UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2000
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to
___________
COMMISSION FILE NUMBER 0-28008
SMARTSERV ONLINE, INC.
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(Exact name of small business issuer as specified in its charter)
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Delaware 13-3750708
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(State or other jurisdiction of incorporation or organization) (I.R.S. employer identification no.)
One Station Place, Stamford, Connecticut 06902
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(Address of principal executive offices) (Zip Code)
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Issuer's telephone number, including area code (203) 353-5950
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Securities registered pursuant to Section 12(b) of the Exchange Act: None
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Securities registered pursuant to Section 12(g) of the Exchange Act:
Title of each class
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Common Stock, $0.01 Par Value
Common Stock Purchase Warrants
Indicate by check mark whether the issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the issuer was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No ___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.___
Issuer's revenues for its most recent fiscal year. $3,696,133
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The aggregate market value of the voting stock (based on the closing price of
such stock on NASDAQ National Market System) held by non-affiliates of the
issuer as of September 25, 2000 was approximately $159,569,000. All officers and
directors of the issuer have been deemed, solely for the purpose of the
foregoing calculation, to be "affiliates" of the issuer.
There were 5,814,841 shares of Common Stock outstanding at September 25, 2000.
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TABLE OF CONTENTS
PART I
Item Page
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1. Description of Business 3
2. Description of Property 8
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 8
PART II
5. Market for Common Equity and Related Stockholder Matters 9
6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
7. Financial Statements 19
8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 40
PART III
9. Directors, Executive officers, Promoters and Control Persons:
Compliance with Section 16(a) of the Exchange Act __
10. Executive Compensation __
11. Security Ownership of Certain Beneficial Owners and Management __
12. Certain Relationships and Related Transactions __
13. Exhibits and Reports on Form 8-K __
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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THE COMPANY
SmartServ Online is a business-to-business Web and wireless application services
provider specializing in building and hosting content-rich and
transaction-intensive applications for both mobile wireless and fixed wireline
users. We deliver Internet-based content and securities trade order routing
solutions, as well as "Web-to-Wireless" or "W2W" applications designed to
facilitate mobile commerce, or "m-commerce". We have developed online financial,
transactional and media applications using a unique "device-independent"
delivery solution and have designed applications that enable the receipt of
information and the execution of transactions on wireless handsets, computers
and personal digital assistants.
INDUSTRY OVERVIEW
GROWTH OF WIRELESS TELECOMMUNICATIONS
The wireless industry remains one of the fastest growing sectors within the
telecommunication services industry. In its May 2000 Industry Report:
Communications Software and Services, Donaldson Lufkin & Jenrette ("DLJ")
estimates that there are currently 400 million world wide cellular
subscribers, a number that is expected to reach 1 billion by 2002. This
represents a compound annual growth rate ("CAGR") of 63.2%. As described by
DLJ, the World Telecommunications Development Report, published by the
International Telecommunications Union, estimates that global wireless
revenues will increase to $400 million by 2003, or 40% of the
telecommunications market, from $185 billion in 1999, or 20% of the total
telecommunications services market. Wireless telecommunications will
continue to grow rapidly due to the availability of new m-commerce and
lifestyle services, the attractively priced service plans made available by
wireless carriers and the proliferation of affordable wireless devices.
GROWTH OF WIRELESS DATA APPLICATIONS AND COMMUNICATIONS
The wireless data services market is one of the fastest growing segments
within the wireless telecommunications market. We believe an increasing
number of people will carry wireless devices for both voice and data
communications rather than for voice communications alone. As described by
DLJ, ARC Group estimates that the number of global wireless data users will
increase from 31 million in 1999 to approximately 1.3 billion in 2005,
representing an 85% CAGR. Also, as described by DLJ, International Data
Corporation ("IDC") expects the number of global wireless Internet users to
surge from 196 million in 1999 to 503 million in 2003. To date, the
adoption of mobile data services has been slow due to the limited bandwidth
of first generation wireless networks, but is expected to expand rapidly as
a result of the introduction of enhanced wireless networks capable of
high-speed data transmission. With the anticipated deployment of 3G
networks there will be increased opportunities for widespread adoption of
wireless data and transaction services.
WIRELESS COMMUNICATIONS AND THE INTERNET
The market for wireless services is growing rapidly alongside the market
for Internet access, and we believe that these markets will continue to
converge. The majority of wireless data penetration will result from the
distribution of handsets and other PCS devices equipped with wireless
modems and Web browsers for accessing the Internet. The market for wireless
data applications will be driven by the increased reliance on the Internet,
intranets and extranets, as well as the emergence of a mobile workforce.
IDC forecasts that in the United States alone, there will be more than 40
million wireless business subscribers by 2003. Additionally, IDC forecasts
that by 2003, total U.S. wireless data subscribers will exceed $115
million. We believe that workers and consumers have become dependent on the
information and applications available on their personal computers and will
demand access to similar information when away from their home or office.
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SERVICES
Recognizing the trend toward mobility, we have developed an infrastructure
that integrates and delivers our Internet-based information and that
effectuates m-commerce transactions via wireless networks and devices. By
developing fully integrated solutions, we offer traditional and new-economy
companies the ability to leverage the Internet and provide m-commerce
capabilities for both wireline and emerging wireless networks. SmartServ's
solutions offer enterprises a platform that enables anytime, anywhere,
any-device access to Web content, industrial-strength transaction routing
systems and a suite of applications for financial and commerce transactions
- all in a secure and reliable hosted environment. Our development efforts
allow our Customers to gain W2W capabilities with significantly lower costs
for development and maintenance than if developed internally. We maintain
the systems while making sure the technology available to our Customers
remains state-of-the-art.
We have invested in the development of a transaction engine and an
application software and communications architecture to provide a highly
scalable and reliable carrier-grade e-commerce solution. We believe our
application software and communications architecture that formats the
information in a manner that is most appropriate for the device on which it
will be displayed will be attractive in the marketplace. Product
development efforts are focused on providing new solutions for user-level
personalization and profiling, integrated payment capabilities and other
enhancements to our current information and transaction services.
Additionally, we are developing new format modifications for emerging
devices, content and feature 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
SmartServ was an early entrant in the dynamic market of distribution of
financial information and transaction services via wireless telephones and
personal digital assistants. We have worked to develop strategic marketing
relationships with 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. Recently, we entered into a Business Alliance Agreement
with Hewlett-Packard Company, whereby the companies agreed to jointly
market their products and services and to work on the build-out of
SmartServ's global infrastructure. We expect Hewlett-Packard to introduce
SmartServ's wireless m-commerce solutions to their interested enterprise
customers. Our strategy of forming alliances with Strategic Marketing
Partners enables us to maximize our market reach at minimal operating
costs, improve product and service performance and grow distribution
channels to end-users.
By combining our application development and 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. Our data and communication architecture adds user
functionality and utility to both wired and wireless technology while our
application development and strategic alliances provide us with a
competitive advantage for providing complete end-to-end solutions.
We expect that our sources of revenue will include the sale of our
solutions to our financial services, telecommunications and enterprise
Customers, as well as the recurring content delivery and transaction fees
resulting from distribution of our services to their end-users. We expect
that our Customers will private label our information and transaction
services and promote them to their end-users. Our m-commerce platform will
enable our Customers to provide m-commerce solutions via both the Internet
and wireless networks.
Our goal is to be a leading provider of software applications and hosting
services that facilitate W2W transactions; to this end we will concentrate
our efforts in the following areas:
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EXPANSION OF CUSTOMER BASE
The expansion of our Customer base is focused primarily on:
o FINANCIAL SERVICES SOLUTIONS
SmartServ seeks to expand its Customer base among financial services
enterprises both institutional and retail, by leveraging its
Transaction Routing Engine and W2W Middleware with a suite of
applications designed to meet the rigorous demands of the financial
community. SmartServ's ability to provide these transaction management
systems via the Internet makes us well-suited to provide these
services in a m-commerce environment. Our experience in providing
these systems better qualifies us to understand the unique needs of
our Customers, whether they are broker/dealers, banks or custodial
clearinghouses. Customers have the ability to choose an entire suite
of transaction and information services or select only those services
that are relevant to their particular business needs.
o TELECOMMUNICATIONS SOLUTIONS
We provide a suite of solutions to help the wireless carriers, handset
manufactures and Internet service providers rapidly expand the
delivery of products and services to their customers. Our platform
supports an array of features and transaction-enabling applications
designed to drive service usage and network revenues. These features
and applications include: authentication, security, customer
administration and management, mobile brokerage, multi-language
support, currency converter and mobile lottery.
o ENTERPRISE SOLUTIONS
We have designed our enterprise commerce solution based upon our
belief that the timely and accurate delivery of information drives
transactions. Alerts notify the consumer of expiring inventories,
price changes or specials in order to prompt transactions. SmartServ's
Transaction Routing Engine and Middleware provide the ideal platform
for a host of commerce applications.
GEOGRAPHIC EXPANSION
We have established a sales and marketing presence in Zurich, Switzerland
in an effort to expand our services into Europe. The extensive and growing
European reliance on wireless services makes it a prime candidate for
SmartServ's information and e-commerce capabilities. Additionally, we
believe that new products and services developed for the European market
will also be introduced into the US market.
APPLICATION DEVELOPMENT AND PLATFORM STABILITY
We plan to continue to expand the development of our core technologies to
include voice recognition, localized financial and lifestyle information,
and payment features while continuing to provide a personalized and
esthetically appealing user interface. We will work to ensure that our
platform is stable and scalable and its information reporting capabilities
meet the demands of our Customers.
EXPANSION OF HOSTING CAPABILITIES
The complexity surrounding the provision of wireless services with regard
to such things as security, redundancy, scalability and reliability
provides us with the opportunity to assume the role of a Wireless
Application Services Provider, or "WASP". As a WASP, we can facilitate the
rapid implementation and deployment of a Customer's wireless business plan.
We will offer carrier-grade operation centers and secure communication
lines worldwide.
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
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introductions. While our application software and communications architecture
makes the services "device independent", we face competition from numerous
services delivered through personal computers. Although in its infancy, the
wireless arena too has its competitors, such as DataLink Systems Corporation, I3
Mobile, Inc., Aether Systems, Inc., Tantau Software, Inc., 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
by 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 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 provides a highly scalable carrier-grade m-commerce solution, offers
easy to use and visually appealing services, and maximizes 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 m-commerce
and our application software employs common user interface techniques, such as
icons, pull-down menus, spreadsheet formats, tree structures and the use of
"key" words, to make our products intuitive to our users. Our software employs a
unique, object-oriented architecture that intelligently identifies a wide range
of wireless and wired devices and dynamically formats the information to
device-specific attributes.
During the fiscal years ended June 30, 2000, 1999 and 1998, we incurred costs of
$383,042, $193,188 and $923,082, respectively, for project development
activities. Additionally, during the fiscal year ended June 30, 2000 and 1999,
we capitalized software development costs amounting to $1,122,000 and $765,000,
respectively. No such costs were capitalized in the year ended June 30, 1998.
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 8i relational database manager, to support a wide array
of wireless browsers and operating systems. The platform seamlessly integrates
real-time data and transaction capabilities, such as stock trade order routing
and m-commerce services, into a user-friendly services interface. We rely upon a
combination of contract provisions, trade secret laws, patent, trademark and
copyright laws to attempt to protect our proprietary rights. We license the use
of our services 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.
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We granted Data Transmission Network Corporation 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 default. 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, Data Transmission Network may at its
sole cost elect to provide its own maintenance to both the system software and
related hardware. Under these circumstances, Data Transmission Network will have
the right to own the system software, including the source codes, and related
hardware, and Data Transmission Network will have no further obligation to pay
us licensing fees which we currently rely on for a significant part of our
revenues.
We are currently negotiating with Data Transmission Network to amend the
Licensing Agreement. Under such amendment, we expect that, in consideration for
a copy of the application source code, Data Transmission Network will return
both the domestic and international marketing rights of the software
applications to SmartServ and will cancel all of the aforementioned default
provisions.
We believe that our software, services, trademark, service mark and other
proprietary rights do not infringe on the proprietary rights of third parties.
However, there can be no assurance that third parties will not assert
infringement claims against us with respect to current features, content or
services or that any such assertion may not require us to enter into royalty
arrangements or result in litigation.
GOVERNMENT REGULATION
We are not currently subject to direct regulation other than federal and state
regulation generally applicable to businesses. However, changes in the
regulatory environment relating to the telecommunications and media industry
could have an effect on our business, including regulatory changes which
directly or indirectly affect telecommunication costs or increase the likelihood
or scope of competition from regional telephone companies. Additionally,
legislative proposals from international, federal and state governmental bodies
in the areas of content regulation, intellectual property and privacy rights, as
well as federal and state tax issues could impose additional regulations and
obligations upon all online service providers. We cannot predict the likelihood
that any such legislation will pass, or the financial impact, if any, the
resulting regulation or taxation may have.
Moreover, the relevance to application 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 application 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
The Company employs forty-four people, forty-two 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 twenty-five people during the period ending June 2001. Such personnel will be
added to assist with the programming requirements of our Customers' 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.
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ITEM 2. DESCRIPTION OF PROPERTY
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The Company occupies approximately 10,300 square feet in a leased facility
located in Stamford, Connecticut. The lease expires in October 2010.
ITEM 3. LEGAL PROCEEDINGS
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On or about June 4, 1999, Michael Fishman, our former Vice President of Sales,
commenced an action against us, Sebastian E. Cassetta (our Chairman of the Board
and Chief Executive Officer), Steven Francesco, (our former President) and four
others 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 counterclaim,
and discovery is proceeding. 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 SmartServ elected to pay the fee 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 have denied the material allegations of the complaint,
including the allegation that we elected to pay in stock. Discovery has
commenced. Although we are vigorously defending this action, there can be no
assurance that we will be successful.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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On May 16, 2000, SmartServ's $.01 par value common stock commenced trading on
the Nasdaq National Market as SSOL. On this date, our Redeemable Common Stock
Purchase Warrants, or public warrants, also commenced trading on the Nasdaq
National Market as SSOLW.
SmartServ's securities traded on the OTC Bulletin Board from May 21, 1998 to May
15, 2000.
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 National
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.
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COMMON STOCK WARRANTS
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HIGH LOW HIGH LOW
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Year Ended June 30, 2000
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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 25.000 47.031 10.500
Year Ended June 30, 1999
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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
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As of September 25, 2000, we had 5,814,841 shares of common stock outstanding
held by 100 record holders. 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 16 record holders.
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.
RECENT SALES OF UNREGISTERED SECURITIES
In May 1997, we issued a $550,000 promissory note and warrants to purchase
51,875 shares of common stock to Zanett Lombardier, Ltd. for $550,000. In each
of July and September 1997, we issued an additional $111,111 promissory note and
warrants to purchase an additional 10,478 shares of common stock to Zanett
Lombardier for $111,111. The warrants are subject to antidilution provisions and
have exercise prices of $4.34 and $5.30 per share. Zanett Securities Corporation
received fees of $78,576 for its services in connection with such transactions.
Additionally, Zanett Securities Corporation received warrants to purchase 18,206
shares of Common Stock. Such warrants are subject to antidilution
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provisions and have exercise prices of $4.34 and $5.30. The promissory notes and
warrants were issued in reliance upon the exemption from registration provided
by Section 4 (2) of the Securities Act.
In September 1997, we issued warrants to purchase 50,083 shares of Common Stock
to Zanett Lombardier as a default penalty under notes issued to Zanett
Lombardier. The warrants have an exercise price of 50% of the closing price of
the Company's Common Stock on the exercise date. In November 1999, Zanett
Lombardier 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 and shares were issued in reliance upon the
exemption from registration provided by Section 4 (2) of the Securities Act.
In September 1997, we 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 Zanett Lombardier Ltd. 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 our
common stock 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. Pursuant to an amendment of the terms of
the Prepaid Warrants because of the Company's default thereunder, the exercise
price of the remaining $612,000 of Prepaid Warrants shall not exceed $1.40 per
share. Zanett Securities Corporation received a commission of $400,000, an
unaccountable expense allowance of $120,000, and warrants to purchase 155,627
shares, subject to antidilution provisions, of common stock at $4.34 per share
in connection with such transaction. The Prepaid Warrants and the warrants
issued to Zanett Securities Corporation were issued in reliance upon the
exemption from registration provided by Section 4 (2) of the Securities Act.
In September 1997, we issued warrants to purchase 130,035 shares of common stock
to Bruno Guazzoni and, subject to stockholder approval, agreed to issue to him
warrants to purchase an additional 792,201 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 $4.34 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 1998 and June 30, 2000, an aggregate of 3,063 Prepaid Warrants
were converted into an aggregate of 1,209,740 shares of our common stock. 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.
In January 1998, we issued warrants to purchase 16,666 shares of common stock to
Ehrenkrantz King and Nussbaum, Inc. in connection with an investment advisory
contract. The warrants had an exercise price of $3.75. 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. In December 1999, we issued 16,666 shares of common stock upon exercise of
the warrants. Proceeds from the exercise of the warrants were $62,497.
In March 1998, we issued warrants to purchase 20,833 shares of common stock to
Steve Rosner, a financial advisor to the Company, at exercise prices of $15.75
to $19.50. In January 1999, we agreed to cancel these warrants and to grant Mr.
Rosner warrants to purchase 40,833 shares of common stock at $.60 per share for
his efforts in arranging our relationship with Spencer Trask Securities, Inc.
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. In March 2000, we issued 40,833 shares of common stock upon
exercise of the warrants. Proceeds from the exercise of the warrants were
$24,500.
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In August 1998, we issued 32,953 shares of common stock to Zanett Lombardier
Ltd. and 17,047 shares of common stock to Bruno Guazzoni in consideration for
their agreeing to certain restrictions on the exercise of 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.
In September 1998, we issued warrants to purchase 3,000 shares of common stock
to Data Transmission Network Corporation for prepayment of certain guaranteed
payments in accordance with the Software License and Service Agreement between
the parties dated April 23, 1998. Such warrants were 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. In June 2000, we
issued 3,000 shares of common stock upon exercise of the warrants. Proceeds from
the exercise of the warrants were $9,000.
In November 1998, we 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 SmartServ officer, as partial
consideration for the settlement of his claims against us and certain of our
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. In February
2000 we issued 16,667 shares of common stock upon exercise of the warrants.
Proceeds from the exercise of the warrants were $83,335.
In November and December 1998, we issued convertible promissory notes in the
amount of $500,000 and warrants to purchase 833,333 shares of common stock to
investors for $500,000. Such warrants were exercisable at $.60 per share.
Spencer Trask Securities, Inc., the placement agent, received a commission of
$50,000 and an unaccountable expense allowance of $15,000 in connection with
such transaction. Additionally, we issued warrants to purchase 166,667 shares of
common stock to Spencer Trask exercisable at $.72 per share. These promissory
notes and warrants were issued in reliance upon the exemption from registration
provided by Section 4 (2) of the Securities Act. During the year ended June 30,
2000, we issued 998,509 shares of common stock upon exercise of these warrants.
Proceeds from the exercise of these warrants were $560,000.
In January 1999, we issued 10,000 shares of common stock to Arnhold & S.
Bleichroeder, Inc., an investor in our 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.
In January 1999, we issued a convertible promissory note in the amount of
$50,000 and warrants to purchase 83,333 shares of common stock to Bruno
Guazzoni, an investor in our 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 in connection with this transaction. The promissory note and the
warrants were issued in reliance upon the exemption from registration provided
by Section 4 (2) of the Securities Act. In May 2000, we issued 16,667 shares of
common stock to Spencer Trask upon exercise of the warrants. Proceeds from the
exercise of the warrants were $12,000.
In July 1999, we issued 180,000 shares of common stock to Arnhold & S.
Bleichroeder, Inc. to settle our obligation to Arnhold & S. Bleichroeder, Inc.
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.
In October 1999, we entered into a consulting agreement with Steven Rosner, a
financial advisor to SmartServ. As consideration for such services, we granted
Mr. Rosner warrants to purchase 100,000
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<PAGE>
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. In consideration of
$125,000 and the issuance of warrants to purchase 8,000 shares of common stock
at $18.375 per share, we extended this agreement for the two-year period
commencing October 24, 2000. The warrants expire on July 2, 2003 and October 24,
2004. In July 2000, we issued 200,000 shares of common stock to Mr. Rosner upon
exercise of warrants to purchase such shares. Proceeds from the exercise of the
warrants were $625,000. No sales commissions were paid in connection with such
transactions. The warrants and the shares were issued in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act.
In November 1999, we issued to Michael Kramer, a warrant to purchase 16,000
shares of common stock at an exercise price of $17.75 per share. This warrant
was issued as partial consideration for technical systems consulting services to
be provided to SmartServ and expires on November 18, 2002. No sales commissions
were paid in connection with such transaction. This warrant was issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act.
In December 1999, our Board of Directors 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 we 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 transactions. These shares were
issued in reliance upon the exemption from registration provided by Section 4
(2) of the Securities Act.
In December 1999, we issued a warrant to purchase an aggregate of 10,000 shares
of common stock at an exercise price of $2.50 per share to the Andrew Seybold
Group LLC. This warrant was issued as partial consideration for marketing
consulting services provided to SmartServ and expires on December 31, 2002. No
sales commissions were paid in connection with such transaction. These warrants
were issued in reliance upon the exemption from registration provided by Section
4(2) of the Securities Act.
In December 1999, we issued to Brauning Associates warrants to purchase an
aggregate of 50,000 shares of common stock at an exercise price of $3.00 per
share. Thereafter, these warrants were transferred by Brauning Associates to
Michael Silva and Todd Peterson, principals of Brauning Associates. These
warrants were issued as partial consideration for marketing consulting services
provided to SmartServ and expire on December 31, 2002. No sales commissions were
paid in connection with such transaction. These warrants were issued in reliance
upon the exemption from registration provided by Section 4(2) of the Securities
Act.
In January 2000, we issued 618,239 shares of common stock to Sebastian Cassetta
in connection with a restricted stock purchase agreement between SmartServ and
Mr. Cassetta. SmartServ 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. The shares were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.
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<PAGE>
In January 2000, we issued 206,080 shares of common stock to Mario Rossi in
connection with a restricted stock purchase agreement between SmartServ and Mr.
Rossi. SmartServ 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. The
shares were issued in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act.
In January 2000, we issued 233,000 shares of common stock to 24 accredited
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 of our common stock at an
exercise price of $15 per share. Proceeds from the issuance of these shares were
$3,495,000. These shares and warrants were issued in reliance upon the exemption
from registration provided by Section 4 (2) of the Securities Act.
In January 2000, we issued 100,000 shares of common stock to 14 additional
accredited 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. Proceeds from the
issuance of these shares were $1,500,000.
In January 2000, we issued to Data Transmission Network Corporation a warrant
for the purchase of 300,000 shares of our 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. In June 2000, we
issued 200,000 shares of common stock upon partial exercise of the warrant.
Proceeds from the exercise of the warrant were $1,720,000. The warrant and the
shares were issued in reliance upon the exemption from registration provided by
Section 4 (2) of the Securities Act.
In May 2000, we issued to Lindquist Global Advisors, LLC, a warrant to purchase
50,000 shares of common stock at an exercise price of $49.50 per share. This
warrant was issued as partial consideration for financial consulting services to
be provided to SmartServ and expires on April 30, 2003. No sales commissions
were paid in connection with such transaction. This warrant was issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act.
In May and June 2000, we issued an aggregate of 95,000 shares of our common
stock to Wireless Acquisition Partners, LLC, at prices ranging from $12 to $24
per share upon the cashless exercise of warrants to purchase such shares. The
shares were issued in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act.
In May 2000, we completed an offering of 353,535 shares of our common stock to 3
accredited investors. Gross proceeds from this transaction amounted to
$17,500,000. Chase Securities, Inc., the placement agent, received a commission
of $700,000 and reimbursement of direct expenses of $17,700 in connection with
this transaction. The sale of these shares was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof.
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<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------ RESULTS OF OPERATIONS
SmartServ is a business-to-business Web and wireless application services
provider specializing in building and hosting content-rich and
transaction-intensive applications for both mobile wireless and fixed wireline
users. We deliver Internet-based content and trade order routing solutions, as
well as "Web-to-Wireless" applications designed to facilitate e-commerce. We
have developed online financial, transactional and media applications using a
unique "device-independent" delivery solution and have designed applications
that enable the receipt of information and the execution of transactions on
wireless handsets, computers and personal digital assistants.
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
information and transaction 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.
Management anticipates that staffing requirements associated with the
implementation of its plan of operation will result in the addition of a minimum
of twenty-five people during the period ending June 30, 2001. Such personnel
will be added to assist primarily with the programming requirements of Strategic
Marketing Partners' product offerings, for customer support and sales and
marketing.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 2000 VERSUS FISCAL YEAR ENDED JUNE 30, 1999
During the years ended June 30, 2000 and 1999 we recorded revenues of $3,696,133
and $1,443,781, respectively. Substantially all of such revenues were earned
through our licensing agreement with Data Transmission Network Corporation.
During the years ended June 30, 2000 and 1999, we recognized $1,656,600 and
$1,112,100, respectively, from the amortization of deferred revenues associated
with this agreement.
During the year ended June 30, 2000, we incurred costs of services of $954,048.
Such costs consisted primarily of information and communication costs
($182,000), personnel costs ($260,900), computer
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hardware leases and maintenance ($356,000) and systems consultants ($104,400).
During the year ended June 30, 1999, we incurred costs of services of $992,741.
Such costs consisted primarily of information and communication costs
($267,600), personnel costs ($288,400), computer hardware leases and maintenance
($339,400), and systems consultants ($97,300). Product development costs were
$383,042 versus $193,188 for the year ended June 30, 1999. During the years
ended June 30, 2000 and 1999, we capitalized $1,122,000 and $765,000,
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 ("Statement 86"). Product development
costs consisted primarily of the amortization of capitalized software
development costs.
During the year ended June 30, 2000, we incurred selling, general and
administrative expenses of $3,998,405 versus. $2,695,999 for the year ended June
30, 1999. During the year ended June 30, 2000 such costs were incurred primarily
for personnel costs ($1,899,200), facilities ($267,800), marketing and
advertising costs ($668,800), professional fees ($952,100), and
telecommunications costs ($87,700). Personnel costs increased by $767,800
primarily from our efforts to built our marketing and sales infrastructure while
marketing and advertising costs increased $405,700 as a result of our efforts to
increase marketplace awareness of our company and its product line. During the
year ended June 30, 1999, such costs were incurred primarily for personnel costs
($1,131,400), facilities ($240,500), marketing and advertising costs ($263,100),
professional fees ($856,000) and telecommunications costs ($69,500).
During the year ended June 30, 2000, noncash charges for stock-based
compensation amounted to $30,271,024 compared to $1,312,324 during the year
ended June 30, 1999. Such noncash charges in 2000 were primarily related to
personnel costs ($28,991,100) resulting from the valuation of stock-based
compensation 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, as they were repriced,
and therefore, compensation expense is recognized for changes in the fair value
of our common stock. During 1999, such costs were approximately $18,000. Noncash
charges for professional fees for the years ended June 30, 2000 and 1999 were
$1,279,900 and $1,294,000, respectively, resulting from the issuance of warrants
to purchase common stock to various financial, marketing and technical
consultants. The value of such common stock purchase warrants was recorded in
accordance with the Black-Scholes pricing methodology.
Interest income for the year ended June 30, 2000 amounted to $241,402 versus
$4,767 for the year ended June 30, 1999. Such amounts were earned primarily from
our investments in highly liquid commercial paper. The increase in interest
income resulted from the availability of funds from our January and May 2000
equity placements. Interest costs for the years ended June 30, 2000 and 1999
were $2,275 and $167,839, respectively. In 1999, such costs were incurred
primarily in connection with the issuance of the 8% convertible notes. Debt
origination and other financing costs were $(677,700) and $3,210,583 for the
years ended June 30, 2000 and 1999, respectively. During the year ended June 30,
1999, we recorded a charge of approximately $986,000 for our obligation to
holders of our Prepaid Warrants pursuant to the default provisions thereof.
During the year ended June 30, 2000, we reversed $717,700 of such charge as a
result of the conversion of certain Prepaid Warrants into our common stock and
the relisting of our common stock on the Nasdaq National Market, thus curing the
event of default. In 1999, $2,593,800 of such amount represents noncash charges
for the issuance of common stock as settlement of certain default obligations
and warrants to purchase common stock in connection with our 8% convertible
notes.
Loss per share was $11.42 per share for year ended June 30, 2000 versus $6.44
per share for the year ended June 30, 1999. Our net loss increased $ 23,869,433
while our weighted average shares of common stock outstanding in 2000 increased
by 1,607,328 shares.
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<PAGE>
FISCAL YEAR ENDED JUNE 30, 1999 VERSUS FISCAL YEAR ENDED JUNE 30, 1998
During the year ended June 30, 1999, we recorded revenues of $1,443,781.
Substantially all of such revenues were earned through our licensing agreement
with Data Transmission Network. During the year ended June 30, 1998, we earned
revenues of $873,476. Of such amount, $210,000 was earned through the
relationship with Data Transmission Network, while $454,000 was earned from
sales of the SmartServ Pro stock quote services.
During the year ended June 30, 1999, we incurred costs of services of $992,741.
Such costs consisted primarily of information and communication costs
($267,600), personnel costs ($288,400), computer hardware leases and maintenance
($339,400) and systems consultants ($97,300). During the year ended June 30,
1998, we 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 Data Transmission
Network. 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 versus $923,082 for the year ended June 30,
1998. The decrease in the product development costs results from the
capitalization of software development costs related to certain product
enhancements in accordance with Statement 86. During the year ended June 30,
1999, we 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, we incurred selling, general and
administrative expenses of $2,695,999 versus $2,561,364 for the year ended June
30, 1998. During the year ended June 30, 1999, such costs were incurred
primarily for personnel costs ($1,131,400), facilities ($240,500), marketing and
advertising costs ($263,100), professional fees ($856,000), 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
($390,800) and telecommunications costs ($73,100).
During the year ended June 30, 1999, noncash charges for stock-based
compensation amounted to $1,312,324 compared to $660,576 during the year ended
June 30, 1998. Such noncash charges resulted from the issuance of common stock
purchase warrants to various financial and marketing consultants. The value of
such common stock purchase warrants was recorded in accordance with the
Black-Scholes pricing methodology.
Interest income for the year ended June 30, 1999 amounted to $4,767 versus
$40,788 for the year ended June 30, 1998. Such amounts were earned primarily
from our 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 our default pursuant to the Prepaid Warrants ($1,095,700). Of
such amounts, $2,593,800 were noncash charges for the issuance of common stock
or warrants to purchase common stock as settlement of such obligations. Interest
and financing costs for the year ended June 30, 1998 were $592,490. These costs
were incurred in connection with the origination of the 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 year ended June 30, 1999 versus $7.65 per
share for the year ended June 30, 1998. While the net loss increased $2,084,117,
our weighted average shares of common stock outstanding in 1999 increased by
446,569 shares, thereby affecting the per share loss.
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CAPITAL RESOURCES AND LIQUIDITY
In June 1999, SmartServ and Data Transmission Network Corporation entered into a
License Agreement that amended their previous agreement. In consideration of the
receipt of $5.175 million, we granted Data Transmission Network 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.
Additionally, we received $324,000 in exchange for an agreement to issue
warrants to purchase 300,000 shares of our common stock at an exercise price of
$8.60 per share. We have agreed to continue to operate these products and
provide maintenance and enhancement services in exchange for a percentage of the
revenues earned by Data Transmission Network therefrom. The companies are
currently negotiating a further amendment to the Licensing Agreement, under
which, in consideration for a copy of the application source code, Data
Transmission Network will return both the domestic and international marketing
rights of the software applications to SmartServ. As part of our strategy for
providing information and transaction capabilities with device independence,
SmartServ will market these applications in both wireline and wireless platforms
in conjunction with Strategic Marketing Partners worldwide. Under this proposed
amendment it is anticipated that SmartServ will continue to provide maintenance
and enhancement services through December 2000, and operational support through
September 2001. SmartServ's monthly revenues will be based on a percentage of
Data Transmission Network's revenues through September 2001, such revenues not
to exceed $83,000 per month.
In November 1998, we completed a financing for $550,000. We 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.
In July 1999, we entered into an agreement with Arnhold & S. Bleichroeder, Inc.
to settle our obligation to Arnhold & S. Bleichroeder pursuant to the default
provisions of the Prepaid Warrants. In accordance with that agreement, we paid
Arnhold & S. Bleichroeder, Inc. $325,000 to redeem the Prepaid Warrants and
issued 180,000 shares of common stock in full settlement of all obligations.
In January 2000, we 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.
In January 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 we completed a private
placement of an additional 100,000 shares of common stock at $15.00 a 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.
During the year ended June 30, 2000, we issued 1,548,842 shares of common stock
to investors upon the exercise of warrants to purchase such shares. Proceeds
from the exercise of these warrants were $3,466,200.
In May 2000, Chase Securities Inc., acting as placement agent for SmartServ,
completed a private placement of 353,535 shares of common stock at $49.50 a
share. The net proceeds of the placement of $16,750,000 were used for general
working capital requirements.
In May 2000, we entered into a Business Alliance Agreement with Hewlett-Packard
Company whereby the companies agreed to jointly market their products and
services, and to work on the build-out of SmartServ's domestic and international
infrastructure. In furtherance of these objectives Hewlett-Packard will provide
us with up to $20,000,000 in secured financing for the acquisition of approved
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hardware, software and services, subject to SmartServ's continuing compliance
with certain financial covenants. The debt is evidenced by a note bearing an
interest rate of 11%, with a three year maturity and may be converted into our
common stock at $33.56 per share.
At June 30, 2000, we have 1,725,000 public warrants (SSOLW) and 300,000 warrants
with terms identical to the public warrants outstanding. These warrants are
currently convertible into our common stock at the ratio of one warrant per
.5174 share of common stock at an exercise price of $7.73 per share. These
warrants are redeemable by SmartServ on not less than 30 days written notice at
the redemption price of $.10 per warrant, provided the average closing bid
quotation of the common stock as reported on the Nasdaq Stock Market has been at
least 187.5% of the current exercise price of the warrants for a period of 20
consecutive trading days ending on the third day prior to the date on which we
give notice of redemption. Proceeds from the exercise of the warrants by the
holders thereof would provide us with approximately $8,000,000.
While we reported a loss from operations of $31,910,000, our net loss from
operations exclusive of stock-based compensation costs was $1,639,000. Cash used
in operations was $1,529,000, while cash used for investing activities was
$1,541,000. Of the amount used for investing activities, $1,100,000 represents
funds used in the development of our software applications.
We are currently involved in two lawsuits. Although we are vigorously defending
these actions, there can be no assurance that we will be successful. The
unfavorable outcome of either of these actions could have a material adverse
effect on our financial condition and cash flows. See Note 10 to the financial
statements for a more detailed discussion of these actions.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in the financial statements. The Company does not believe that the adoption of
SAB 101 will have a material affect on the Company's financial results.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Forward-looking statements in this document and those made from time-to-time by
our employees are made under the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements concerning
future plans or results are necessarily only estimates and actual results could
differ materially from expectations. Certain factors that could cause or
contribute to such differences include, and are not limited to, potential
fluctuations in quarterly results, the size and timing of awards and performance
on contracts, dependence on large contracts and a limited number of customers,
dependence on wireless and/or internet networks of third-parties for certain
products and services, lengthy sales and implementation cycles, changes in
management's estimates incident to accounting for contracts, availability and
cost of key components, market acceptance of new or enhanced products and
services, proprietary technology and changing technology, competitive
conditions, system performance, management of growth, the risk that our current
and future products and services may contain errors or be affected by technical
problems that would be difficult and costly to detect and correct, dependence on
key personnel and general economic and political conditions and other factors
affecting spending by customers, and other risks described in this Annual Report
on Form 10-KSB and our other filings with the Securities and Exchange
Commission.
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ITEM 7. FINANCIAL STATEMENTS
------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors 20
Balance Sheets as of June 30, 2000 and 1999 21
Statements of Operations for the years
ended June 30, 2000, 1999 and 1998 23
Statement of Stockholders' Equity (Deficiency)
for the years ended June 30, 2000, 1999 and 1998 24
Statements of Cash Flows for the years
ended June 30, 2000, 1999 and 1998 27
Notes to Financial Statements 28
</TABLE>
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<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, 2000 and 1999, and the related statements of operations, stockholders'
equity (deficiency), and cash flows for each of the three years in the period
ended June 30, 2000. 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, 2000 and 1999, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 2000, in conformity with
accounting principles generally accepted in the United States.
/S/ ERNST & YOUNG LLP
Stamford, Connecticut
August 15, 2000, except
for footnote 13 as to
which the date is
September 28, 2000
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<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30
-----------------------------------------
2000 1999
------------------- -- ------------------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 24,016,345 $ 2,165,551
Accounts receivable 236,498 348,278
Prepaid expenses 213,956 50,150
------------------- ------------------
Total current assets 24,466,799 2,563,979
------------------- ------------------
Property and equipment, net 687,439 498,448
Other assets
Capitalized software development costs,
net of accumulated amortization of $412,236 at
June 30, 2000 and $82,108 at June 30, 1999 1,475,212 683,337
Security deposit 73,374 74,834
------------------- ------------------
1,548,586 758,171
------------------- ------------------
Total Assets $ 26,702,824 $ 3,820,598
=================== ==================
</TABLE>
See accompanying notes.
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<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30
-----------------------------------------
2000 1999
------------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
<S> <C> <C>
Accounts payable $ 1,482,019 $ 780,543
Accrued liabilities 1,097,289 637,779
Accrued liabilities to warrant holders -- 1,311,365
------------------- ------------------
Total current liabilities 2,579,308 2,729,687
------------------- ------------------
Deferred revenues 4,141,579 5,798,211
COMMITMENTS AND CONTINGENCIES - NOTE 10
STOCKHOLDERS' EQUITY (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 - 5,576,894 at June 30, 2000
and 1,199,787 shares at June 30, 1999 55,768 11,998
Common stock subscribed -- 1,812,554
Additional paid-in capital 75,842,858 20,679,611
Notes receivable from officers (666,841) (1,812,554)
Unearned compensation (2,310,284) (3,452,904)
Accumulated deficit (52,939,564) (21,946,005)
------------------- ------------------
Total stockholders' equity (deficiency) 19,981,937 (4,707,300)
------------------- ------------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 26,702,824 $ 3,820,598
=================== ==================
</TABLE>
See accompanying notes.
-22-
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-----------------------------------------------------------------
2000 1999 1998
------------------- ------------------- ---------------------
<S> <C> <C> <C>
Revenues $ 3,696,133 $ 1,443,781 $ 873,476
------------------- ------------------- ---------------------
Costs and expenses
Cost of services (954,048) (992,741) (1,216,761)
Product development expenses (383,042) (193,188) (923,082)
Selling, general and administrative
expenses (3,998,405) (2,695,999) (2,561,364)
Stock-based compensation (30,271,024) (1,312,324) (660,576)
------------------- ------------------- ---------------------
Total costs and expenses (35,606,519) (5,194,252) (5,361,783)
------------------- ------------------- ---------------------
Loss from operations (31,910,386) (3,750,471) (4,488,307)
------------------- ------------------- ---------------------
Other income (expense):
Interest income 241,402 4,767 40,788
Interest expense (2,275) (167,839) (57,485)
Debt origination and other financing costs 677,700 (3,210,583) (535,005)
------------------- ------------------- ---------------------
916,827 (3,373,655) (551,702)
------------------- ------------------- ---------------------
Net loss $ (30,993,559) $ (7,124,126) $ (5,040,009)
=================== =================== =====================
Basic and diluted loss per share $ (11.42) $ (6.44) $ (7.65)
=================== =================== =====================
Weighted average shares outstanding 2,712,931 1,105,603 659,034
=================== =================== =====================
</TABLE>
See accompanying notes.
-23-
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<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.
-24-
<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, 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
for amending certain
terms 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 -- -- -- -- -- 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 as
compensation for services -- -- -- -- 59,000 -- --
Redemption of Prepaid Common
Stock Purchase Warrants -- -- -- -- (325,000) -- --
Issuance of Common Stock
Purchase Warrants in
connection with a
licensing agreement -- -- -- -- 324,000 -- --
</TABLE>
See accompanying notes.
-25-
<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>
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)
Issuance of Common Stock in
settlement of obligations
to a Prepaid Warrant
holder 180,000 1,800 -- -- 266,895 -- --
Issuance of Common Stock
upon exercise of employee
stock options 47,808 478 -- -- 80,290 -- --
Issuance of warrants to
purchase 334,000 shares
of Common Stock for
various consulting
services -- -- -- -- 137,300 (77,400) --
Conversion of 1,357 Prepaid
Common Stock Purchase
Warrants into Common Stock 810,785 8,107 -- -- (8,107) -- --
Issuance of Common Stock in
connection with Officers'
Restricted Stock Purchase
and Employment Agreements 1,103,137 11,031 (1,812,554) 1,145,713 3,997,821 -- --
Issuance of Common Stock
upon exercise of warrants
to purchase Common Stock 1,548,842 15,489 -- -- 3,465,006 -- --
Amortization of unearned
compensation -- -- -- -- -- 1,220,020 --
Issuance of Common Stock and
warrants to purchase 18,640
shares of Common Stock in
connection with private
placements, net of direct
costs of $1,073,900 686,535 6,865 -- -- 21,414,438 -- --
Change in market value of
employee stock options and
stock subscriptions -- -- -- -- 25,809,604 -- --
Net loss for the year -- -- -- -- -- -- (30,993,559)
----------- ----------- ------------- ------------- ------------- -------------- --------------
Balance at June 30, 2000 5,576,894 $ 55,768 $ -- $(666,841) $75,842,858 $(2,310,284) $(52,939,564)
=========== =========== ============= ============= ============= ============== ==============
</TABLE>
See accompanying notes.
-26-
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-------------------------------------------------------
2000 1999 1998
------------------ --------------- ----------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $ (30,993,559) $ (7,124,126) $ (5,040,009)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization 560,472 278,646 193,601
Provision for losses on and write-off of receivables -- -- (1,300)
Noncash interest costs -- 12,524 52,837
Noncash debt origination and other financing costs (717,670) 2,593,808 475,527
Noncash compensation costs 28,991,104 18,304 --
Noncash consulting services 1,279,920 1,349,020 660,576
Amortization of unearned revenues (1,656,632) (1,112,138) (251,058)
Settlement of litigation -- -- 145,750
Changes in operating assets and liabilities
Accounts receivable 111,780 (237,227) 40,031
Prepaid expenses (163,806) (44,547) (25,878)
Accounts payable and accrued liabilities 1,151,075 781,264 344,441
Salaries payable (93,443) 36,135 (9,093)
Unearned revenues -- 6,121,776 1,002,193
Security deposit 1,460 (4,397) 10,781
------------------ --------------- ----------------
Net cash provided by (used for) operating activities (1,529,299) 2,669,042 (2,401,601)
------------------ --------------- ----------------
INVESTING ACTIVITIES
Capitalization of software development costs (1,122,003) (765,445) --
Purchase of equipment (419,335) (84,449) (60,424)
------------------ --------------- ----------------
Net cash used for investing activities (1,541,338) (849,894) (60,424)
------------------ --------------- ----------------
FINANCING ACTIVITIES
Proceeds from the issuance of warrants 24,746 324,000 2,643,941
Proceeds from the issuance of common stock 26,031,723 -- --
Repayment of officers' loans 9,012 -- --
Proceeds from the issuance of short-term notes -- 478,500 196,500
Repayment of short-term notes -- (691,794) --
Repayment of capital lease obligation (70,147) (83,528) (92,536)
Proceeds of advances from DTN -- 2,058,300 --
Repayment of advances from DTN -- (2,058,300) --
Costs of issuing securities (1,073,903) (35,000) (25,000)
------------------ --------------- ----------------
Net cash provided by (used for) financing activities 24,921,431 (7,822) 2,722,905
------------------ --------------- ----------------
Increase in cash and cash equivalents 21,850,794 1,811,326 260,880
Cash and cash equivalents - beginning of year 2,165,551 354,225 93,345
----------------- --------------- ----------------
Cash and cash equivalents - end of year $ 24,016,345 $ 2,165,551 $ 354,225
================= =============== ================
</TABLE>
See accompanying notes.
-27-
<PAGE>
SMARTSERV ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
SmartServ Online, Inc. commenced operations on August 20, 1993. We deliver
Internet-based and wireless content, as well as "Web-to-Wireless" applications,
such as securities trade order routing, that enable e-commerce by providing
transactional and information services to our alliance partners or Strategic
Marketing Partners. We have developed online financial, transactional and media
applications using a unique "device independent" delivery solution and make
these services available to wireless handsets and personal digital assistants,
personal computers and the Internet through our application software and
communications architecture. Our services facilitate stock trading and other
e-commerce transactions, as well as the dissemination of real-time stock quotes,
business and financial news, sports information, private-labeled electronic
mail, national weather reports and other business and entertainment information
in a user-friendly manner.
Our plan of operation focuses on the business-to-business strategy of marketing
our services in partnership with those companies that have an economic incentive
to provide our information and transaction services to their customers.
Management believes that SmartServ's primary source of revenues will be derived
from consumers who purchase the services through these Strategic Marketing
Partners. Through the use of this strategy, the consumer is a customer of both
SmartServ and its Strategic Marketing Partner. We also believe that the sale of
our information and transaction services through the cooperative efforts of
Strategic Marketing Partners with more recognizable brand names than our own is
important to our success.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
---------------------
The financial statements are prepared in conformity with accounting principles
generally accepted in the United States.
Our 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 our agreement with
Data Transmission Network Corporation are being amortized over the anticipated
future revenue stream, a period of 42 months, commencing June 1, 1999.
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.
-28-
<PAGE>
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
--------------------------------------
In connection with certain contracts entered into between SmartServ and its
Strategic Marketing Partners, as well as other projects, we have capitalized
costs related to certain product enhancements and application development 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 our financial instruments approximate fair value.
SUPPLEMENTAL CASH FLOW DATA
---------------------------
We consider all highly liquid investments with a maturity date 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, 2000, 1999 and 1998 were $2,275, $101,974 and $32,536, respectively.
CONCENTRATION OF CREDIT RISK
----------------------------
Financial instruments that potentially subject SmartServ to concentrations of
credit risk consist primarily of its commercial paper investments and accounts
receivable. While our commercial paper investments are short-term and highly
liquid, it is management's policy to invest in only those companies with a AAA
credit rating. There is no single geographic concentration of sales or related
accounts receivable in the United States. At June 30, 2000, accounts receivable
consist principally of amounts due from Data Transmission Network ($168,300),
and a telecommunications company ($24,100). We perform periodic credit
evaluations of our customers and, if applicable, provide 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 $91,700,
$20,500 and $97,100 in 2000, 1999 and 1998, respectively.
STOCK BASED COMPENSATION
------------------------
We maintain several 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. We
account 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. Certain options, which have been repriced, are subject to the
variable plan requirements of APB No. 25, that requires us to record
compensation expense for changes in the fair value of our common stock.
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in the financial statements. We do not believe that the adoption of SAB 101 will
have a material affect on our financial results.
RECLASSIFICATIONS
-----------------
Certain amounts in the 1999 and 1998 presentations have been reclassified to
conform to the 2000 presentation.
-29-
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30
------------------------------------------
2000 1999
------------------- -----------------
<S> <C> <C>
Data processing equipment $ 1,109,828 $ 700,210
Data processing equipment purchased under a capital lease 246,211 246,211
Office furniture and equipment 81,140 71,423
Display equipment 9,635 9,635
Leasehold improvements 36,678 36,678
------------------- -----------------
1,483,492 1,064,157
Accumulated depreciation, including $155,933 and
$106,691 for equipment purchased under a capital lease (796,053) (565,709)
------------------- -----------------
$ 687,439 $ 498,448
=================== =================
</TABLE>
4. NOTES PAYABLE
Commencing November 1998, we 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 our common stock. The convertible notes were repaid in June
1999. 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 SmartServ common stock
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, we have
recorded a non-cash charge for 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.
In December 1998, we executed an agreement with a service provider whereby
certain of our obligations, amounting to $141,794, were converted into a 12%
note payable. In June 1999, the outstanding balance of $66,794 was repaid.
5. EQUITY TRANSACTIONS
In September 1997, The Zanett Securities Corporation ("Zanett"), acting as our
placement agent, completed the private placement ("Placement") of $4 million of
our Prepaid Common Stock Purchase Warrants ("Prepaid Warrants"). The sale of
these Prepaid Warrants was exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. At June
30, 2000, Prepaid
-30-
<PAGE>
Warrants with a face value of $612,000 were outstanding and are currently
convertible into 437,142 shares of our common stock. 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, we issued warrants to purchase 155,627 shares of common
stock to Zanett that are subject to antidilution provisions and are exercisable
at $4.34 per share of common stock. These warrants expire on September 30, 2002.
Also in conjunction with the Placement, we entered into an agreement with a
financial consultant who is an affiliate of Zanett Lombardier, Ltd, an investor
in the Prepaid Warrants. During the five-year term of the agreement such
consultant will provide us with advisory services relating to financial and
strategic ventures and alliances, investment banking and general financial
advisory services, and advice and assistance with our market development
activities. As compensation for these services, we issued warrants to purchase
922,236 shares of common stock to this consultant that are subject to
antidilution provisions and are exercisable at $4.34 per share of common stock.
We have valued these 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. We have recorded consulting expense of $1,165,000,
$1,165,000 and $527,600 for the years ended June 30, 2000, 1999 and 1998,
respectively.
During the year ended June 30, 1998, holders of 1,429.33 of our Prepaid Warrants
converted such warrants into 220,395 shares of common stock at exercise prices
ranging from $3.54 to $8.40 per share.
In August 1998, we 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 our common stock at that date as
other financing costs.
In September 1998, we issued warrants to purchase 3,000 shares of common stock
to Data Transmission Network Corporation for prepayment of certain guaranteed
payments in accordance with the Software License and Service Agreement between
the parties dated April 23, 1998. Such warrants were 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. In June 1999, in
consideration of the receipt of $324,000, we agreed to issue Data Transmission
Network warrants for the purchase of 300,000 shares of our common stock at $8.60
per share. The warrants have been recorded in accordance with the Black-Scholes
pricing methodology and will expire on November 17, 2000. In June 2000, we
issued 203,000 shares of common stock upon the partial exercise of the warrants.
Proceeds from the exercise of the warrants were $1,729,000.
In November 1998, we issued 125,000 shares of common stock and warrants to
purchase 16,667 shares of common stock, exercisable at $5.00 per share until
November 11, 2001, to Mr. Steven Francesco, a former SmartServ officer, as
partial consideration for the settlement of his claims against us and certain of
our officers and directors. The value of these shares has been recorded in
selling, general and administrative expenses based upon the fair value of our
common stock at that date while the warrants have been recorded in accordance
with the Black-Scholes pricing methodology. In February 2000, we issued 16,667
shares of our common stock to Mr. Francesco upon exercise of the warrants. The
proceeds from such exercise amounted to $83,335.
In December 1998, our Board of Directors approved the terms of employment
contracts for Sebastian E. Cassetta, Chairman and Chief Executive Officer, and
Mario F. Rossi, Senior Vice President of Technology. Accordingly, SmartServ and
Mr. Cassetta have entered into an employment agreement, effective January 1,
1999 and expiring on December 31, 2001, providing for, among other things, the
sale to him of 618,239 shares of restricted stock. SmartServ received cash in
the amount of $6,182 and a 5 year, non-recourse promissory note in the amount of
$457,497. The note is secured by the stock and bears an interest rate of 6.75%.
The stock purchase agreement provides SmartServ with certain repurchase options
and provides Mr.
-31-
<PAGE>
Cassetta with a put option in the event of the termination of his employment.
SmartServ and Mr. Rossi have also entered into an employment 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.
SmartServ received cash in the amount of $2,061 and a 5 year, non-recourse
promissory note in the amount of $152,499. The note is secured by the stock and
bears an interest rate of 6.75%. The 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 October 1999, our 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. Through December 31, 1999, the restricted
stock awards were variable plan awards pursuant to APB No. 25 and accordingly,
SmartServ was required to recognize compensation expense for the changes in the
market value of its common stock. In conjunction therewith, we have recorded a
charge to compensation expense of $15,636,300, as well as a corresponding
increase to additional paid-in capital. We have amended our restricted stock
purchase agreements with Messrs. Cassetta and Rossi to provide for certain
recourse against them in the event of their default on their obligations to us.
Accordingly, the restricted stock awards are no longer variable plan awards
pursuant to APB No. 25.
In January 1999, we issued 10,000 shares of common stock to Arnhold & S.
Bleichroeder, Inc., an investor in our Prepaid Warrants, in consideration of an
agreement to waive certain events of default under such Prepaid Warrants. In
July 1999, we paid $325,000 to redeem the Prepaid Warrants held by Arnhold & S.
Bleichroeder and issued 180,000 shares of common stock in full settlement of all
obligations to Arnhold & S. Bleichroeder. These shares have been recorded at the
fair value of SmartServ's common stock on the date of issuance as other
financing costs.
In January 1999, we agreed to cancel warrants to purchase 20,833 shares of
common stock exercisable at $15.75 and $19.50 per share to a financial advisor
to SmartServ, and to grant such advisor warrants to purchase 40,833 shares of
common stock at $.60 per share for his efforts at arranging our relationship
with Spencer Trask Securities. These warrants have been recorded in accordance
with the Black-Scholes pricing methodology as selling, general and
administrative expenses. In March 2000, we issued 40,833 shares of common stock
upon exercise of the warrants. Proceeds from the exercise of the warrants were
$24,500.
During the year ended June 30, 1999, holders of 276.67 of our Prepaid Warrants
converted such warrants into 178,560 shares of common stock at exercise prices
ranging from $.75 to $2.38 per share.
The delisting of our common stock from the Nasdaq Small Cap Market in May 1998
caused us to default on certain terms and conditions of the Prepaid Warrants.
Such default obligated SmartServ to pay financial penalties, as well as to
redeem the outstanding Prepaid Warrants at a 43% premium. We had been unable to
obtain appropriate waivers from holders of $1,994,000 of such Prepaid Warrants.
Accordingly, we recorded a charge to debt origination and other financing costs
in the amount of $986,365, representing the potential penalties due such
holders. During the year ended June 30, 2000, we reversed such unpaid penalties
upon the conversion by the holders of the Prepaid Warrants into SmartServ common
stock.
In October 1999, SmartServ entered into a restricted stock agreement with Robert
Pearl, Vice President International Development, providing for the sale to Mr.
Pearl of 76,818 shares of common stock at a purchase price of $.75 per share.
SmartServ received cash in the amount of $768 and a 5 year, non-recourse
promissory note in the amount of $56,845. The note is secured by the stock and
bears an interest rate of 7.50%. The stock purchase agreement provides SmartServ
with certain repurchase options and provides Mr. Pearl with a put option in the
event of the termination of his employment.
In October 1999, we entered into a consulting agreement with a financial
advisor. As consideration for such services, we granted this 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. In
-32-
<PAGE>
consideration of $125,000 and the issuance of warrants to purchase 8,000 shares
of common stock at $18.375 per share, we extended this agreement for the
two-year period commencing October 24, 2000. The warrants expire on October 24,
2004. We have recorded a noncash charge of $62,400 for the value of the warrants
to unearned compensation that is being amortized to income over the term of the
agreement. In July 2000, we issued 200,000 shares of our common stock to this
advisor upon exercise of warrants to purchase such shares. Proceeds from the
exercise were $625,000.
In December 1999, we issued 202,000 shares of common stock to Messrs. Cassetta
and Rossi in satisfaction of our bonus obligations to them, pursuant to their
employment contracts. We have recorded a charge to compensation expense of
$3,181,500 for the change in fair value of our common stock between the due date
of the obligation and the grant date of the common stock.
During the year ended June 30, 2000, we issued warrants to purchase 126,000
shares of our common stock to various marketing and technical consultants as
partial compensation for services rendered and to be rendered to SmartServ. The
warrants have exercise prices of between $2.50 and $49.50 and expire through
April 30, 2003. During the year we recorded charges to earnings of $74,000 in
connection with these warrants.
In January 2000, we completed an offering of 333,000 shares of our common stock
to accredited investors. Gross proceeds from the offering amounted to $4,995,000
or $15.00 per share of common stock. In connection with this transaction, we
paid $25,000 and issued warrants to purchase 18,640 shares of common stock at
$15.00 per share through January 18, 2005 to American First Associates Corp. as
compensation for services as placement agent for the offering.
During the year ended June 30, 2000, we issued 1,288,342 shares of common stock
to certain other investors at prices ranging from $.60 to $24.00 per share upon
exercise of warrants to purchase such shares. Proceeds from the exercise of
these warrants were $1,630,764.
During the year ended June 30, 2000, holders of 1,357 of our Prepaid Warrants
converted such warrants into 810,785 shares of common stock at exercise prices
ranging from $1.40 to $8.40 per share.
In May 2000, we completed an offering of 353,535 shares of our common stock to
accredited investors. Gross proceeds from the offering amounted to $17,500,000
or $49.50 per share of common stock. Chase Securities, Inc., acting as placement
agent for the offering, received a commission of $700,000 and reimbursement for
$17,700 of expenses.
At June 30, 2000, we have 1,725,000 public warrants (SSOLW) and 300,000 warrants
with terms identical to the public warrants outstanding. These warrants are
currently convertible into our common stock at the ratio of one warrant per
.5174 share of common stock at an exercise price of $7.73 per share. These
warrants are redeemable by SmartServ on not less than 30 days written notice at
the redemption price of $.10 per warrant, provided the average closing bid
quotation of the common stock as reported on the Nasdaq Stock Market has been at
least 187.5% of the current exercise price of the warrants for a period of 20
consecutive trading days ending on the third day prior to the date on which we
give notice of redemption.
6. STOCK-BASED COMPENSATION
In connection with the grant of certain stock options, warrants and other
compensation arrangements, we have recorded charges to earnings that are noncash
in nature. Certain of these grants are subject to the variable plan requirements
of APB No. 25 that require us to record compensation expense for changes in the
fair value of our common stock.
The following table shows the amount of stock-based compensation that would have
been recorded in the
-33-
<PAGE>
categories of the statement of operations had stock-based compensation not been
separately stated therein:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-------------------- ----------------------------------------
2000 1999 1998
-------------------- ------------------- ------------------
<S> <C> <C> <C>
Costs of revenues $2,749,997 $ 1,724 $ --
Selling, general and administrative expenses 27,521,024 1,310,600 660,576
-------------------- ------------------- ------------------
$ 30,271,021 $ 1,312,324 $ 660,576
==================== =================== ==================
</TABLE>
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------------------------------------------------
2000 1999 1998
------------------ -------------------- --------------------
Numerator:
<S> <C> <C> <C>
Net loss $ (30,993,559) $ (7,124,126) $ (5,040,009)
================== ==================== ====================
Denominator:
Weighted average shares 2,712,931 1,105,603 659,034
================== ==================== ====================
Basic and diluted loss per common share
$ (11.42) $ (6.44) $ (7.65)
================== ==================== ====================
</TABLE>
At June 30, 2000, $612,000 of our Prepaid Warrants were outstanding. At that
date, the Prepaid Warrants were convertible into 437,142 shares of common stock.
Additionally, there were warrants to purchase 2,808,000 shares of our common
stock outstanding. Such warrants have exercise prices ranging from $0.60 to
$72.00 per share and expire from March 2001 through January 2005. Based on the
closing sale price ($70.56) of our common stock at June 30, 2000, there were,
exclusive of the Prepaid Warrants, currently exercisable in-the-money warrants
outstanding for the purchase of 2,807,000 shares of common stock. Additionally,
we have established several employee stock option plans and granted options
thereunder to our employees, directors, and consultants. 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 May 29, 2010. At June 30, 2000, there are options
outstanding for the purchase of 1,322,781 shares of our common stock. Neither
the warrants nor the options have been included in the computation of diluted
loss per share because their inclusion would be antidilutive.
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<PAGE>
8. INCOME TAXES
At June 30, 2000 and 1999, SmartServ has deferred tax assets as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Capitalized Start-up Costs $ 371,000 $ 741,600
Net Operating Loss Carryforwards 19,182,000 6,578,000
------------ -------------
$ 19,553,000 $ 7,319,600
============== ============
</TABLE>
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," we have 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
$19,553,000 at June 30, 2000 from $7,319,600 at June 30, 1999 and $5,238,500 at
June 30, 1998.
At June 30, 2000, we have net operating loss carryforwards for Federal income
tax purposes of approximately $40,600,000 which expire in the years 2009 through
2015. As a result of the public issuance of stock by SmartServ on March 21,
1996, and the resultant change in ownership pursuant to Internal Revenue Code
Section 382, the utilization of net operating losses incurred to this date may
be limited.
9. LEASES
SmartServ 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, we entered into a 3 year noncancelable capital lease for certain
computer equipment used to provide information services. We also lease certain
other computer equipment under operating leases which expire through July 2000.
Rent expense amounted to approximately $267,800, $290,600, and $278,000 for the
years ended June 30, 2000, 1999, and 1998, respectively.
Minimum future rental payments at June 30, 2000 are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
----------------------------------------
YEAR ENDING JUNE 30 PREMISES EQUIPMENT
------------------- -----------------
<S> <C> <C>
2001 $ 345,100 $ 1,600
2002 374,300 --
2003 437,900 --
2004 480,700
2005 491,100
Thereafter 2,800,000
------------------- -----------------
$ 4,929,100 $ 1,600
=================== =================
</TABLE>
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<PAGE>
10. COMMITMENTS AND CONTINGENCIES
On or about June 4, 1999, Michael Fishman, our former Vice President of Sales,
commenced an action against us, Sebastian E. Cassetta (our Chairman of the Board
and Chief Executive Officer), Steven Francesco (our former President) and four
others 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 counterclaim,
and discovery is proceeding. 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 SmartServ elected to pay the fee 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 have denied the material allegations of the complaint,
including the allegation that we elected to pay in stock. Discovery has
commenced. 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.
11. SIGNIFICANT RELATIONSHIPS
In April 1998, we entered into an agreement with Data Transmission Network
Corporation whereby Data Transmission Network purchased the exclusive right to
market three of our 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. In June 1999,
SmartServ and Data Transmission Network amended the agreement such that in
consideration of the receipt of $5.175 million, we granted Data Transmission
Network an exclusive perpetual worldwide license to our Internet-based (i)
SmartServ Pro, (ii) TradeNet, (iii) BrokerNet, and (iv) an order entry/routing
system. Additionally, we received $324,000 in exchange for an agreement to issue
warrants to purchase 300,000 shares of our common stock at an exercise price of
$8.60 per share. We have agreed to continue to operate these products and
provide maintenance and enhancement services in exchange for a percentage of the
revenues earned by Data Transmission Network therefrom. The cost of our
commitment to provide such maintenance and enhancement services is limited to a
maximum of 20% of the revenues earned by SmartServ. None of our wireless
products were included in this transaction.
During the years ended June 30, 2000 and 1999, our relationship with Data
Transmission Network accounted for 96.9% and 94.8%, respectively, of our
revenues while during the year ended June 30, 1998, three Strategic Marketing
Partner relationships accounted for 10.2%, 10.0% and 24.1%, respectively, of the
our revenues.
12. EMPLOYEE STOCK OPTION PLAN
In April 1996, our Board of Directors approved the establishment of an Employee
Stock Option Plan authorizing stock option grants to our directors, key
employees, and consultants. 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.
In September 1997, our Board of Directors 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. In October
1998, our 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 was $1.29 per share. Such options expire on
October 7, 2008. In accordance with APB No. 25, we have recorded the changes in
the fair value of the shares underlying 177,201 of such options to reflect the
compensatory nature of their issuance. In November 1998, our 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.
-36-
<PAGE>
In December 1998, our Board of Directors approved a plan to compensate
non-employee directors for their service to SmartServ. Accordingly, each
non-employee director will receive options to purchase 10,000 shares of our
common stock at the commencement of each fiscal year. Effective January 1, 1999,
we issued options to such persons to purchase 50,000 shares of common stock
exercisable at $2.35 per share through December 31, 2003.
In October 1999, our Board of Directors authorized the establishment of our 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 our common stock. The Board of Directors authorized the
issuance of 400,000 of such options to both employees and non-employee directors
at the fair value of the common stock on that date. The 1999 Plan provides for
the issuance of such options at not less than the fair value of the common stock
on the date of grant.
In May 2000, our Board of Directors authorized the establishment of our 2000
Employee Stock Option Plan ("2000 Plan"). The 2000 Plan provides for the
issuance of options to employees and directors for the purchase of a maximum of
925,000 shares of our common stock. The 2000 Plan provides for the issuance of
such options at not less than the fair value of the common stock on the date of
grant. The Board of Directors authorized the issuance of 657,000 of such options
to employees and non-employee directors at an exercise price in excess of the
fair value on the date of grant.
Information concerning stock options for the Company is as follows:
<TABLE>
<CAPTION>
AVERAGE
EXERCISE
OPTIONS PRICE
-------------------- -----------------------
<S> <C> <C> <C>
Balance at July 1, 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
Granted 1,091,000 31.10
Exercised (47,810) 1.69
Cancelled (6,310) 1.40
-------------------- -----------------------
Balance at June 30, 2000 1,322,781 $ 25.92
==================== =======================
</TABLE>
-37-
<PAGE>
The following table summarizes information about employee stock options
outstanding as of June 30, 2000.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -----------------------------------
AVERAGE
AVERAGE REMAINING AVERAGE
RANGE OF NUMBER OF EXERCISE CONTRACTUAL NUMBER OF EXERCISE
EXERCISE PRICES OPTIONS PRICE LIFE (YEARS) OPTIONS PRICE
--------------------------- ----------------- --------------- --------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
$ .94 to $ 2.34 631,781 $ 1.15 8.7 148,541 $ 1.47
17.00 20,000 17.00 4.5 20,000 17.00
49.50 671,000 49.50 9.9 70,000 49.50
----------------- ----------------
1,322,781 238,541
================= ================
</TABLE>
SUPPLEMENTAL AND PRO FORMA DISCLOSURE
Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" ("Statement 123") 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 SmartServ had accounted for its employee
stock option plan under the fair value methods described in Statement 123. The
fair value of options granted under our employee stock option plans was
estimated at the date of grant using the Black-Scholes option pricing model. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected dividend yield, the expected life
of the options, the expected stock price volatility, and the risk-free interest
rate.
Pertinent assumptions with regard to the determination of fair value of the
options and their impact on earnings per share are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------------- --------------- ------------------
<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 159.1% 147.0% 143.9%
Risk-free interest rate 5.41% 5.75% 6.0%
Weighted average grant date fair value of
options $25.07 $1.92 $10.92
</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.
-38-
<PAGE>
SmartServ's pro forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
---------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------- -- ------------------------------ -- -----------------------------
REPORTED PROFORMA REPORTED PROFORMA REPORTED PROFORMA
---------------- --------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net Loss $30,993,559 $32,115,231 $7,124,126 $7,308,036 $5,040,009 $5,654,512
================ =============== =============== ============== ============== ==============
Loss per Share $11.42 $11.84 $6.44 $6.61 $7.65 $8.58
================ =============== =============== ============== ============== ==============
</TABLE>
13. SUBSEQUENT EVENTS
Subsequent to June 30, 2000, we issued 242,615 shares of common stock to certain
investors at prices ranging from $2.63 to $14.64 per share upon exercise of
warrants to purchase such shares. Proceeds from the exercise of these warrants
were $1,137,264.
On September 28, 2000, we entered into a $20,000,000 line of credit facility
with Hewlett-Packard Company. The agreement provides for the financing of the
acquisition of approved hardware, software and services, subject to our
continuing compliance with certain financial covenants. The facility is
evidenced by a note that bears interest at 11% per annum and is secured by
SmartServ's tangible assets. The note matures in three years from issuance and
may be converted into common stock at $33.56 per share.
-39-
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
------- AND FINANCIAL DISCLOSURE
None.
-40
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
------- COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth information with respect to the executive
officers and directors of SmartServ Online, Inc.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C>
Sebastian E. Cassetta 51 Chief Executive Officer, Chairman of
the Board and Class III Director
Alan G. Bozian 46 Executive Vice President and Chief Financial
Officer
Mario F. Rossi 61 Executive Vice President of Operations and Class
II Director
Thomas W. Haller, CPA 46 Senior Vice President, Treasurer and Chief
Accounting Officer
Richard D. Kerschner 33 Senior Vice President, General Counsel and Secretary
John Montgomery 38 Senior Vice President of Financial Services
Robert Pearl 32 Senior Vice President International Development
Claudio Guazzoni 36 Class I Director
Charles R. Klotz 58 Class II Director
Stephen Lawler 36 Class III Director
L. Scott Perry 51 Class I Director
Robert Steele 60 Class II Director
Catherine Cassel Talmadge 47 Class I Director
Charles R. Wood 58 Class III Director
</TABLE>
SEBASTIAN E. CASSETTA has been Chief Executive Officer, Chairman of the Board
and a director of the Company since its inception. Mr. Cassetta was also the
Company's Treasurer and Secretary from its inception until March 1996 and
September 2000, respectively. From June 1987 to August 1992, Mr. Cassetta was
the President of Burns and Roe Securacom Inc., an engineering and large-scale
systems integration firm. He is also a former Director, Managing Director and
Vice President of Brinks Inc. At Brinks, he expanded international operations in
over 15 countries and became the youngest person to be appointed Vice President
in Brinks' 140 year history. Appointed by President Reagan and Department of
Commerce Secretary Malcolm Baldridge, he served on both the U.S. Export Council
and The Industry Sector Advisory Committee (ISAC) regarding GATT negotiations.
He is a former member of the Board of Directors of The Young Presidents'
Organization and the former Chairman of the New York Chapter.
ALAN G. BOZIAN joined the Company as Senior Vice President & Chief Financial
Officer in May 2000. In October 2000, Mr. Bozian was promoted to Executive Vice
President. Prior to joining the Company, he spent 24 years at UBS AG and its
predecessor, Union Bank of Switzerland, a global integrated investment services
firm. At UBS, Mr. Bozian rose through a series of senior trading management and
treasury management positions including responsibility for its worldwide
treasury activities as Global Treasurer.
MARIO F. ROSSI was Vice President of Operations of the Company from December
1994 to February 1998, Senior Vice President, Operations and Chief Technology
Officer until October 2000 when he was promoted to Executive Vice President. In
February 1998, Mr. Rossi was appointed a director of the Company. Mr. Rossi has
business and operational management experience in the computer,
telecommunications and security fields. He has an extensive background in
product development, operations and technical marketing. From 1989 to 1994, Mr.
Rossi was Vice President of Operations for MVS Inc., a fiber optic company
specializing in wireless technology, and a General Manager at Pirelli
-41-
<PAGE>
from 1986 to 1988. From 1971 to 1986, he was Director of Development of Philips
Medical Systems, in the U.S. as well as the Netherlands.
THOMAS W. HALLER, CPA joined the Company as Vice President, Treasurer and Chief
Financial Officer in March 1996. He served as the Company's Chief Financial
Officer until June 2000, when he became the Company's Chief Accounting Officer.
In October 2000, Mr. Haller was promoted to Senior Vice President. 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.
RICHARD D. KERSCHNER joined the Company as Vice President and General Counsel in
April 2000. In September 2000, Mr. Kerschner was elected Secretary of the
Company and in October 2000 he was promoted to Senior Vice President. Prior
thereto Mr. Kerschner was Managing Counsel at Omnipoint Communications, a
leading wireless service provider, where he supervised a staff of attorneys and
paralegals in Omnipoint's legal and regulatory affairs department. Mr. Kerschner
joined Omnipoint in 1997 and worked on all aspects of its legal and regulatory
issues, and had primary in-house responsibility for Omnipoint's corporate
finance, mergers and acquisitions, joint ventures and strategic alliances, tax
and general commercial litigation. Mr. Kerschner was in private practice with
the law firm of McCann & McCann from 1994 to 1997.
JOHN MONTGOMERY joined the Company in April 2000 as Vice President of Financial
Services with over 15 years of global and domestic securities experience. In
October 2000, Mr. Montgomery was promoted to Senior Vice President. From January
1999 to January 2000 Mr. Montgomery was a Director of, and from April 1997 to
January 1999 a Vice President of, SG Cowen Securities. Managing over 22 sales
professionals, he provided account coverage to broker-dealers, money managers,
mutual funds, insurance companies and commercial banks. Mr. Montgomery holds
several NASD registrations, including General Securities Sales Supervisor. He
has experience with equities, fixed-income, options and interest rate
derivatives. Mr. Montgomery spent 5 years in institutional sales at UBS
Securities, over 3 years in portfolio strategies for PaineWebber and 3 years
with Merrill Lynch Capital Markets.
ROBERT PEARL joined the Company in September 1998 with over 7 years of wireless
industry experience. He is responsible for developing the Company's wireless
strategy and consummating relationships with key business and technology
strategic alliances. In March 2000, Mr. Pearl was promoted to Vice President and
in October 2000 to Senior Vice President. Mr. Pearl is a co-founder and former
co-chairman of the WAP Forum's Developer Expert Group. Prior to joining the
Company, Mr. Pearl was Project Manager for Wireless Information Services at
Omnipoint from 1996 to 1998 and Marketing Liaison at AT&T Wireless (formerly
McCaw Cellular Communications) from 1993 to 1996.
CLAUDIO GUAZZONI became a director of the Company 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.
CHARLES R. KLOTZ became a director of the Company on May 15, 2000. Since 1985,
Mr. Klotz has been a director of a number of private and public companies
associated with David R. Barclay and Frederick H. Barclay. He was President and
Chief Executive Officer of Gulf Resources & Chemical Corporation from 1985-1988
and he was Chairman and Chief Executive Officer of Gotaas Larsen Shipping
Corporation from 1988-1997. Prior thereto, he was with Bank of Boston where he
held a number of positions
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<PAGE>
including Head of Corporate Banking in London and Deputy Head of Specialized
Corporate Finance which covered acquisition finance and venture capital.
STEPHEN LAWLER was elected a director of the Company 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 the Company since November 1996. Since
June 1998, Mr. Perry has been Vice President, Strategy & Alliances - AT&T
Solutions. From December 1995 to June 1998, Mr. Perry had been Vice President,
Advanced Platform Services of AT&T Corp. From January 1989 to December 1995, Mr.
Perry held various positions with AT&T including Vice President -- Business
Multimedia Services, Vice President (East) -- Business Communications Services
and Vice President -- Marketing, Strategy and Technical Support for AT&T Data
Systems Group. Mr. Perry serves on the Board of Directors of Junior Achievement
of New York, is a member of the Cornell University Engineering College Advisory
Council and serves on the Board of INEA, a private financial planning software
company based in Toronto, Canada.
ROBERT STEELE was appointed a director of the Company on February 23, 1998.
Since February 1998, Mr. Steele has been Vice Chairman of the John Ryan Company,
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 the Company since March 1996.
Since May 1999, Ms. Talmadge has been Senior Vice President of Business
Development for High Speed Access Corporation. From September 1984 to May 1999,
she held various positions with Time Warner Cable, a division of Time Warner
Entertainment Company, L.P., including Vice President, Cable Programming;
Director, Programming Development; Director, Operations; Director, Financial
Analyses; and Manager, Budget Department.
CHARLES R. WOOD was appointed a director of the Company in September 1998. Mr.
Wood was Senior Vice President of DTN and President of its Financial Services
Division, from 1989 and 1986, respectively, until February 28, 2000.
The Company's officers are elected annually and serve at the discretion of the
Board of Directors for one year subject to any rights provided by the employment
agreements described below under "Executive Compensation -- Employment
Agreements".
ITEM 10. EXECUTIVE COMPENSATION
--------
The following table sets forth information concerning annual and long-term
compensation, paid or accrued, for the Chief Executive Officer and for each
other executive officer (the "Named Executive Officer") of the Company whose
compensation exceeded $100,000 in fiscal 2000 for services in all
capacities to the Company during the last three fiscal years.
-43-
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
RESTRICTED SECURITIES
NAME AND FISCAL OTHER ANNUAL STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) AWARDS (2) OPTIONS COMPENSATION
------------------ ---- ------ ----- ---------------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sebastian E. Cassetta 2000 $ 216,200 $241,300 $ 9,750 $ -- 23,000 $ 27,100(10)
Chief Executive 1999 155,000 116,414(3) 9,750 185,471(4) 92,000(6) 24,416(10)
Officer 1998 125,000 -- 9,750 -- 37,500(7) --(11)
Mario F. Rossi 2000 162,000 104,100 6,000 -- 22,000 --(11)
Senior Vice 1999 122,500 43,749(3) 6,000 61,824 67,500(8) --(11)
President of Operations 1998 92,400 -- 6,000 -- 20,834(7) --(11)
Thomas W. Haller 2000 112,250 21,300 6,000 -- 79,000 --(11)
Treasurer 1999 89,400 2,600 6,000 -- 32,000(9) --(11)
1998 77,700 -- 6,000 -- 15,000(7) --(11)
</TABLE>
(1) Amounts shown consist of a non-accountable expense allowance.
(2) The Named Executive Officers did not receive any LTIP Payouts in 2000, 1999
or 1998.
(3) Based on the closing price of $.75 on June 30, 1999 the date on which the
bonus was earned. If such amount were calculated at $16.50, the closing
price on December 28, 1999, the day immediately preceding the date of grant,
the value of the common stock issued in satisfaction of the bonus obligation
was $2,442,000 and $891,000 for Messrs. Cassetta and Rossi, respectively.
(4) On December 29, 1998, the Board of Directors approved the sale to Mr.
Cassetta of 618,239 shares of restricted stock representing 9% of the fully
diluted shares of common stock of the Company at that date. Compensation has
been determined as the number of shares awarded to Mr. Cassetta times the
closing price of the Company's common stock on December 29, 1998 ($2.50)
less the consideration to be paid by Mr. Cassetta. At June 30, 2000, based
upon the closing bid price ($70.5625) of the Company's common stock, the
value of Mr. Cassetta's shares was $43,624,500. 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, the Company'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.
(5) On December 29, 1998, the Board of Directors approved the sale to Mr. Rossi
of 206,080 shares of restricted stock representing 3% of the fully diluted
shares of common stock of the Company at that date. Compensation has been
determined as the number of shares awarded to Mr. Rossi times the closing
price of the Company's common stock on December 29, 1998 ($2.50) less the
consideration to be paid by Mr. Rossi. At June 30, 2000, based upon the
closing bid price ($70.5625) of the Company's common stock, the value of Mr.
Rossi's shares was $14,541,500. 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, the Company'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.
(6) Includes options for the purchase of 37,500 shares which were canceled when
repriced options to purchase a like number of shares were granted in lieu
thereof.
(7) Such options were canceled when repriced options were granted in lieu
thereof in fiscal 1999.
(8) Includes options for the purchase of 25,250 shares which were canceled when
repriced options to purchase a like number of shares were granted in lieu
thereof.
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<PAGE>
(9) Includes options for the purchase of 15,000 shares which were canceled when
repriced options to purchase a like number of shares were granted in lieu
thereof.
(10)Amounts represent premiums paid by the Company for life and disability
insurance for the benefit of Mr. Cassetta.
(11)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 2000:
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL 2000
(INDIVIDUAL GRANTS) (1)
-----------------------
Number of % of Total Options
Securities Underlying Granted to Employees Exercise Expiration
Name Options Granted% in Fiscal 2000 Price Date
---- ---------------- -------------- ----- ----
<S> <C> <C> <C> <C>
Sebastian E. Cassetta 15,000 $ .9375 10/12/09
8,000 2.11% 49.50 5/29/10
Mario F. Rossi 15,000 $ .9375 10/12/09
7,000 2.02% 49.50 5/29/10
Thomas W. Haller 72,000 $ .9375 10/12/09
7,000 7.24% 49.50 5/29/10
</TABLE>
(1) No stock appreciation rights ("SARs") were granted to the Named Executive
Officers during fiscal 2000.
The following table sets forth information as to the number of unexercised
shares of common stock underlying stock options and the value of unexercised
in-the-money stock options at fiscal year end:
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUE (1)(2)
-----------------------------------
Number of
Unexercised Securities Value of Unexercised
Underlying Options In-The-Money Options
at Fiscal Year End at Fiscal Year End
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
---- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Sebastian E. Cassetta -- -- 27,250/50,250 $1,884,800/$3,097,700
Mario F. Rossi -- -- 21,125/43,125 $1,460,500/$2,652,300
Thomas W. Haller -- -- 16,000/95,000 $1,105,500/$6,266,000
</TABLE>
(1) No SARs were granted to, or exercised by, the Named Executive Officers
during fiscal 2000.
(2) Value is based on the last sale price of the Company's common stock as
reported by the NASDAQ National Market on June 30, 2000 ($70.5625) less the
exercise price of the option.
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<PAGE>
DIRECTORS' COMPENSATION
Each Director who is not an officer or employee of the Company is
reimbursed for his or her out-of-pocket expenses incurred in connection with
attendance at meetings or other Company business. Prior to December 31, 1999,
each non-employee director received a $1,000 fee for each meeting he or she
attended. Commencing January 1, 2000, each non-employee director receives a
$1,500 fee for each meeting he or she attends. Additionally, each committee
member receives up to $1,000 per meeting attended.
The Compensation Committee has the discretionary authority to grant
options to non-employee directors. Pursuant to such authority, on October 13,
1999 it granted options to purchase 10,000 shares of common stock at a price of
$.9375 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.
EMPLOYMENT AGREEMENTS
The Company and Mr. Cassetta have entered into an employment agreement
("Cassetta Agreement"), effective January 1, 1999 and expiring on December 31,
2001, providing for (1) base compensation of $185,000 per annum, (2) additional
compensation of up to 100% of base compensation and (3) the sale to him of
618,239 shares of restricted stock representing 9% of the fully diluted shares
of common stock of the Company. Mr. Cassetta's additional compensation will be
equal to 10% of his base compensation for each 10% increase in sales during the
first year of the Cassetta Agreement, subject to a maximum of 100% of base
compensation. In each subsequent year of the Cassetta Agreement, Mr. Cassetta
will receive additional compensation equal to 5% of his base compensation for
each 5% increase in sales, subject again to a maximum of 100% of base
compensation. The purchase price ($2.20 per share) of the restricted stock was
equal to 110% of the 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. 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 the Company
with certain repurchase options and provides Mr. Cassetta with a put option in
the event of the termination of his employment. In the event that Mr. Cassetta's
employment is terminated without cause, Mr. Cassetta will receive a lump sum
severance payment equal to his full base salary for the remaining term of the
Cassetta Agreement, discounted to the present value using an 8% discount rate
and continuing benefit coverage for the lesser of 12 months or the remaining
term of the Cassetta Agreement. On 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.
The Company and Mr. Rossi have entered into an employment agreement ("Rossi
Agreement"), effective January 1, 1999 and expiring on December 31, 2001,
providing for (1) base compensation of $135,000 per annum, (2) additional
compensation of up to 50% of base compensation and (3) the sale to him of
206,080 shares of restricted stock representing 3% of the fully diluted shares
of common stock of the Company. Mr. Rossi's additional compensation will be
equal to 5% of his base compensation for each 10% increase in sales during the
first year of the Rossi Agreement, subject to a maximum of 50% of base
compensation. In each subsequent year of the Rossi Agreement, Mr. Rossi will
receive additional compensation equal to 2.5% of base compensation for each 5%
increase in sales, subject again to a maximum of 50% of base compensation. The
purchase price ($2.20 per share) of the restricted stock 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 the
Company with certain repurchase options and provides Mr. Rossi with a put option
in the event of the termination of his employment. In the event that Mr. Rossi's
employment is terminated without cause, Mr. Rossi will receive a lump sum
severance payment equal to his full base salary for the remaining term of the
Rossi Agreement, discounted to the present value using an 8% discount rate and
continuing benefit coverage for the lesser of 12 months or the remaining term of
the Rossi Agreement. On 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.
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<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------
The following table sets forth, as of October 5, 2000, certain information with
respect to the beneficial ownership of the Common Stock by (i) each person known
by the Company to beneficially own more than 5% of the outstanding shares, (ii)
each director of the Company, (iii) each Named Executive Officer and (iv) all
executive officers and directors of the Company as a group. Except as otherwise
indicated, each person listed below has sole voting and investment power with
respect to the shares of Common Stock set forth opposite such person's name.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of
Beneficial Owner(1) Beneficial Ownership(2) Outstanding Shares (3)
------------------- ----------------------- ----------------------
<S> <C> <C>
Sebastian E. Cassetta
c/o SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902 890,991(4) 15.16%
Steven Rosner
1220 Mirabeau Lane
Gladwyn, Pennsylvania 19035 405,533 6.97%
Mario F. Rossi
c/o SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902 310,579(5) 5.30%
TecCapital, Ltd.
c/o Berwick Management, Inc.
150 Federal Street, 19th Floor
Boston, MA 02110 303,030 5.21%
Data Transmission Network Corporation
9110 West Dodge Road
Omaha, Nebraska 68114 179,900(6) 3.04%
Claudio Guazzoni 103,699(7) 1.75%
L. Scott Perry 35,833(8) *
Catherine Cassel Talmadge 35,816(8) *
Stephen Lawler 30,000(9) *
Robert H. Steele 24,166(10) *
Charles R. Wood 24,000(11) *
Charles R. Klotz 10,000(12) *
All executive officers and directors
as a group (18 persons) 1,704,475(13) 26.91%
</TABLE>
--------------------
* Less than 1%
(1) Under the rules of the Securities and Exchange Commission (the "SEC"),
addresses are only given for holders of 5% or more of the outstanding Common
Stock of the Company.
(2) Under the rules of the SEC, a person is deemed to be the beneficial owner of
a security if such person has or shares the power to vote or direct the
voting of such security or the power to dispose or direct the disposition of
such security. A person is also deemed to be a beneficial owner of any
securities if that person has the right to acquire beneficial ownership
within 60 days of the date hereof. Except as otherwise indicated the named
entities or individuals have sole voting and investment power with respect
to the shares of Common Stock beneficially owned.
(3) Represents the number of shares of common stock beneficially owned as of
October 5, 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 61,999 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.
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<PAGE>
(5) Includes 49,749 shares of common stock subject to currently exercisable
options.
(6) Includes 100,000 shares of common stock subject to currently exercisable
warrants.
(7) Includes 34,166 shares of common stock subject to currently exercisable
options. Also includes 69,533 shares of common stock subject to currently
exercisable warrants.
(8) Includes 35,000 shares of common stock subject to currently exercisable
options.
(9) Represents 30,000 shares of common stock subject to currently exercisable
options.
(10)Includes 20,000 shares of common stock subject to currently exercisable
options.
(11)Includes 10,000 shares of common stock subject to currently exercisable
options.
(12)Represents 10,000 shares of common stock subject to currently exercisable
options. Does not include 303,031 shares beneficially owned by TecCapital,
Ltd. of which Mr. Klotz is a director. Mr. Klotz disclaims beneficial
ownership of these shares.
(13)Includes 2,051 shares held in trust for the benefit of Mr. Cassetta's wife,
and 507,154 shares of common stock subject to currently exercisable options
and warrants issued to all executive officers and directors.
CHANGES IN CONTROL
The Company and each of Sebastian J. Cassetta and Stephen Francesco (former
President of the Company) have entered into an agreement with Zanett Capital,
Inc. ("Zanett") dated September 29, 1997, as subsequently amended, which
provides, among other things, that for a period of five years, upon default
under the prepaid warrants, the Company will, at the request of Zanett, appoint
such number of designees of Zanett to its Board of Directors so that the
designees of Zanett will constitute a majority of the members of the Board of
Directors of the Company. Further, Messrs. Cassetta and Francesco have agreed to
vote their shares of common stock, representing approximately 15.17% of the
outstanding stock of the Company, in favor of the designees of Zanett Capital,
Inc., at each Annual Meeting of Stockholders of the Company at which directors
are elected.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), officers, directors and holders of more than 10%
of the outstanding shares of the Company's Common Stock ("Reporting Persons")
are required to file periodic reports of their ownership of, and transactions
involving, the Company's Common Stock with the SEC. Based solely upon a review
of copies of such reports received by the Company, the Company believes that its
Reporting Persons have complied with all Section 16 filing requirements
applicable to them with respect to the Company's fiscal year ended June 30,
2000, except for the following:
Stephen Lawler and Charles R. Klotz, each a director of the Company,
and Alan G. Bozian, an officer of the Company, each filed a late Initial
Statement of Beneficial Ownership of Securities on Form 3 when Messrs. Lawler
and Klotz became directors of the Company and Mr. Bozian became an officer of
the Company. Mr. Bozian's Form 3 also reflected the receipt of certain stock
options. Charles R. Wood filed a late Statement of Changes of Beneficial
Ownership on Form 4, reflecting the receipt of certain stock options and the
acquisition and contemporaneous and disposition (by gift) of stock in the
Company. Sebastian E. Cassetta and Mario F. Rossi, each an officer and director
of the Company, Thomas W. Haller, Richard D. Kerschner, John Montgomery and
Robert Pearl, each an officer of the Company, and Claudio Guazzoni, Charles R.
Klotz and Stephen Perry, each a director of the Company, each failed to file an
Annual Statement of Beneficial Ownership of Securities on Form 5, which were to
reflect the receipt of certain stock options. Additionally, the Forms of Messrs.
Cassetta, Rossi, Montgomery and Pearl each were to reflect a single acquisition
of common stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 24, 1999, the Company and Data Transmission network ("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 (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
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<PAGE>
and medium sized brokerage companies and (4) 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. Charles R. Wood, a
director of the Company, was until February 28, 2000, Senior Vice President of
DTN and President of its Financial Services Division.
The Company believes that the terms of the transactions described above were no
less favorable to the Company than would have been obtained from a
non-affiliated third party for similar transactions at the time of entering into
such transactions. In accordance with the Company's policy, such transactions
were approved by a majority of the independent disinterested directors of the
Company.
-49-
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
-------
(A) INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
------- -----------
3.1 Amended and Restated Certificate of Incorporation of the
Company**
3.2 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation filed on June 1, 1998*
3.3 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation filed on October 16, 1998*
3.4 By-laws of the Company, as amended**
4.1 Specimen Certificate of the Company's Common Stock**
4.2 Stock Purchase Agreement, dated May 12, 2000, between the Company
and TecCapital, Ltd., The Abernathy Group and Conseco Equity Fund
*******
4.3 Note Purchase Agreement, dated September 28, 2000, between the
Company and Hewlett-Packard Company+
4.4 Registration Rights Agreement, dated September 28, 2000, between
the Company and Hewlett-Packard Company +
4.5 Convertible Secured U.S. $20,000,000 Promissory Note, dated
September 28, 2000, between the Company and Hewlett-Packard
Company+
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 Second Lease Modification and Extension Agreement, dated June 29,
2000, between the Company and One Station Place, L.P. regarding
the Company's Stamford, Connecticut, offices +
10.8 Form of 1996 Stock Option Plan *****
10.9 Form of 1999 Stock Option Plan *******
10.10 Form of 2000 Stock Option Plan +
10.11 Asset Purchase and Software License and Service Agreements
between SmartServ Online, Inc. and Data Transmission Network
Corporation, dated April 23, 1998******
10.12 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 *
10.13 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 *
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<PAGE>
10.14 Amended and Restated Employment Agreement between SmartServ
Online, Inc. and Sebastian E. Cassetta, dated January 1, 1999 *
10.15 Restricted Stock Purchase Agreement between SmartServ Online,
Inc. and Sebastian E. Cassetta, dated December 29, 1999 *
10.16 Employment Agreement between SmartServ Online, Inc. and Mario F.
Rossi, dated January 1, 1999 *
10.17 Restricted Stock Purchase Agreement between SmartServ Online,
Inc. and Mario F. Rossi, dated December 29, 1999 *
10.18 Amended Restricted Stock Purchase Agreement between SmartServ
Online, Inc. and Sebastian E. Cassetta, dated December 31, 1999
*******
10.19 Amended Promissory Note between SmartServ Online, Inc. and
Sebastian E. Cassetta, dated January 4, 2000 *******
10.20 Amended Security Agreement between SmartServ Online, Inc. and
Sebastian E. Cassetta, dated January 4, 2000 *******
10.21 Amended Restricted Stock Purchase Agreement between SmartServ
Online, Inc. and Mario F. Rossi, dated December 31, 1999 *******
10.22 Amended Promissory Note between SmartServ Online, Inc. and Mario
F. Rossi, dated January 4, 2000 *******
10.23 Amended Security Agreement between SmartServ Online, Inc. and
Mario F. Rossi, dated January 4, 2000 *******
10.24 Employment Agreement between SmartServ Online, Inc. and Alan G.
Bozian, dated May 29, 2000 *******
10.25 Restricted Stock Purchase Agreement between SmartServ Online,
Inc. and Robert W. Pearl, dated October 13, 1999 +
10.26 Promissory Note between SmartServ Online, Inc. and Robert W.
Pearl, dated January 31, 2000 +
10.27 Security Agreement between SmartServ Online, Inc. and Robert W.
Pearl, dated January 31, 2000 +
23.2 Consent of Ernst & Young LLP+
27 Financial Data Schedule +
+ Filed as an exhibit to the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 2000
* 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 registration statement on
Form SB-2 (Registration No. 333-114)
*** Filed as an exhibit to the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1996
**** Filed as an exhibit to the Company's Current Report on Form 8-K/A
for an event dated September 30, 1997
***** Filed as an exhibit to the Company's Proxy Statement dated
October 10, 1996
****** Filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for the period ended March 31, 1998
******* Filed as an exhibit to the Company's Registration Statement on
Form SB-2 (Registration No. 333-43258) on August 7, 2000
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<PAGE>
(B) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on May 16, 2000 under Item 5
regarding its completion of a $17,500,000 equity financing to three investors.
No financial statements were filed with such report.
-52-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this amended report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SMARTSERV ONLINE, INC.
Registrant
October 30, 2000 By: /s/ Sebastian E. Cassetta
-------------------------
Sebastian E. Cassetta
Chairman of the Board
Chief Executive Officer
-53-
