a holder of $325,000
of the Company's Prepaid Common Stock Purchase Warrants ("Prepaid Warrants"), to
settle the Company's obligation to such holder pursuant to the default
provisions of the Prepaid Warrants. Accordingly, the Company paid $325,000 to
redeem the Prepaid Warrants and issued 180,000 shares of Common Stock in full
settlement of all obligations to the holder. Settlement costs of $268,695 were
recorded during the year ended June 30, 1999.
During the period July 1, 1999 through December 31, 1999, holders of $87,803 of
the Company's Prepaid Warrants converted such warrants into 30,525 shares of
Common Stock at an exercise price of $2.88 per share.
On October 13, 1999, the Board of Directors authorized the establishment of the
Company's 1999 Employee Stock Option Plan ("1999 Plan"). The 1999 Plan provides
for the issuance of options to employees and directors for the purchase of a
maximum of 400,000 shares of Common Stock of the Company at not less than the
fair value of the Common Stock on the date of grant. Additionally, the Board of
Directors authorized the repricing of the restricted shares granted to Messrs.
Cassetta and Rossi to $.75 per share, the fair value of the shares at that date.
The restricted stock awards are variable plan awards pursuant to APB No. 25 and
accordingly, the Company is required to recognize compensation expense for the
changes in the market value of its Common Stock. In conjunction therewith, the
Company has recorded a charge to compensation expense of $15,636,300 for the
three and six month periods ended December 31, 1999, as well as a corresponding
increase to additional paid-in capital.
Also on October 13, 1999, the Board of Directors authorized the Company to enter
into a restricted stock agreement with Robert Pearl, Director of Business
Development, pursuant to which Mr. Pearl will be awarded 1% of the fully diluted
shares of Common Stock of the Company as of that date at the purchase price of
$.75 per share.
In October 1999, the Company entered into a consulting agreement with a
financial advisor to the Company. As consideration for such services, the
Company granted such advisor warrants to purchase 100,000 shares of Common Stock
at an exercise price of $2.625 per share and warrants to purchase 100,000 shares
of Common Stock at $3.65 per share. The warrants expire on October 24, 2004. The
Company recorded a noncash charge of $60,000 to unearned compensation which is
being amortized to income over the one year term of the agreement.
F-9
<PAGE>
In November 1999, the Company issued 25,042 shares of Common Stock to Zanett
Lombardier, Ltd pursuant to the cashless exercise provisions of warrants to
purchase 50,084 shares of Common Stock.
In December 1999, the Board of Directors authorized the issuance of 148,000
shares of Common Stock to Mr. Sebastian Cassetta in satisfaction of its bonus
obligation to Mr. Cassetta pursuant to his employment contract. The Company has
recorded a charge to compensation expense of $2,331,000 for the change in the
fair value of the Company's Common Stock between the due date of the obligation
and the grant date of the Common Stock.
In December 1999, the Board of Directors authorized the issuance of 54,000
shares of Common Stock to Mr. Mario Rossi in satisfaction of its bonus
obligation to Mr. Rossi pursuant to his employment contract. The Company has
recorded a charge to compensation expense of $850,500 for the change in the fair
value of the Company's Common Stock between the due date of the obligation and
the grant date of the Common Stock.
In December 1999, the Company issued 16,666 shares of Common Stock to
Ehrenkrantz King Nussbaum, Inc., financial advisors to the Company, upon the
exercise of warrants to purchase such Common Stock. The exercise price of the
warrants was $3.75 per share.
During the fiscal year ended June 30, 1999, the Company recorded a charge of
$717,700 as the potential cost of its default pursuant the terms of the Prepaid
Warrants. At December 31, 1999, the Company received waivers from such default
and reversed such previously recorded costs.
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31 SIX MONTHS ENDED DECEMBER 31
--------------------------------------- --------------------------------------
1999 1998 1999 1998
------------------ ----------------- ------------------ ------------------
Numerator:
<S> <C> <C> <C> <C>
Net loss $ (20,780,564) $ (1,533,275) $ (21,096,231) $ (2,387,452)
================== ================= ================== ==================
Denominator:
Weighted average shares 1,409,046 1,089,881 1,388,546 1,010,487
================== ================= ================== ==================
Basic and diluted earnings per
common share $ (14.75) $ (1.41) $ (15.19) $ (2.36)
================== ================= ================== ==================
</TABLE>
At December 31, 1999, $1,881,197 of the Company's prepaid common stock purchase
warrants ("Prepaid Warrants") were outstanding. At that date, the Prepaid
Warrants were convertible into 1,217,403 shares of Common Stock. Additionally,
there were 3,911,000 common stock purchase warrants outstanding. Such warrants
have exercise prices ranging from $.60 to $72.00 per share and expire from March
2001 through January 2004. Based on the closing price ($19.72) of the Company's
Common Stock at December 31, 1999, there were, exclusive of the Prepaid
Warrants, currently exercisable in-the-money warrants outstanding for the
purchase of 3,898,000 shares of Common Stock. Additionally, the Company has
established employee stock option plans and authorized restricted stock awards
to employees, directors and consultants to the Company. These options are
intended to qualify as incentive stock options within the meaning of Section 422
of the Internal Revenue Code, as amended, or as nonqualified stock options. The
options are partially exercisable after one year from date of grant and no
options may be granted after April 15, 2006. At December 31, 1999, options and
restricted stock awards have been authorized for the purchase of 1,593,000
shares of the Company's Common Stock. None of the warrants, options or
restricted stock awards have been included in the computation of diluted loss
per share because their inclusion would be antidilutive.
F-10
<PAGE>
6. STOCK-BASED COMPENSATION
In connection with the grant of certain stock options, warrants and other
compensation arrangements, the Company has recorded charges to earnings that are
noncash in nature. These grants are subject to the variable plan requirements of
APB No. 25 that requires the Company to record compensation expense for changes
in the fair value of the Company's Common Stock.
The following table shows the amount of stock-based compensation that would have
been recorded in the categories of the statement of operations had stock-based
compensation not been separately stated therein:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED DECEMBER 31 ENDED DECEMBER 31
--------------------------------------- -------------------------------------
1999 1998 1999 1998
------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Costs of revenues $ 602,468 $ -- $ 597,701 $ --
Product development expenses -- -- -- --
Selling, general and administrative
expenses 20,759,600 335,004 21,037,318 665,425
------------------- ----------------- ----------------- -----------------
$ 21,362,068 $ 335,004 $ 21,635,019 $ 665,425
=================== ================= ================= =================
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
By letter dated April 10, 1998, Michael Fishman, then Vice President of Sales
for the Company, resigned his position. On or about April 24, 1998, Mr. Fishman
filed a complaint against the Company, Sebastian E. Cassetta and four other
defendants in the United States District Court for the District of Connecticut.
The complaint asserted claims under Sections 10(b) and 18 of the Securities
Exchange Act of 1934, as well as several state law claims, including breach of
contract, fraud and misrepresentation. Mr. Fishman alleged that the Company (1)
failed to pay him the benefits and compensation to which he was entitled and (2)
made material misrepresentations in its filings with the Securities and Exchange
Commission. On December 11, 1998, the Court granted the Company's motion to
dismiss Mr. Fishman's action without prejudice to the plaintiff to seek leave to
file an amended complaint within 30 days. On May 12, 1999, the Court denied the
plaintiff's subsequent motion for leave to file a substituted complaint on the
basis that the federal securities law claim, the only federal claim alleged by
the plaintiff, was still deficient. Accordingly, the federal securities claim
was dismissed with prejudice. On or about June 4, 1999, Mr. Fishman commenced an
action against the same defendants and added as a seventh defendant, the
Company's former President, Steven Francesco, in the Connecticut Superior Court
for the Judicial District of Stamford/Norwalk at Stamford alleging breach of
contract, breach of duty of good faith and fair dealing, fraudulent
misrepresentation, negligent misrepresentation, intentional misrepresentation
and failure to pay wages. The defendants have answered the complaint and filed
counterclaims for fraudulent inducement and breach of contract. Plaintiff has
responded to the counterclaims and discovery is proceeding. Although the Company
is vigorously defending this action, there can be no assurance that it will be
successful.
On or about May 11, 1998, Ronald G. Weiner filed a complaint against the Company
and Mr. Francesco in the Supreme Court of the State of New York, County of New
York. The complaint alleges, among other things, that in May 1993, by letter
from Mr. Francesco, Mr. Weiner was offered a 10% equity stake in Smart Phone
Services, Inc. ("SPS"), a Subchapter S company of which Mr. Francesco allegedly
was the President and sole shareholder, in exchange for his active involvement
in, among other things, raising capital and managing the financial aspects of
SPS. The complaint alleges that, in November 1993, Mr. Francesco sent a letter
to Mr. Weiner in which he (i) represented that SPS had failed to attract a
single investor and (ii) withdrew his offer to Mr. Weiner of a 10% equity
position in SPS. The complaint further alleges that, in conversations with Mr.
Weiner beginning in
F-11
<PAGE>
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 and asserted affirmative defenses. No discovery in this action has yet
been taken. Although the Company is vigorously defending this action, there can
be no assurance that it will be successful.
8. SUBSEQUENT EVENTS
On January 18, 2000, the Company completed an offering ("Offering") of 333,000
shares of Common Stock to accredited investors. Gross proceeds from the Offering
amounted to $4,995,000 or $15.00 per share of Common Stock. The Company has
agreed to file a registration statement with the Securities and Exchange
Commission ("SEC") within 90 days to register the shares and use its best
efforts to have such registration declared effective. Should the Company fail to
file a registration statement with the SEC within 90 days, the holders will be
entitled to receive an additional number of shares equal to 10% of the shares
purchased in the Offering. The sale of these shares and warrants was exempt from
the registration requirements of the Securities Act of 1933, as amended,
pursuant to Section 4(2) thereof.
In January 2000, the Company issued 618,239 shares of Common Stock to Sebastian
Cassetta in connection with a restricted stock purchase agreement between the
Company and Mr. Cassetta. The Company received cash in the amount of $6,182 and
a note in the amount of $457,497. The note bears interest at 6.75% and is
secured by the Common Stock. No sales commissions were paid in connection with
such transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
In January 2000, the Company issued 206,080 shares of Common Stock to Mario
Rossi in connection with a restricted stock purchase agreement between the
Company and Mr. Rossi. The Company received cash in the amount of $2,061 and a
note in the amount of $152,499. The note bears interest at 6.75% and is secured
by the Common Stock. No sales commissions were paid in connection with such
transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
In January 2000, the Company issued 306,667 shares to certain participants of
the Company's November 1998 interim financing upon the exercise of warrants to
purchase such shares. Proceeds from the exercise of such warrants were $184,000.
These shares were issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act.
In January and February 2000, $739,000 of Prepaid Warrants were converted into
an aggregate of 527,855 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.
F-12
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
SmartServ Online, Inc.
We have audited the accompanying balance sheets of SmartServ Online, Inc. as of
June 30, 1999 and 1998, and the related statements of operations, stockholders'
equity (deficiency), and cash flows for each of the three years in the period
ended June 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SmartServ Online, Inc. at June
30, 1999 and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 1999, in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that SmartServ
Online, Inc. will continue as a going concern. As more fully described in Note
1, the Company has incurred recurring operating losses and has a working capital
deficiency. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/S/ ERNST & YOUNG LLP
Stamford, Connecticut
October 13, 1999
F-13
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30
-----------------------------------------
1999 1998
--------------------- -------------------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 2,165,551 $ 354,225
Accounts receivable 348,278 111,051
Prepaid expenses 50,150 130,603
--------------------- -------------------
Total current assets 2,563,979 595,879
--------------------- -------------------
Property and equipment, net 498,448 610,537
Other assets
Capitalized software development costs,
net of accumulated amortization of $82,108 683,337 --
Security deposit 74,834 70,437
--------------------- -------------------
758,171 70,437
--------------------- -------------------
Total Assets $ 3,820,598 $ 1,276,853
===================== ===================
</TABLE>
F-14
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30
-----------------------------------------
1999 1998
-------------------- --------------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
<S> <C> <C>
Accounts payable $ 780,543 $ 800,545
Accrued liabilities 474,189 736,137
Accrued liabilities to warrant holders 1,311,365 --
Salaries payable 93,443 57,308
Capital lease obligation - current portion 70,147 76,127
Deferred revenues - current portion 1,656,632 776,049
-------------------- --------------------
Total current liabilities 4,386,319 2,446,166
-------------------- --------------------
Capital lease obligation - long-term portion -- 77,548
Deferred revenues - long-term portion 4,141,579 --
COMMITMENTS AND CONTINGENCIES - NOTE 9
STOCKHOLDERS' DEFICIENCY
Preferred stock - $0.01 par value
Authorized - 1,000,000 shares
Issued and outstanding - None
Common Stock - $0.01 par value
Authorized - 40,000,000 shares
Issued and outstanding - 1,199,787 shares at June 30, 1999
and 836,227 shares at June 30, 1998 11,998 8,362
Common stock subscribed 1,812,554 --
Notes receivable from officers (1,812,554) --
Additional paid-in capital 20,679,611 18,184,580
Unearned compensation (3,452,904) (4,617,924)
Accumulated deficit (21,946,005) (14,821,879)
-------------------- --------------------
Total stockholders' deficiency (4,707,300) (1,246,861)
-------------------- --------------------
Total Liabilities and Stockholders' Deficiency $ 3,820,598 $ 1,276,853
==================== ====================
</TABLE>
See accompanying notes.
F-15
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-----------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------
Revenues $ 1,443,781 $ 873,476 $ 688,610
-----------------------------------------------------------
Costs and expenses
<S> <C> <C> <C>
Cost of services (994,465) (1,216,761) (1,133,884)
Product development expenses (193,188) (923,082) (1,150,224)
Selling, general and administrative
expenses (4,006,599) (3,221,940) (2,861,845)
-----------------------------------------------------------
Total costs and expenses (5,194,252) (5,361,783) (5,145,953)
-----------------------------------------------------------
Loss from operations (3,750,471) (4,488,307) (4,457,343)
-----------------------------------------------------------
Other income (expense):
Interest income 4,767 40,788 74,507
Interest expense (167,839) (57,485) (20,194)
Debt origination and other financing costs (3,210,583) (535,005) (31,452)
-----------------------------------------------------------
(3,373,655) (551,702) 22,861
-----------------------------------------------------------
Net loss $ (7,124,126) $ (5,040,009) $ (4,434,482)
===========================================================
Basic and diluted loss per share $ (6.44) $ (7.65) $ (7.20)
===========================================================
Weighted average shares outstanding 1,105,603 659,034 615,833
===========================================================
</TABLE>
See accompanying notes.
F-16
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
COMMON STOCK NOTES ADDITIONAL
PAR COMMON STOCK RECEIVABLE PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED FROM OFFICERS CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1996 615,832 $ 6,158 $ -- $ -- $8,789,091 $ -- $(5,347,388)
Change in market value of
employee stock options -- -- -- -- 188,293 -- --
Issuance of Common Stock
Purchase Warrants in
connection with
investment advisory
services -- -- -- -- 75,000 -- --
Issuance of Common Stock
Purchase Warrants in
connection with
short-term line of credit -- -- -- -- 25,000 -- --
Net loss for the year -- -- -- -- -- -- (4,434,482)
----------------------------------------------------------------------------------------------
Balances at June 30, 1997 615,832 $ 6,158 $ -- $ -- $9,077,384 $ -- $ (9,781,870)
----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-17
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK COMMON RECEIVABLE ADDITIONAL
PAR STOCK FROM PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED OFFICERS CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1997 615,832 $ 6,158 $ -- $ -- $ 9,077,384 $ -- $ (9,781,870)
Issuance of 4,000 Prepaid
Common Stock Purchase
Warrants; net of direct
costs of $545,000 -- -- -- -- 3,455,000 -- --
Conversion of 1,429.33
Prepaid Common Stock
Purchase Warrants into
Common Stock 220,395 2,204 -- -- (2,204) -- --
Issuance of Common Stock
Purchase Warrants to a
financial consultant in
connection with the
issuance of 4,000 Prepaid
Common Stock Purchase
Warrants -- -- -- -- 5,145,500 (5,145,500) --
Issuance of Common Stock
Purchase Warrants in
connection with the --
issuance of notes -- -- -- -- 388,900 --
Issuance of Common Stock
Purchase Warrants in
connection with investment
advisory contracts -- -- -- -- 120,000 -- --
Amortization of unearned
compensation -- -- -- -- -- 527,576 --
Net loss for the year -- -- -- -- -- -- (5,040,009)
----------------------------------------------------------------------------------------------
Balances at June 30, 1998 836,227 $ 8,362 $ -- $ -- $ 18,184,580 $ (4,617,924) $ (14,821,879)
----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-18
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK COMMON RECEIVABLE ADDITIONAL
PAR STOCK FROM PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED OFFICER CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1998 836,227 $ 8,362 $ -- $ -- $ 18,184,580 $ (4,617,924) $ (14,821,879)
Conversion of 276.67 Prepaid
Common Stock Purchase
Warrants into Common Stock 178,560 1,786 -- -- (1,786) -- --
Issuance of Common Stock to
Prepaid Warrant holders
as consideration for
amending certain terms
and conditions of the
Prepaid Warrants 60,000 600 -- -- 146,713 -- --
Issuance of Common Stock
Purchase Warrants in
connection with
prepayments made by a
marketing partner -- -- -- -- 6,300 -- --
Issuance of Common Stock
Purchase Warrants in
connection with the
issuance of 8%
convertible notes -- -- -- -- 1,573,000 -- --
Beneficial conversion
feature of 8% convertible
notes -- -- -- -- 550,000 -- --
Issuance of Common Stock and
warrants to purchase
Common Stock in partial
settlement of litigation 125,000 1,250 -- -- 144,500 -- --
Amortization of unearned
compensation over the
term of the consulting
agreement -- -- -- -- -- 1,165,020 --
Common Stock subscriptions
and notes receivable in
connection with officers'
employment agreements -- -- 1,812,554 (1,812,554) -- -- --
Issuance of Common Stock
Purchase Warrants to a
financial consultant as
compensation for services -- -- -- -- 59,000 -- --
Redemption of Prepaid Common
Stock Purchase Warrants -- -- -- -- (325,000) -- --
</TABLE>
See accompanying notes.
F-19
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
<TABLE>
<CAPTION>
COMMON STOCK NOTES ADDITIONAL
PAR COMMON STOCK RECEIVABLE PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED FROM OFFICERS CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Authorization of the
issuance of Common Stock
Purchase Warrants in
connection with a
licensing agreement -- -- -- -- 324,000 -- --
Change in market value of
employee stock options -- -- -- -- 18,304 -- --
Net loss for the year -- -- -- -- -- -- (7,124,126)
----------- ----------- ------------- ------------- ------------- -------------- --------------
Balance at June 30, 1999 1,199,787 $11,998 $1,812,554 $(1,812,554) $20,679,611 $(3,452,904) $(21,946,005)
=========== =========== ============= ============= ============= ============== ==============
</TABLE>
See accompanying notes.
F-20
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-----------------------------------------------------
1999 1998 1997
-----------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $ (7,124,126) $ (5,040,009) $ (4,434,482)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization 278,646 193,601 149,182
Provision for losses on and write-off of receivables -- (1,300) 29,248
Noncash interest costs 12,524 52,837 --
Noncash debt origination and other financing costs 2,593,808 475,527 30,449
Noncash compensation costs 18,304 -- 188,293
Noncash consulting services 1,349,020 660,576 75,000
Amortization of unearned revenues (1,112,138) (251,058) --
Settlement of litigation -- 145,750 --
Changes in operating assets and liabilities
Accounts receivable (237,227) 40,031 (121,040)
Prepaid expenses (44,547) (25,878) (22,415)
Accounts payable and accrued liabilities 781,264 349,764 558,317
Accrued interest -- (5,323) 16,323
Payroll taxes payable 1,696 (16,089) 5,482
Salaries payable 34,439 6,996 1,364
Unearned revenues 6,121,776 1,002,193 24,914
Security deposit (4,397) 10,781 --
-----------------------------------------------------
Net cash provided by (used for) operating activities 2,669,042 (2,401,601) (3,499,365)
-----------------------------------------------------
INVESTING ACTIVITIES
Capitalization of software development costs (765,445) -- --
Purchase of equipment (84,449) (60,424) (351,786)
-----------------------------------------------------
Net cash used for investing activities (849,894) (60,424) (351,786)
-----------------------------------------------------
FINANCING ACTIVITIES
Proceeds from the issuance of warrants 324,000 2,643,941 --
Proceeds from the issuance of short-term notes 478,500 196,500 493,646
Repayment of short-term notes (691,794) -- --
Repayment of capital lease obligation (83,528) (92,536) --
Proceeds of advances from DTN 2,058,300 -- --
Repayment of advances from DTN (2,058,300) -- --
Costs of issuing securities (35,000) (25,000) (10,000)
-----------------------------------------------------
Net cash provided by (used for) financing activities (7,822) 2,722,905 483,646
-----------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,811,326 260,880 (3,367,505)
Cash and cash equivalents - beginning of year 354,225 93,345 3,460,850
-----------------------------------------------------
Cash and cash equivalents - end of year $ 2,165,551 $ 354,225 $ 93,345
=====================================================
</TABLE>
See accompanying notes.
F-21
<PAGE>
SMARTSERV ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND LIQUIDITY
SmartServ Online, Inc. (the "Company") commenced operations on August 20, 1993.
The Company offers a range of services designed to facilitate e-commerce by
providing transactional and information services to its alliance partners
("Strategic Marketing Partners"). The Company has developed online financial,
transactional and media applications using a unique "device independent"
delivery solution and makes these services available through its application
software and communication architecture to wireless telephones and personal
digital assistants, personal computers and the Internet. The Company's services
include stock trading, real-time stock quotes, business and financial news,
sports information, private-labeled electronic mail, national weather reports
and other business and entertainment information.
The Company's financial statements for the year ended June 30, 1999 have been
prepared on a going concern basis which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business. The Company incurred net losses of $7,124,126, $5,040,009, and
$4,434,482 for the years ended June 30, 1999, 1998, and 1997, respectively, and
as of June 30, 1999 had an accumulated deficit of $21,946,005 and a deficiency
of net assets of $4,707,300. The Company is also a defendant in several legal
proceedings (see Note 9) which could have a material adverse effect on the
Company's financial position, cash flow, and results of operations. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of these uncertainties.
The Company's business plan focuses on the strategy of marketing its services in
partnership with those companies that have an economic incentive to provide the
Company's information and transaction services to their customers. Management
believes that the Company's primary source of revenues will be derived from
consumers who purchase the services through its Strategic Marketing Partners.
Through the use of this strategy, the consumer is a customer of both SmartServ
and its Strategic Marketing Partner. The Company also believes that the sale of
its information and transaction services through the cooperative efforts of
partners with more recognizable brand names than its own is important to its
success.
On September 30, 1997, the Company completed a private placement ("Placement")
of $4 million of Prepaid Common Stock Purchase Warrants ("Prepaid Warrants") as
more fully disclosed in Note 5. An integral part of this Placement was the
conversion of notes payable and accrued interest thereon, aggregating $836,059,
into Prepaid Warrants. The net proceeds of $2,643,941 provided the Company with
working capital to continue its marketing efforts.
Effective May 1, 1998, the Company entered into an agreement with Data
Transmission Network Corporation ("DTN") whereby DTN purchased the exclusive
right to market three of the Company's Internet products: SmartServ Pro, a real
time stock quote product; TradeNet, an online trading vehicle for the customers
of small and medium sized brokerage companies, and BrokerNet, an administrative
reporting package for brokers of small and medium sized brokerage companies. The
consummation of this agreement has removed the Company from the retail market
and allows the Company to focus on business-to-business marketing. The Company
received $850,000 upon execution of the agreement and
F-22
<PAGE>
received minimum monthly payments of $100,000 through April 1999. On June 24,
1999, the Company and DTN entered into an agreement that amended the Software
License and Service Agreement dated April 23, 1998. In consideration of the
receipt of $5.175 million, the Company granted DTN an exclusive perpetual
worldwide license to the Company's Internet-based (i) SmartServ Pro, (ii)
TradeNet, (iii) BrokerNet, and (iv) order entry/routing system. Additionally,
the Company received $324,000 in exchange for an agreement to issue warrants to
purchase 300,000 shares of the Company's Common Stock at an exercise price of
$8.60 per share. The Company has agreed to continue to operate these products
and provide maintenance and enhancement services in exchange for a percentage of
the revenues earned by DTN therefrom. The cost of the Company's commitment to
provide such maintenance and enhancement services is limited to a maximum of 20%
of the revenues earned by the Company. None of the Company's wireless products
were included in this transaction.
The market for online information and transactional services is highly
competitive and subject to rapid innovation and technological change, shifting
consumer preferences and frequent new service introductions. The Company
believes that potential new competitors, including large multimedia and
information systems companies, are increasing their focus on transaction
processing. Increased competition in the market for the Company's services could
materially and adversely affect the Company's results of operations through
price reductions and loss of potential market share. The Company's ability to
compete in the future depends on its ability to maintain the technological and
performance advantages of its current distribution platform and to introduce new
applications that achieve market acceptance.
Notwithstanding the execution of the DTN agreements and the continual
discussions with potential Strategic Marketing Partners about future
relationships, the Company's ability to generate fee revenue and working capital
may not be sufficient to meet management's objectives as presently structured.
Management recognizes that the Company must generate additional revenues or
consider additional modifications to its sales and marketing program or
institute cost reductions to allow it to continue to operate with available cash
resources. There is no assurance that the Company will generate future revenues
or cash flow from operations or that the Company's products and services will
continue to be accepted in the marketplace by the ultimate consumers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
- ---------------------
The financial statements are prepared in conformity with generally accepted
accounting principles.
The Company's stockholders approved a one-for-six reverse stock split at a
Special Meeting on October 15, 1998. Such reverse stock split became effective
on October 26, 1998. All applicable financial statement amounts and related
disclosures have been restated to give effect to this transaction.
USE OF ESTIMATES
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
REVENUE RECOGNITION
- -------------------
Revenues are recognized as services are provided. Deferred revenues, resulting
from customer prepayments, are recognized as services are provided throughout
the term of the agreement. Deferred revenues resulting from the Company's
agreements with DTN are being amortized over the anticipated future revenue
stream, a period of 42 months.
F-23
<PAGE>
BASIC AND DILUTED EARNINGS PER SHARE
- ------------------------------------
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("Statement 128"). Statement
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented and, where necessary, restated
to conform to the Statement 128 requirements. The weighted average shares
outstanding are determined as the mean average of the shares outstanding and
assumed to be outstanding during the period.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
- --------------------------------------
In connection with certain contracts entered into between the Company and its
Strategic Marketing Partners, the Company has capitalized software development
costs related to certain product enhancements in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed", effective July 1, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------
The carrying amounts of the Company's financial instruments approximate fair
value.
SUPPLEMENTAL CASH FLOW DATA
- ---------------------------
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Interest, debt origination and other financing costs paid during the years ended
June 30, 1999, 1998, and 1997 were $101,974, $32,536, and $9,194, respectively.
CONCENTRATION OF CREDIT RISK
- ----------------------------
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of accounts receivable. There is no single
geographic concentration of sales or related accounts receivable in the United
States. At June 30, 1999, accounts receivable consist principally of amounts due
from DTN ($268,000), and a telecommunications company ($78,100). The Company
performs periodic credit evaluations of its customers and, if applicable,
provides for credit losses in the financial statements.
PROPERTY AND EQUIPMENT
- ----------------------
Property and equipment are stated at cost. Equipment purchased under a capital
lease has been recorded at the present value of the future minimum lease
payments at the date of acquisition. Depreciation is computed using the
straight-line method over estimated useful lives of three to ten years.
ADVERTISING COSTS
- -----------------
Advertising costs are expensed as incurred and were approximately $20,500,
$97,100, and $540,000 in 1999, 1998 and 1997, respectively.
STOCK BASED COMPENSATION
- ------------------------
The Company maintains a stock option plan for employees and non-employee
directors that provides for the granting of stock options for a fixed number of
shares with an exercise price equal to the fair value of the shares at the date
of grant. The Company accounts for this stock compensation plan in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). Accordingly, compensation expense is recognized to
the extent that the fair value of the stock exceeds the exercise price of the
option at the measurement date. In 1997, the Company adopted the
F-24
<PAGE>
disclosure provisions of Statement of Financial Accounting Standards No. 123
"Accounting for Stock-based Compensation".
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, as amended by SOP 98-4, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). The
adoption of SOP 98-1 is not expected to have a material effect on the Company's
operations. SOP 98-1 is required to be adopted by the Company no later than July
1, 1999.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30
------------------------------------------
1999 1998
------------------- -----------------
<S> <C> <C>
Data processing equipment $ 700,210 $ 616,587
Data processing equipment purchased under a capital lease 246,211 246,211
Office furniture and equipment 71,423 70,597
Display equipment 9,635 9,635
Leasehold improvements 36,678 36,678
------------------- -----------------
1,064,157 979,708
Accumulated depreciation, including $106,691 and
$57,449 for equipment purchased under a capital lease (565,709) (369,171)
------------------- -----------------
$ 498,448 $ 610,537
=================== =================
</TABLE>
During the year ended June 30, 1997, the Company leased computer equipment with
a capitalized cost of $246,211. The recording of such costs and the related
capitalized lease obligation are non-cash transactions for the purposes of the
Statement of Cash Flows.
4. NOTES PAYABLE
On May 29, 1997, the Company entered into a line of credit facility with a
financial institution for a maximum borrowing thereunder of $550,000. Borrowings
under this facility were to be repaid on August 27, 1997 along with interest at
the rate of 24% per annum. On July 21, 1997 and September 16, 1997, the facility
was amended to provide for additional borrowings of up to $222,222. On September
30, 1997, notes payable of $772,222 and accrued interest thereon of $63,837 were
converted into the Company's Prepaid Warrants as more fully described in Note 5.
In conjunction with the origination of the line of credit facility, the Company
issued 56,627 common stock purchase warrants to the financial institution.
Similarly, the Company issued 11,438 warrants for each of the July and September
amendments. As a result of the Company's default on the note in August, the
Company was required to issue 50,083 "default" warrants to such institution. At
June 30, 1999, these warrants were exercisable at prices ranging from $.75 to
$6.07. These warrants are subject to certain antidilution provisions and expire
in September 2002. Pursuant to Statement of Financial Accounting Standard No.
123, "Accounting for Stock Based Compensation", the Company valued these
warrants in accordance with the Black-Scholes pricing methodology at the time of
issuance and recorded such valuation in the statement of operations as debt
origination and other financing costs. The Company recorded debt origination and
other financing costs associated with these warrants of $463,567 for the year
ended June 30, 1998.
F-25
<PAGE>
Commencing November 20, 1998, the Company sold five and one-half (5.5) units,
each consisting of a secured 8% convertible note in the principal amount of
$100,000 and warrants to purchase Common Stock of the Company. The warrants are
exercisable at $.60 per share of Common Stock. The convertible notes were repaid
in June 1999. The Company has agreed to register the shares of Common Stock
issuable upon exercise of the warrants. In addition to customary fees and
expenses, Spencer Trask Securities, Inc. ("Spencer Trask"), the placement agent,
received for nominal consideration, warrants to purchase ten percent (10%) of
the shares of Common Stock of the Company issuable on conversion of the notes
and exercise of the warrants at $.72 per share. The issuance to the noteholders
of warrants to purchase 916,667 shares of Common Stock, as well as those issued
to Spencer Trask for the purchase of 183,333 shares of Common Stock have been
valued in accordance with the Black-Scholes pricing methodology and recorded as
debt origination and other financing costs. Also in connection with the 8%
convertible notes, the Company has recorded a non-cash charge to debt
origination and other financing costs of $550,000 representing the perceived
cost of the beneficial conversion feature of the notes. Emerging Issues Task
Force Issue 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios" ("Issue 98-5")
defines the beneficial conversion feature as the non-detachable conversion
feature that is "in-the-money" at the date of issuance. Issue 98-5 requires the
recognition of the intrinsic value of the conversion feature as the difference
between the conversion price and the fair value of the common stock into which
the notes are convertible. Such amount is limited to the proceeds of the
financing ($550,000) and has been recorded in debt origination and other
financing costs as of the date of issuance.
On December 30, 1998, the Company executed an agreement with a service provider
whereby certain obligations of the Company, amounting to $141,794, were
converted into a 12% note payable. On June 28, 1999, the outstanding balance of
$66,794 was repaid.
5. EQUITY TRANSACTIONS
During the year ended June 30, 1997, the Company authorized the issuance of
warrants for the purchase of 33,333 shares of Common Stock in connection with
certain investment advisory agreements. Such warrants are exercisable at prices
ranging from $12.00 to $24.00 per share through May 2002.
On September 30, 1997, The Zanett Securities Corporation ("Zanett"), acting as
placement agent for the Company, completed the private placement ("Placement")
of $4 million of the Company's Prepaid Common Stock Purchase Warrants ("Prepaid
Warrants"). The sale of the Prepaid Warrants was exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2)
thereof. Each Prepaid Warrant entitles the holder to purchase that number of
shares of Common Stock that is equal to $1,000 divided by the applicable
exercise price. Such exercise price is determined initially as 70% of the
average closing bid price of the Common Stock for the 10 trading days ending on
the day prior to exercise of the Prepaid Warrants. Additionally, the exercise
discount shall be increased by 1% for each subsequent 60 day period that the
Prepaid Warrants remain unexercised. The exercise price, however, shall never
exceed $8.40. The Prepaid Warrants became exercisable on December 29, 1997 and
expire on September 30, 2000.
As compensation for its services, Zanett received a placement fee and an
unaccountable expense allowance of 10% ($400,000) and 3% ($120,000),
respectively, of the gross proceeds of the Placement. Additionally, the Company
issued 135,906 Common Stock Purchase Warrants to Zanett that are subject to
antidilution provisions and are exercisable at $4.97 per share of Common Stock.
These warrants expire on September 30, 2002.
Also in conjunction with the Placement, the Company entered into an agreement
with Bruno Guazzoni, a financial consultant who is an affiliate of Zanett
Lombardier, Ltd., an investor in the Prepaid Warrants.
F-26
<PAGE>
During the five-year term of the agreement such consultant will provide the
Company with advisory services relating to financial and strategic ventures and
alliances, investment banking and general financial advisory services, and
advice and assistance with the Company's market development activities. As
compensation for these services, the Company authorized the issuance of 805,370
Common Stock Purchase Warrants ("Consulting Warrants") to this consultant that
are subject to antidilution provisions and are exercisable at $4.97 per share of
Common Stock. The Company has valued these Consulting Warrants in accordance
with Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation", and the Black-Scholes pricing methodology at
$5,145,500 and recorded this amount in stockholders' equity as unearned
compensation. Unearned compensation is being amortized to income over the
five-year term of the agreement. These warrants expire on September 30, 2002.
The Company has recorded consulting expense of $1,165,020 and $527,576 for the
years ended June 30, 1999 and 1998, respectively.
During the year ended June 30, 1999, holders of 276.67 of the Company's Prepaid
Warrants converted such warrants into 178,560 shares of Common Stock at exercise
prices ranging from $.75 to $2.38 per share.
On August 31, 1998, the Company issued 32,953 shares of Common Stock to Zanett
Lombardier, Ltd. and 17,047 shares of Common Stock to Bruno Guazzoni in
consideration of their agreement to certain restrictions on the exercise of
Prepaid Warrants and the resale of the shares of Common Stock issuable on
exercise thereof. Such shares have been recorded at the fair value of the
Company's Common Stock at that date as other financing costs.
On September 8, 1998, the Company issued warrants to purchase 3,000 shares of
Common Stock to DTN for prepayment of certain guaranteed payments in accordance
with the Software License and Service Agreement between the parties dated April
23, 1998. Such warrants are exercisable at $3.00 per share of Common Stock and
have been recorded in accordance with the Black-Scholes pricing methodology as
other financing costs.
On November 17, 1998, the Company issued 125,000 shares of Common Stock and
warrants to purchase 16,667 shares of Common Stock, exercisable at $5.00 per
share until November 11, 2001, to Steven Francesco, a former officer of the
Company, as partial consideration for the settlement of his claims against the
Company and certain of its officers and directors. The value of these shares has
been recorded in selling, general and administrative expenses based upon the
fair value of the Company's Common Stock at that date while the warrants have
been recorded in accordance with the Black-Scholes pricing methodology.
On December 29, 1998, the Board of Directors approved the terms of employment
contracts for Sebastian E. Cassetta, Chairman and Chief Executive Officer, and
Mario F. Rossi, Vice President of Technology. The employment agreement with Mr.
Cassetta ("Cassetta Agreement"), is effective January 1, 1999, expires on
December 31, 2001, and provides for, among other things, the sale to him of
618,239 shares of restricted stock representing 9% of the fully diluted shares
of Common Stock of the Company. The purchase price ($2.20 per share) of the
restricted stock is equal to 110% of fair market value of the Company's Common
Stock for the 30 days preceding the date of the stock purchase agreement
("Cassetta Stock Purchase Agreement") contemplated by the Cassetta Agreement.
The purchase price has been paid with a 5 year, non-recourse promissory note,
secured by the stock, at an interest rate of 6.75%, which is 1% below the prime
rate on the date of the Cassetta Stock Purchase Agreement. The Cassetta Stock
Purchase Agreement provides the Company with certain repurchase options and
provides Mr. Cassetta with a put option in the event of the termination of his
employment. In accordance with APB No. 25, the Company will record the changes
in the fair value of such shares in recognition of the compensatory nature of
their issuance. On October 13, 1999, the Board of Directors agreed to reprice
the shares granted
F-27
<PAGE>
to Mr. Cassetta to $.75 per share, the fair value of the shares at that date.
The Company and Mr. Rossi have also entered into an employment agreement ("Rossi
Agreement"), effective January 1, 1999 and expiring on December 31, 2001,
providing for, among other things, the sale to him of 206,080 shares of
restricted stock representing 3% of the fully diluted shares of Common Stock of
the Company. The purchase price ($2.20 per share) of the restricted stock is
equal to 110% of fair market value for the 30 days preceding the date of the
stock purchase agreement ("Rossi Stock Purchase Agreement") contemplated by the
Rossi Agreement. The purchase price has been paid with a 5 year, non-recourse
promissory note, secured by the stock, at an interest rate of 6.75%, which is 1%
below the prime rate on the date of the Rossi Stock Purchase Agreement. The
Rossi Stock Purchase Agreement provides the Company with certain repurchase
options and provides Mr. Rossi with a put option in the event of the termination
of his employment. In accordance with APB No. 25, the Company will record the
changes in the fair value of such shares in recognition of the compensatory
nature of their issuance. On October 13, 1999, the Board of Directors agreed to
reprice the shares granted to Mr. Rossi to $.75 per share, the fair value of the
shares at that date.
On January 14, 1999, the Company issued 10,000 shares of Common Stock to Arnhold
& S. Bleichroeder, Inc. ("ASB"), an investor in the Company's Prepaid Warrants,
in consideration of an agreement to waive certain events of default under such
Prepaid Warrants. These shares have been recorded at the fair value of the
Company's Common Stock at that date as other financing costs.
On January 20, 1999, the Company agreed to cancel warrants to purchase 20,833
shares of Common Stock exercisable at $15.75 and $19.50 per share to Steven
Rosner, a financial advisor to the Company, and to grant Mr. Rosner warrants to
purchase 40,833 shares of Common Stock at $.60 per share for his efforts at
arranging the Company's relationship with Spencer Trask. Such warrants will
expire on January 20, 2004. These warrants have been recorded in accordance with
the Black-Scholes pricing methodology as selling, general and administrative
expenses.
On June 24, 1999, in consideration of the receipt of $324,000, the Company
agreed to issue DTN warrants for the purchase of 300,000 shares of the Company's
Common Stock at $8.60 per share. The warrants will expire on the earlier of
April 30, 2003, or the date one year after the market price of a share of Common
Stock reaches $8.60. These warrants have been recorded in accordance with the
Black-Scholes pricing methodology.
The delisting of the Company's Common Stock from the Nasdaq Small Cap Market
caused the Company to default on certain terms and conditions of the Prepaid
Warrants. Such default obligates the Company to pay financial penalties, as well
as to redeem the outstanding Prepaid Warrants at a 43% premium. The Company has
been unable to obtain appropriate waivers from holders of $1,994,000 of such
Prepaid Warrants. Accordingly, the Company has recorded a charge to debt
origination and other financing costs in the amount of $986,365, representing
the potential penalties due such holders.
F-28
<PAGE>
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------------------------------------------------
1999 1998 1997
------------------ -------------------- --------------------
Numerator:
<S> <C> <C> <C>
Net loss $ (7,124,126) $ (5,040,009) $ (4,434,482)
================== ==================== ====================
Denominator:
Weighted average shares 1,105,603 659,034 615,833
================== ==================== ====================
Basic and diluted loss per common
share $ (6.44) $ (7.65) $ (7.20)
================== ==================== ====================
</TABLE>
At June 30, 1999 there were, exclusive of the Prepaid Warrants (Note 5),
3,195,000 Common Stock Purchase Warrants outstanding. Such warrants have
exercise prices ranging from $.60 to $72.00 per share and expire from March 2001
through January 2004. Based on the closing bid price ($1.50) of the Company's
Common Stock at June 30, 1999, there were, exclusive of the Prepaid Warrants,
currently exercisable in-the-money warrants outstanding for the purchase of
507,700 shares of Common Stock. Additionally, the Company has established an
employee stock option plan for the benefit of directors, employees, and
consultants to the Company. These options are intended to qualify as incentive
stock options within the meaning of Section 422 of the Internal Revenue Code, as
amended, or as nonqualified stock options. The options are partially exercisable
after one year from date of grant and no options may be granted after April 15,
2006. At June 30, 1999, there are options outstanding for the purchase of
285,901 shares of the Company's Common Stock. None of the warrants or options
have been included in the computation of diluted loss per share because their
inclusion would be antidilutive. (See Note 11 for a discussion of the Company's
stock option plans.)
7. INCOME TAXES
At June 30, 1999 and 1998, the Company has deferred tax assets as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Capitalized Start-up Costs $ 741,600 $ 1,112,500
Net Operating Loss Carryforwards 6,578,000 4,126,000
------------- ------------
$ 7,319,600 $ 5,238,500
============= ============
</TABLE>
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," the Company has established a valuation allowance
to fully reserve the future income tax benefit of these deferred tax assets due
to uncertainty about their future realization. The valuation allowance increased
to $7,319,600 at June 30, 1999 from $5,238,500 at June 30, 1998 and $3,540,000
at June 30, 1997.
At June 30, 1999, the Company has net operating loss carryforwards for Federal
income tax purposes of approximately $8,930,000 which expire in the years 2009
through 2013. As a result of the public issuance of stock by the Company on
March 21, 1996, and the resultant change in ownership pursuant to
F-29
<PAGE>
Internal Revenue Code Section 382, the utilization of net operating losses
incurred prior to this date may be limited.
8. LEASES
The Company leases office space for its Stamford, Connecticut headquarters under
a noncancelable lease. The lease includes escalation clauses for items such as
real estate taxes, building operation and maintenance expenses, and electricity
usage.
On May 1, 1997, the Company entered into a 3 year noncancelable capital lease
for certain computer equipment used to provide information services. The Company
also leases certain other computer equipment under operating leases which expire
through July 2000.
Rent expense amounted to approximately $290,600, $278,000, and $207,000 for the
years ended June 30, 1999, 1998, and 1997, respectively.
Minimum future rental payments at June 30, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
------------------------------------ CAPITAL
YEAR ENDING JUNE 30 PREMISES EQUIPMENT LEASE
- ------------------ ----------------- --------------- ------------------
<S> <C> <C> <C>
2000 $ 179,700 $ 41,000 $ 75,341
2001 186,000 1,600 --
2002 192,300 -- --
2003 67,000 -- --
----------------- --------------- ------------------
$ 625,000 $ 42,600 75,341
================= ===============
Less amounts
representing interest
and executory costs 5,194
------------------
$ 70,147
==================
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
By letter dated April 10, 1998, Michael Fishman, then Vice President of Sales
for the Company, resigned his position. On or about April 24, 1998, Mr. Fishman
filed a complaint against the Company, Sebastian E. Cassetta and four other
defendants in the United States District Court for the District of Connecticut.
The complaint asserted claims under Sections 10(b) and 18 of the Securities
Exchange Act of 1934, as well as several state law claims, including breach of
contract, fraud and misrepresentation. Mr. Fishman alleged that the Company (1)
failed to pay him the benefits and compensation to which he was entitled and (2)
made material misrepresentations in its filings with the Securities and Exchange
Commission. On December 11, 1998, the Court granted the Company's motion to
dismiss Mr. Fishman's action without prejudice to the plaintiff to seek leave to
file an amended complaint within 30 days. On May 12, 1999, the Court denied the
plaintiff's subsequent motion for leave to file a substituted complaint on the
basis that the federal securities law claim, the only federal claim alleged by
the plaintiff, was still deficient. Accordingly, the federal securities claim
was dismissed with prejudice. On or about June 4, 1999, Mr. Fishman commenced an
action against the same defendants and added as a seventh defendant, the
Company's former President, Mr. Steven Francesco, in the Connecticut Superior
Court for the Judicial
F-30
<PAGE>
District of Stamford/Norwalk at Stamford alleging breach of contract, breach of
duty of good faith and fair dealing, fraudulent misrepresentation, negligent
misrepresentation, intentional misrepresentation and failure to pay wages. The
defendants have answered the complaint and filed counterclaims for fraudulent
inducement and breach of contract. Plaintiff's response to counterclaims was due
October 14, 1999 and has yet to be received. Although the Company is vigorously
defending this action, there can be no assurance that it will be successful.
By memorandum dated April 10, 1998, Jonathan Paschkes, then Vice President of
Marketing for the Company, resigned his position. On or about November 17, 1998,
Mr. Paschkes filed a complaint against the Company and Sebastian E. Cassetta in
the United States District Court, District of Connecticut. In the complaint, Mr.
Paschkes alleges (i) fraudulent inducement to him to accept his position with
the Company; (ii) breach of various terms of the Company's employment contract
with him; and (iii) failure by the Company to pay him wages and bonuses and
issue options to him pursuant to the terms of his employment contract. On or
about February 18, 1999, Mr. Paschkes filed an amended complaint. The Company
answered the amended complaint and asserted counterclaims against Mr. Paschkes
for fraudulent inducement, breach of contract, conversion and statutory theft.
On October 5, 1999, an agreement in principle was reached between the Company
and Mr. Paschkes in full settlement of these claims. The Company anticipates
executing a settlement agreement with Mr. Paschkes and filing a Stipulation of
Dismissal with prejudice before October 31, 1999. The Company has recorded a
charge for the settlement of such claims in the results of operations for the
year ended June 30, 1999.
On or about May 11, 1998, Ronald G. Weiner filed a complaint against the Company
and Mr. Francesco in the Supreme Court of the State of New York, County of New
York. The complaint alleges, among other things, that in May 1993, by letter
from Mr. Francesco, Mr. Weiner was offered a 10% equity stake in Smart Phone
Services, Inc. ("SPS"), a Subchapter S company of which Mr. Francesco allegedly
was the President and sole shareholder, in exchange for his active involvement
in, among other things, raising capital and managing the financial aspects of
SPS. The complaint alleges that, in November 1993, Mr. Francesco sent a letter
to Mr. Weiner in which he (i) represented that SPS had failed to attract a
single investor and (ii) withdrew his offer to Mr. Weiner of a 10% equity
position in SPS. The complaint further alleges that, in conversations with Mr.
Weiner beginning in November 1993, Mr. Francesco represented that he was ceasing
all efforts to capitalize SPS. The complaint alleges, among other things, that
Mr. Francesco and SPS breached their agreement with Mr. Weiner by withdrawing
their offer to him of a 10% equity stake in SPS, and that, at the time Mr.
Francesco represented that he was ceasing efforts to capitalize SPS, he had
actually formed the Company and was actively seeking investors for it. The
complaint further alleges that the Company is a successor entity to SPS and
that, therefore, the Company is liable for SPS' and Mr. Francesco's alleged
conduct in derogation of their alleged agreement with Mr. Weiner. The complaint
seeks, among other things, (i) a declaratory judgment declaring Mr. Weiner a 10%
equity shareholder of the Company, (ii) a constructive trust in Mr. Weiner's
favor for 10% for the Company's equity shares and (iii) restitution against Mr.
Francesco and the Company for unjust enrichment. On his unjust enrichment claim,
Mr. Weiner seeks unspecified damages that he alleges to be at least $250,000. In
its answer to the complaint, the Company has denied the material allegations of
the complaint, asserted affirmative defenses and also asserted cross-claims
against Mr. Francesco seeking indemnification from, or contribution towards, any
judgment that Mr. Weiner may obtain against the Company. In accordance with an
agreement dated November 11, 1998, the Company has filed a motion to discontinue
the cross-claims that it asserted against Mr. Francesco. No discovery in this
action has yet been taken. Although the Company is vigorously defending this
action there can be no assurance that it will be successful.
10. SIGNIFICANT RELATIONSHIPS
During the year ended June 30, 1999, the Company's relationship with DTN
accounted for 94.8% of its
F-31
<PAGE>
revenues. During the year ended June 30, 1998, three Strategic Marketing Partner
relationships accounted for 10.2%, 10.0% and 24.1%, respectively, of the
Company's revenues while during the year ended June 30, 1997, one Strategic
Marketing Partner relationship accounted for approximately 46.4% of the
Company's revenues.
11. EMPLOYEE STOCK OPTION PLAN
In April 1996, the Board of Directors approved the establishment of an Employee
Stock Option Plan authorizing stock option grants to directors, key employees,
and consultants of the Company. The options are intended to qualify as incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, or as nonqualified stock options. The Plan provides for the
issuance of up to 250,000 of such options at not less than the fair value of the
stock on the date of grant. The options are partially exercisable after one year
from date of grant and expire on the tenth anniversary of the date of grant.
On September 24, 1997, the Compensation Committee granted new stock options to
employees and non-employee directors conditional upon cancellation of all of
their existing stock options. Such options were exercisable at $12.00. On
October 8, 1998, the Board of Directors voted to cancel the outstanding employee
and non-employee director options and reissue options covering a like number of
shares to employees and non-employee directors at an exercise price not less
than the fair value at that date. The exercise price of the options issued to
employees and non-employee directors on October 8, 1998 was $1.29 per share.
Such options expire on October 7, 2008. In accordance with APB No. 25, the
Company has recorded the changes in the fair value of the shares underlying
177,201 of such options to reflect the compensatory nature of their issuance. On
November 20, 1998, the Board of Directors granted employees options to purchase
58,700 shares of Common Stock at $1.625 per share. Such options expire on
November 19, 2008.
On December 29, 1998, the Board approved a plan to compensate non-employee
directors for their service to the Company by granting to them options to
purchase 10,000 shares of the Company's Common Stock at the commencement of each
calendar year. Effective January 1, 1999, the Company issued options to such
persons to purchase 50,000 shares of Common Stock exercisable at $2.35 per share
through December 31, 2003.
On October 13, 1999, the Board of Directors authorized the establishment of the
Company's 1999 Employee Stock Option Plan ("1999 Plan"). The 1999 Plan provides
for the issuance of options to employees and directors for the purchase of a
maximum of 400,000 shares of Common Stock of the Company at not less than the
fair value of the Common Stock on the date of grant. The Board authorized the
issuance of 300,000 of such options to employees at the fair value of the Common
Stock on that date.
F-32
<PAGE>
Information concerning stock options for the Company is as follows:
<TABLE>
<CAPTION>
AVERAGE
EXERCISE
OPTIONS PRICE
-------------------- -----------------------
<S> <C> <C>
Balance at July 1, 1996 51,925 $ 38.82
Granted 70,829 31.38
Exercised -- --
Cancelled 66,362 37.32
-------------------- -----------------------
Balance at June 30, 1997 56,392 31.26
Granted 206,391 12.00
Exercised -- --
Cancelled 85,216 25.50
-------------------- -----------------------
Balance at June 30, 1998 177,567 12.00
Granted 463,858 1.92
Exercised -- --
Cancelled 355,524 7.26
-------------------- -----------------------
Balance at June 30, 1999 285,901 $ 1.54
==================== =======================
</TABLE>
The following table summarizes information about the Company's stock options
outstanding as of June 30, 1999.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -----------------------------------
AVERAGE
AVERAGE REMAINING AVERAGE
RANGE OF NUMBER OF EXERCISE CONTRACTUAL NUMBER OF EXERCISE
EXERCISE PRICES OPTIONS PRICE LIFE (YEARS) OPTIONS PRICE
- --------------------------- ----------------- --------------- --------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
$1.29 - $2.35 285,901 $ 1.54 8.25 81,164 $ 1.96
=========================== ================= =============== =============== ================ ==================
</TABLE>
SUPPLEMENTAL AND PRO FORMA DISCLOSURE
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation." This Statement requires companies to recognize compensation
expense based on the respective fair values of the options at the date of grant.
Companies that choose not to adopt the new rules will continue to apply the
existing accounting rules contained in APB No. 25, but are required to disclose
the pro forma effects on net income and earnings per share, as if the fair value
based method of accounting had been applied.
The pro forma information regarding net loss and loss per share required by
Statement 123 has been determined as if the Company had accounted for its
employee stock option plan under the fair value methods described in that
Statement. The fair value of options granted under the Company's employee stock
option plan was estimated at the date of grant using the Black-Scholes option
pricing model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require
F-33
<PAGE>
the input of highly subjective assumptions including the expected dividend
yield, the expected life of the options, the expected stock price volatility,
and the risk-free interest rate.
Pertinent assumptions with regard to the determination of fair value of the
options and their impact on earnings per share are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- --------------- ------------------
<S> <C> <C> <C>
Weighted average dividend yield for options
granted 0.0% 0.0% 0.0%
Weighted average expected life in years 5.0 5.0 5.0
Weighted average volatility 147.0% 143.9% 70.8%
Risk-free interest rate 5.75% 6.0% 6.5%
Weighted average grant date fair value of
options $1.92 $10.92 $19.80
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. As such, the pro forma
net loss and loss per share are not indicative of future years.
The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------------------------
REPORTED PROFORMA REPORTED PROFORMA REPORTED PROFORMA
--------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net Loss $7,124,126 $7,308,036 $5,040,009 $5,654,512 $4,434,482 $5,209,947
=============== ============== ============== ============== ============== ==============
Loss per Share $6.44 $6.61 $7.65 $8.58 $7.20 $8.46
=============== ============== ============== ============== ============== ==============
</TABLE>
12. SUBSEQUENT EVENTS
On July 1, 1999, the Company entered into an agreement with ASB, a holder of
$325,000 of the Company's Prepaid Warrants, to settle the Company's obligation
to ASB pursuant to the default provisions of the Prepaid Warrants. Pursuant to
such agreement, the Company paid ASB $325,000 to redeem the Prepaid Warrants and
issued 180,000 shares of Common Stock in full settlement of all obligations to
ASB. The Company has agreed to file a registration statement with the Securities
and Exchange Commission covering such shares. Settlement costs of $268,695 have
been recorded as debt origination and other financing costs during the year
ended June 30, 1999.
On October 13, 1999, the Board of Directors agreed to enter into a restricted
stock purchase agreement with Mr. Robert Pearl, Director of Business
Development. Accordingly, Mr. Pearl has been granted 1% of the fully diluted
shares of Common Stock of the Company as of that date at the purchase price of
$.75 per share.
F-34
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SMARTSERV ONLINE, INC.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE NO.
------- ----------- --------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation of the Company
3.2 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation filed on June 1, 1998
3.3 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation filed on October 16, 1998
3.4 By-laws of the Company, as amended
4.1 Specimen Certificate of the Company's Common Stock
4.2 Placement Agent Agreement dated as of January 11, 2000 between
the Company and America First Associates Corp.
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP
10.1 Information Distribution License Agreement dated as of July 18,
1994 between the Company and S&P ComStock, Inc.
10.2 New York Stock Exchange, Inc. Agreement for Receipt and Use of
Market Data dated as of August 11, 1994 between the Company and
the New York Stock Exchange, Inc.
10.3 The Nasdaq Stock Market, Inc. Vendor Agreement for Level 1
Service and Last Sale Service dated as of September 12, 1994
between the Company and The Nasdaq Stock Exchange, Inc.
("Nasdaq")
10.4 Amendment to Vendor Agreement for Level 1 Service and Last Sale
Service dated as of October 11, 1994 between the Company and
Nasdaq
10.5 Lease Agreement dated as of March 4, 1994, between the Company
and One Station Place, L.P. regarding the Company's Stamford,
Connecticut offices
10.6 Lease Modification and Extension Agreement, dated February 6,
1996, between the Company and One Station Place, L.P. regarding
the Company's Stamford, Connecticut offices
10.7 Form of 1996 Stock Option Plan
10.8 Asset Purchase and Software License and Service Agreements
between SmartServ Online, Inc. and Data Transmission Network
Corporation, dated April 23, 1998
10.9 Amendment to the Software and License Agreement between
SmartServ Online, Inc. and Data Transmission Network
Corporation,
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
dated June 24, 1999. Portions of this exhibit (indicated by
asterisks) have been omitted pursuant to an order by the
Securities and Exchange Commission dated December 2, 1999,
granting confidential treatment under the Securities Exchange
Act of 1934 and the omitted portions have been filed separately
with the Securities and Exchange Commission.
10.10 Letter agreement dated August 26, 1999, amending the Amendment
to the Software and License Agreement between SmartServ Online,
Inc. and Data Transmission Network Corporation, dated June 24,
1999. Portions of this exhibit (indicated by asterisks) have
been omitted pursuant to an order by the Securities and Exchange
Commission dated December 2, 1999, granting confidential
treatment under the Securities Exchange Act of 1934 and the
omitted portions have been filed separately with the Securities
and Exchange Commission.
10.11 Amended and Restated Employment Agreement between SmartServ
Online, Inc. and Sebastian E. Cassetta, dated January 1, 1999
10.12 Restricted Stock Purchase Agreement between SmartServ Online,
Inc. and Sebastian E. Cassetta, dated December 29, 1998
10.13 Employment Agreement between SmartServ Online, Inc. and Mario F.
Rossi, dated January 1, 1999
10.14 Restricted Stock Purchase Agreement between SmartServ Online,
Inc. and Mario F. Rossi, dated December 29, 1998
23.1 Consent of Ernst & Young LLP
23.2 Consent of Parker Chapin Flattau & Klimpl, LLP (Included in
Exhibit 5.1)
24.1 Power of Attorney of certain directors and officers of SmartServ
(Included as part of the signature page beginning on page II-7
of this filing)
</TABLE>
EXHIBIT 4.2
SmartServ Online, Inc.
up to
233,000 Shares of Common Stock
($.01 Par Value)
Placement Agent Agreement
-------------------------
January 11, 2000
America First Associates Corp.
415 Madison Avenue
3rd Floor
New York, NY 10017
Gentlemen:
1. Introductory.
SmartServ Online, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell up to 233,000 shares of its Common Stock,
$.01 par value (the "Shares"). The Company hereby appoints you as its exclusive
agent for the purpose of finding purchasers for and selling the Shares, subject
to the terms and provisions of this agreement, on a "best efforts basis".
The term "Placement Agent", as used herein, shall mean America
First Associates Corp. Whether or not so expressed, all obligations of the
Placement Agent and of the Company are several in accordance with their
respective interests and not joint, and nothing herein contained shall
constitute the Placement Agent or the Company partners of one another.
2. Representations and Warranties of the Company. The Company
represents and warrants to you that:
(a) The Company is a corporation duly organized and validly
existing in good standing under the laws of the State of Delaware, with
power and authority to own or lease its properties and conduct its
business as described in the Private Placement Memorandum hereinafter
mentioned; and that the Company is duly qualified and in good standing
as a foreign corporation in each jurisdiction in which such
qualification is required.
(b) A Private Placement Memorandum ("Memorandum") with respect
to the Shares has been prepared by the Company in conformity with the
requirements of the
<PAGE>
Securities Act of 1933 (the "Act") and the rules and regulations (the
"Rules and Regulations") of the Securities and Exchange Commission
thereunder. The Memorandum, together with exhibits, covering the Shares
proposed to be offered, have been carefully prepared by the Company
with the cooperation of the Placement Agent, and the Company shall
prepare all filings necessary with the Securities and Exchange
Commission, including the preparation and filing of Form D, and all
applicable filings under state securities laws. Copies of the
Memorandum have been delivered to you and the Company has consented to
the use of such copies for purposes permitted by the Act.
(c) There has been no order by any agency exercising
jurisdiction over the offering preventing or suspending the use of the
Memorandum. The Memorandum does not contain any untrue statement of a
material fact or omit to state any material fact required to be made
therein or necessary to make the statements therein not misleading;
provided, however, that the Company makes no representations or
warranty as to statements or omissions made in reliance upon and in
conformity with written information furnished to the Company by you
expressly for use therein.
(d) The securities of the Company conform to all statements
with regard thereto contained in the Memorandum, and the Company has an
authorized and outstanding capitalization as set forth in the
Memorandum. All of the outstanding shares of common stock of the
Company have been duly and validly issued and are fully paid and
nonassessable. Upon issuance of and payment for the Shares to be issued
and sold by the Company, as provided herein, such Shares will be duly
and validly authorized and issued, fully paid and nonassessable.
(e) Except as reflected in or contemplated by the Memorandum,
since the respective date as of which information is given in the
Memorandum, there has not been any material adverse change in the
financial condition or general affairs of the Company or any material
transaction entered into by the Company other than transactions in the
ordinary course of business.
(f) The financial statements contained in the Memorandum
fairly present the financial condition of the Company and the results
of its operations as of the dates and for the periods therein specified
and such financial statements have been prepared in conformity with
generally accepted accounting principles consistently applied
throughout the periods involved, and Ernst & Young LLP, who have
rendered reports on certain of such financial statements, are
independent public accountants as required by the Act and the Rules and
Regulations.
(g) No consent, approval, authorization, or other order of any
governmental authority is required in connection with the execution or
delivery by the Company of this agreement or the issuance and sale by
the Company of the Shares to be sold by it hereunder, except such as
may be required under the Act or state securities laws.
(h) Except as set forth in the Memorandum, there are no
actions, suits, or proceedings pending, or to the knowledge of the
Company threatened, against the
2
<PAGE>
Company or any of its property, at law or in equity or before or by any
federal or state commission, regulatory body, or administrative agency
or other governmental body, domestic or foreign, in which any adverse
decision might have a materially adverse effect on the business or
property of the Company.
(i) The execution and delivery of this agreement, the
consummation of the transactions herein contemplated, and compliance
with the terms of this agreement by the Company will not conflict with,
or constitute a default under, any indenture, mortgage, deed of trust,
or other agreement or instrument to which the Company is a party, or
the Certificate of Incorporation or Bylaws of the Company, or any law,
order, rule or regulation, writ, judgment, indenture, order or decree
of any government, governmental instrumentality, or court, domestic or
foreign, having jurisdiction over the Company or any of its property.
(j) The Company does not have any subsidiaries.
(k) Except as set forth in the Memorandum, the Company is not
in default in any material respect and no event has occurred which,
with the passage of time or the giving of notice, or both, would
constitute a material default in any contract or agreement to which the
Company is a party or by which it is bound.
3. Sale, Purchase and Delivery of Shares.
(a) Subject to the terms and conditions herein set forth, the
Company hereby appoints you as its exclusive agent from the date hereof
and until January 31, 2000 for the purpose of offering the Shares as
provided in this agreement on a "best efforts basis". You agree to use
your best efforts to sell the Shares as our agent. It is understood and
agreed that there is no firm commitment on your part to purchase any of
the Shares. If subscriptions for Shares of common stock are less than
233,000 Shares, you and the Company will agree to close or not to close
the offering. Conversely, if subscriptions exceed 233,000 Shares, you
and the Company and will agree or not agree upon the sale of Shares to
cover over-subscriptions.
You will offer the Shares hereunder at a price of
$15.00 per share. You will be entitled to a commission of 8% on each
Share sold by you as such agent payable by the Company on the Closing
Date from the funds deposited in the special bank escrow account
described in paragraph (b) hereof. You may, in your discretion, offer a
part of the Shares to dealers who are members of the National
Association of Securities Dealers, Inc., selected by you at such price
less a concession as you determine and you may form and manage a
selling group of such selected dealers.
Upon the closing of the offering, the Company will
sell to the Placement Agent warrants (the "Placement Agent Warrants")
for a purchase price of $.01 per Warrant, entitling the Placement Agent
to purchase an amount of Shares equal to 8% of the Shares sold in the
Offering. The Placement Agent Warrants will contain anti-dilution
provisions acceptable to the Placement Agent. The Placement Agent
Warrants will be exercisable for a period of five (5) years after the
date of the Memorandum and, if the
3
<PAGE>
Warrants are not exercised during such term, they shall automatically
expire. The exercise price of the Placement Agent Warrants shall be the
Share offering price. The Company will set aside and at all times have
available a sufficient number of Shares of its Common Stock to be
issued upon the exercise of the Placement Agent Warrants. The Warrants
will not be transferable to anyone, except to officers or affiliates of
the Placement Agent.
(b) All funds received from subscribers of Shares will be
deposited by you in a special noninterest bearing escrow account (or if
invested, such investment will only be made in permissible investment
under SEC Rule 15c2-4) to be maintained by you for the account of the
Company at a bank of your choice. All funds, represented by check or
otherwise, shall be made payable to you for our account and deposited
in escrow. On the Closing Date, you will distribute the funds then
deposited in such special bank escrow account, as their interests may
appear, to the Company, selected dealers, and to yourself.
In the event this agreement in terminated prior to
the Closing Date for any reason whatsoever, you shall promptly refund
to the subscribers of the Shares all funds which have been received
from them by you without interest.
All costs, expense, and charges incurred in
connection with the special bank escrow account shall be paid by the
Company.
(c) It is understood and agreed that, unless we agree
otherwise, if all Shares are not sold by you pursuant to this agreement
during the offering, we shall close with respect to the Shares sold.
(d) Closing of the offering will take place at your offices in
New York, New York, at 10 o'clock a.m., Eastern Time, on the earlier of
(i) five days from the date on which all of the Shares have been sold,
or (ii) January 31, 2000, said date being herein called the "Closing
Date". Certificates for the Shares registered in such a manner and in
such denominations as you may request will be delivered to you so that
you may examine and package such certificates for delivery at least ten
full business days after the Closing Date.
(e) The Company agrees that, within 90 days after the closing
of the offering of the Shares, it will file a Registration Statement
and all necessary amendments thereto under the Securities Act of 1933
registering the Shares of Common Stock subject to the offering and the
Common Stock underlying the Warrants to the Placement Agent. The
Company will use its best efforts to cause the above filing to become
effective. All expenses of such registration, including, but not
limited to, legal, accounting and printing costs, will be borne by the
Company, but the Company shall not be responsible for the cost of any
separate counsel to review the Registration Statement on behalf of or
to advise the shareholders or the Placement Agent. In the event the
Company fails to file the Registration Statement or to use its best
efforts to cause such filing to become effective, then the Company will
issue to the purchasers in this offering additional Shares amounting to
10% of the Shares purchased by such shareholders and to the Placement
Agent an additional 10% of Placement Agent Warrants.
4
<PAGE>
4. Covenants of the Company. The Company covenants and agrees with you
that:
(a) The Company will furnish to you and dealers selected by
you as soon as possible as many copies of the Memorandum (and of any
amended or supplemented Memorandum) as you may reasonably request. If
during such period any event occurs as a result of which the
Memorandum, as then amended or supplemented, would include an untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in the light of the circumstances
under which they were made, not misleading, or it shall be necessary to
amend or supplement the Memorandum to comply with the Act or with the
Rules and Regulations, the Company will forthwith notify you thereof
and on your request prepare and furnish to you and dealers selected by
you, in such quantity as you and such dealers may reasonably request,
an amendment or supplement which will correct such statement or
omission or cause the Memorandum to comply with the Act and with the
Rules and Regulations. The Company will not at any time prior to the
expiration of the offering period prepare any amendment to the
Memorandum of which you shall not previously have been advised and
furnished with a copy or to which your counsel shall have reasonably
objected in writing, or which is not in compliance with the Act and the
Rules and Regulations.
(b) The Company will, when and as requested by you, take all
action necessary to permit the offering of the Shares as contemplated
hereby under the securities laws of such states as you shall designate
and, during the period of twelve months after the date of the
Memorandum, to keep qualification of the Shares in good standing under
such laws; provided, however, that the Company shall not be required to
qualify as a foreign corporation or to file a consent to service of
process in any state in any action other than one arising out of the
offering or sale of the Shares. Said qualification of the Shares under
the securities laws of the said states shall be effected by your
counsel and the Company shall pay the legal fees therefor and all other
expenses incident thereto.
(c) Whether or not the transactions contemplated hereby are
consummated or this agreement is terminated, the Company will pay all
costs and expenses incident to the performance of the obligations of
the Company hereunder, including the fees and expenses of the Company's
counsel and accountants, registration fees, the costs and expenses
incident to the preparation, printing, shipping and filing of the
Memorandum and all amendments and supplements thereto (and such copies
thereof as the Placement Agent may reasonably require) and this
agreement and related documents, filing fees required to be paid to the
National Association of Securities Dealers, Inc., if any, the costs
incurred in connection with the qualification of the Shares under state
securities laws as provided in subparagraph (b) hereof (including the
fees and disbursements of your counsel in this connection). Payment to
you of a non-refundable expense allowance of $25,000, $15,000 of which
has been previously paid, and $10,000 to be paid upon closing or
termination of the offering.
(d) The Company will apply and utilize the proceeds from the
sale of the Shares in the manner described in the Memorandum.
5
<PAGE>
(e) The Company will comply with all obligations to the
Placement Agent and to its security holders undertaken by it in the
Memorandum.
5. Conditions of Placement Agent's Obligations. Your obligations as
provided herein shall be subject in your reasonable discretion to the accuracy
of the representations and warranties of the Company herein contained as of the
date hereof and as of the Closing Date, to the performance by the Company of its
obligations hereunder and the following additional conditions:
(a) It is agreed between the Company and you that all
documents and other information relating to the Company's affairs will
be made available upon request to you and your counsel at your office
or at the office of your counsel and copies of any such documents will
be furnished upon request to you or your counsel. Included within the
documents which must be made available as soon as possible are the
following: The Company's Certificate of Incorporation and By-laws and
all amendments thereto, minutes of all meetings of the Company's
incorporators, stockholders and directors, all financial statements and
correct copies of any and all material contracts, leases and agreements
to which the Company is a party and all reports and filings made by the
Company with the Securities and Exchange Commission within the prior
three years.
(b) You have not notified the Company that the Memorandum or
any amendment or supplement thereto contains an untrue statement of a
fact which in the opinion of your counsel is material, or omits to
state a fact which, in the opinion of such counsel, is material and is
required to be stated therein or is necessary to make the statements
therein not misleading.
(c) At the time of the execution of this agreement and at the
Closing Date, counsel for the Company, shall have furnished to you
their written opinion, addressed to you and dated as of the date it is
required to be delivered, in form and substance satisfactory to you,
with photostats or signed counterparts thereof for each of the
soliciting dealers, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the State of Delaware and has full corporate power and
authority to own and lease its properties and conduct its
business, as described in the Memorandum; and, the Company is
duly qualified to do business and is in good standing as a
foreign corporation in each jurisdiction where the conduct of
its business or its ownership or leasing of property requires
it to be qualified where the failure to be so qualified would
cause a material adverse effect on the Company; and
(ii) The Shares of Common Stock to be sold by the
Company hereunder, at the time of delivery to the Placement
Agent pursuant to Section 3 hereof, will be duly and validly
authorized and issued, fully paid and nonassessable and will
conform in all material respects to the description thereof
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contained in the Memorandum; other than as described in the
Memorandum there are presently no preemptive or other rights
to subscribe for or to purchase shares of Common Stock
pursuant to the Certificate of Incorporation or the law of the
State of Delaware, and none of the Shares of Common Stock
being sold hereunder by the Company will be issued in
violation of any such preemptive rights of any stockholder of
the Company; and all corporate action required to be taken for
the authorization, issue and sale of the Shares of Common
Stock has been validly taken; and
(iii) This agreement has been duly and validly
authorized, executed and delivered by the Company and
constitutes the valid and legally binding obligation of the
Company except insofar as indemnification of the Placement
Agent may be limited under applicable securities laws and
decisions thereunder.
(iv) The execution and delivery of and compliance
with this agreement by the Company, the consummation of the
transactions herein contemplated and the compliance with the
terms hereof will not conflict with or result in a breach or
violation of any of the terms and provisions of, or constitute
a default under, any indenture, mortgage, deed of trust or
other material agreement or instrument known to such counsel
to which the Company is a party or by which it is bound or to
which its property is subject, or under its Certificate of
Incorporation or Bylaws. No consent, approval, authorization
or order of any court or governmental agency or body is
required for the consummation of the transactions by the
Company contemplated by this agreement, except such as have
been obtained under the Act and the Rules and Regulations and
such as may be required under state securities laws in
connection with the purchase and distribution of the Shares by
the Placement Agent.
(v) The statements in the Memorandum under the
caption "Description of Capital Stock" insofar as they are, or
refer to, descriptions of documents or statements of law or
legal conclusions, have been reviewed by them and are correct
in all material respects.
(vi) Such counsel does not know of any legal or
governmental proceedings required to be described in the
Memorandum which are not described as required, or of any
contracts (other than this agreement, as to which such counsel
need express no opinion) or documents of a character required
to be described in the Memorandum which are not described as
required.
Such counsel shall confirm that, in connection with the
preparation of the Memorandum, such counsel has participated in
telephone conferences with officers of the Company at which conferences
the contents of the Memorandum were discussed and (without taking
further action to verify independently the statements made in the
Memorandum, and without assuming responsibility for the accuracy or
completeness of such statements, except as provided in paragraph (v)
above) nothing has come to such counsel's attention that would lead
such counsel to believe that either the Memorandum
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(except for the financial statements and other financial data included
therein, as to which such counsel need express no opinion) contains any
untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statement
therein not misleading, provided, however, that we make no statement
herein whatsoever as to any of the financial statements or notes
contained therein or omitted therefrom or other financial, numerical,
statistical or accounting data included therein or omitted therefrom.
In giving such opinion, such counsel may rely as to matters of
fact upon statements and certifications of officers of the Company and
of other appropriate persons and may rely as to matters of law, other
than the law of the United States, upon an opinion or opinions of local
counsel acceptable to the Placement Agent, provided that any such
opinion or opinions are referred to in said opinion and that said
counsel shall state that they believe that you and they are justified
in relying thereon.
(e) At and as of the date hereof and the Closing Date, the
Placement Agent shall have received a certificate, dated as of the date
hereof and the Closing Date, signed by the chief executive officer and
the principal financial officer of the Company, in form and substance
satisfactory to you, stating in effect that except as may be reflected
in or contemplated by the Memorandum (i) the representations and
warranties of the Company in this agreement are true and correct as of
the date hereof and the Closing Date, and the Company has complied with
all of the material agreements and satisfied all the material
conditions on its part to be performed or satisfied at or prior to the
date hereof and the Closing Date; (ii) since the respective dates as of
which information is given in the Memorandum, there has not been any
material adverse change in the condition or in the business of the
Company considered as a whole; (iii) since such dates there has not
been any material transaction entered into by the Company other than
transactions in the ordinary course of business; and (iv) such other
matters as the Placement Agent or counsel for the Placement Agent may
reasonably request.
(f) Before the Closing Date, Michael G. Quinn, Esquire,
counsel for the Placement Agent, shall have been furnished with such
opinions and copies of such documents as he may reasonably require for
the purpose of enabling him to pass upon the issuance and sale of the
Shares as herein contemplated and related proceedings, or in order to
evidence the accuracy or completeness of any of the representations or
warranties, or the fulfillment of any of the conditions, herein
contained; and all proceedings taken by the Company in connection with
the issuance and sale of the Shares as herein contemplated and all
opinions and certificates mentioned above or elsewhere in this
agreement shall be satisfactory in form and substance to the Placement
Agent and said counsel for the Placement Agent.
(g) Except as contemplated in the Memorandum, subsequent to
the respective dates as of which information is given in the
Memorandum, there shall not have been any material change in the
capital stock or long-term debt of the Company or any adverse change,
or any development specifically related to the business of the Company
involving a prospective material adverse change, in the condition
(financial or other), net
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worth or results of operations of the Company which, in the judgment of
the Placement Agent, makes it impractical or inadvisable to offer or
deliver the Shares on the terms and in the manner contemplated in the
Memorandum.
(h) There shall have been furnished or caused to be furnished
to the Placement Agent such further certificates and documents as the
Placement Agent may have reasonably requested.
If any of the conditions specified in this Section 5 shall not have
been fulfilled, this agreement may be terminated by the Placement Agent upon
notice to the Company or such conditions may be waived, modified or the time for
fulfillment thereof may be extended by the Placement Agent upon notice to the
Company.
6. Indemnification.
(a) The Company will indemnify and hold harmless the Placement
Agent, its agents and each person, if any, who controls the Placement
Agent within the meaning of the Act against any losses, claims, damages
or liabilities, joint or several, to which they may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material
fact contained in the Memorandum or any amendment or supplement thereto
or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; and will
reimburse the Placement Agent and each such controlling person for any
legal or other expenses reasonably incurred by the Placement Agent or
such controlling person in connection with investigating or defending
any such loss, claim, damage, liability or action. This indemnity
agreement will be in addition to any liability which the Company may
otherwise have.
(b) The Placement Agent will indemnify and hold harmless the
Company, each of its directors, each of its officers and each person,
if any, who controls the Company within the meaning of the Act, against
any losses, claims, damages or liabilities to which the Company or any
such director, officer or controlling person may become subject, under
the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material
fact contained in the Memorandum or any amendment or supplement
thereto, or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each
case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in
reliance upon and in conformity with written information furnished to
the Company by the Placement Agent specifically for use therein; and
will reimburse any legal or other expenses reasonably incurred by the
Company or any such director, officer or controlling person in
connection with investigating or defending any such loss, claim,
damage, liability or action. This indemnity agreement will be in
addition to any liability which the Placement Agent may otherwise have.
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(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section, notify the indemnifying party of
the commencement thereof, but the omission so to notify the
indemnifying party will not relieve it from any liability which it may
have to any indemnified party otherwise than under this Section except
to the extent the indemnifying party is prejudiced by such delay. In
case any such action is brought against any indemnified party, and it
notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the
extent that it may wish, join with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party will not be liable
to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation.
The indemnified party shall have the right to employ its counsel in any
such action, but the fees and expenses of such counsel shall be at the
expense of such indemnified party unless (i) the employment of the
counsel by such indemnified party has been authorized by the
indemnifying party, (ii) the indemnified party shall have been advised
in writing by counsel that there may be conflict of interest between
the indemnifying party and the indemnified party in the conduct of the
defense of such action (in which case the indemnifying party shall not
have the right to direct the defense of such action on behalf of the
indemnified party) or (iii) the indemnifying party shall not in fact
have employed counsel to assume the defense of such action, in each of
which cases the fees and expenses of one such counsel for all of the
indemnified parties shall be at the expense of the indemnifying party.
An indemnifying party shall not be liable for any settlement of any
action or claim effected without its consent.
7. Termination.
(a) This agreement may be terminated at any time prior to the
Closing Date by the Placement Agent by written notice to the Company if
(i) the Company has sustained a loss, whether or not insured, by reason
of fire, flood, accident or other calamity, which, in the reasonable
opinion of the Placement Agent substantially affects the value of the
properties of the Company or materially interferes with the operation
of the business of the Company, (ii) all trading in securities on the
New York Stock Exchange or the American Stock Exchange has been
suspended or limited or minimum prices have been established on any
such exchange, (iii) a banking moratorium has been declared by either
federal or New York state authorities, (iv) an outbreak of major
hostilities or other national or international calamity has occurred
which, in each case, make it inadvisable to proceed with the offering
or (v) any action has been taken by any government in respect of its
monetary affairs which, in the reasonable opinion of the Placement
Agent, has a material adverse effect on the United States securities
markets.
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(b) If this agreement shall be terminated pursuant to Section
5 or this Section 7, or if the obligation provided for herein are not
consummated because of any refusal, inability or failure on the part of
the Company to comply with any of the terms or to fulfill any of the
conditions of this agreement, or if for any reason the Company shall be
unable to perform all its obligations under this agreement, the Company
shall not be liable to the Placement Agent for damages on account of
loss of anticipated profits arising out of the transactions covered by
this agreement, but the Company shall remain liable to the extent
provided in Sections 4(d), 6(a) and 6(c) hereof.
8. Survival of Indemnities, Representations and Warranties. All
representations, warranties, agreements, covenants and indemnities contained
herein of the Company and of the Placement Agent shall remain operative and in
full force and effect and shall survive the delivery of and payment for the
Shares or termination of this agreement pursuant to Section 7 hereof, as the
case may be.
9. Parties in Interest. This agreement shall inure to the benefit of
and be binding upon the Company and the Placement Agent, the officers, directors
and partners of such parties, each controlling person referred to in Section 6
hereof, and their respective successors and assigns. Nothing in this agreement
is intended or shall be construed to give to any person, firm or corporation,
other than the parties hereto and their respective successors and assigns and
the controlling persons and officers and directors referred to in Section 6
hereof, any legal or equitable right, remedy or claim under or in respect of
this agreement or any provision herein contained; this agreement and all
conditions and provisions hereof being intended to be and being for the sole and
exclusive benefit of the parties hereto and their respective successors and
assigns, and such controlling persons, directors and officers, and for the
benefit of no other person or corporation.
The term "successor" as used in this agreement shall not
include any purchaser, as such purchaser, of any Shares from the Placement Agent
or any selected dealer.
This agreement constitutes the entire agreement between the
parties concerning the subject matter hereof, and supersedes any letter of
intent previously entered into.
10. Notices. All communications, terminations and notices hereunder
shall be in writing and, if sent to the Placement Agent, shall be mailed or
delivered and confirmed to America First Associates Corp., 415 Madison Avenue,
3rd Floor, New York, NY 10017, Attn: Joseph Genzardi, President; if sent to the
Company shall be mailed or delivered to SmartServ Online, Inc., One Station
Place, Stamford, Connecticut 06902, Attn: Thomas W. Haller, CFO.
11. Counterparts. This agreement may be executed in any number of
counterparts which, taken together shall constitute one and the same instrument.
12. Governing Law. This agreement shall be governed by and construed in
accordance with the laws of the State of New York without regard to its
principles of conflicts of laws.
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Please sign the enclosed duplicate of this letter, whereupon this
letter will become a binding agreement between the parties in accordance with
its terms.
Very truly yours,
SMARTSERVE ONLINE, INC.
By:
---------------------------------
Thomas W. Haller, Chief Financial
Officer
The foregoing agreement is hereby confirmed and accepted, as of the date first
above written.
AMERICA FIRST ASSOCIATES CORP.
By: ___________________________________
Joseph Genzardi, President
EXHIBIT 5.1
April 17, 2000
SmartServ Online, Inc.
One Station Place
Stamford, CT 06902
Gentlemen:
We have acted as counsel for SmartServ Online, Inc., a Delaware
corporation (the "Company"), in connection with its Registration Statement on
Form SB-2 (the "Registration Statement") filed with the Securities and Exchange
Commission relating to the registration of 351,640 shares of Common Stock, par
value $ .01 per share (the "Shares"), of which 333,000 are outstanding and
18,640 are issuable upon exercise of warrants granted by the Company (the
"Warrants").
In connection with the foregoing, we have examined, among other things,
the Registration Statement, the Warrants and originals or copies, satisfactory
to us, of all such corporate records and of all such other agreements,
certificates and documents as we have deemed relevant and necessary as a basis
for the opinion hereinafter expressed. In such examination, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals and the conformity with the original documents of documents
submitted to us as copies. As to any facts material to such opinion, we have, to
the extent that relevant facts were not independently established by us, relied
on certificates of public officials and certificates, oaths and declarations of
officers or other representatives of the Company.
Based upon and subject to the foregoing, we are of the opinion that the
333,000 outstanding Shares being registered pursuant to the Registration
Statement are validly issued, fully paid and non-assessable and the 18,640
Shares issuable upon exercise of the Warrants will be, when issued pursuant to
the terms and provisions of the Warrants, validly issued, fully paid and
non-assessable.
We hereby consent to the filing of a copy of this opinion as an exhibit
to the Registration Statement.
Very truly yours,
/s/ Parker Chapin LLP
Parker Chapin LLP
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated October 13, 1999 in the Registration Statement (Form
SB-2) and related Prospectus of SmartServ Online, Inc. for the registration of
351,640 shares of its common stock.
Stamford, CT /s/ ERNST & YOUNG LLP
April 10, 2000
