+As filed with the Securities and Exchange Commission on August 8, 2000.
REGISTRATION NO. 333-________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
SMARTSERV ONLINE, INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 7375 13-3750708
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
ONE STATION PLACE
STAMFORD, CT 06902
(203) 353-5950
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
RICHARD D. KERSCHNER, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
SMARTSERV ONLINE, INC.
ONE STATION PLACE
STAMFORD, CT 06902
(203) 353-5950
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies of communications to:
MICHAEL J. SHEF, ESQ.
PARKER CHAPIN LLP
THE CHRYSLER BUILDING
405 LEXINGTON AVENUE
NEW YORK, NEW YORK 10174
TELEPHONE NO.: (212) 704-6000
FACSIMILE NO.: (212) 704-6288
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
========================================== ========================== ============================== ============================
TITLE OF EACH CLASS OF AMOUNT TO BE REGISTERED PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE
========================================== ========================== ============================== ============================
<S> <C> <C> <C> <C> <C>
Common Stock, par value $.01 per share 668,715 (1) $23,300,705(2) $6,151
========================================== ========================== ============================== ============================
</TABLE>
(1) Pursuant to Rule 416(b), there shall be deemed covered hereby all
additional securities resulting from antidilution adjustments.
(2) Estimated pursuant to Rule 457(c) under the Securities Act of 1933 solely
for the purpose of computing the amount of the registration fee. The fee
for the common stock was based on the average of the closing bid and asked
price of the common stock reported on the Nasdaq National Market on August
2, 2000.
(3) Does not include the following securities for which SmartServ paid a fee in
connection with the filing of a Registration Statement on Form SB-2 (File
No. 333-114) and for which this Registration Statement serves as
Post-Effective Amendment No. 1: (i) 155,211 shares of SmartServ's common
stock issuable upon exercise of warrants at $7.731 per share issued between
September 1995 and March 1996 to certain bridge lenders, and (ii) 892,461
shares of SmartServ's common stock issuable upon the exercise of warrants
at $7.731 per share issued in its May 1996 initial public offering.
Pursuant to Rule 429, this Registration Statement serves as Post-Effective
Amendment No. 1 to the Registrant's Registration Statement on Form SB-2 (File
No. 333-114) relating to: (i) 155,211 shares of SmartServ's common stock
issuable upon exercise of warrants at $7.731 per share issued between September
1995 and March 1996 to certain bridge lenders, and (ii) 892,461 shares of
SmartServ's common stock issuable upon the exercise of warrants at $7.731 per
share issued in its May 1996 initial public offering.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
================================================================================
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
PROSPECTUS
SMARTSERV ONLINE, INC.
668,715 SHARES OF COMMON STOCK
o The selling stockholders are offering to sell 668,715 shares
of common stock of which 292,954 shares are issuable upon
exercise of warrants.
This prospectus also covers (i) 155,211 shares of our common
stock issuable upon exercise of warrants at $7.731 per share
issued between September 1995 and March 1996 to certain bridge
lenders, and (ii) 892,461 shares of our common stock issuable
upon the exercise of warrants at $7.731 per share issued in
our May 1996 initial public offering.
o We will not receive any proceeds from the offering of common
stock. We will receive approximately $12,085,000 if all of the
warrants are exercised. These proceeds will be used for our
general corporate purposes.
o Our common stock is traded and quoted on the Nasdaq National
Market (NMS) under the symbol "SSOL". On August 2, 2000, the
last reported bid price of our common stock was $34.8125 and
the last reported asked price was $34.8750.
THE SECURITIES OFFERED IN THIS PROSPECTUS INVOLVE A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY CONSIDER THE FACTORS DESCRIBED UNDER THE HEADING "RISK FACTORS"
BEGINNING ON PAGE 3.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------------------
The date of this prospectus is August __, 2000
-1-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PROSPECTUS SUMMARY................................................................................................3
ABOUT OUR COMPANY.................................................................................................3
SUMMARY FINANCIAL DATA............................................................................................3
RISK FACTORS......................................................................................................4
SPECIAL INFORMATION REGARDING FORWARD LOOKING STATEMENTS..........................................................8
USE OF PROCEEDS...................................................................................................8
MARKET PRICE OF OUR COMMON STOCK AND PUBLIC WARRANTS..............................................................8
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.........................................................9
BUSINESS.........................................................................................................15
MANAGEMENT.......................................................................................................19
PRINCIPAL STOCKHOLDERS...........................................................................................27
SELLING STOCKHOLDERS.............................................................................................29
PLAN OF DISTRIBUTION.............................................................................................30
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................31
DESCRIPTION OF CAPITAL STOCK.....................................................................................32
DELAWARE BUSINESS COMBINATION PROVISIONS.........................................................................34
INDEMNIFICATION OF DIRECTORS AND OFFICERS........................................................................34
WHERE YOU CAN FIND MORE INFORMATION..............................................................................35
TRANSFER AGENT...................................................................................................36
LEGAL MATTERS....................................................................................................36
EXPERTS..........................................................................................................36
INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
</TABLE>
-2-
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information included elsewhere in this
document. You should carefully review the more detailed information and
financial statements included in this document. The summary is not complete
and may not contain all of the information you may need to consider before
investing in our common stock. We urge you to carefully read this document,
including the "Risk Factors" section beginning on page 4 and the Financial
Statements and notes to those statements beginning on page F-1 of this
document.
ABOUT OUR COMPANY
Please note that throughout this prospectus, the words "we", "our" or
"us" refer to SmartServ Online, Inc. and not to the selling stockholders.
SmartServ Online, Inc. was organized in 1993. We are 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 telephones and personal digital assistants. Our
executive offices are located at One Station Place, Stamford, Connecticut
06902 and our telephone number is (203) 353-5950.
SUMMARY FINANCIAL DATA
This summary financial data is derived from our financial statements
for the fiscal years ended June 30, 1999, June 30, 1998 and June 30, 1997,
and for the fiscal periods ended March 31, 2000 and March 31, 1999, certain
of which are included elsewhere herein. You should read the following
summary financial data in conjunction with the financial statements and
notes to those statements.
<TABLE>
<CAPTION>
Nine Months Ended
March 31 Years Ended June 30
----------------------------------------- ------------------------------------------------
STATEMENT OF OPERATIONS 2000 1999 1999 1998 1997
<S> <C> <C> <C> <C> <C>
Revenues $ 2,710,856 $ 1,028,353 $ 1,443,781 $ 873,476 $ 688,610
Loss from Operations (35,819,259) * (2,538,791) (3,750,471) (4,488,307) (4,457,343)
Net Loss (35,083,239) * (4,766,362) (7,124,126) (5,040,009) (4,434,482)
Basic and Diluted Loss per (17.55) (4.45) (6.44) (7.65) (7.20)
Share
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET At March 31 At June 30
----------------------------------------- ------------------------------------------------
2000 1999 1998 1997
------------------- ------------------------------------------------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents $ 5,175,577 $ 2,165,551 $ 354,225 $ 93,345
Working Capital (Deficiency) 4,368,144 (1,822,340) (1,850,287) (901,026)
Total Assets 7,570,111 3,820,598 1,276,853 1,246,689
Total Liabilities and Deferred
Revenues 5,832,698 8,527,898 2,523,714 1,945,017
Shareholders' Equity 1,737,413 (4,707,300) (1,246,861) (698,328)
(Deficiency)
* Included in such amount are noncash charges for stock-based compensation
costs of $35,636,026.
-3-
<PAGE>
RISK FACTORS
An investment in our common stock is highly speculative and involves a
high degree of risk. Therefore, you should consider all of the risk factors
discussed below, as well as the other information contained in this document.
You should not invest in our common stock unless you can afford to lose your
entire investment and you are not dependent on the funds you are investing.
WE HAVE A HISTORY OF LOSSES AND IF WE DO NOT ACHIEVE PROFITABILITY WE
MAY NOT BE ABLE TO CONTINUE OUR BUSINESS
We have incurred net losses of $7,124,126 for the year ended June 30,
1999, $5,040,009 for the year ended June 30, 1998, $4,434,482 for the year ended
June 30, 1997 and $2,966,287 for the year ended June 30, 1996. Additionally, we
have incurred a net loss of $35,083,239 for the nine month period ended March
31, 2000. However, included in the March 31, 2000 operating results were noncash
charges for stock-based compensation of $35,636,026. At March 31, 2000, we had
an accumulated deficit of $57,029,244 and stockholders equity of $1,737,413.
Losses have resulted principally from costs incurred in connection with
activities aimed at developing our software, information and transactional
services and from costs associated with our marketing and administrative
activities. We have incurred substantial expenses and commitments and continue
to operate at a deficit on a monthly basis. No assurance can be provided that we
will be able to develop revenues sufficient to support our operations. On May
15, 2000, SmartServ sold common stock to investors in a private placement.
Proceeds from that offering were $17,500,000. Giving effect to this offering, we
had stockholders' equity of approximately $18,437,000 at March 31, 2000 on a
proforma basis.
WE DEPEND ON ONE CUSTOMER, AND THE LOSS OF THIS CUSTOMER COULD
ADVERSELY AFFECT OUR OPERATING RESULTS
Currently, substantially all of our revenues are generated through our
licensing arrangement with Data Transmission Network Corporation, or DTN. Our
results of operations will depend upon numerous factors including sustained
revenues from our arrangement with DTN, the regulatory environment, introduction
and market acceptance of new services, establishing alliances with strategic
marketing partners and competition. If we default under the license agreement,
DTN may at its sole cost elect to provide its own maintenance to both the system
software and related hardware. Under these circumstances, DTN will have the
right to own the system software, including the source codes, and related
hardware, and DTN will have no further obligation to pay us licensing fees which
we currently rely on for a significant part of our revenues. We anticipate that
our results of operations for the immediate future will continue to depend to a
significant extent upon revenues from DTN and a small number of customers. In
order to increase our revenues, we will need to attract and retain additional
customers. Our failure to obtain a sufficient number of additional customers
could adversely affect our results of operations.
OUR INDEPENDENT AUDITORS HAVE ISSUED A REPORT WHICH MAY HURT OUR
ABILITY TO RAISE ADDITIONAL FINANCING AND THE PRICE OF OUR COMMON STOCK
The report of our independent auditors on our financial statements for
the years ended June 30, 1999 and 1998 contains an explanatory paragraph which
indicates that we have had recurring operating losses and a working capital
deficiency which raise substantial doubt about our ability to continue as a
going concern. This report may make it more difficult for us to raise additional
debt or equity financing needed to run our business and is not viewed favorably
by analysts of, or investors in, our common stock. We urge potential investors
to review this report before making a decision to invest in our company.
-4-
<PAGE>
OUR BUSINESS DEPENDS UPON STRATEGIC MARKETING PARTNERSHIPS WHICH MAY
NOT MATERIALIZE
We intend to sell our services primarily by entering into non-exclusive
agreements with strategic marketing partners who would brand our information and
transaction services with their own private label, promote the product offering
and then provide our information and e-commence services to their clients. Our
success will depend on:
o our ability to enter into agreements with strategic marketing
partners;
o the ultimate success of these strategic marketing partners;
and
o the ability of the strategic marketing partners to
successfully market our services.
Our failure to complete our strategic alliance strategy or the failure
of the strategic marketing partners to develop and sustain a market for our
services would have a material adverse affect on our overall performance.
Although we view strategic marketing alliances as a major factor in the
successful commercialization of our services, there can be no assurance that the
strategic marketing partners would view an alliance with us as significant to
their businesses and any potential benefits from these arrangements may not
materialize.
THE MARKET FOR OUR BUSINESS IS DEVELOPING AND MAY NOT ACHIEVE THE
GROWTH WE EXPECT
Online information and transactional services, as well as the
convergence of wireless and Internet technologies, are developing markets. Our
future growth and profitability will depend, in part, upon consumer acceptance
of online information and transactional services in general and a significant
expansion in the consumer market for the delivery of such services via wireless
telephones and personal digital assistants, and personal computers. Even if
these markets experience substantial growth, there can be no assurance that our
services will be commercially successful or will benefit from such growth.
Further, even if initially successful, any continued development and expansion
of a market for our services will depend in part upon our ability to create and
develop additional services and adjust existing services in accordance with
changing consumer preferences, all at competitive prices. Our failure to develop
new services and generate revenues could have a material adverse effect on our
financial condition and operating results.
WE COMPETE AGAINST LARGER, WELL KNOWN COMPANIES WITH GREATER RESOURCES
THAN WE HAVE
The market for Web and wireless based information and transactional
services is highly competitive and involves rapid innovation and technological
change, shifting consumer preferences and frequent new service introductions.
Most of our competitors and potential competitors have substantially greater
financial, marketing and technical resources than we have. Increased competition
in the market for our services could limit our ability to expand and materially
and adversely affect our results of operations.
The principal competitive factors in both the Internet-based and
wireless services industry include content, product features and quality, ease
of use, access to distribution channels, brand recognition, reliability and
price. We believe that potential new competitors, including large multimedia and
information system companies, are increasing their focus on transaction
processing. We face increasing competition
-5-
<PAGE>
from other emerging services delivered through personal computers and wireless
devices such as developing transactional services offered by Data Broadcasting
Corporation, Electronic Data Systems Corp. and other Web-based software and
online companies. Established online information services including those
offered by America Online, Inc., offer competing services delivered through
personal computers. Although in its infancy, the wireless arena too has its
competitors, such as Datalink Systems Corporation, I 3 Mobile, Inc., Aether
Systems, Inc. (a/k/a Aether Technologies), Tantau Software, Inc., 724 Solutions,
Inc. and W-Trade Technologies, Inc. We expect competition to increase from
existing competitors and from new competitors, including telecommunications
companies.
The information content provided through our software and communication
architecture is generally purchased through non-exclusive distribution
agreements. While we are not dependent on any single content provider, existing
and potential competitors may enter into agreements with these and other such
providers and thereby acquire the ability to deliver online information and
transactional services substantially similar to those provided by us.
WE ARE HIGHLY DEPENDENT ON OUR EXECUTIVE OFFICERS AND SEVERAL TECHNICAL
EMPLOYEES, THE LOSS OF ANY OF WHOM COULD HAVE AN ADVERSE IMPACT ON OUR FUTURE
OPERATIONS
We believe that due to the rapid pace of innovation within our
industry, factors such as the technological and creative skills of our personnel
are more important in establishing and maintaining a leadership position within
the industry than legal protections of our technology. We are dependent on our
ability to recruit, retain and motivate high quality personnel. However,
competition for such personnel is intense and the inability to attract and
retain additional qualified employees or the loss of current key employees could
materially and adversely affect our business, operating results and financial
condition. We maintain and are the sole beneficiary of a key-person life
insurance policy on the life of (1) Mr. Sebastian E. Cassetta, our Chief
Executive Officer, in the amount of $1,000,000 and (2) Mr. Mario F. Rossi, our
Senior Vice President of Technology, in the amount of $500,000. The loss of the
services of either Mr. Cassetta or Mr. Rossi would have a material adverse
effect upon our business, financial condition and results of operations.
PROVISIONS IN OUR CHARTER MAY MAKE IT MORE DIFFICULT FOR A PERSON TO
ACQUIRE US AT A PREMIUM TO OUR CURRENT MARKET VALUE
Our charter restricts the ability of our stockholders to call a
stockholders meeting and provides that our stockholders may not act by written
consent or change the number of directors and classes of our board of directors.
These provisions may have the effect of deterring or delaying certain
transactions involving an actual or potential change in control of SmartServ,
including transactions in which our stockholders might otherwise receive a
premium for their shares over then current market prices, and may limit the
ability of our stockholders to approve transactions that they may deem to be in
their best interests.
YOUR OWNERSHIP INTEREST, VOTING POWER AND THE MARKET PRICE OF OUR
COMMON STOCK MAY DECREASE BECAUSE WE HAVE ISSUED, AND MAY CONTINUE TO ISSUE, A
SUBSTANTIAL NUMBER OF SECURITIES CONVERTIBLE OR EXERCISABLE INTO OUR COMMON
STOCK
We have issued common stock, options and warrants to purchase our
common stock, and in the future we may issue additional shares of common stock,
options, warrants, preferred stock or other securities exercisable for or
convertible into our common stock. At July 27, 2000, there were $612,000 of our
prepaid warrants outstanding that were then convertible into 437,142 shares of
our common stock. Additionally, we have issued warrants to investors and
consultants and granted options to employees for the purchase of 3,930,600
shares of our common stock. Except for 1,047,000 shares subject to stock
options, substantially all of such shares have been registered for resale under
the Securities Act. Additional shares are available for sale under Rule 144 of
the Securities Act.
-6-
<PAGE>
Sales of these shares or the market's perception that these sales could occur
may cause the market price of our common stock to fall and may make it more
difficult for us to sell equity securities in the future at a time and price
that we deem appropriate or to use equity securities as consideration for future
acquisitions.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS
We have designed and developed our own information platform,
"SmartServ", based on Sun Microsystems, Inc. computers and Oracle Corp.'s
version 7.X relational database manager, to support a variety of end user
devices. Although we intend to protect our rights vigorously, there can be no
assurance that any of the measures to protect our proprietary rights explained
below will be successful. In an effort to protect our proprietary rights, we
rely upon a combination of contract provisions and copyrights, trade secret laws
and a service mark. We license the use of our services to our strategic
marketing partners under agreements that contain terms and conditions
prohibiting the unauthorized reproduction of our software and services. We seek
to protect the source code of our application software and communications
architecture as a trade secret and as an unpublished copyrighted work.
We believe that our service mark "SmartServ Online" has significant
value and is important to the marketing of our services. There can be no
absolute assurance, however, that our mark does not or will not violate the
proprietary rights of others, that our mark would be upheld if challenged or
that we would not be prevented from using our mark, any of which could have an
adverse effect on us. In addition, there can be no assurance that we will have
the financial resources necessary to enforce or defend our mark. We believe that
our software, services, service mark and other proprietary rights do not
infringe on the proprietary rights of third parties. However, there can be no
assurance that third parties will not assert infringement claims against us with
respect to current features, content or services or that any such assertion may
not require us to enter into royalty arrangements or result in litigation.
OUR LICENSE ARRANGEMENT WITH DTN CONTAINS PROVISIONS WHICH ALLOW DTN TO
TERMINATE OUR RELATIONSHIP AND TAKE OWNERSHIP OF CERTAIN OF OUR PROPRIETARY
TECHNOLOGY UNDER CERTAIN CIRCUMSTANCES
We granted DTN an exclusive perpetual worldwide license to our
Internet-based (1) real-time stock quote product, (2) online trading vehicle for
customers of small and medium sized brokerage companies, (3) administrative
reporting package for brokers of small and medium sized brokerage companies and
(4) order entry/routing system. Under the license agreement, we are required to
maintain certain systems' performance standards and to satisfy other general
business requirements. Our inability to maintain compliance with the license
agreement could result in a default thereunder. In addition, a change of control
of SmartServ is an event of default under the license agreement. A change of
control includes a change in the majority of the members on our board of
directors. Under a letter agreement with Zanett Capital, Inc., Zanett Capital
may elect a majority of the board under certain circumstances, including the
failure of our common stock to be listed on Nasdaq.
If an event of default occurs under the license agreement, DTN may at
its sole cost elect to provide its own maintenance to both the system software
and related hardware. Under these circumstances, DTN will have the right to own
the system software, including the source codes, and related hardware, and DTN
will have no further obligation to pay us licensing fees which we currently rely
on for a significant part of our revenues.
-7-
<PAGE>
WE ARE INVOLVED IN SEVERAL PENDING LEGAL PROCEEDINGS WHICH, IF RESOLVED
AGAINST US, COULD CAUSE DILUTION TO OUR STOCKHOLDERS AND HAVE A MATERIAL
NEGATIVE IMPACT ON OUR OPERATIONS
From time to time we have been, and expect to continue to be, a party
to legal proceedings and claims in the ordinary course of our business. Our
ongoing legal proceedings with Michael Fishman and Commonwealth Associates, L.P.
have been set forth in the Business section of this document under the heading
"Legal Proceedings". Commonwealth seeks 13,333 shares of our common stock or
damages of at least $1,770,000. While we expect to contest these matters
vigorously, litigation is inherently uncertain and an adverse judgment on any of
these claims could cause dilution to our stockholders as well as harm our
business. Even if not meritorious, any of these current and future matters could
require the expenditure of significant financial and managerial resources.
SPECIAL INFORMATION REGARDING FORWARD LOOKING STATEMENTS
Some of the statements in this prospectus or in the documents we
incorporate by reference are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve certain known and unknown risks, uncertainties and other
factors which may cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by these forward-looking statements. These factors include,
among others, the factors set forth above under "Risk Factors." The words
"believe," "expect," "anticipate," "intend" and "plan" and similar expressions
identify forward-looking statements. We caution you not to place undue reliance
on these forward-looking statements. We undertake no obligation to update or
revise any forward-looking statements or to publicly announce the result of any
revisions to any of the forward-looking statements in this document to reflect
future events or developments.
USE OF PROCEEDS
We will receive approximately $12,085,000 if all of the warrants for
the underlying shares of common stock being registered are exercised. We expect
to use these proceeds, if any, for general corporate purposes.
MARKET PRICE OF OUR COMMON STOCK AND PUBLIC WARRANTS
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 until 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.
-8-
<PAGE>
COMMON STOCK WARRANTS
------------ --------
HIGH LOW HIGH LOW
---- --- ---- ---
Year Ending June 30, 2001
-------------------------
<S> <C> <C> <C> <C>
First Quarter $ 70.250 $ 33.188 $ 27.000 $ 11.000
(through August 2, 2000)
Year Ended June 30, 2000
------------------------
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
------------------------
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
</TABLE>
As of August 2, 2000, we had 5,776,870 shares of common stock
outstanding held by 113 shareholders of record. We estimate that our common
stock is held by approximately 2,000 beneficial holders. As of such date, we had
1,725,000 public warrants outstanding held by 17 warrant holders of record.
DIVIDENDS
We have never paid a cash dividend on our common stock. It is our
present policy to retain earnings, if any, to finance the development and growth
of our business. Accordingly, we do not anticipate that cash dividends will be
paid until our earnings and financial condition justify such dividends, and
there can be no assurance that we can achieve such earnings.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PLAN OF OPERATION
SmartServ delivers Internet-based and wireless content and trade order
routing solutions that enable the processing of transactions for its strategic
alliances, or Strategic Marketing Partners, and their customers. SmartServ has
developed online and wireless financial, transactional and media applications
using a unique "device-independent" delivery solution.
SmartServ's plan of operation includes programs for the sale of its
information and transactional application services through Strategic Marketing
Partners utilizing a "business-to-business" strategy. Such a strategy provides
access to a large number of potential subscribers and allows SmartServ to
maximize its market reach at minimal operating costs. The flexibility of
SmartServ's application software and
-9-
<PAGE>
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. With the licensing of four of its Internet
products by DTN in 1998, SmartServ has discontinued efforts to develop a direct
subscriber base.
Management anticipates that staffing requirements associated with the
implementation of its plan of operation will result in the addition of a minimum
of fifteen people during the period ending December 31, 2000. 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
NINE MONTHS ENDED MARCH 31, 2000 VS. NINE MONTHS ENDED MARCH 31, 1999
During the nine months ended March 31, 2000 and 1999, SmartServ
recorded revenues of $2,710,856 and $1,028,353, respectively. Substantially all
of such revenues were earned through SmartServ's licensing of its products to
DTN. Of such amounts, SmartServ recognized $1,242,472 and $146,602,
respectively, as amortization of deferred revenues emanating from its licensing
agreement with DTN.
During the nine months ended March 31, 2000, SmartServ incurred costs
of revenues of $603,355. These costs consisted primarily of information and
communication costs ($98,600), personnel costs ($152,700), computer hardware
leases, depreciation and maintenance costs ($242,400) and consulting fees
($43,600). During the nine months ended March 31, 1999, SmartServ incurred costs
of revenues of $593,798. Such costs consisted primarily of information and
communication costs ($209,200), personnel costs ($108,500), and computer
hardware leases, depreciation and maintenance costs ($255,400). Product
development costs were $240,500 and $132,600 for the nine months ended March 31,
2000 and 1999, respectively. Such costs consisted primarily of personnel costs
of $31,400 and $8,900 in 2000 and 1999, respectively, and amortization expenses
relating to capitalized software development costs of $209,100 and $94,200 in
2000 and 1999, respectively. During the nine months ended March 31, 2000 and
1999, SmartServ capitalized $846,814 and $672,875, respectively, of development
costs in accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed", or Statement 86.
-10-
<PAGE>
During the nine months ended March 31, 2000, SmartServ incurred
selling, general and administrative expenses of $2,050,202. Such costs were
incurred primarily for personnel costs ($888,700), facilities ($145,800),
marketing and advertising costs ($294,000) and professional fees ($555,200).
During the nine months ended March 31, 1999, SmartServ incurred selling, general
and administrative expenses of $1,799,139. Such costs were incurred primarily
for personnel costs ($599,200), marketing and advertising costs ($210,300),
professional fees ($616,000), facilities ($166,600) and telecommunications costs
($51,700).
During the nine months ended March 31, 2000, noncash charges for
stock-based compensation amounted to $35,636,026 compared to $1,041,602 during
the nine months ended March 31, 1999. Such noncash charges in 2000 were
primarily related to personnel costs ($34,677,300) resulting from the valuation
of stock-based compensation in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", or APB No. 25.
Noncash charges pertaining to professional fees amounted to $958,700 and
$1,002,800 for the nine months ended March 31, 2000 and 1999, respectively.
These noncash professional fees resulted from the issuance of common stock
purchase warrants 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 nine months ended March 31, 2000 and 1999
amounted to $58,570 and $3,772, respectively. During the nine months ended March
31, 2000, such amounts were earned from SmartServ's investments in highly rated
commercial paper. During the nine months ended March 31, 1999, such amounts were
earned primarily from the SmartServ's cash balances. During the nine months
ended March 31, 2000 and 1999, interest and financing costs were $40,250 and
$2,231,343, respectively. During the nine months ended March 31, 2000 such costs
were related to a partial redemption of SmartServ's Prepaid Warrants. During the
nine months ended March 31, 1999, such costs consisted primarily of interest and
the amortization of deferred financing costs ($454,700) associated with the
issuance of $550,000 of convertible notes in December 1998 and January 1999, and
costs ($958,900) associated with the settlement of obligations to holders of
SmartServ's Prepaid Warrants. SmartServ has received a waiver of certain events
of default pursuant to its Prepaid Warrants, and accordingly in December 1999,
reversed previously recorded charges of $717,700. The common stock purchase
warrants have been recorded in the financial statements in accordance with the
Black-Scholes pricing methodology.
FISCAL YEAR ENDED JUNE 30, 1999 VERSUS FISCAL YEAR ENDED JUNE 30, 1998
During the year ended June 30, 1999, SmartServ recorded revenues of
$1,443,781. Substantially all of such revenues were earned through its licensing
agreement with DTN. During the year ended June 30, 1998, SmartServ earned
revenues of $873,476. Of such amount, $210,000 was earned through the
relationship with DTN, while $454,000 was earned from the sale of the SmartServ
Pro stock quote services.
During the year ended June 30, 1999, SmartServ incurred costs of
services of $994,465. Such costs consisted primarily of information and
communication costs ($267,600), personnel costs ($290,100), computer hardware
leases and maintenance ($339,400) and systems consultants ($97,300). During the
year ended June 30, 1998, SmartServ incurred costs of revenues of $1,216,761.
Such costs consisted primarily of information and communication costs
($551,700), personnel costs ($310,600), and computer hardware leases and
maintenance ($339,300). Information and communication costs decreased in 1999
compared to 1998 as a result of the licensing agreement entered into between
SmartServ and DTN. Personnel costs decreased in 1999 compared to 1998 as a
result of the migration of personnel resources into product development areas in
1999. Product development costs were $193,188 vs. $923,082 for the year ended
June 30, 1998. The decrease in the product development costs resulted from the
capitalization of software development costs related to certain product
enhancements in accordance with Statement 86. During the year ended June 30,
1999, SmartServ capitalized $765,000 of development costs in accordance with
Statement 86. No such costs
-11-
<PAGE>
were capitalized during the year ended June 30, 1998. During the year ended June
30, 1999, product development costs consisted primarily of the amortization of
capitalized software development costs. During the year ended June 30, 1998,
product development costs consisted primarily of personnel costs ($541,400) and
computer system consultants ($335,000).
During the year ended June 30, 1999, SmartServ incurred selling,
general and administrative expenses of $4,006,599 vs. $3,221,940 for the year
ended June 30, 1998. During the year ended June 30, 1999, such costs were
incurred primarily for personnel costs ($1,148,400), facilities ($240,500),
marketing and advertising costs ($263,100), professional fees ($2,150,000), and
telecommunications costs ($69,500). During the year ended June 30, 1998, such
costs were incurred primarily for personnel costs ($1,349,000), facilities
($216,000), marketing and advertising costs ($240,400), professional fees
($1,051,400) and telecommunications costs ($73,100). Included in professional
fees are noncash charges of $1,349,020 in 1999 and $660,576 in 1998 representing
the amortization of deferred costs in connection with the issuance of warrants
to financial consultants.
Interest income for the year ended June 30, 1999 amounted to $4,767 vs.
$40,788 for the year ended June 30, 1998. Such amounts were earned primarily
from SmartServ's investments in highly liquid commercial paper. Interest and
financing costs for the year ended June 30, 1999 were $3,378,422. Such costs
were incurred primarily in connection with the issuance of the 8% convertible
notes ($2,254,700) and SmartServ's default pursuant to the prepaid warrants
($1,095,700). Of such amounts, $2,593,800 were noncash charges for the issuance
of common stock or warrants to purchase common stock as settlement of such
obligations. Interest and financing costs for the year ended June 30, 1998 were
$592,490. These costs were incurred in connection with the origination of
SmartServ's May 1997 line of credit. Of such amount, $463,600 represents the
noncash charges associated with the issuance of certain common stock purchase
warrants.
Loss per share was $6.44 per share for the year ended June 30, 1999 vs.
$7.65 per share for the year ended June 30, 1998. While the net loss increased
by $2,084,117, SmartServ's weighted average shares of common stock outstanding
in 1999 increased by 446,569 shares, thereby affecting the per share loss.
FISCAL YEAR ENDED JUNE 30, 1998 VERSUS FISCAL YEAR ENDED JUNE 30, 1997
During the year ended June 30, 1998, SmartServ recorded revenues of
$873,476 from the sale of its information services vs. $688,610 during the year
ended June 30, 1997. Included in revenues for the year ended June 30, 1998 was
$210,000 resulting from SmartServ's licensing agreement with DTN and $454,000
from the sale of the SmartServ Pro stock quote services. During the year ended
June 30, 1997, SmartServ earned revenues from the enhancement, implementation
and marketing of services to Schroder & Co. Inc. of $342,200.
During the year ended June 30, 1998, SmartServ incurred costs of
services of $1,216,761. Such costs consisted primarily of information and
communication costs ($551,700), personnel costs ($310,600) and computer hardware
leases and maintenance ($339,300). During the year ended June 30, 1997, with
SmartServ's departure from the development stage, it incurred costs of revenues
of $1,133,884. Such costs consisted primarily of information and communication
costs ($390,000), personnel costs ($417,500), computer hardware leases and
maintenance ($201,800) and screenphone purchases ($95,300). Product development
costs were $923,082 vs. $1,150,224 for the year ended June 30, 1997. During the
year ended June 30, 1998, such costs consisted primarily of personnel costs
($541,400) and computer system consultants ($335,000). During the year ended
June 30, 1997 such costs consisted primarily of personnel costs ($686,100) and
computer system consultants ($454,000). Included in personnel costs in 1997 is a
noncash charge of approximately $73,000 for the change in market value of
employee stock options.
-12-
<PAGE>
During the year ended June 30, 1998, SmartServ incurred selling,
general and administrative expenses of $3,221,940 vs. $2,861,845 for the year
ended June 30, 1997. During the year ended June 30, 1998, such costs were
incurred primarily for personnel costs ($1,349,000), facilities ($216,000),
advertising and marketing costs ($240,400), professional fees ($1,051,400) and
telecommunications costs ($73,100). During the year ended June 30, 1998,
selling, general and administrative costs increased $360,095 from the prior year
as a result of increases in professional fees ($593,000), personnel costs
($403,500) and facilities costs ($55,700). Such increases were offset by a
decrease in advertising and marketing expenses of $600,900. Professional fees
includes a noncash charge of $527,576, representing amortization of deferred
compensation in connection with the issuance of 592,592 common stock purchase
warrants to a financial consultant.
Interest income for the year ended June 30, 1998 amounted to $40,788
vs. $74,507 for the year ended June 30, 1997. Such amounts were earned primarily
from SmartServ's investments in highly liquid commercial paper. Interest and
financing costs for the year ended June 30, 1998 were $592,490. These costs were
incurred in connection with the origination of SmartServ's May 1997 line of
credit. Of such amount, $463,600 represents the noncash charges associated with
the revaluation of certain common stock purchase warrants granted to Zanett
Securities Corporation. Interest and financing costs for the year ended June 30,
1997 were $54,646. Such amounts were incurred in connection with SmartServ's May
1997 line of credit.
Loss per share was $7.65 per share for the year ended June 30, 1998 vs.
$7.20 per share for the year ended June 30, 1997. While the net loss increased
by $605,527, SmartServ's weighted average shares of common stock outstanding
increased by 43,201 shares, thereby affecting the per share loss.
CAPITAL RESOURCES AND LIQUIDITY
On June 24, 1999, SmartServ and DTN entered into a License Agreement
that amended their previous agreement. In consideration of the receipt of $5.175
million, SmartServ granted DTN an exclusive perpetual worldwide license to its
Internet-based (1) real-time stock quote product, (2) online trading vehicle for
customers of small and medium sized brokerage companies, (3) administrative
reporting package for brokers of small and medium sized brokerage companies and
(4) order entry/routing system. Additionally, SmartServ received $324,000 in
exchange for an agreement to issue warrants to purchase 300,000 shares of its
common stock at an exercise price of $8.60 per share. SmartServ has agreed to
continue to operate these products and provide maintenance and enhancement
services in exchange for a percentage of the revenues earned by DTN therefrom.
The cost of the SmartServ's commitment to provide such maintenance and
enhancement services is limited to a maximum of 20% of the revenues earned by
SmartServ. If SmartServ defaults under the license agreement, DTN may at its
sole cost elect to provide its own maintenance to both the system software and
related hardware. Under these circumstances, DTN will have the right to own the
system software, including the source codes, and related hardware, and DTN will
have no further obligation to pay SmartServ licensing fees which SmartServ
currently relies on for a significant part of its revenues. None of SmartServ's
wireless products were included in this transaction. Although SmartServ believes
that DTN has the experience and the financial ability to distribute its services
to thousands of potential customers, there can be no assurance that the products
and services will be accepted by the ultimate consumer on a widespread basis.
In November 1998, SmartServ completed a financing of $550,000 of its
securities. SmartServ sold five and one-half (5.5) units, each consisting of a
secured convertible 8% note in the principal amount of $100,000 and warrants to
purchase common stock. The notes and the warrants were initially convertible and
exercisable, respectively, at $.60 per share of common stock. Such notes were
repaid in June 1999.
On July 1, 1999, SmartServ entered into an agreement with Arnhold & S.
Bleichroeder, Inc. to settle its obligation to Arnhold & S. Bleichroeder under
the default provisions of its prepaid warrants. In
-13-
<PAGE>
accordance with that agreement, SmartServ paid Arnhold & S. Bleichroeder
$325,000 to redeem the prepaid warrants and issued 180,000 shares of common
stock in full settlement of all obligations.
In January 2000, SmartServ issued 306,667 shares of common stock to
certain investors in the November 1998 interim financing upon the exercise of
warrants to purchase such shares. Proceeds from the exercise of these warrants
were $184,000.
On January 18, 2000, America First Associates Corp., acting as
placement agent for SmartServ, completed a private placement of 233,000 shares
of common stock at $15.00 a share. The net proceeds of the placement of
$3,215,400 were used for general working capital requirements. In addition, on
January 18, 2000, SmartServ completed a private placement of an additional
100,000 shares of common stock at $15.00 a 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 quarter ended March 31, 2000, the Company issued 474,022
shares of common stock to investors upon the exercise of warrants to purchase
such shares. Proceeds from the exercise of these warrants were $696,944.
On May 15, 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.
SmartServ's financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. SmartServ incurred
net losses of $7,124,126, $5,040,009, and $4,434,482 for the years ended June
30, 1999, 1998 and 1997, respectively. Additionally, SmartServ has incurred a
net loss of $35,083,239 for the nine month period ended March 31, 2000. Included
in such amount were noncash charges for stock-based compensation costs of
$35,636,026. At March 31, 2000, SmartServ had an accumulated deficit of
$57,029,244 and stockholders' equity of $1,737,413; however, after giving effect
to the May 2000 private placement, SmartServ had stockholders' equity of
approximately $18,437,000 on a proforma basis. SmartServ is also a defendant in
several legal proceedings that could have a material adverse effect on its
financial position, cash flows and results of operations. Losses have resulted
principally from costs incurred in connection with activities aimed at
developing our software, information and transactional services and from costs
associated with our marketing and administrative activities. We have incurred
substantial expenses and commitments and continue to operate at a deficit on a
monthly basis. No assurance can be provided that we will be able to develop
revenues sufficient to support our operations. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of these uncertainties.
Management believes that upon the successful implementation of its
marketing plan, sufficient revenues will be generated to meet operating
requirements. Management also believes that the successful execution of its
proposed plan of operations will generate sufficient cash flow from operations
to enable SmartServ to offer its services on an economically sound basis. No
assurance can be given that such goals will be obtained or that any expected
revenues or cash flows will be achieved.
-14-
<PAGE>
BUSINESS
THE COMPANY
SmartServ Online is a business-to-business Web and wireless application
services provider (ASP) 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 telephones and personal digital assistants.
SERVICES
SmartServ's services and platform solve the problem of ubiquitous Web
access by offering enterprises application development and customization
services, secure and reliable hosting environments, industrial strength
transaction-routing systems and anytime, anywhere access. Recognizing the call
for mobility, we developed an infrastructure to integrate and deliver our
Internet-based information and to effectuate e-commerce transactions on wireless
networks and devices. We offer complete systems to help traditional companies
reach the Web and new-economy companies extend from the Web to the emerging
mobile market. All SmartServ developed and hosted applications are accessible
from the vast array of Web and wireless interactive appliances. We are well
positioned to provide Web-based information and transaction applications and
solutions for Strategic Marketing Partners such as financial institutions,
wireless carriers, device manufacturers and value-added service providers and
retailers. Our core competency focuses on providing financial news and reports
-- including real-time stock quotes -- with the goal of facilitating online and
wireless stock trading and other transactions. To complement our financial
offerings, we also provide a host of personalized information services from
local news, sports and weather to traffic and entertainment services that can be
accessed on demand or as an alert.
We have invested in the development of a transaction engine and an
application software and communications architecture in an attempt to make our
services easy to use and visually appealing, as well as to take advantage of the
different virtues and capabilities of established and emerging devices capable
of interacting with Web-based and Web-to-Wireless applications. We believe that
our application software and communications architecture, which recognize
multiple devices, format the information for the particular device and present
the information in a user-friendly manner, will be attractive in the
marketplace. Product development efforts are focused on providing enhancements
to the current information and transaction services, format modifications for
emerging devices, content and features improvements and customizations based on
market requirements. We intend to continue to invest in this area and believe
our transaction engine, application software and communications architecture
represent an important competitive advantage.
MARKETING STRATEGY
We believe our primary source of revenues will ultimately be derived
from the sale of our information and transactional application services through
Strategic Marketing Partners utilizing a "business-to-business" strategy. We
expect that Strategic Marketing Partners will brand our information and
transaction services with their own private label, promote the packaged
offering, and then distribute these information and e-commerce services to their
clients. Additionally, our e-commerce platform will enable our Strategic
Marketing Partners to offer transaction services via the Internet and wireless
networks. Our strategy of forming alliances with Strategic Marketing Partners
enables us to maximize our market reach at minimal operating costs, improve
product and services performance and grow distribution channels to end-users.
-15-
<PAGE>
In May 1998, we licensed to DTN the rights to market and service three
of our Internet products. DTN, which has over 150,000 subscribers for its
satellite-based information services, lacked an Internet-based product and
delivery system. We filled that need. In June 1999, we entered into an agreement
with DTN that expanded our relationship. In consideration of the receipt of
$5.175 million, we granted DTN an exclusive perpetual worldwide license to our
Internet-based (1) real-time stock quote product, (2) online trading vehicle for
customers of small and medium sized brokerage companies, (3) administrative
reporting package for brokers of small and medium sized brokerage companies and
(4) order entry/routing system. We will continue to operate and support these
products in exchange for a percentage of the revenues earned by DTN therefrom.
None of our wireless products were included in these transactions. During the
year ended June 30, 1998, we discontinued our efforts to sell products directly
to the retail market via our own marketing programs.
As an early entrant in the dynamic market of distribution of financial
information and transaction services via wireless telephones and personal
digital assistants, we are developing strategic marketing relationships with the
wireless equipment manufacturers, carriers, other value-added service providers
and potential corporate partners. We continuously seek to increase product
performance and widen our distribution by building and maintaining this network
of Strategic Marketing Partners. Combining our application development and data
platform with the core competencies of our Strategic Marketing Partners we are
offering a packaged turnkey solution for extending content and transactions to
the wireless environment. Management believes the wireless area has tremendous
potential for distribution of our information products and as a source of
revenues from "fee based" transactions such as routing stock order entries and
other e-commerce offerings.
The market for wireless services is exploding alongside the market for
Internet access, and Management believes that these markets are about to
converge. The majority of wireless data penetration will result from the
distribution of telephones and other PCS devices equipped with wireless modems
and Web browsers for accessing the Internet. Our data and communication
architecture adds user functionality and utility to both wired and wireless
technology. With our Web-server platform, application development and strategic
alliances, we have the competitive advantage of providing complete end-to-end
solutions.
While we continue to have discussions about potential marketing
opportunities with major equipment manufacturers, telecommunications and stock
brokerage companies, there can be no assurance that we will enter into
agreements with any such companies.
COMPETITION
The market for Web-based information and transactional services is
highly competitive and subject to rapid innovation and technological change,
shifting consumer preferences and frequent new service introductions. While our
application software and communications architecture makes the services "device
independent", we face increasing competition from other emerging services
delivered through personal computers, such as developing transactional services
offered by Data Broadcasting Corporation, Electronic Data Systems Corp. and
other Web-based software companies. Established online information services
including those offered by America Online, Inc., offer competing services
delivered through personal computers. Although in its infancy, the wireless
arena too has its competitors, such as DataLink Systems Corporation, I 3 Mobile,
Inc., Aether Systems, Inc. (a/k/a Aether Technologies), 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
-16-
<PAGE>
for our services could limit our ability to expand and materially and adversely
affect our results of operations.
The information content provided through our application software and
communication architecture is generally purchased through non-exclusive
distribution agreements. While we are not dependent on any one content provider,
existing and potential competitors may enter into agreements with these and
other such providers and thereby acquire the ability to deliver online
information and transactional services substantially similar to those provided
us.
The principal competitive factors in both the online and wireless
industries include content, product features and quality, ease of use, access to
distribution channels, brand recognition, reliability and price. Our strategy of
establishing alliances with potential Strategic Marketing Partners and our
ability to provide what we believe to be unique software applications and
communications architecture should enable us to compete effectively.
SOFTWARE
We have developed an application software and communications
architecture that we believe makes our services easy to use and visually
appealing, and which maximize the capabilities of various devices.
Our user-friendly front-end application software provides instant
access to information and flexibility to the varying needs of multiple users.
Subscribers are empowered to create their own groupings of information they
routinely request and are able to navigate directly to the information they seek
with the software's easy to read menu systems and search capabilities. Our
transaction engine has been designed to facilitate various forms of e-commerce.
Our application software employs common user interface techniques, such as
icons, pull-down menus, spreadsheet formats, tree structures and the use of
"key" words, to make our product intuitive to our users. Our software employs a
unique, object-oriented architecture that intelligently identifies a wide range
of wireless and wired devices and formats the information to device-specific
attributes..
During the fiscal years ended June 30, 1999, 1998 and 1997, we incurred
costs of $193,188, $923,082 and $1,150,224, respectively, for research and
project development activities. Additionally, during the fiscal year ended June
30, 1999, we capitalized software development costs amounting to $765,000; no
such costs were capitalized in either of the years ended June 30, 1998 or 1997.
During the nine months ended March 31, 2000, we incurred $240,500 for research
and project development activities and capitalized software development costs of
approximately $846,800.
PROPRIETARY RIGHTS
We have designed and developed our own "device independent" information
and transaction platform, "SmartServ", based on Sun Microsystems, Inc. computers
and Oracle Corp.'s version 7.X relational database manager, to support a 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 e-commerce services, into a user-friendly services' interface.
We rely upon a combination of contract provisions, trade secret laws and a
service mark to attempt to protect our proprietary rights. We license the use of
our services to Strategic Marketing Partners under agreements that contain terms
and conditions prohibiting the unauthorized reproduction of our software and
services. Although we intend to protect our rights vigorously, there can be no
assurance that any of the foregoing measures will be successful.
We granted DTN an exclusive perpetual worldwide license to our
Internet-based (1) real-time stock quote product, (2) online trading vehicle for
customers of small and medium sized brokerage companies, (3)
-17-
<PAGE>
administrative reporting package for brokers of small and medium sized brokerage
companies and (4) order entry/routing system. Under the license agreement, we
are required to maintain certain systems' performance standards and to satisfy
other general business requirements. Our inability to maintain compliance with
the license agreement could result in a default thereunder. In addition, a
change of control of SmartServ is an event of default under the license
agreement. A change of control includes a change in the majority of the members
on our board of directors. Under a letter agreement with Zanett Capital, Inc.,
Zanett Capital may elect a majority of the board under certain circumstances,
including the failure of our common stock to be listed on Nasdaq.
If we default under the license agreement, DTN may at its sole cost
elect to provide its own maintenance to both the system software and related
hardware. Under these circumstances, DTN will have the right to own the system
software, including the source codes, and related hardware, and DTN will have no
further obligation to pay us licensing fees which we currently rely on for a
significant part of our revenues.
We believe that our software, services, 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 applicability 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
We employ thirty-eight people, thirty-seven 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 fifteen people during the period ending December 31, 2000. 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. None of our employees are covered by a collective bargaining
agreement, and we believe that our relationship with our employees is
satisfactory.
-18-
<PAGE>
DESCRIPTION OF PROPERTY
We occupy approximately 6,300 square feet in a leased facility located
in Stamford, Connecticut. The lease expires in October 2002.
LEGAL PROCEEDINGS
On or about June 4, 1999, Michael Fishman, our former Vice President of
Sales, commenced an action against us, Sebastian E. Cassetta, 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
counter-claim, 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 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.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to the
executive officers and directors of SmartServ Online, Inc.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Sebastian E. Cassetta 51 Chief Executive Officer, Secretary, Chairman of the
Board and Class III Director
Alan G. Bozian 46 Senior Vice President and Chief Financial Officer
Mario F. Rossi (4) 61 Senior Vice President of Operations and Class II
Director
Thomas W. Haller, CPA 46 Vice President, Treasurer and Chief Accounting Officer
Richard D. Kerschner 33 Vice President and General Counsel
John Montgomery 38 Vice President of Financial Services
Robert Pearl 32 Vice President of Strategy and Alliances
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Evan Sohn 32 Vice President of Business Development
Claudio Guazzoni (3) 36 Class I Director
Charles R. Klotz 58 Class II Director
Stephen Lawler (4) 36 Class III Director
L. Scott Perry (2) 51 Class I Director
Robert Steele (1) (2) (3) 60 Class II Director
Catherine Cassel Talmadge (2) (3) 47 Class I Director
Charles R. Wood (1) 58 Class III Director
---------------------------------
</TABLE>
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Member of the Finance Committee
(4) Member of the Technology Advisory Committee
SEBASTIAN E. CASSETTA has been Chief Executive Officer, Secretary,
Chairman of the Board and a director of SmartServ since its inception. Mr.
Cassetta was also SmartServ's Treasurer from its inception until March 1996.
From June 1987 to August 1992, Mr. Cassetta was the President of Burns and Roe
Securacom Inc., an engineering and large-scale systems integration firm. He is
also a former Director, Managing Director and Vice President of Brinks Inc. At
Brinks, he expanded international operations in over 15 countries and became the
youngest person to be appointed Vice President in Brinks' 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 SmartServ as Senior Vice President & Chief
Financial Officer in May 2000. Prior to joining SmartServ, 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 SmartServ from
December 1994 to February 1998 when he was promoted to Senior Vice President,
Operations and Chief Technology Officer and was appointed a director of
SmartServ. 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 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 SmartServ as Vice President, Treasurer and
Chief Financial Officer in March 1996. He served as SmartServ's Chief Financial
Officer until June 2000, when he became SmartServ's Chief Accounting Officer.
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 SmartServ as Vice President and General
Counsel in April 2000. Prior thereto Mr. Kerschner was Managing Counsel at
Omnipoint Communications, a leading wireless
-20-
<PAGE>
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 the 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 SmartServ in April 2000 with over 15 years of
global and domestic securities experience. From January 1999 to January 2000 Mr.
Montgomery was a Director of and from April 1997 to January 1999 was a Vice
President of SG Gowen 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 SmartServ in September 1998 with over 7 years of
wireless industry experience. He is responsible for developing SmartServ's
wireless strategy and consummating relationships with key business and
technology strategic alliances. Mr. Pearl is a co-founder and former co-chairman
of the WAP Forum's Developer Expert Group. Prior to joining SmartServ, 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.
EVAN SOHN joined SmartServ Online in March 2000 as the Vice President
of Business Development. Prior thereto, Mr. Sohn was the Vice President of
Business Development of the Strategic Technologies division of IMS Health from
December 1998 to March 2000. He joined Strategic Technologies upon its
acquisition of Logix, Inc., a company he founded in 1989 and of which he served
as President. Logix was a leading provider of mobile and handheld applications
in areas of sales force automation, financial services, wireless communication
and medical information.
CLAUDIO GUAZZONI became a director of SmartServ on January 11, 1998.
Since 1993, Mr. Guazzoni has been President of The Zanett Securities Corporation
(now known as the Planet Zanett Internet Incubator) and Zanett Capital, Inc.
providing financial and strategic consulting services to growth companies. Prior
to joining the Zanett organization, Mr. Guazzoni was a Money Manager with Delphi
Capital Management, Inc. (1992) and an associate with Salomon Brothers, Inc.
from 1985 to 1991.
CHARLES R. KLOTZ became a director of SmartServ 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 1985-1998
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 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 SmartServ on December 28,
1999. He has been the Group Product Manager for the Mobile Internet Business
Unit at Microsoft Corporation since April 1999. Mr. Lawler's experience includes
all aspects of engineering including software development, program management,
quality assurance and documentation. Additionally, he has directed product
marketing teams, program management teams and engineering teams. From 1992 to
April 1999, he worked for MapInfo Corporation where he was a member of the
Executive Team, the Managing Director of Product Marketing and Product
Management and the Managing Director of Software Development and Product
Development.
-21-
<PAGE>
L. SCOTT PERRY has been a director of SmartServ since November 1996.
Since June 1998, Mr. Perry has been Vice President, Strategy & Alliances - AT&T
Solutions. From December 1995 to June 1998, Mr. Perry had been Vice President,
Advanced Platform Services of AT&T Corp. From January 1989 to December 1995, Mr.
Perry held various positions with AT&T including Vice President -- Business
Multimedia Services, Vice President (East) -- Business Communications Services
and Vice President -- Marketing, Strategy and Technical Support for AT&T Data
Systems Group. Mr. Perry serves on the Board of Directors of Junior Achievement
of New York, is a member of the Cornell University Engineering College Advisory
Council and serves on the Board of INEA, a private financial planning software
company based in Toronto, Canada.
ROBERT STEELE was appointed a director of SmartServ on February 23,
1998. Since February 1998, Mr. Steele has been Vice Chairman of the John Ryan
Company, an international bank support and marketing company. From 1992 to
February 1998, Mr. Steele was a Senior Vice President of the John Ryan Company.
Mr. Steele is the former President of Dollar Dry Dock Bank and a member of the
Board of Directors of Moore Medical Corp., Scan Optics, Inc. Accent Color
Sciences, Inc., NLC Insurance Companies, Inc. and the New York Mercantile
Exchange.
CATHERINE CASSEL TALMADGE has been a director of SmartServ since March
1996. Since May 1999, Ms. Talmadge has been Senior Vice President of Business
Development for High Speed Access Corporation. From September 1984 to May 1999,
she held various positions with Time Warner Cable, a division of Time Warner
Entertainment Company, L.P., including Vice President, Cable Programming;
Director, Programming Development; Director, Operations; Director, Financial
Analyses; and Manager, Budget Department.
CHARLES R. WOOD was appointed a director of SmartServ in September
1998. Mr. Wood was Senior Vice President of DTN and President of its Financial
Services Division, from 1989 and 1986, respectively, until February 28, 2000.
BOARD OF DIRECTORS
The Board of Directors consists of nine directors divided into three
classes: Class I Directors, Class II Directors and Class III Directors. The
Class I and Class III Directors will serve until the 1999 annual meeting and the
Class II Directors will serve until the 2000 annual meeting or, in each case,
until their respective successors are duly elected and qualified or until their
earlier resignation or removal. Upon such annual meetings of stockholders, the
Class III Directors will serve until the annual meeting of SmartServ's
stockholders to be held in 2001, the Class I Directors will serve until the
annual meeting of SmartServ's stockholders to be held in 2002 and the Class II
Directors will serve until the annual meeting of SmartServ's stockholders to be
held in 2003. Directors of each Class are elected for a full term of three years
(or any lesser period representing the balance of the previous term of such
Class) and until their respective successors are duly elected and qualified or
until their earlier resignation or removal. Officers are appointed annually and
serve at the discretion of the Board for one year. Under a Stock Purchase
Agreement dated May 15, 2000, TecCapital Ltd. has the right to designate one
member of SmartServ's Board of Directors. Messrs. Cassetta and Rossi agreed to
vote all shares of SmartServ held by them, representing approximately 18.83% of
the outstanding stock of SmartServ, to elect the director designated by
TecCapital. In the event of a default under SmartServ's prepaid warrants,
SmartServ will, at the request of Zanett Capital, Inc., appoint such number of
designees of Zanett Capital, Inc. to its Board of Directors so that the
designees of Zanett Capital, Inc. will constitute a majority of the members of
the Board of Directors of SmartServ. Further, Messrs. Cassetta and Francesco
have agreed to vote their shares of common stock, representing approximately
15.27% of the outstanding stock of SmartServ, in favor of such designees of
Zanett Capital, Inc., at each Annual Meeting of Stockholders of SmartServ at
which directors are elected.
-22-
<PAGE>
BOARD COMMITTEES
The Compensation Committee, currently composed of Messrs. Wood and
Steele, has authority over officer compensation and administers our employee
stock option plans.
The Audit Committee, currently composed of Messrs. Steele and Perry and
Ms. Talmadge, serves as the Board's liaison with our auditors.
The Finance Committee, currently composed of Mr. Guazzoni, Mr. Steele
and Ms. Talmadge, reviews expenditures of SmartServ.
The Technology Advisory Committee, currently composed of Messrs. Lawler
and Rossi, is responsible for identifying new technologies and markets therefor.
COMPENSATION OF DIRECTORS
Each director who is not an officer or employee of SmartServ is
reimbursed for his or her out-of-pocket expenses incurred in connection with
attendance at meetings or other company business. Between December 29, 1998 and
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 may receive up to $1,000 per meeting attended.
Between November 4, 1996 and April 24, 1998, each person who was not a
salaried employee of SmartServ was granted, on the date he or she became a
director, an option to purchase 5,000 shares of common stock and immediately
following each annual meeting of stockholders at which directors were elected,
each such person elected to serve as a director at that annual meeting or who
remained a director following that annual meeting was granted an option to
purchase 5,000 shares of common stock. Subsequent to April 24, 1998, the
Compensation Committee has had the discretionary authority to grant options to
non-employee directors. Pursuant to such authority, on December 28, 1998 and
October 13, 1999 it granted options to purchase 10,000 shares of common stock at
a price of $2.35 and $.9375, respectively, to each non-employee director. The
exercise price of each share of common stock under any option granted to a
director was equal to the fair market value of a share of common stock on the
date the option was granted.
EXECUTIVE COMPENSATION
The following table sets forth information concerning annual and
long-term compensation, paid or accrued, for the Chief Executive Officer and for
each other executive officer (the "Named Executive Officers") of SmartServ whose
compensation exceeded $100,000 in fiscal 1999 for services in all capacities to
SmartServ during the last three fiscal years.
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------------------------------------------------------
RESTRICTED SECURITIES
NAME AND PRINCIPAL FISCAL OTHER ANNUAL STOCK AWARDS UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION (1) (2) OPTIONS COMPENSATION
-------------------------- -------- ------------- ---------- ------------------ --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sebastian E. Cassetta 1999 $ 155,000 $ 5,414 $ 9,750 $ 185,471(3) 92,000 (5) $24,416(8)
Chief Executive 1998 125,000 -- 9,750 -- 37,500 (6) -- (9)
Officer 1997 125,000 -- 9,750 -- 16,666 (6) -- (9)
Mario F. Rossi 1999 122,500 3,249 6,000 61,824(4) 67,500 (7) -- (9)
</TABLE>
-23-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Vice President 1998 92,400 -- 6,000 -- 20,834 (6) -- (9)
of Operations 1997 75,000 -- 6,000 -- 4,416 (6) -- (9)
</TABLE>
(1) Amounts shown consist of a non-accountable expense allowance.
(2) The Named Executive Officers did not receive any LTIP Payouts in 1999, 1998
or 1997.
(3) On December 29, 1998, the Board of Directors approved the sale to Mr.
Cassetta of 618,239 shares of restricted stock representing 9% of the fully
diluted shares of common stock of SmartServ. Compensation has been
determined as the number of shares awarded to Mr. Cassetta times the
closing price of SmartServ's common stock on December 29, 1998 ($2.50) less
the consideration to be paid by Mr. Cassetta. At June 30, 1999, based upon
the closing bid price ($1.50) of SmartServ's common stock, the value of Mr.
Cassetta's shares was $0. On October 13, 1999, the Board of Directors
agreed to reprice the shares granted to Mr. Cassetta to $.75 per share, the
fair value of the shares at that date. Through December 31, 1999, the
purchase of this restricted stock was recorded as a variable award pursuant
to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees". In accordance therewith, SmartServ's results of operations
for the six months ended December 31, 1999 includes a noncash compensation
charge of $11,727,000 for the change in the fair value of its common stock
at December 31, 1999.
(4) On December 29, 1998, the Board of Directors approved the sale to Mr. Rossi
of 206,080 shares of restricted stock representing 3% of the fully diluted
shares of common stock of SmartServ. Compensation has been determined as
the number of shares awarded to Mr. Rossi times the closing price of
SmartServ's common stock on December 29, 1998 ($2.50) less the
consideration to be paid by Mr. Rossi. At June 30, 1999, based upon the
closing bid price ($1.50) of SmartServ's common stock, the value of Mr.
Rossi's shares was $0. On October 13, 1999, the Board of Directors agreed
to reprice the shares granted to Mr. Rossi to $.75 per share, the fair
value of the shares at that date. Through December 31, 1999, the purchase
of this restricted stock was recorded as a variable award pursuant to
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". In accordance therewith, SmartServ's results of operations for
the six months ended December 31, 1999 includes a noncash compensation
charge of $3,909,000 for the change in the fair value of its common stock
at December 31, 1999.
(5) Includes options for the purchase of 37,500 shares which were cancelled
when repriced options to purchase a like number of shares were granted in
lieu thereof.
(6) Such options were cancelled when repriced options were granted in lieu
thereof in fiscal 1999.
(7) Includes options for the purchase of 25,250 shares which were cancelled
when repriced options to purchase a like number of shares were granted in
lieu thereof.
(8) Amounts represent premiums paid by SmartServ for life and disability
insurance for the benefit of Mr. Cassetta.
(9) The aggregate amount of personal benefits not included in the Summary
Compensation Table does not exceed the lesser of either $50,000 or 10% of
the total annual salary and bonus paid to the Named Executive Officers.
-24-
<PAGE>
STOCK OPTIONS
The following table sets forth information with respect to stock
options granted to the Named Executive Officers during fiscal year 1999:
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL 1999
(INDIVIDUAL GRANTS) (1)
-----------------------
NUMBER OF % OF TOTAL OPTIONS
SECURITIES UNDERLYING GRANTED TO EMPLOYEES IN EXERCISE EXPIRATION
NAME OPTIONS GRANTED FISCAL 1999 PRICE DATE
-------------------------- ----------------------- ------------------------- ------------------- ---------------------
<S> <C> <C> <C> <C> <C>
Sebastian E. Cassetta 17,000 3.66% $ 1.625 11/19/08
37,500 8.08 1.290 10/07/08
37,500 (2) 8.08 2.530 8/06/08
Mario F. Rossi 17,000 3.66 1.625 11/19/08
25,250 5.44 1.290 10/07/08
25,250 (2) 5.44 2.530 8/06/08
</TABLE>
(1) No stock appreciation rights ("SARs") were granted to the Named Executive
Officers during fiscal 1999.
(2) Cancelled on October 8, 1998.
The following table sets forth information as to the number of unexercised
shares of common stock underlying stock options and the value of unexercised
in-the-money stock options at fiscal year end:
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUE (1)(2)
-----------------------------------
VALUE OF
NUMBER OF UNEXERCISED IN-
UNEXERCISED THE-MONEY
SECURITIES UNDERLYING OPTIONS AT
UNDERLYING OPTIONS FISCAL YEAR
AT FISCAL YEAR END END
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
------------------------------ -------------------- ----------------- -------------------------- ---------------------
<S> <C> <C>
Sebastian E. Cassetta -- -- 0/54,499 $0/$7,874
Mario F. Rossi -- -- 0/42,249 $0/$5,302
</TABLE>
(1) No SARs were granted to, or exercised by, the Named Executive Officers
during fiscal 1999.
(2) Value is based on the closing bid price of SmartServ's common stock as
reported by the OTC Bulletin Board on June 30, 1999 ($1.50) less the
exercise price of the option.
EMPLOYMENT AGREEMENTS
SmartServ and Mr. Cassetta have entered into an employment agreement
("Cassetta Agreement"), effective January 1, 1999 and expiring on December 31,
2001, providing for (1) base compensation of $185,000 per annum, (2) additional
compensation of up to 100% of base compensation and (3) the sale to
-25-
<PAGE>
him of 618,239 shares of restricted stock representing 9% of the fully diluted
shares of common stock of SmartServ. Mr. Cassetta's additional compensation will
be equal to 10% of his base compensation for each 10% increase in sales during
the first year of the Cassetta Agreement, subject to a maximum of 100% of base
compensation. In each subsequent year of the Cassetta Agreement, Mr. Cassetta
will receive additional compensation equal to 5% of his base compensation for
each 5% increase in sales, subject again to a maximum of 100% of base
compensation. The purchase price ($2.20 per share) of the restricted stock was
equal to 110% of the fair market value of SmartServ's common stock for the 30
days preceding the date of the stock purchase agreement ("Cassetta Stock
Purchase Agreement") contemplated by the Cassetta Agreement. On October 13,
1999, the Board of Directors agreed to reprice the shares granted to Mr.
Cassetta to $.75 per share, the fair market value of the shares at that date.
$6,182.39 of the purchase price has been paid in cash and the balance by a 5
year, non-recourse promissory note, secured by the stock, at an interest rate of
6.75%, which is 1% below the prime rate on the date of the Cassetta Stock
Purchase Agreement. The Cassetta Stock Purchase Agreement provides SmartServ
with certain repurchase options and provides Mr. Cassetta with a put option in
the event of the termination of his employment. In the event that Mr. Cassetta's
employment is terminated without cause, Mr. Cassetta will receive a lump sum
severance payment equal to his full base salary for the remaining term of the
Cassetta Agreement, discounted to the present value using an 8% discount rate
and continuing benefit coverage for the lesser of 12 months or the remaining
term of the Cassetta Agreement. On December 28, 1999, the Board of Directors of
the Company approved the payment to Mr. Cassetta in stock of the bonus payable
to him for 1999 under his employment agreement. Pursuant thereto, in March 2000
the Company issued 148,000 shares of common stock to Mr. Cassetta.
SmartServ and Mr. Rossi have entered into an employment agreement
("Rossi Agreement"), effective January 1, 1999 and expiring on December 31,
2001, providing for (1) base compensation of $135,000 per annum, (2) additional
compensation of up to 50% of base compensation and (3) the sale to him of
206,080 shares of restricted stock representing 3% of the fully diluted shares
of common stock of SmartServ. Mr. Rossi's additional compensation will be equal
to 5% of his base compensation for each 10% increase in sales during the first
year of the Rossi Agreement, subject to a maximum of 50% of base compensation.
In each subsequent year of the Rossi Agreement, Mr. Rossi will receive
additional compensation equal to 2.5% of base compensation for each 5% increase
in sales, subject again to a maximum of 50% of base compensation. The purchase
price ($2.20 per share) of the restricted stock was equal to 110% of the fair
market value for the 30 days preceding the date of the stock purchase agreement
("Rossi Stock Purchase Agreement") contemplated by the Rossi Agreement. On
October 13, 1999, the Board of Directors agreed to reprice the shares granted to
Mr. Rossi to $.75 per share, the fair market value of the shares at that date.
$2,060.80 of the purchase price has been paid in cash and the balance by a 5
year, non-recourse promissory note, secured by the stock, at an interest rate of
6.75%, which is 1% below the prime rate on the date of the Rossi Stock Purchase
Agreement. The Rossi Stock Purchase Agreement provides SmartServ with certain
repurchase options and provides Mr. Rossi with a put option in the event of the
termination of his employment. In the event that Mr. Rossi's employment is
terminated without cause, Mr. Rossi will receive a lump sum severance payment
equal to his full base salary for the remaining term of the Rossi Agreement,
discounted to the present value using an 8% discount rate and continuing benefit
coverage for the lesser of 12 months or the remaining term of the Rossi
Agreement. On December 28, 1999, the Board of Directors of the Company approved
the payment to Mr. Rossi in stock of the bonus payable to him for 1999 under his
employment agreement. Pursuant thereto, in March 2000 the Company issued 54,000
shares of common stock to Mr. Rossi.
SmartServ and Mr. Bozian have entered into an employment agreement
("Bozian Agreement"), effective May 29, 2000 and expiring on May 29, 2003,
providing for (1) base compensation of $250,000 per annum, (2) a merit bonus of
up to 50% of base compensation, (3) the grant to him of options to purchase an
aggregate of 175,000 shares of stock at an exercise price of $49.50 per share
and (4) reimbursement of certain moving and other expenses. In the event that
Mr. Bozian's employment is terminated without cause,
-26-
<PAGE>
he will receive a lump sum severance payment equal to his full base salary for
the remaining term of the Bozian 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 Bozian Agreement.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of July 10, 2000, certain
information with respect to the beneficial ownership of the common stock by (1)
each person known by SmartServ to beneficially own more than 5% of the
outstanding shares, (2) each director of SmartServ, (3) each Named Executive
Officer and (4) all executive officers and directors of SmartServ as a group.
Except as otherwise indicated, each person listed below has sole voting and
investment power with respect to the shares of common stock set forth opposite
such person's name.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP (2) OUTSTANDING SHARES (3)
-------------------- ------------------------ ----------------------
<S> <C> <C>
Sebastian E. Cassetta 856,241 (4) 15.27%
c/o SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902
Steven Rosner 411,300 (5) 7.11%
1220 Mirabeau Lane
Gladwyn, Pennsylvania 19035
TecCapital Ltd. 303,030 5.43%
c/o Berwick Management, Inc.
150 Federal Street, 19th Floor
Boston, MA 02110
Data Transmission Network Corporation 285,000 (6) 5.02%
9110 West Dodge Road
Omaha, Nebraska 68114
Mario F. Rossi 281,954 (7) 5.04%
c/o SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902
Claudio Guazzoni 93,699 (8) 1.65%
L. Scott Perry 25,833 (9) *
Catherine Cassel Talmadge 25,816 (9) *
Stephen Lawler 20,000 (10) *
Robert H. Steele 14,166 (11) *
Charles R. Wood 14,000 *
</TABLE>
-27-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Charles R. Klotz 0 (12) *
All executive officers and directors
as a group (15 persons) 1,455,973 (13) 24.90%
</TABLE>
* Less than 1% of the outstanding common stock
(1) Under the rules of the Securities and Exchange Commission (SEC), addresses
are only given for holders of 5% or more of the outstanding common stock of
SmartServ.
(2) Under the rules of the SEC, a person is deemed to be the beneficial owner
of a security if such person has or shares the power to vote or direct the
voting of such security or the power to dispose or direct the disposition
of such security. A person is also deemed to be a beneficial owner of any
securities if that person has the right to acquire beneficial ownership
within 60 days of the date hereof. Unless otherwise indicated by footnote,
the named entities or individuals have sole voting and investment power
with respect to the shares of common stock beneficially owned.
(3) Represents the number of shares of common stock beneficially owned as of
July 10, 2000 by each named person or group, expressed as a percentage of
the sum of all of the shares of such class outstanding as of such date and
the number of shares not outstanding, but beneficially owned by such named
person or group.
(4) Includes 27,249 shares of common stock subject to currently exercisable
options. Also includes 2,051 shares held in trust for the benefit of Mr.
Cassetta's wife.
(5) Includes 208,000 shares of common stock subject to currently exercisable
warrants.
(6) Includes 100,000 shares of common stock subject to currently exercisable
warrants.
(7) Includes 21,124 shares of common stock subject to currently exercisable
options.
(8) Includes 24,166 shares of common stock subject to currently exercisable
options. Also includes 69,533 shares of common stock subject to currently
exercisable warrants.
(9) Includes 25,000 shares of common stock subject to currently exercisable
options.
(10) Represents 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) 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,
268,236 shares of common stock subject to currently exercisable options and
warrants issued to all executive officers and directors.
CHANGES IN CONTROL
SmartServ and each of Messrs. Cassetta and Francesco have entered into
an agreement with Zanett Capital, Inc. dated September 29, 1997, as subsequently
amended, which provides, among other things, that
-28-
<PAGE>
for a period of 5 years, upon an event of default under the prepaid warrants,
SmartServ will, at the request of Zanett Capital, Inc., appoint such number of
designees of Zanett Capital, Inc. to its Board of Directors so that the
designees of Zanett Capital, Inc., will constitute a majority of the members of
the Board of Directors of SmartServ. Further, Messrs. Cassetta and Francesco
have agreed to vote their shares of common stock, representing approximately
15.27% of the outstanding stock of SmartServ, in favor of the designees of
Zanett Capital, Inc., at each Annual Meeting of Stockholders of SmartServ at
which directors are elected.
SELLING STOCKHOLDERS
The shares being offered for resale by the selling stockholders consist
of the shares of common stock issued in our May 2000 private placement, the
shares of common stock held by certain financial consultants and shares of
common stock issuable upon exercise of stock purchase warrants held by (a)
several investors who have held such warrants since prior to our initial public
offering and (b) several financial, marketing and technical consultants. Other
than consulting arrangements with Bruno Guazzoni, Andrew Seybold Group, LLC,
InterBank Funding Corp., Ehrenkrantz King Nussbaum, Inc., Michael Kramer,
Lindquist Global Advisors, LLC, Steven Rosner and Brauning Associates (of which
Michael P. Silva and Todd M. Peterson are principals and transferees),
investment advisory relationships with The Zanett Securities Corporation, (of
which Claudio Guazzoni, a director of SmartServ, is a principal) and that
Charles R. Klotz is a director of SmartServ and designee of TecCapital, Ltd.,
none of the selling stockholders has, and, within the past three years, none has
had, any position, office or other material relationship with us or any of our
predecessors or affiliates.
The following table sets forth the name of the selling stockholders,
the number of shares of common stock beneficially owned by the selling
stockholders as of July 10, 2000 and the number of shares of common stock being
offered by the selling stockholders. The shares being offered hereby are being
registered to permit public secondary trading, and the selling stockholders may
offer all or part of the shares for resale from time to time. However, the
selling stockholders are under no obligation to sell all or any portion of such
shares nor are the selling stockholders obligated to sell any shares immediately
under this prospectus. All information with respect to share ownership has been
furnished by the selling stockholders. Because the selling stockholders may sell
all or part of their shares, no estimates can be given as to the number of
shares of common stock that will be held by the selling stockholders upon
termination of any offering made hereby.
<TABLE>
<CAPTION>
Shares of Common Stock Shares of Common Beneficial Ownership
Beneficially Stock After Offering If All
Selling Stockholders Owned to be Sold Shares Are Sold
-------------------- ----- ---------- ---------------
<S> <C> <C> <C>
TecCapital, Ltd. 303,030 303,030 --
The Abernathy Group 20,202 20,202 --
Hare & Co. 30,303 30,303 --
John E. Herzog 4,167 4,167 --
Andrew DaPonte 3,750 3,750 --
Emanuel E. Geduld 2,083 2,083 --
Anchung Sammy Chung and Fong-Chi Alison
Taso 1,250 1,250 --
Alexandra Building Corp. 833 833 --
Andrew Seybold Group, LLC 10,000 10,000 --
InterBank Funding Corp. 4,309 4,309 --
</TABLE>
-29-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Ehrenkrantz King Nussbaum, Inc. 16,667 16,667 --
Michael Kramer 16,000 16,000 --
Lindquist Global Advisors, LLC 0 50,000 (1) --
Steven Rosner 411,300 8,000 403,300
Bruno Guazzoni 116,866 116,866 --
Zanett Lombardier, Ltd. 9,227 9,227 --
Samuel L. Milbank 4,406 4,406 --
David M. McCarthy 8,811 8,811 --
Claudio Guazzoni 8,811 8,811 --
Michael P. Silva 40,000 40,000 --
Todd M. Peterson 10,000 10,000 --
------ ------- ----
Total 1,022,015 668,715 403,300
======= ======= =======
</TABLE>
-----------------------------
(1) Represents 50,000 shares underlying warrants to purchase such shares
that are not included in shares of common stock beneficially owned
because the warrants are not currently exercisable nor will be within
the next 60 days.
We agreed with Zanett Lombardier, Ltd. and Bruno Guazzoni to register
the underlying shares of common stock pursuant to the antidilution provisions of
warrants issued to them. They agreed that they will not exercise their warrants
to the extent that they would beneficially own more than 4.99% of our common
stock. They can waive this restriction on 61 days notice.
PLAN OF DISTRIBUTION
The shares may be sold or distributed from time to time by the selling
stockholders or by pledgees, donees or transferees of, or successors in interest
to, the selling stockholders, directly to one or more purchasers (including
pledgees) or through brokers, dealers or underwriters who may act solely as
agents or may acquire shares as principals, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices, at negotiated
prices or at fixed prices, which may be changed. The distribution of the shares
may be effected in one or more of the following methods:
o ordinary brokers transactions, which may include long or short sales,
o transactions involving cross or block trades or otherwise on the OTC
Bulletin Board,
-30-
<PAGE>
o purchases by brokers, dealers or underwriters as principal and resale
by such purchasers for their own accounts pursuant to this prospectus,
o "at the market" to or through market makers or into an existing market
for the common stock,
o in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected
through agents,
o through transactions in options, swaps or other derivatives (whether
exchange listed or otherwise), or
o any combination of the foregoing, or by any other legally available
means.
In addition, the selling stockholders may enter into hedging
transactions with broker-dealers who may engage in short sales of shares in the
course of hedging the positions they assume with the selling stockholders. The
selling stockholders may also enter into option or other transactions with
broker-dealers that require the delivery by such broker-dealers of the shares,
which shares may be resold thereafter pursuant to this prospectus.
Brokers, dealers, underwriters or agents participating in the
distribution of the shares may receive compensation in the form of discounts,
concessions or commissions from the selling stockholders and/or the purchasers
of shares for whom such broker-dealers may act as agent or to whom they may sell
as principal, or both (which compensation as to a particular broker-dealer may
be in excess of customary commissions). The selling stockholders and any
broker-dealers acting in connection with the sale of the shares hereunder may be
deemed to be underwriters within the meaning of Section 2(11) of the Securities
Act of 1933, and any commissions received by them and any profit realized by
them on the resale of shares as principals may be deemed underwriting
compensation under the Securities Act of 1933. Neither SmartServ nor the selling
stockholders can presently estimate the amount of such compensation. SmartServ
knows of no existing arrangements between the selling stockholders and any other
stockholder, broker, dealer, underwriter or agent relating to the sale or
distribution of the shares.
SmartServ will not receive any proceeds from the sale of the shares
pursuant to this prospectus. SmartServ has agreed to bear the expenses of the
registration of the shares, including legal and accounting fees, and such
expenses are estimated to be approximately $42,000.
SmartServ has informed the selling stockholders that while they are
engaged in a distribution of the shares included in this prospectus they are
required to comply with certain anti-manipulative rules contained in Regulation
M under the Securities Exchange Act of 1934. With certain exceptions, Regulation
M precludes the selling stockholders, any affiliated purchasers, and any
broker-dealer or other person who participates in such distribution from bidding
for or purchasing, or attempting to induce any person to bid for or purchase any
security which is the subject of the distribution until the entire distribution
is complete. Regulation M also prohibits any bids or purchases made in order to
stabilize the price of a security in connection with the distribution of that
security. All of the foregoing may affect the marketability of the shares
offered by this prospectus.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 24, 1999, SmartServ and DTN entered into an agreement that
amended the Software License and Service Agreement dated April 23, 1998. In
consideration of the receipt of $5.175 million, SmartServ granted DTN an
exclusive perpetual worldwide license to SmartServ's Internet-based (1)
real-time stock quote product, (2) online trading vehicle for customers of small
and medium sized brokerage companies, (3) administrative reporting package for
brokers of small and medium sized brokerage companies
-31-
<PAGE>
and (4) order entry/routing system. Additionally, SmartServ received $324,000 in
exchange for an agreement to issue warrants to purchase 300,000 shares of
SmartServ's common stock at an exercise price of $8.60 per share. SmartServ has
agreed to continue to operate these products and provide maintenance and
enhancement services in exchange for a percentage of the revenues earned by DTN
therefrom. The cost of SmartServ's commitment to provide such maintenance and
enhancement services is limited to a maximum of 20% of the revenues earned by
SmartServ. Charles R. Wood, a director of SmartServ, was until February 28,
2000, Senior Vice President of DTN and President of its Financial Services
Division.
SmartServ believes that the terms of the transactions described above
were no less favorable to SmartServ than would have been obtained from a
non-affiliated third party for similar transactions at the time of entering into
such transactions. In accordance with SmartServ's policy, such transactions were
approved by a majority of the independent disinterested directors of SmartServ.
DESCRIPTION OF CAPITAL STOCK
The following is a summary description of our capital stock and certain
provisions of our Amended and Restated Certificate of Incorporation and By-Laws,
copies of which have been incorporated by reference as exhibits to the
registration statement of which this prospectus forms a part. The following
discussion is qualified in its entirety by reference to such exhibits. We have
also included a summary description of only those warrants held by selling
stockholders and we have not described any of our other outstanding warrants.
GENERAL
Our authorized capital stock consists of 40,000,000 shares of common
stock, par value $.01 per share, and 1,000,000 shares of preferred stock, par
value $.01 per share. As of August 2, 2000, we had 5,776,870 shares of common
stock issued and outstanding. No shares of preferred stock are issued and
outstanding. We have reserved 4,513,930 shares of common stock for issuance
pursuant to outstanding options and warrants.
COMMON STOCK
The holders of the common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders. Our Amended
and Restated Certificate of Incorporation and By-Laws do not provide for
cumulative voting rights in the election of directors. Accordingly, holders of a
majority of the shares of common stock entitled to vote in any election of
directors may elect all of the directors standing for election. Holders of
common stock are entitled to receive ratably such dividends as may be declared
by the Board out of funds legally available therefor. In the event of our
liquidation, dissolution or winding up, holders of common stock are entitled to
share ratably in the assets remaining after payment of liabilities. Holders of
common stock have no preemptive, conversion or redemption rights. All of the
outstanding shares of common stock are fully-paid and nonassessable.
PREFERRED STOCK
Our Board of Directors may, without stockholder approval, establish and
issue shares of one or more classes or series of preferred stock having the
designations, number of shares, dividend rates, liquidation preferences,
redemption provisions, sinking fund provisions, conversion rights, voting rights
and other rights, preferences and limitations that our Board may determine. The
Board may authorize the issuance of preferred stock with voting, conversion and
economic rights senior to the common stock so that the issuance of preferred
stock could adversely affect the market value of the common stock. The creation
of one or more series of preferred stock may adversely affect the voting power
or other rights of the holders of common stock. The issuance of preferred stock,
while providing flexibility in connection with possible acquisitions
-32-
<PAGE>
and other corporate purposes could, among other things and under some
circumstances, have the effect of delaying, deferring or preventing a change in
control without any action by stockholders.
WARRANTS
Between September 1995 and March 1996 we issued to certain bridge
lenders warrants to purchase 155,211 shares of common stock at an exercise price
of $7.731 per share, subject to adjustment in certain events. Unless exercised,
the warrants will automatically expire on March 20, 2001.
On March 21, 1996 in our initial public offering we issued 1,725,000
Redeemable Common Stock Purchase Warrants pursuant to a warrant agreement, or
the Warrant Agreement, between us, Rickel & Associates, Inc., Continental Stock
Transfer & Trust Company, as warrant agent, and others. Pursuant to the terms of
the Warrant Agreement, such warrants are currently convertible into 892,461
shares of common stock. Upon surrender of 1.933 warrants and $7.731, the
registered holder would be entitled to receive one share of common stock. Such
conversion formula remains subject to adjustment in certain events. Unless
exercised, the warrants will automatically expire on March 20, 2001. The
warrants are subject to redemption by the Company at a redemption price of $.10
per warrant at any time, upon not less than 30 days prior written notice to the
holders of the warrants, provided the average closing bid quotation of the
common stock has been at least 187.5% of the then 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. The warrants will be
exercisable until the close of business on the day immediately preceding the
date fixed for redemption. The Warrant Agreement may be amended, subject to
certain exceptions, by us and the warrant agent with the written consent of the
holders of at least a majority of the warrants.
Prior to our initial public offering, we issued to Alexandra Building
Corp., John E. Herzog, Andrew DaPonte, Emanuel E. Geduld, Anchung Sammy Chung
and Fong-Chi Alison Tsao, for nominal consideration, warrants to purchase an
aggregate of 12,083 shares of common stock at an exercise price of $24.00 per
share during the period ending March 21, 2001.
On January 1, 1999, we issued to Andrew Seybold Group, LLC a warrant to
purchase 10,000 shares of common stock at an exercise price of $2.50 per share.
These warrants were issued as partial consideration for marketing consulting
services provided to the Company and expire on December 31, 2001.
On November 19, 1999, we issued to Michael Kramer a warrant to purchase
16,000 shares of common stock at an exercise price of $17.75. These warrants
were issued as partial consideration for technical consulting services provided
to the Company and expire on November 18, 2002.
On December 31, 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 the Company and expire on December 31, 2002.
On January 4, 2000, we issued to Steven Rosner, a warrant to purchase
8,000 shares of common stock at an exercise price of $18.375. This warrant was
issued as partial consideration for financial consulting services to be provided
to the Company and expires on July 2, 2003.
On January 7, 2000, we issued 16,667 shares of common stock to
Ehrenkrantz King Nussbaum, Inc. upon exercise of warrants.
-33-
<PAGE>
On March 15, 2000, we issued 4,309 shares of common stock to InterBank
Funding Corp. upon exercise of warrants.
On April 5, 2000, we issued 1,250 shares of common stock to Anchung
Sammy Chung and Fong-Chi Alison Tsao upon exercise of warrants.
On May 1, 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. This
warrant was issued as partial consideration for financial consulting services to
be provided to the Company and will expire on April 30, 2003.
The warrants may be exercised in whole or in part, subject to the
limitations provided in the warrants. Any warrant holders who do not exercise
their warrants prior to the conclusion of the exercise period will forfeit the
right to purchase the shares of common stock underlying the warrants and any
outstanding warrants will become void and be of no further force or effect.
Holders of the warrants have no voting, preemptive, liquidation or
other rights of a stockholder, and no dividends will be declared on the
warrants.
We have agreed to pay all registration expenses incurred in connection
with the registration of the common stock issuable upon exercise of the
warrants.
DELAWARE BUSINESS COMBINATION PROVISIONS
We are governed by the provisions of Section 203 of the Delaware
General Corporation Law ("DGCL"). In general, this statute prohibits a publicly
held Delaware corporation from engaging, under certain circumstances, in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder unless:
o prior to the date at which the stockholder became an interested
stockholder, the Board of Directors approved either the business
combination or the transaction in which the person became an interested
stockholder;
o the stockholder acquired more than 85% of the outstanding voting stock of
the corporation (excluding shares held by directors who are officers and
shares held in certain employee stock plans) upon consummation of the
transaction in which the stockholder became an interested stockholder; or
o the business combination is approved by the Board of Directors and by at
least 66-2/3% of the outstanding voting stock of the corporation (excluding
shares held by the interested stockholder) at a meeting of stockholders
(and not by written consent) held on or after the date such stockholder
became an interested stockholder.
An "interested stockholder" is a person who, together with affiliates
and associates, owns (or at any time within the prior three years did own) 15%
or more of the corporation's voting stock. Section 203 defines a "business
combination" to include, without limitation, mergers, consolidations, stock
sales and asset-based transactions and other transactions resulting in a
financial benefit to the interested stockholder.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102(b)(7) of the DGCL enables a corporation in its original
certificate of incorporation or an amendment thereto to eliminate or limit the
personal liability of a director to a corporation or its stockholders for
violations of the director's fiduciary duty, except:
-34-
<PAGE>
o for any breach of a director's duty of loyalty to the corporation or
its stockholders,
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
o pursuant to Section 174 of the DGCL (providing for liability of
directors for unlawful payment of dividends or unlawful stock
purchases or redemptions), or
o for any transaction from which a director derived an improper personal
benefit.
The Amended and Restated Certificate of Incorporation of SmartServ provides in
effect for the elimination of the liability of directors to the extent permitted
by the DGCL.
Section 145 of the DGCL provides, in summary, that directors and
officers of Delaware corporations are entitled, under certain circumstances, to
be indemnified against all expenses and liabilities (including attorney's fees)
incurred by them as a result of suits brought against them in their capacity as
a director or officer, if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, if they had
no reasonable cause to believe their conduct was unlawful; provided, that no
indemnification may be made against expenses in respect of any claim, issue or
matter as to which they shall have been adjudged to be liable to the
corporation, unless and only to the extent that the court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, they
are fairly and reasonably entitled to indemnity for such expenses which the
court shall deem proper. Any such indemnification may be made by the corporation
only as authorized in each specific case upon a determination by the
stockholders or disinterested directors that indemnification is proper because
the indemnitee has met the applicable standard of conduct. SmartServ's By-Laws
entitle officers and directors of SmartServ to indemnification to the fullest
extent permitted by the DGCL.
SmartServ has agreed to indemnify each of its directors and certain
officers against certain liabilities, including liabilities under the Securities
Act of 1933. In addition, SmartServ maintains an insurance policy with respect
to potential liabilities of its directors and officers, including potential
liabilities under the Securities Act of 1933.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
SmartServ pursuant to the provisions described above, or otherwise, SmartServ
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by SmartServ of
expenses incurred or paid by a director, officer or controlling person of
SmartServ in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, SmartServ will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the
Securities and Exchange Commission. You may read and copy any report, proxy
statement or other information we file with the Commission at the Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's Regional Offices at 75 Park Place, Room 1400, New York, New York
10007 and Citicorp
-35-
<PAGE>
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. In addition, we file electronic versions of these
documents on the Commission's Electronic Data Gathering Analysis and Retrieval,
or EDGAR, System. The Commission maintains a website at http.//www.sec.gov that
contains reports, proxy statements and other information filed with the
Commission.
We have filed a registration statement on Form SB-2 with the Commission
to register the shares of our common stock to be sold by the selling
stockholders. This prospectus is part of that registration statement and, as
permitted by the Commission's rules, does not contain all of the information set
forth in the registration statement. For further information with respect to us
or our common stock, you may refer to the registration statement and to the
exhibits and schedules filed as part of the registration statement. You can
review a copy of the registration statement and its exhibits and schedules at
the public reference room maintained by the Commission, and on the Commission's
web site, as described above. You should note that statements contained in this
prospectus that refer to the contents of any contract or other document are not
necessarily complete. Such statements are qualified by reference to the copy of
such contract or other document filed as an exhibit to the registration
statement.
TRANSFER AGENT
The Transfer Agent and Registrar for the common stock is Continental
Stock Transfer & Trust Company, Two Broadway, New York, New York 10004. Its
telephone number is (212) 509-4000.
LEGAL MATTERS
The validity of the shares of common stock offered in this prospectus
has been passed upon for us by Parker Chapin LLP, The Chrysler Building, 405
Lexington Avenue, New York, New York 10174. Its telephone number is (212)
704-6000.
EXPERTS
The financial statements of SmartServ Online, Inc. at June 30, 1999 and
1998, and for each of the three years in the period ended June 30, 1999,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
(which contains an explanatory paragraph describing conditions that raise
substantial doubt about the Company's ability to continue as a going concern as
described in Note 1 to the financial statements) appearing elsewhere herein, and
are included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
-36-
<PAGE>
--------------------------------------------------------------------------------
[LOGO]
SMARTSERV ONLINE, INC.
668,715
Shares
of
Common Stock
PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THAT WE
HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS IS NOT AN OFFER TO SELL COMMON
STOCK AND IS NOT SOLICITING AN OFFER TO BUY COMMON STOCK IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
August __, 2000
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.
Section 145 of the General Corporation Law of Delaware ("DGCL")
provides that directors, officers, employees or agents of Delaware corporations
are entitled, under certain circumstances, to be indemnified against expenses
(including attorneys' fees) and other liabilities actually and reasonably
incurred by them in connection with any suit brought against them in their
capacity as a director, officer, employee or agent, if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, if they had no reasonable cause to believe their conduct was
unlawful. Section 145 also provides that directors, officers, employees and
agents may also be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by them in connection with a derivative suit
bought against them in their capacity as a director, if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification may be made without
court approval if such person was adjudged liable to the corporation.
Article Tenth of the registrant's Certificate of Incorporation provides
that the registrant shall indemnify any and all persons whom it shall have power
to indemnify to the fullest extent permitted by the DGCL. Article VI of the
registrant's by-laws provides that the registrant shall indemnify authorized
representatives of the registrant to the fullest extent permitted by the DGCL.
The registrant's by-laws also permit the registrant to purchase insurance on
behalf of any such person against any liability asserted against such person and
incurred by such person in any capacity, or out of such person's status as such,
whether or not the registrant would have the power to indemnify such person
against such liability under the foregoing provision of the by-laws.
The registrant maintains a directors and officers liability insurance
policy with National Union Fire Insurance Company of Pittsburgh, PA. The policy
insures the directors and officers of the registrant against loss arising from
certain claims made against such directors or officers by reason of certain
wrongful acts.
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection
with the issuance and distribution of the securities being registered hereby.
All such expenses will be borne by the registrant; none shall be borne by any
selling stockholders.
Securities and Exchange
Commission registration fee $ 6,151
Legal fees and expenses $ 20,000
Accounting fees and expenses $ 15,000
Miscellaneous $ 849
Total $ 42,000
-------------------------------
II-1
<PAGE>
Item 26. RECENT SALES OF UNREGISTERED SECURITIES.
On May 29, 1997, the Company issued a $550,000 promissory note and
warrants to purchase 45,302 shares of common stock to Zanett Lombardier, Ltd.
("ZLL") for $550,000. On each of July 21, 1997 and September 16, 1997, the
Company issued an additional $111,111 promissory note and warrants to purchase
an additional 10,478 shares of common stock to ZLL 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 ("Zanett") received fees of
$78,576 for its services in connection with such transactions. Additionally,
Zanett received warrants to purchase 18,206 shares of common stock. Such
warrants are subject to antidilution 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.
On September 16, 1997, the Company issued warrants to purchase 50,083
shares of common stock to ZLL as a default penalty under the ZLL notes. The
warrants have an exercise price of 50% of the closing price of the Company's
common stock on the exercise date. On November 16, 1999, ZLL exercised on a
cashless basis all of such warrants in exchange for 25,042 shares of common
stock. No sales commissions were paid in connection with such transactions. The
warrants were issued in reliance upon the exemption from registration provided
by Section 4 (2) of the Securities Act. The shares were issued in reliance upon
the exemption from registration provided by Section 3 (a) (9) of the Securities
Act.
On September 29, 1997, the Company issued 4,000 prepaid common stock
purchase warrants ("Prepaid Warrants") to 12 investors for $4,000,000. Included
in such amount was $772,222 of the promissory notes issued to ZLL and $63,837 of
accrued interest thereon which were cancelled in connection with this
transaction. The Prepaid Warrants are convertible into a number of shares of
common stock of the Company that is equal to $1,000 divided by the applicable
exercise price. The exercise price is 70% of the average closing bid price of
the common stock for the 10 trading days ending on the day prior to exercise of
such warrants, reduced by 1% for each 60 day period the Prepaid Warrants remain
unexercised, but in no event above $8.40 per share. Zanett received a commission
of $400,000, an unaccountable expense allowance of $120,000, and warrants to
purchase 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, were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On September 29, 1997, the Company issued 130,035 warrants 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 13, 1998 and March 21, 2000 an aggregate of 3,388
Prepaid Warrants were converted into an aggregate of 1,209,738 shares of common
stock of the Company. No sales commissions were paid in connection with such
conversions. The shares were issued in reliance upon the exemption from
registration provided by Section 3 (a) (9) of the Securities Act.
On January 2, 1998 and March 3, 1998, the Company issued warrants to
purchase 16,666 and 20,833 shares of common stock, respectively, in connection
with consulting contracts. The warrants have exercise prices of $3.75 and $15.75
to $19.50, respectively. No sales commissions were paid in
II-2
<PAGE>
connection with such transactions. The warrants were issued in reliance upon the
exemption from registration provided by Section 4 (2) of the Securities Act.
On August 31, 1998, the Company issued 32,953 shares of common stock to
ZLL and 17,047 shares of common stock to Bruno Guazzoni in consideration for
their agreeing to certain restrictions on the exercise of the Prepaid Warrants
and the resale of the shares of common stock issuable on exercise thereof. No
sales commissions were paid in connection with such transaction. The shares were
issued in reliance upon the exemption from registration provided by Section 4
(2) of the Securities Act.
On September 8, 1998, the Company issued warrants to purchase 3,000
shares of common stock to Data Transmission Network Corporation ("DTN") for
prepayment of certain guaranteed payments in accordance with the Software
License and Service Agreement between the parties dated April 23, 1998. Such
warrants are exercisable at $3.00 per share of common stock. These warrants were
issued in reliance upon the exemption from registration provided by Section 4
(2) of the Securities Act. No sales commissions were paid in connection with
such transaction.
On November 17, 1998, the Company issued 125,000 shares of common stock
and warrants to purchase 16,667 shares of common stock, exercisable at $5.00 per
share until November 11, 2001, to Steven Francesco, a former officer of the
Company, as partial consideration for the settlement of his claims against the
Company and certain of its officers and directors. The shares and warrants were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act. No sales commissions were paid in connection with such
transaction.
Between November 20, 1998 and December 3, 1998, the Company issued
convertible promissory notes in the amount of $500,000 and warrants to purchase
833,333 shares of common stock to 6 investors for $500,000. Such warrants are
exercisable at $.60 per share and expire on November 19, 2003. Spencer Trask
Securities, Inc. ("Spencer Trask"), the placement agent, received a commission
of $50,000 and an unaccountable expense allowance of $15,000 in connection with
such transaction. Additionally, the Company issued warrants to purchase 166,667
shares of common stock to Spencer Trask exercisable at $.72 per share through
November 29, 2003. These promissory notes and warrants were issued in reliance
upon the exemption from registration provided by Section 4 (2) of the Securities
Act.
On January 14, 1999, the Company issued 10,000 shares of common stock
to Arnhold & S. Bleichroeder, Inc. ("ASB"), an investor in the Company's Prepaid
Warrants, in consideration of an agreement to waive certain events of default
under such Prepaid Warrants. No sales commissions were paid in connection with
such transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On January 20, 1999, the Company agreed to cancel warrants to purchase
20,833 shares of common stock exercisable at $15.75 and $19.50 per share to Mr.
Steven Rosner, a financial advisor to the Company, and to grant Mr. Rosner
warrants to purchase 40,833 shares of common stock at $.60 per share for his
efforts in arranging the Company's relationship with Spencer Trask. These
warrants expire on March 4, 2003 and January 19, 2004 and were issued in
reliance upon the exemption from registration provided by Section 4 (2) of the
Securities Act.
On January 28, 1999, the Company issued a convertible promissory note
in the amount of $50,000 and warrants to purchase 83,333 shares of common stock
to Mr. Bruno Guazzoni, an investor in the Company's Prepaid Warrants, for
$50,000. Such warrants are exercisable at $.60 per share and expire on November
19, 2003. Spencer Trask, the placement agent, received a commission of $5,000,
an unaccountable expense allowance of $1,500 and warrants to purchase 16,667
shares of common stock at $.72 per share through January 26, 2004 in connection
with this transaction. The promissory note and the
II-3
<PAGE>
warrants were issued in reliance upon the exemption from registration provided
by Section 4 (2) of the Securities Act.
On July 6, 1999, the Company issued 180,000 shares of common stock to
ASB to settle the Company's obligation to ASB pursuant to the default provisions
of the Prepaid Warrants. No sales commissions were paid in connection with such
transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On November 19, 1999, the Company 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 the Company 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.
On December 28, 1999, the Board of Directors of the Company approved
the payment to Sebastian E. Cassetta and Mario F. Rossi in stock of the bonus
payable to them for 1999 under their employment agreements. Pursuant thereto, in
March 2000 the Company issued 148,000 shares of common stock to Mr. Cassetta and
54,000 shares to Mr. Rossi. No sales commissions were paid in connection with
such transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On December 31, 1999, the Company 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 the Company 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.
On January 4, 2000, the Company issued 618,239 and 206,080 shares of
common stock to Sebastian E. Cassetta and Mario F. Rossi, respectively, pursuant
to Stock Purchase Agreements dated December 29, 1998 between the Company and
each of them. No sales commissions were paid in connection with such
transactions. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On January 4, 2000, the Company issued to Steven Rosner, a warrant to
purchase 8,000 shares of common stock at an exercise price of $18.375 per share.
This warrant was issued as partial consideration for financial consulting
services to be provided to the Company and expires on July 2, 2003. No sales
commissions were paid in connection with such transaction. The warrant was
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act.
On January 18, 2000, the Company issued 233,000 shares of common stock
to 24 investors. America First Associates Corp., the placement agent, received a
commission of 8% of the aggregate purchase price of the shares purchased in the
offering, an unaccountable expense allowance of $25,000 in connection with such
transaction and warrants to purchase 18,640 shares. These shares and warrants
were issued in reliance upon the exemption from registration provided by Section
4 (2) of the Securities Act.
II-4
<PAGE>
On January 18, 2000, the Company issued 100,000 shares of common stock
to 14 additional investors. No sales commissions were paid in connection with
such transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On January 20, 2000, the Company issued to DTN a warrant to purchase
300,000 shares of the Company's common stock at $8.60 per share in exchange for
$324,000. The warrant will expire on November 17, 2000. No sales commissions
were paid in connection with such transaction. The warrant was issued in
reliance upon the exemption from registration provided by Section 4 (2) of the
Securities Act.
On May 1, 2000, the Company 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 the Company and expires on April 30, 2003.
No sales commissions were paid in connection with such transaction. This warrant
is to be issued in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act.
On May 15, 2000, the Company issued 353,535 shares of common stock to 3
investors. Chase Securities Inc., the placement agent, received a commission of
4% of the aggregate purchase price of the shares purchased in the offering and
an unaccountable expense allowance of $50,000 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.
Item 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
-------------------------------------------
(a) Exhibits:
The following exhibits are filed as part of this registration
statement:
EXHIBIT DESCRIPTION
------- -----------
3.1 Amended and Restated Certificate of Incorporation of the
Company**
3.2 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation filed on June 1, 1998 *
3.3 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation filed on October 16, 1998*
3.4 By-laws of the Company, as amended**
4.1 Specimen Certificate of the Company's Common Stock**
4.2 Form of Warrant Agent Agreement**
4.3 Form of Redeemable Warrant**
4.4 Form of Warrant Agreement used by the Company for the warrants
issued to Alexandra Building Corp., John E. Herzog, Emanuel E.
Geduld, Andrew DaPonte, Anchung Sammy Chung and Fong-Chi
Allison Tsao+
4.5 Form of Warrant Agreement used by the Company for the warrants
issued to Steven Rosner, Andrew Seybold Group, LLC, Michael
Kramer, Lindquist Global Advisors, LLC and Brauning
Associates+
4.6 Stock Purchase Agreement dated May 12, 2000 between the
Company and TecCapital, Ltd., The Abernathy Group and Conseco
Equity Fund+
5.1 Opinion of Parker Chapin LLP+
10.1 Information Distribution License Agreement dated as of July
18, 1994 between the
II-5
<PAGE>
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 1996 Stock Option Plan****
10.8 1999 Stock Option Plan+
10.9 Asset Purchase and Software License and Service Agreements
between SmartServ Online, Inc. and Data Transmission Network
Corporation, dated April 23, 1998*****
10.10 Amendment to the Software and License Agreement between
SmartServ Online, Inc. and Data Transmission Network
Corporation, dated June 24, 1999. Portions of this exhibit
(indicated by asterisks) have been omitted pursuant to an
order by the Securities and Exchange Commission dated December
2, 1999, granting confidential treatment under the Securities
Exchange Act of 1934 and the omitted portions have been filed
separately with the Securities and Exchange Commission *
10.11 Letter agreement dated August 26, 1999, amending the Amendment
to the Software and License Agreement between SmartServ
Online, Inc. and Data Transmission Network Corporation, dated
June 24, 1999. Portions of this exhibit (indicated by
asterisks) have been omitted pursuant to an order by the
Securities and Exchange Commission dated December 2, 1999,
granting confidential treatment under the Securities Exchange
Act of 1934 and the omitted portions have been filed
separately with the Securities and Exchange Commission *
10.12 Amended and Restated Employment Agreement between SmartServ
Online, Inc. and Sebastian E. Cassetta, dated January 1, 1999*
10.13 Restricted Stock Purchase Agreement between SmartServ Online,
Inc. and Sebastian E. Cassetta, dated December 29, 1998*
10.14 Employment Agreement between SmartServ Online, Inc. and Mario
F. Rossi, dated January 1, 1999*
10.15 Restricted Stock Purchase Agreement between SmartServ Online,
Inc. and Mario F. Rossi, dated December 29, 1998*
10.16 Amended Restricted Stock Purchase Agreement between SmartServ
Online, Inc. and Sebastian E. Cassetta, dated December 31,
1999+
10.17 Amended Promissory Note between SmartServ Online, Inc. and
Sebastian E. Cassetta, dated January 4, 2000+
10.18 Amended Security Agreement between SmartServ Online, Inc. and
Sebastian E. Cassetta, dated January 4, 2000+
10.19 Amended Restricted Stock Purchase Agreement between SmartServ
Online, Inc. and Mario F. Rossi, dated December 31, 1999+
10.20 Amended Promissory Note between SmartServ Online, Inc. and
Mario F. Rossi, dated January 4, 2000+
10.21 Amended Security Agreement between SmartServ Online, Inc. and
Mario F. Rossi, dated January 4, 2000+
10.22 Employment Agreement between SmartServ Online, Inc. and Alan
G. Bozian, dated
II-6
<PAGE>
May 29, 2000+
23.1 Consent of Ernst & Young LLP+
23.2 Consent of Parker Chapin LLP (Included in Exhibit 5.1)
24.1 Power of Attorney of certain directors and officers of
SmartServ (Included as part of the signature page beginning on
page II-8 of this filing)
------------
+ Filed herewith
* Filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1999
** Filed as an exhibit to the Company's registration statement on
Form SB-2 (Registration No. 333-114)
*** Filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1996
**** Filed as an exhibit to the Company's Proxy Statement dated
October 10, 1996
***** Filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for the period ended March 31, 1998
Item 28. UNDERTAKINGS.
-------------
(A) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement to:
(i) Include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental
change in the information set forth in the
registration statement; and
(iii) Include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering therein, and
the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(B) Undertaking Required by Regulation S-B, Item 512(e).
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or controlling persons
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
II-7
<PAGE>
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel that the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(C) Undertaking Required by Regulation S-B, Item 512(f)
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at the time
shall be deemed to be the initial bona fide offering thereof.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on the 8th day of August, 2000.
SmartServ Online, Inc.
By:/s/ Sebastian E. Cassetta
------------------------------
Sebastian E. Cassetta
Chairman of the Board, Chief
Executive Officer and Secretary
POWER OF ATTORNEY
The undersigned directors and officers of SmartServ Online, Inc. hereby
constitute and appoint Sebastian E. Cassetta, Mario F. Rossi and Thomas W.
Haller and each of them, with full power to act without the other and with full
power of substitution and resubstitution, our true and lawful attorneys-in-fact
with full power to execute in our name and behalf in the capacities indicated
below any and all amendments (including post-effective amendments and amendments
thereto) to this registration statement under the Securities Act of 1933 and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and hereby ratify and
confirm each and every act and thing that such attorneys-in-fact, or any of
them, or their substitutes, shall lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Sebastian E. Cassetta Chairman of the Board, August 8, 2000
--------------------------------------- Chief Executive Officer, Secretary
Sebastian E. Cassetta and Director
/s/ Alan G. Bozian Senior Vice President and August 8, 2000
--------------------------------------- Chief Financial Officer
Alan G. Bozian
/s/ Thomas W. Haller Vice President and Treasurer August 8, 2000
--------------------------------------- (Chief Accounting Officer)
Thomas W. Haller
/s/ Mario F. Rossi Director August 8, 2000
---------------------------------------
Mario F. Rossi
Director August __, 2000
---------------------------------------
Claudio Guazzoni
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Charles R. Klotz Director August 8, 2000
---------------------------------------
Charles R. Klotz
Director August __, 2000
---------------------------------------
Stephen Lawler
/s/ L. Scott Perry Director August 8, 2000
---------------------------------------
L. Scott Perry
/s/ Robert H. Steele Director August 8, 2000
---------------------------------------
Robert H. Steele
/s/ Catherine Cassel Talmadge Director August 8, 2000
---------------------------------------
Catherine Cassel Talmadge
/s/ Charles R. Wood Director August 8, 2000
---------------------------------------
Charles R. Wood
</TABLE>
II-10
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
UNAUDITED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS AND NINE
MONTHS ENDED MARCH 31, 2000
<S> <C>
Balance Sheets as of June 30, 1999 and March 31, 2000 (unaudited) F-2
Statements of Operations for the three month and the nine month periods
ended March 31, 2000 and 1999 (unaudited) F-4
Statement of Changes in Stockholders' Deficiency
for the nine months ended March 31, 2000 (unaudited) F-5
Statements of Cash Flows for the three month and the nine month periods
ended March 31, 2000 and 1999 (unaudited) F-6
Notes to Unaudited Financial Statements F-7
FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDING JUNE 30, 1999 AND JUNE 30, 1998
AND JUNE 30, 1997
Report of Independent Auditors F-13
Balance Sheets as of June 30, 1999 and 1998 F-14
Statements of Operations for the years
ended June 30, 1999, 1998 and 1997 F-16
Statement of Stockholders' Equity (Deficiency)
for the years ended June 30, 1997, 1998 and 1999 F-17
Statements of Cash Flows for the years
ended June 30, 1999, 1998 and 1997 F-21
Notes to Financial Statements F-22
</TABLE>
F-1
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
-------------------- ------------------
(UNAUDITED)
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 5,175,577 $ 2,165,551
Accounts receivable 265,465 348,278
Prepaid expenses 204,061 50,150
-------------------- ------------------
Total current assets 5,645,103 2,563,979
-------------------- ------------------
Property and equipment - net 530,594 498,448
Other assets
Capitalized software development costs - net of accumulated
amortization of $291,219 at March 31, 2000 and $82,108 at
June 30, 1999 1,321,040 683,337
Security deposits 73,374 74,834
-------------------- ------------------
1,394,414 758,171
-------------------- ------------------
Total Assets $ 7,570,111 $ 3,820,598
==================== ==================
</TABLE>
See accompanying notes.
F-2
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
-------------------- ------------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
<S> <C> <C>
Accounts payable $ 919,580 $ 780,543
Accrued liabilities 249,181 474,189
Accrued liabilities to warrant holders -- 1,311,365
Salaries payable 108,198 93,443
Capital lease obligation -- 70,147
-------------------- ------------------
Total current liabilities 1,276,959 2,729,687
-------------------- ------------------
Deferred revenues 4,555,739 5,798,211
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred Stock - $.01 par value
Authorized - 1,000,000 shares
Issued and outstanding - none
Common Stock - $.01 par value
Authorized - 40,000,000 shares
Issued and outstanding - 4,098,388 shares at March 31, 2000
and 1,199,787 shares at June 30, 1999 40,983 11,998
Common stock subscribed 57,614 1,812,554
Additional paid-in capital 61,956,440 20,679,611
Unearned compensation (2,621,539) (3,452,904)
Notes receivable from officers (666,841) (1,812,554)
Accumulated deficit (57,029,244) (21,946,005)
-------------------- ------------------
Total stockholders' equity (deficiency) 1,737,413 (4,707,300)
-------------------- ------------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 7,570,111 $ 3,820,598
==================== ==================
</TABLE>
See accompanying notes.
F-3
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED MARCH 31 ENDED MARCH 31
--------------------------------------- --------------------------------------
2000 1999 2000 1999
------------------ ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Revenues $989,943 $334,624 $2,710,856 $1,028,353
------------------ ----------------- ----------------- ----------------
Costs and expenses:
Costs of revenues 157,942 204,277 603,355 593,798
Product development expenses 106,312 81,389 240,532 132,605
Selling, general and administrative
expenses 747,227 609,094 2,050,202 1,799,139
Stock-based compensation 14,001,007 399,092 35,636,026 1,041,602
------------------ ----------------- ----------------- ----------------
Total costs and expenses 15,012,488 1,293,852 38,530,115 3,567,144
------------------ ----------------- ----------------- ----------------
Loss from operations (14,022,545) (959,228) (35,819,259) (2,538,791)
------------------ ----------------- ----------------- ----------------
Other income (expense):
Interest income 45,537 864 58,570 3,772
Interest expense and other
financing costs (10,000) (1,420,546) (40,250) (2,231,343)
Prepaid warrant costs -- -- 717,700 --
------------------ ----------------- ----------------- ----------------
35,537 (1,419,682) 736,020 (2,227,571)
------------------ ----------------- ----------------- ----------------
Net loss $ (13,987,008) $ (2,378,910) $ (35,083,239) $ (4,766,362)
================== ================= ================= ================
Basic and diluted earnings per common share $ (4.33) $ (1.98) $ (17.55) $ (4.45)
================== ================= ================= ================
Weighted average shares outstanding 3,232,687 1,198,563 1,998,790 1,072,264
================== ================= ================= ================
</TABLE>
See accompanying notes.
F-4
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
NINE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK COMMON NOTES ADDITIONAL
PAR STOCK RECEIVABLE PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED FROM OFFICERS CAPITAL COMPENSATION DEFICIT
--------------------- ------------ ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
connection with the
settlement of obligations
to a Prepaid Warrant
holder 180,000 1,800 -- -- 266,895 -- --
Issuance of Common Stock
upon exercise of employee
stock options 47,808 478 -- -- 80,290 -- --
Issuance of warrants to
purchase 284,000 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 1,103,157 shares
of Common Stock in
connection with Officer's
Restricted Stock Purchase
and Employment Agreements 1,026,319 10,263 (1,754,940) 1,145,713 3,940,976 -- --
Issuance of Common Stock
upon exercise of warrants
to purchase Common Stock 500,689 5,007 -- -- 707,938 -- --
Amortization of unearned
compensation over the
terms of consulting
agreements -- -- -- -- -- 908,765 --
Issuance of 333,000 shares
of Common Stock and
warrants to purchase
18,640 shares of Common
Stock in connection with
private placement, net of
direct costs of $326,200 333,000 3,330 -- -- 4,665,675 -- --
Change in market value of
employee stock options and
stock subscriptions -- -- -- -- 31,485,862 -- --
Net loss for the period -- -- -- -- -- -- (35,083,239)
---------- ---------- ------------ ------------- -------------- -------------- -------------
Balance at March 31, 2000 $4,098,388 $40,983 $ 57,614 $ (666,841) $61,956,440 $(2,621,539) $(57,029,244)
========== ========== ============ ============= ============== ============== =============
</TABLE>
See accompanying notes.
F-5
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED MARCH 31 ENDED MARCH 31
------------------------------------- --------------------------------------
2000 1999 2000 1999
------------------ ---------------- ------------------ -----------------
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net loss $ (13,987,008) $ (2,378,910) $(35,083,239) $ (4,766,362)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization 146,891 97,739 368,237 237,555
Noncash interest expense and other
financing costs -- 665,360 -- 1,459,605
Noncash compensation costs 13,624,852 38,837 34,667,361 38,837
Noncash consulting costs 376,155 360,255 968,665 1,002,765
Amortization of unearned revenues (414,160) (115,534) (1,242,472) (146,602)
Changes in operating assets and liabilities
Accounts receivable 120,542 16,770 82,813 51,581
Prepaid expenses (152,284) 36,580 (153,911) (36,047)
Accounts payable and accrued liabilities 75,705 305,480 (977,142) 844,530
Accrued interest payable -- 13,807 -- 17,583
Salaries payable 60,005 29,864 14,755 (5,046)
Unearned revenues -- 13,152 -- 226,203
Security deposit -- -- 1,460 --
------------------ ---------------- ------------------ -----------------
Net cash used for operating activities (149,302) (916,600) (1,353,473) (1,075,398)
------------------ ---------------- ------------------ -----------------
INVESTING ACTIVITIES
Purchase of equipment (127,901) (146,104) (191,271) (168,799)
Capitalization of software development costs (293,519) (176,970) (846,814) (672,785)
------------------ ---------------- ------------------ -----------------
Net cash used for investing activities (421,420) (323,074) (1,038,085) (841,584)
------------------ ---------------- ------------------ -----------------
FINANCING ACTIVITIES
Repayment of capital lease obligation (23,942) (21,222) (70,147) (61,575)
Proceeds from the issuance of notes -- 43,500 -- 478,500
Repayment of notes -- (75,000) -- (75,000)
Proceeds from the issuance of common stock, net of
direct costs of $326,200 5,398,660 -- 5,471,731 --
Deferred financing costs -- -- -- (35,000)
Proceeds of advances from DTN Corporation -- 1,408,287 -- 1,408,287
------------------ ---------------- ------------------ -----------------
Net cash provided by financing activities 5,374,718 1,355,565 5,401,584 1,715,212
------------------ ---------------- ------------------ -----------------
Increase (decrease) in cash and cash equivalents 4,803,996 115,891 3,010,026 (201,770)
Cash and cash equivalents - beginning of period 371,581 36,564 2,165,551 354,225
------------------ ---------------- ------------------ -----------------
Cash and cash equivalents - end of period $ 5,175,577 $ 152,455 $ 5,175,577 $ 152,455
================== ================ ================== =================
</TABLE>
See accompanying notes.
F-6
<PAGE>
SMARTSERV ONLINE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2000
1. ORGANIZATION
SmartServ Online, Inc. (the "Company") commenced operations on August 20, 1993.
The Company delivers 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 its
alliance partners. The Company has developed online financial, transactional and
media applications using a unique "device independent" delivery solution and
makes these services available to wireless telephones and personal digital
assistants, personal computers and the Internet through its application software
and communications architecture. The Company's services facilitate stock trading
and disseminate real-time stock quotes, business and financial news, sports
information, private-labeled electronic mail, national weather reports and other
business and entertainment information in a user-friendly manner.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
---------------------
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information, the instructions of Form 10-QSB and Rule 310 of
Regulation S-B and, therefore, do not include all information and notes
necessary for a presentation of results of operations, financial position and
cash flows in conformity with generally accepted accounting principles. The
balance sheet at June 30, 1999 has been derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The financial statements should be read in conjunction
with the Company's Annual Report on Form 10-KSB for the year ended June 30,
1999. In the opinion of the Company, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation have been made. Results of
operations for the nine months ended March 31, 2000 are not necessarily
indicative of those expected for the year ending June 30, 2000.
USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States, requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
-------------------
Revenues are recognized as services are provided. Deferred revenues, resulting
from customer prepayments, are recognized as services are provided throughout
the term of the agreement. Deferred revenues resulting from the Company's
agreements with Data Transmission Network Corporation ("DTN") are being
amortized over the term of the anticipated future revenue stream, a period of 42
months, commencing on 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.
F-7
<PAGE>
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
--------------------------------------
In connection with certain contracts entered into between the Company and its
Strategic Marketing Partners, the Company has capitalized software development
costs related to certain product enhancements in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed", effective July 1, 1998.
STOCK BASED COMPENSATION
------------------------
The Company maintains stock option plans for employees and non-employee
directors that provide for the granting of stock options for a fixed number of
shares with an exercise price equal to the fair value of the shares at the date
of grant. The Company accounts for these stock compensation plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). Certain options, which have been repriced, are
subject to the variable plan requirements of APB No. 25, that requires the
Company to record compensation expense for changes in the fair value of the
Company's Common Stock.
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. SAB 101 must be applied to the financial statements
no later than the quarter ending September 30, 2000. The Company does not
believe that the adoption of SAB 101 will have a material affect on the
Company's financial results.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
------------------- -----------------
<S> <C> <C>
Data processing equipment $ 891,481 $ 700,210
Data processing equipment under a capital lease 246,211 246,211
Office furniture and equipment 71,423 71,423
Display equipment 9,635 9,635
Leasehold improvements 36,678 36,678
------------------- -----------------
1,255,428 1,064,157
Accumulated depreciation, including $143,623 and $106,691 at
March 31, 2000 and June 30, 1999, respectively, for equipment
under a capital lease (724,834) (565,709)
------------------- -----------------
$ 530,594 $ 498,448
=================== =================
</TABLE>
4. EQUITY TRANSACTIONS
On July 1, 1999, the Company entered into an agreement with a holder of $325,000
of the Company's Prepaid Common Stock Purchase Warrants ("Prepaid Warrants"), to
settle the Company's obligation to such holder pursuant to the default
provisions of the Prepaid Warrants. Accordingly, the Company paid $325,000 to
redeem the Prepaid Warrants and issued 180,000 shares of Common Stock in full
settlement of all obligations to the holder. Settlement costs of $268,695 were
recorded during the year ended June 30, 1999.
During the period, holders of $1,357,000 of the Company's Prepaid Warrants
converted such warrants into 810,785 shares of Common Stock at exercise prices
ranging from $1.40 to $8.40 per share.
F-8
<PAGE>
In October 1999, the Board of Directors authorized the repricing of the
restricted shares granted to Messrs. Cassetta and Rossi to $.75 per share, the
fair value of the shares at that date. Through December 31, 1999, the restricted
stock awards were variable plan awards pursuant to APB No. 25 and accordingly,
the Company was required to recognize compensation expense for the changes in
the market value of its Common Stock. In conjunction therewith, the Company has
recorded a charge to compensation expense of $15,636,300 for the nine-month
period ended March 31, 2000, as well as a corresponding increase to additional
paid-in capital.
In October 1999, the Board of Directors authorized the Company to enter into a
restricted stock agreement with Robert Pearl, Vice President Strategy and
Alliances, pursuant to which Mr. Pearl was awarded 76,818 shares of Common Stock
at the purchase price of $.75 per share.
In October 1999, the Company entered into a consulting agreement with a
financial advisor to the Company. As consideration for such services, the
Company granted such advisor warrants to purchase 100,000 shares of Common Stock
at an exercise price of $2.625 per share and warrants to purchase 100,000 shares
of Common Stock at $3.65 per share. In consideration of $125,000 and the
issuance of warrants to purchase 8,000 shares of Common Stock at $18.375 per
share, the Company extended this agreement for the two-year period commencing
October 24, 2000. The warrants expire on October 24, 2004. The Company recorded
a noncash charge of $62,400 to unearned compensation for the value of the
warrants that is being amortized to income over the term of the agreement.
In November 1999, the Company issued 25,042 shares of Common Stock to Zanett
Lombardier, Ltd. pursuant to the cashless exercise provisions of warrants to
purchase 50,084 shares of Common Stock.
During the period, the Board of Directors authorized the issuance of an
aggregate of 202,000 shares of Common Stock to Messrs. Cassetta and Rossi in
satisfaction of its bonus obligations to Messrs. Cassetta and Rossi, pursuant to
their employment contracts. The Company has recorded a charge to compensation
expense of $3,181,500 for the change in fair value of the Company's Common Stock
between the due date of the obligation and the grant date of the Common Stock.
The Company also issued 824,319 shares of Common Stock to Messrs. Cassetta and
Rossi in connection with restricted stock purchase agreements between the
Company and Messrs. Cassetta and Rossi. The Company received cash in the amount
of $8,243 and notes in the amount of $609,996. The notes bear interest at 6.75 %
and are secured by the Common Stock.
During the period, the Company granted warrants to purchase 16,000 shares of
Common Stock at an exercise price of $17.75 to a computer software consultant.
The Company recorded a noncash charge of $15,000 to unearned compensation which
is being amortized to income over the term of the agreement.
During the period, the Company issued 333,334 shares of Common Stock to certain
participants of the Company's November 1998 financing upon the exercise of
warrants to purchase such shares. Proceeds from the exercise of these warrants
were $200,000.
During the period, the Company issued warrants to purchase 10,000 shares of
Common Stock at an exercise price of $2.50 per share to a marketing consultant
in connection with services rendered to the Company. Such warrants were recorded
in accordance with the Black Scholes pricing methodology. The Company recorded a
charge to earnings of $19,900 in connection with such issuance.
In January 2000, the Company completed an offering ("Offering") of 333,000
shares of its 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, the Company issued warrants to purchase 18,640
shares of Common Stock at $15.00 per share through January 18, 2005 to America
First Associates Corp. in connection with services as placement agent for the
Offering.
F-9
<PAGE>
During the period, the Company issued warrants to purchase 50,000 shares of
Common Stock at an exercise price of $3.00 per share to a marketing consultant
in connection with the completion of services rendered to the Company. The
Company recorded a charge to earnings of $40,000 in connection with such
issuance.
During the period, the Company issued 142,308 shares of Common Stock to certain
investors at prices ranging from $0.60 to $9.28 per share upon exercise of
warrants to purchase such shares. Proceeds from the exercise of these warrants
were $512,900.
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 NINE MONTHS ENDED MARCH 31
--------------------------------------- --------------------------------------
2000 1999 2000 1999
------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (13,987,008) $ (2,378,910) $ (35,083,239) $ (4,766,362)
================== ================= ================== ==================
Denominator:
Weighted average shares 3,232,687 1,198,563 1,998,790 1,072,264
================== ================= ================== ==================
Basic and diluted earnings per
common share $ (4.33) $ (1.98) $ (17.55) $ (4.45)
================== ================= ================== ==================
</TABLE>
At March 31, 2000, $612,000 of the Company's prepaid common stock purchase
warrants ("Prepaid Warrants") were outstanding. At that date, the Prepaid
Warrants were convertible into 437,000 shares of Common Stock. Additionally
there were 3,597,200 common stock purchase warrants outstanding. Such warrants
have exercise prices ranging from $0.60 to $72.00 per share and expire from
March 2001 through October 2004. Additionally, the Company has established
employee stock option plans and authorized restricted stock awards to employees,
directors, and consultants to the Company. These options are intended to qualify
as incentive stock options within the meaning of Section 422 of the Internal
Revenue Code, as amended, or as nonqualified stock options. The options are
partially exercisable after one year from date of grant and no options may be
granted after April 15, 2006. At March 31, 2000, options and restricted stock
awards have been authorized for the purchase of 733,000 shares of the Company's
Common Stock. None of the warrants or options have been included in the
computation of diluted loss per share because their inclusion would be
antidilutive.
6. STOCK-BASED COMPENSATION
In connection with the grant of certain stock options, warrants and other
compensation arrangements, the Company has recorded charges to earnings that are
noncash in nature. These grants are subject to the variable plan requirements of
APB No. 25 that require the Company to record compensation expense for changes
in the fair value of the Company's Common Stock.
The following table shows the amount of stock-based compensation that would have
been recorded in the categories of the statement of operations had stock-based
compensation not been separately stated therein:
F-10
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED MARCH 31 ENDED MARCH 31
--------------------------------------- --------------------------------------
2000 1999 2000 1999
------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Costs of revenues $ 3,039,090 $ 8,720 $ 3,636,791 $ 8,720
Selling, general and administrative
expenses 10,961,917 390,372 31,999,235 1,032,882
------------------ ----------------- ------------------ ------------------
$ 14,001,007 $ 399,092 $ 35,636,026 $ 1,041,602
================== ================= ================== ==================
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
By letter dated April 10, 1998, Michael Fishman, then Vice President of Sales
for the Company, resigned his position. On or about April 24, 1998, Mr. Fishman
filed a complaint against the Company, Sebastian E. Cassetta and four other
defendants in the United States District Court for the District of Connecticut.
The complaint asserted claims under Sections 10(b) and 18 of the Securities
Exchange Act of 1934, as well as several state law claims, including breach of
contract, fraud and misrepresentation. Mr. Fishman alleged that the Company (1)
failed to pay him the benefits and compensation to which he was entitled and (2)
made material misrepresentations in its filings with the Securities and Exchange
Commission. On December 11, 1998, the Court granted the Company's motion to
dismiss Mr. Fishman's action without prejudice to the plaintiff to seek leave to
file an amended complaint within 30 days. On May 12, 1999, the Court denied the
plaintiff's subsequent motion for leave to file a substituted complaint on the
basis that the federal securities law claim, the only federal claim alleged by
the plaintiff, was still deficient. Accordingly, the federal securities claim
was dismissed with prejudice. On or about June 4, 1999, Mr. Fishman commenced an
action against the same defendants and added as a seventh defendant, the
Company's former President, Steven Francesco, in the Connecticut Superior Court
for the Judicial District of Stamford/Norwalk at Stamford alleging breach of
contract, breach of duty of good faith and fair dealing, fraudulent
misrepresentation, negligent misrepresentation, intentional misrepresentation
and failure to pay wages. The defendants have answered the complaint and filed
counterclaims for fraudulent inducement and breach of contract. Plaintiff has
responded to the counter-claim, and discovery is proceeding. By pleading dated
February 29, 2000, Mr. Fishman filed an application with the Court seeking entry
of a prejudgment remedy in the amount of $19,250,000. To date, Mr. Fishman's
application has not been acted on by the Court and no hearing date has been set.
Although the Company is vigorously defending this action, there can be no
assurance that it will be successful.
On or about May 11, 1998, Ronald G. Weiner filed a complaint against Mr.
Francesco and the Company in the Supreme Court of the State of New York, County
of New York. The complaint alleges, among other things, that in May 1993, by
letter from Mr. Francesco, Mr. Weiner was offered a 10% equity stake in Smart
Phone Services, Inc. ("SPS"), a Subchapter S company of which Mr. Francesco
allegedly was the President and sole shareholder, in exchange for his active
involvement in, among other things, raising capital and managing the financial
aspects of SPS. The complaint alleges that, in November 1993, Mr. Francesco sent
a letter to Mr. Weiner in which he (1) represented that SPS had failed to
attract a single investor and (2) withdrew his offer to Mr. Weiner of a 10%
equity position in SPS. The complaint further alleges that, in conversations
with Mr. Weiner beginning in November 1993, Mr. Francesco represented that he
was ceasing all efforts to capitalize SPS. The complaint alleges, among other
things, that Mr. Francesco and SPS breached their agreement with Mr. Weiner by
withdrawing their offer to him of a 10% equity stake in SPS, and that, at the
time Mr. Francesco represented that he was ceasing efforts to capitalize SPS, he
had actually formed SmartServ and was actively seeking investors for it. The
complaint further alleges that the Company is a successor entity to SPS and
that, therefore, the Company is liable for SPS' and Mr. Francesco's alleged
conduct in derogation of their alleged agreement with Mr. Weiner. The complaint
seeks, among other things, (1) a declaratory judgment declaring Mr. Weiner a 10%
equity shareholder of the Company, (2) a constructive trust in Mr. Weiner's
favor for 10% of the Company `s equity shares and (3) restitution against Mr.
Francesco and the Company for unjust enrichment. On his unjust enrichment claim,
Mr. Weiner seeks unspecified damages that he alleges to be at least $250,000. In
the
F-11
<PAGE>
Company's answer to the complaint, the Company denied the material allegations
of the complaint and asserted affirmative defenses. No discovery in this action
has yet been taken. Although the Company is vigorously defending this action
there can be no assurance that it will be successful.
On or about February 29, 2000, Commonwealth Associates, L.P. filed a complaint
against the Company 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
the Company entered into an engagement letter pursuant to which Commonwealth was
to provide financial advisory and investment banking services to the Company in
connection with a possible combination between the Company and Data Link Systems
Corporation. The engagement letter provided for a nonrefundable fee of $15,000
payable in cash or common stock at the Company's option. The complaint alleges
that notwithstanding the terms of the engagement letter the fee was to be paid
in stock and seeks 13,333 shares of common stock or at least $1,770,000 together
with interest and costs. In the Company's answer to the complaint, the Company
denied the material allegations of the complaint. Discovery in this action has
recently commenced and is proceeding. Although the Company is vigorously
defending this action there can be no assurance that it will be successful.
While the Company intends to vigorously defend these actions, the unfavorable
outcome of any such action could have a material adverse effect on the Company's
financial condition, results of operations, and cash flows.
8. SUBSEQUENT EVENTS
On May 15, 2000, the Company completed an offering of 353,535 shares of its
Common Stock to accredited investors. Proceeds from this transaction amounted to
$16,715,000, net of commissions and expenses of $785,000.
F-12
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
SmartServ Online, Inc.
We have audited the accompanying balance sheets of SmartServ Online, Inc. as of
June 30, 1999 and 1998, and the related statements of operations, stockholders'
equity (deficiency), and cash flows for each of the three years in the period
ended June 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SmartServ Online, Inc. at June
30, 1999 and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 1999, in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that SmartServ
Online, Inc. will continue as a going concern. As more fully described in Note
1, the Company has incurred recurring operating losses and has a working capital
deficiency. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/S/ ERNST & YOUNG LLP
Stamford, Connecticut
October 13, 1999
F-13
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30
-----------------------------------------
1999 1998
--------------------- -------------------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 2,165,551 $ 354,225
Accounts receivable 348,278 111,051
Prepaid expenses 50,150 130,603
--------------------- -------------------
Total current assets 2,563,979 595,879
--------------------- -------------------
Property and equipment, net 498,448 610,537
Other assets
Capitalized software development costs,
net of accumulated amortization of $82,108 683,337 --
Security deposit 74,834 70,437
--------------------- -------------------
758,171 70,437
--------------------- -------------------
Total Assets $ 3,820,598 $ 1,276,853
===================== ===================
</TABLE>
F-14
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30
-----------------------------------------
1999 1998
-------------------- --------------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
<S> <C> <C>
Current liabilities
Accounts payable $ 780,543 $ 800,545
Accrued liabilities 474,189 736,137
Accrued liabilities to warrant holders 1,311,365 --
Salaries payable 93,443 57,308
Capital lease obligation - current portion 70,147 76,127
Deferred revenues - current portion 1,656,632 776,049
-------------------- --------------------
Total current liabilities 4,386,319 2,446,166
-------------------- --------------------
Capital lease obligation - long-term portion -- 77,548
Deferred revenues - long-term portion 4,141,579 --
COMMITMENTS AND CONTINGENCIES - NOTE 9
STOCKHOLDERS' DEFICIENCY
Preferred stock - $0.01 par value
Authorized - 1,000,000 shares
Issued and outstanding - None
Common Stock - $0.01 par value
Authorized - 40,000,000 shares
Issued and outstanding - 1,199,787 shares at June 30, 1999
and 836,227 shares at June 30, 1998 11,998 8,362
Common stock subscribed 1,812,554 --
Notes receivable from officers (1,812,554) --
Additional paid-in capital 20,679,611 18,184,580
Unearned compensation (3,452,904) (4,617,924)
Accumulated deficit (21,946,005) (14,821,879)
-------------------- --------------------
Total stockholders' deficiency (4,707,300) (1,246,861)
-------------------- --------------------
Total Liabilities and Stockholders' Deficiency $ 3,820,598 $ 1,276,853
==================== ====================
</TABLE>
See accompanying notes.
F-15
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-----------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 1,443,781 $ 873,476 $ 688,610
-----------------------------------------------------------
Costs and expenses
Cost of services (994,465) (1,216,761) (1,133,884)
Product development expenses (193,188) (923,082) (1,150,224)
Selling, general and administrative
expenses (4,006,599) (3,221,940) (2,861,845)
-----------------------------------------------------------
Total costs and expenses (5,194,252) (5,361,783) (5,145,953)
-----------------------------------------------------------
Loss from operations (3,750,471) (4,488,307) (4,457,343)
-----------------------------------------------------------
Other income (expense):
Interest income 4,767 40,788 74,507
Interest expense (167,839) (57,485) (20,194)
Debt origination and other financing costs (3,210,583) (535,005) (31,452)
-----------------------------------------------------------
(3,373,655) (551,702) 22,861
-----------------------------------------------------------
Net loss $ (7,124,126) $ (5,040,009) $ (4,434,482)
===========================================================
Basic and diluted loss per share $ (6.44) $ (7.65) $ (7.20)
===========================================================
Weighted average shares outstanding 1,105,603 659,034 615,833
===========================================================
</TABLE>
See accompanying notes.
F-16
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
COMMON STOCK NOTES ADDITIONAL
PAR COMMON STOCK RECEIVABLE PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED FROM OFFICERS CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1996 615,832 $ 6,158 $ -- $ -- $8,789,091 $ -- $(5,347,388)
Change in market value of
employee stock options -- -- -- -- 188,293 -- --
Issuance of Common Stock
Purchase Warrants in
connection with
investment advisory
services -- -- -- -- 75,000 -- --
Issuance of Common Stock
Purchase Warrants in
connection with
short-term line of credit -- -- -- -- 25,000 -- --
Net loss for the year -- -- -- -- -- -- (4,434,482)
----------------------------------------------------------------------------------------------
Balances at June 30, 1997 615,832 $ 6,158 $ -- $ -- $9,077,384 $ -- $ (9,781,870)
----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-17
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
<TABLE>
<CAPTION>
COMMON STOCK NOTES ADDITIONAL
PAR COMMON STOCK RECEIVABLE PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED FROM OFFICERS CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1997 $615,832 $ 6,158 $ -- $ -- $ 9,077,384 $ -- $ (9,781,870)
Issuance of 4,000 Prepaid
Common Stock Purchase
Warrants; net of direct
costs of $545,000 -- -- -- -- 3,455,000 -- --
Conversion of 1,429.33
Prepaid Common Stock
Purchase Warrants into
Common Stock 220,395 2,204 -- -- (2,204) -- --
Issuance of Common Stock
Purchase Warrants to a
financial consultant in
connection with the
issuance of 4,000 Prepaid
Common Stock Purchase
Warrants -- -- -- -- 5,145,500 (5,145,500) --
Issuance of Common Stock
Purchase Warrants in
connection with the --
issuance of notes -- -- -- -- 388,900 --
Issuance of Common Stock
Purchase Warrants in
connection with investment
advisory contracts -- -- -- -- 120,000 -- --
Amortization of unearned
compensation -- -- -- -- -- 527,576 --
Net loss for the year -- -- -- -- -- -- (5,040,009)
----------------------------------------------------------------------------------------------
Balances at June 30, 1998 $836,227 $ 8,362 $ -- $ -- $ 18,184,580 $ (4,617,924) $ (14,821,879)
----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-18
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
<TABLE>
<CAPTION>
COMMON STOCK NOTES ADDITIONAL
PAR COMMON STOCK RECEIVABLE PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED FROM OFFICERS CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1998 $836,227 $ 8,362 $ -- $ -- $ 18,184,580 $ (4,617,924) $ (14,821,879)
Conversion of 276.67 Prepaid
Common Stock Purchase
Warrants into Common Stock 178,560 1,786 -- -- (1,786) -- --
Issuance of Common Stock to
Prepaid Warrant holders
as consideration for
amending certain terms
and conditions of the
Prepaid Warrants 60,000 600 -- -- 146,713 -- --
Issuance of Common Stock
Purchase Warrants in
connection with
prepayments made by a
marketing partner -- -- -- -- 6,300 -- --
Issuance of Common Stock
Purchase Warrants in
connection with the
issuance of 8%
convertible notes -- -- -- -- 1,573,000 -- --
Beneficial conversion
feature of 8% convertible
notes -- -- -- -- 550,000 -- --
Issuance of Common Stock and
warrants to purchase
Common Stock in partial
settlement of litigation 125,000 1,250 -- -- 144,500 -- --
Amortization of unearned
compensation over the
term of the consulting
agreement -- -- -- -- -- 1,165,020 --
Common Stock subscriptions
and notes receivable in
connection with officers'
employment agreements -- -- 1,812,554 (1,812,554) -- -- --
Issuance of Common Stock
Purchase Warrants to a
financial consultant as
compensation for services -- -- -- -- 59,000 -- --
Redemption of Prepaid Common
Stock Purchase Warrants -- -- -- -- (325,000) -- --
</TABLE>
See accompanying notes.
F-19
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
<TABLE>
<CAPTION>
COMMON STOCK NOTES ADDITIONAL
PAR COMMON STOCK RECEIVABLE PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED FROM OFFICERS CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Authorization of the
issuance of Common Stock
Purchase Warrants in
connection with a
licensing agreement -- -- -- -- 324,000 -- --
Change in market value of
employee stock options -- -- -- -- 18,304 -- --
Net loss for the year -- -- -- -- -- -- (7,124,126)
----------- ----------- ------------- ------------- ------------- -------------- --------------
Balance at June 30, 1999 $1,199,787 $11,998 $1,812,554 $(1,812,554) $20,679,611 $(3,452,904) $(21,946,005)
=========== =========== ============= ============= ============= ============== ==============
</TABLE>
See accompanying notes.
F-20
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-----------------------------------------------------
1999 1998 1997
-----------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $ (7,124,126) $ (5,040,009) $ (4,434,482)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization 278,646 193,601 149,182
Provision for losses on and write-off of receivables -- (1,300) 29,248
Noncash interest costs 12,524 52,837 --
Noncash debt origination and other financing costs 2,593,808 475,527 30,449
Noncash compensation costs 18,304 -- 188,293
Noncash consulting services 1,349,020 660,576 75,000
Amortization of unearned revenues (1,112,138) (251,058) --
Settlement of litigation -- 145,750 --
Changes in operating assets and liabilities
Accounts receivable (237,227) 40,031 (121,040)
Prepaid expenses (44,547) (25,878) (22,415)
Accounts payable and accrued liabilities 781,264 349,764 558,317
Accrued interest -- (5,323) 16,323
Payroll taxes payable 1,696 (16,089) 5,482
Salaries payable 34,439 6,996 1,364
Unearned revenues 6,121,776 1,002,193 24,914
Security deposit (4,397) 10,781 --
-----------------------------------------------------
Net cash provided by (used for) operating activities 2,669,042 (2,401,601) (3,499,365)
-----------------------------------------------------
INVESTING ACTIVITIES
Capitalization of software development costs (765,445) -- --
Purchase of equipment (84,449) (60,424) (351,786)
-----------------------------------------------------
Net cash used for investing activities (849,894) (60,424) (351,786)
-----------------------------------------------------
FINANCING ACTIVITIES
Proceeds from the issuance of warrants 324,000 2,643,941 --
Proceeds from the issuance of short-term notes 478,500 196,500 493,646
Repayment of short-term notes (691,794) -- --
Repayment of capital lease obligation (83,528) (92,536) --
Proceeds of advances from DTN 2,058,300 -- --
Repayment of advances from DTN (2,058,300) -- --
Costs of issuing securities (35,000) (25,000) (10,000)
-----------------------------------------------------
Net cash provided by (used for) financing activities (7,822) 2,722,905 483,646
-----------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,811,326 260,880 (3,367,505)
Cash and cash equivalents - beginning of year 354,225 93,345 3,460,850
-----------------------------------------------------
Cash and cash equivalents - end of year $ 2,165,551 $ 354,225 $ 93,345
=====================================================
</TABLE>
See accompanying notes.
F-21
<PAGE>
SMARTSERV ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND LIQUIDITY
SmartServ Online, Inc. (the "Company") commenced operations on August 20, 1993.
The Company offers a range of services designed to facilitate e-commerce by
providing transactional and information services to its alliance partners
("Strategic Marketing Partners"). The Company has developed online financial,
transactional and media applications using a unique "device independent"
delivery solution and makes these services available through its application
software and communication architecture to wireless telephones and personal
digital assistants, personal computers and the Internet. The Company's services
include stock trading, real-time stock quotes, business and financial news,
sports information, private-labeled electronic mail, national weather reports
and other business and entertainment information.
The Company's financial statements for the year ended June 30, 1999 have been
prepared on a going concern basis which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business. The Company incurred net losses of $7,124,126, $5,040,009, and
$4,434,482 for the years ended June 30, 1999, 1998, and 1997, respectively, and
as of June 30, 1999 had an accumulated deficit of $21,946,005 and a deficiency
of net assets of $4,707,300. The Company is also a defendant in several legal
proceedings (see Note 9) which could have a material adverse effect on the
Company's financial position, cash flow, and results of operations. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of these uncertainties.
The Company's business plan focuses on the strategy of marketing its services in
partnership with those companies that have an economic incentive to provide the
Company's information and transaction services to their customers. Management
believes that the Company's primary source of revenues will be derived from
consumers who purchase the services through its Strategic Marketing Partners.
Through the use of this strategy, the consumer is a customer of both SmartServ
and its Strategic Marketing Partner. The Company also believes that the sale of
its information and transaction services through the cooperative efforts of
partners with more recognizable brand names than its own is important to its
success.
On September 30, 1997, the Company completed a private placement ("Placement")
of $4 million of Prepaid Common Stock Purchase Warrants ("Prepaid Warrants") as
more fully disclosed in Note 5. An integral part of this Placement was the
conversion of notes payable and accrued interest thereon, aggregating $836,059,
into Prepaid Warrants. The net proceeds of $2,643,941 provided the Company with
working capital to continue its marketing efforts.
Effective May 1, 1998, the Company entered into an agreement with Data
Transmission Network Corporation ("DTN") whereby DTN purchased the exclusive
right to market three of the Company's Internet products: SmartServ Pro, a real
time stock quote product; TradeNet, an online trading vehicle for the customers
of small and medium sized brokerage companies, and BrokerNet, an administrative
reporting package for brokers of small and medium sized brokerage companies. The
consummation of this agreement has removed the Company from the retail market
and allows the Company to focus on business-to-business marketing. The Company
received $850,000 upon execution of the agreement and
F-22
<PAGE>
received minimum monthly payments of $100,000 through April 1999. On June 24,
1999, the Company and DTN entered into an agreement that amended the Software
License and Service Agreement dated April 23, 1998. In consideration of the
receipt of $5.175 million, the Company granted DTN an exclusive perpetual
worldwide license to the Company's Internet-based (i) SmartServ Pro, (ii)
TradeNet, (iii) BrokerNet, and (iv) order entry/routing system. Additionally,
the Company received $324,000 in exchange for an agreement to issue warrants to
purchase 300,000 shares of the Company's Common Stock at an exercise price of
$8.60 per share. The Company has agreed to continue to operate these products
and provide maintenance and enhancement services in exchange for a percentage of
the revenues earned by DTN therefrom. The cost of the Company's commitment to
provide such maintenance and enhancement services is limited to a maximum of 20%
of the revenues earned by the Company. None of the Company's wireless products
were included in this transaction.
The market for online information and transactional services is highly
competitive and subject to rapid innovation and technological change, shifting
consumer preferences and frequent new service introductions. The Company
believes that potential new competitors, including large multimedia and
information systems companies, are increasing their focus on transaction
processing. Increased competition in the market for the Company's services could
materially and adversely affect the Company's results of operations through
price reductions and loss of potential market share. The Company's ability to
compete in the future depends on its ability to maintain the technological and
performance advantages of its current distribution platform and to introduce new
applications that achieve market acceptance.
Notwithstanding the execution of the DTN agreements and the continual
discussions with potential Strategic Marketing Partners about future
relationships, the Company's ability to generate fee revenue and working capital
may not be sufficient to meet management's objectives as presently structured.
Management recognizes that the Company must generate additional revenues or
consider additional modifications to its sales and marketing program or
institute cost reductions to allow it to continue to operate with available cash
resources. There is no assurance that the Company will generate future revenues
or cash flow from operations or that the Company's products and services will
continue to be accepted in the marketplace by the ultimate consumers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
---------------------
The financial statements are prepared in conformity with generally accepted
accounting principles.
The Company's stockholders approved a one-for-six reverse stock split at a
Special Meeting on October 15, 1998. Such reverse stock split became effective
on October 26, 1998. All applicable financial statement amounts and related
disclosures have been restated to give effect to this transaction.
USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
REVENUE RECOGNITION
-------------------
Revenues are recognized as services are provided. Deferred revenues, resulting
from customer prepayments, are recognized as services are provided throughout
the term of the agreement. Deferred revenues resulting from the Company's
agreements with DTN are being amortized over the anticipated future revenue
stream, a period of 42 months.
F-23
<PAGE>
BASIC AND DILUTED EARNINGS PER SHARE
------------------------------------
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("Statement 128"). Statement
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented and, where necessary, restated
to conform to the Statement 128 requirements. The weighted average shares
outstanding are determined as the mean average of the shares outstanding and
assumed to be outstanding during the period.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
--------------------------------------
In connection with certain contracts entered into between the Company and its
Strategic Marketing Partners, the Company has capitalized software development
costs related to certain product enhancements in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed", effective July 1, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The carrying amounts of the Company's financial instruments approximate fair
value.
SUPPLEMENTAL CASH FLOW DATA
---------------------------
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Interest, debt origination and other financing costs paid during the years ended
June 30, 1999, 1998, and 1997 were $101,974, $32,536, and $9,194, respectively.
CONCENTRATION OF CREDIT RISK
----------------------------
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of accounts receivable. There is no single
geographic concentration of sales or related accounts receivable in the United
States. At June 30, 1999, accounts receivable consist principally of amounts due
from DTN ($268,000), and a telecommunications company ($78,100). The Company
performs periodic credit evaluations of its customers and, if applicable,
provides for credit losses in the financial statements.
PROPERTY AND EQUIPMENT
----------------------
Property and equipment are stated at cost. Equipment purchased under a capital
lease has been recorded at the present value of the future minimum lease
payments at the date of acquisition. Depreciation is computed using the
straight-line method over estimated useful lives of three to ten years.
ADVERTISING COSTS
-----------------
Advertising costs are expensed as incurred and were approximately $20,500,
$97,100, and $540,000 in 1999, 1998 and 1997, respectively.
STOCK BASED COMPENSATION
------------------------
The Company maintains a stock option plan for employees and non-employee
directors that provides for the granting of stock options for a fixed number of
shares with an exercise price equal to the fair value of the shares at the date
of grant. The Company accounts for this stock compensation plan in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). Accordingly, compensation expense is recognized to
the extent that the fair value of the stock exceeds the exercise price of the
option at the measurement date. In 1997, the Company adopted the
F-24
<PAGE>
disclosure provisions of Statement of Financial Accounting Standards No. 123
"Accounting for Stock-based Compensation".
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, as amended by SOP 98-4, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). The
adoption of SOP 98-1 is not expected to have a material effect on the Company's
operations. SOP 98-1 is required to be adopted by the Company no later than July
1, 1999.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30
------------------------------------------
1999 1998
------------------- -----------------
<S> <C> <C>
Data processing equipment $ 700,210 $ 616,587
Data processing equipment purchased under a capital lease 246,211 246,211
Office furniture and equipment 71,423 70,597
Display equipment 9,635 9,635
Leasehold improvements 36,678 36,678
------------------- -----------------
1,064,157 979,708
Accumulated depreciation, including $106,691 and
$57,449 for equipment purchased under a capital lease (565,709) (369,171)
------------------- -----------------
$ 498,448 $ 610,537
=================== =================
</TABLE>
During the year ended June 30, 1997, the Company leased computer equipment with
a capitalized cost of $246,211. The recording of such costs and the related
capitalized lease obligation are non-cash transactions for the purposes of the
Statement of Cash Flows.
4. NOTES PAYABLE
On May 29, 1997, the Company entered into a line of credit facility with a
financial institution for a maximum borrowing thereunder of $550,000. Borrowings
under this facility were to be repaid on August 27, 1997 along with interest at
the rate of 24% per annum. On July 21, 1997 and September 16, 1997, the facility
was amended to provide for additional borrowings of up to $222,222. On September
30, 1997, notes payable of $772,222 and accrued interest thereon of $63,837 were
converted into the Company's Prepaid Warrants as more fully described in Note 5.
In conjunction with the origination of the line of credit facility, the Company
issued 56,627 common stock purchase warrants to the financial institution.
Similarly, the Company issued 11,438 warrants for each of the July and September
amendments. As a result of the Company's default on the note in August, the
Company was required to issue 50,083 "default" warrants to such institution. At
June 30, 1999, these warrants were exercisable at prices ranging from $.75 to
$6.07. These warrants are subject to certain antidilution provisions and expire
in September 2002. Pursuant to Statement of Financial Accounting Standard No.
123, "Accounting for Stock Based Compensation", the Company valued these
warrants in accordance with the Black-Scholes pricing methodology at the time of
issuance and recorded such valuation in the statement of operations as debt
origination and other financing costs. The Company recorded debt origination and
other financing costs associated with these warrants of $463,567 for the year
ended June 30, 1998.
F-25
<PAGE>
Commencing November 20, 1998, the Company sold five and one-half (5.5) units,
each consisting of a secured 8% convertible note in the principal amount of
$100,000 and warrants to purchase Common Stock of the Company. The warrants are
exercisable at $.60 per share of Common Stock. The convertible notes were repaid
in June 1999. The Company has agreed to register the shares of Common Stock
issuable upon exercise of the warrants. In addition to customary fees and
expenses, Spencer Trask Securities, Inc. ("Spencer Trask"), the placement agent,
received for nominal consideration, warrants to purchase ten percent (10%) of
the shares of Common Stock of the Company issuable on conversion of the notes
and exercise of the warrants at $.72 per share. The issuance to the noteholders
of warrants to purchase 916,667 shares of Common Stock, as well as those issued
to Spencer Trask for the purchase of 183,333 shares of Common Stock have been
valued in accordance with the Black-Scholes pricing methodology and recorded as
debt origination and other financing costs. Also in connection with the 8%
convertible notes, the Company has recorded a non-cash charge to debt
origination and other financing costs of $550,000 representing the perceived
cost of the beneficial conversion feature of the notes. Emerging Issues Task
Force Issue 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios" ("Issue 98-5")
defines the beneficial conversion feature as the non-detachable conversion
feature that is "in-the-money" at the date of issuance. Issue 98-5 requires the
recognition of the intrinsic value of the conversion feature as the difference
between the conversion price and the fair value of the common stock into which
the notes are convertible. Such amount is limited to the proceeds of the
financing ($550,000) and has been recorded in debt origination and other
financing costs as of the date of issuance.
On December 30, 1998, the Company executed an agreement with a service provider
whereby certain obligations of the Company, amounting to $141,794, were
converted into a 12% note payable. On June 28, 1999, the outstanding balance of
$66,794 was repaid.
5. EQUITY TRANSACTIONS
During the year ended June 30, 1997, the Company authorized the issuance of
warrants for the purchase of 33,333 shares of Common Stock in connection with
certain investment advisory agreements. Such warrants are exercisable at prices
ranging from $12.00 to $24.00 per share through May 2002.
On September 30, 1997, The Zanett Securities Corporation ("Zanett"), acting as
placement agent for the Company, completed the private placement ("Placement")
of $4 million of the Company's Prepaid Common Stock Purchase Warrants ("Prepaid
Warrants"). The sale of the Prepaid Warrants was exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2)
thereof. Each Prepaid Warrant entitles the holder to purchase that number of
shares of Common Stock that is equal to $1,000 divided by the applicable
exercise price. Such exercise price is determined initially as 70% of the
average closing bid price of the Common Stock for the 10 trading days ending on
the day prior to exercise of the Prepaid Warrants. Additionally, the exercise
discount shall be increased by 1% for each subsequent 60 day period that the
Prepaid Warrants remain unexercised. The exercise price, however, shall never
exceed $8.40. The Prepaid Warrants became exercisable on December 29, 1997 and
expire on September 30, 2000.
As compensation for its services, Zanett received a placement fee and an
unaccountable expense allowance of 10% ($400,000) and 3% ($120,000),
respectively, of the gross proceeds of the Placement. Additionally, the Company
issued 135,906 Common Stock Purchase Warrants to Zanett that are subject to
antidilution provisions and are exercisable at $4.97 per share of Common Stock.
These warrants expire on September 30, 2002.
Also in conjunction with the Placement, the Company entered into an agreement
with Bruno Guazzoni, a financial consultant who is an affiliate of Zanett
Lombardier, Ltd., an investor in the Prepaid Warrants.
F-26
<PAGE>
During the five-year term of the agreement such consultant will provide the
Company with advisory services relating to financial and strategic ventures and
alliances, investment banking and general financial advisory services, and
advice and assistance with the Company's market development activities. As
compensation for these services, the Company authorized the issuance of 805,370
Common Stock Purchase Warrants ("Consulting Warrants") to this consultant that
are subject to antidilution provisions and are exercisable at $4.97 per share of
Common Stock. The Company has valued these Consulting Warrants in accordance
with Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation", and the Black-Scholes pricing methodology at
$5,145,500 and recorded this amount in stockholders' equity as unearned
compensation. Unearned compensation is being amortized to income over the
five-year term of the agreement. These warrants expire on September 30, 2002.
The Company has recorded consulting expense of $1,165,020 and $527,576 for the
years ended June 30, 1999 and 1998, respectively.
During the year ended June 30, 1999, holders of 276.67 of the Company's Prepaid
Warrants converted such warrants into 178,560 shares of Common Stock at exercise
prices ranging from $.75 to $2.38 per share.
On August 31, 1998, the Company issued 32,953 shares of Common Stock to Zanett
Lombardier, Ltd. and 17,047 shares of Common Stock to Bruno Guazzoni in
consideration of their agreement to certain restrictions on the exercise of
Prepaid Warrants and the resale of the shares of Common Stock issuable on
exercise thereof. Such shares have been recorded at the fair value of the
Company's Common Stock at that date as other financing costs.
On September 8, 1998, the Company issued warrants to purchase 3,000 shares of
Common Stock to DTN for prepayment of certain guaranteed payments in accordance
with the Software License and Service Agreement between the parties dated April
23, 1998. Such warrants are exercisable at $3.00 per share of Common Stock and
have been recorded in accordance with the Black-Scholes pricing methodology as
other financing costs.
On November 17, 1998, the Company issued 125,000 shares of Common Stock and
warrants to purchase 16,667 shares of Common Stock, exercisable at $5.00 per
share until November 11, 2001, to Steven Francesco, a former officer of the
Company, as partial consideration for the settlement of his claims against the
Company and certain of its officers and directors. The value of these shares has
been recorded in selling, general and administrative expenses based upon the
fair value of the Company's Common Stock at that date while the warrants have
been recorded in accordance with the Black-Scholes pricing methodology.
On December 29, 1998, the Board of Directors approved the terms of employment
contracts for Sebastian E. Cassetta, Chairman and Chief Executive Officer, and
Mario F. Rossi, Vice President of Technology. The employment agreement with Mr.
Cassetta ("Cassetta Agreement"), is effective January 1, 1999, expires on
December 31, 2001, and provides for, among other things, the sale to him of
618,239 shares of restricted stock representing 9% of the fully diluted shares
of Common Stock of the Company. The purchase price ($2.20 per share) of the
restricted stock is equal to 110% of fair market value of the Company's Common
Stock for the 30 days preceding the date of the stock purchase agreement
("Cassetta Stock Purchase Agreement") contemplated by the Cassetta Agreement.
The purchase price has been paid with a 5 year, non-recourse promissory note,
secured by the stock, at an interest rate of 6.75%, which is 1% below the prime
rate on the date of the Cassetta Stock Purchase Agreement. The Cassetta Stock
Purchase Agreement provides the Company with certain repurchase options and
provides Mr. Cassetta with a put option in the event of the termination of his
employment. In accordance with APB No. 25, the Company will record the changes
in the fair value of such shares in recognition of the compensatory nature of
their issuance. On October 13, 1999, the Board of Directors agreed to reprice
the shares granted
F-27
<PAGE>
to Mr. Cassetta to $.75 per share, the fair value of the shares at that date.
The Company and Mr. Rossi have also entered into an employment agreement ("Rossi
Agreement"), effective January 1, 1999 and expiring on December 31, 2001,
providing for, among other things, the sale to him of 206,080 shares of
restricted stock representing 3% of the fully diluted shares of Common Stock of
the Company. The purchase price ($2.20 per share) of the restricted stock is
equal to 110% of fair market value for the 30 days preceding the date of the
stock purchase agreement ("Rossi Stock Purchase Agreement") contemplated by the
Rossi Agreement. The purchase price has been paid with a 5 year, non-recourse
promissory note, secured by the stock, at an interest rate of 6.75%, which is 1%
below the prime rate on the date of the Rossi Stock Purchase Agreement. The
Rossi Stock Purchase Agreement provides the Company with certain repurchase
options and provides Mr. Rossi with a put option in the event of the termination
of his employment. In accordance with APB No. 25, the Company will record the
changes in the fair value of such shares in recognition of the compensatory
nature of their issuance. On October 13, 1999, the Board of Directors agreed to
reprice the shares granted to Mr. Rossi to $.75 per share, the fair value of the
shares at that date.
On January 14, 1999, the Company issued 10,000 shares of Common Stock to Arnhold
& S. Bleichroeder, Inc. ("ASB"), an investor in the Company's Prepaid Warrants,
in consideration of an agreement to waive certain events of default under such
Prepaid Warrants. These shares have been recorded at the fair value of the
Company's Common Stock at that date as other financing costs.
On January 20, 1999, the Company agreed to cancel warrants to purchase 20,833
shares of Common Stock exercisable at $15.75 and $19.50 per share to Steven
Rosner, a financial advisor to the Company, and to grant Mr. Rosner warrants to
purchase 40,833 shares of Common Stock at $.60 per share for his efforts at
arranging the Company's relationship with Spencer Trask. Such warrants will
expire on January 20, 2004. These warrants have been recorded in accordance with
the Black-Scholes pricing methodology as selling, general and administrative
expenses.
On June 24, 1999, in consideration of the receipt of $324,000, the Company
agreed to issue DTN warrants for the purchase of 300,000 shares of the Company's
Common Stock at $8.60 per share. The warrants will expire on the earlier of
April 30, 2003, or the date one year after the market price of a share of Common
Stock reaches $8.60. These warrants have been recorded in accordance with the
Black-Scholes pricing methodology.
The delisting of the Company's Common Stock from the Nasdaq Small Cap Market
caused the Company to default on certain terms and conditions of the Prepaid
Warrants. Such default obligates the Company to pay financial penalties, as well
as to redeem the outstanding Prepaid Warrants at a 43% premium. The Company has
been unable to obtain appropriate waivers from holders of $1,994,000 of such
Prepaid Warrants. Accordingly, the Company has recorded a charge to debt
origination and other financing costs in the amount of $986,365, representing
the potential penalties due such holders.
F-28
<PAGE>
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------------------------------------------------
1999 1998 1997
------------------ -------------------- --------------------
<S> <C> <C> <C>
Numerator:
Net loss $ (7,124,126) $ (5,040,009) $ (4,434,482)
================== ==================== ====================
Denominator:
Weighted average shares 1,105,603 659,034 615,833
================== ==================== ====================
Basic and diluted loss per common
share $ (6.44) $ (7.65) $ (7.20)
================== ==================== ====================
</TABLE>
At June 30, 1999 there were, exclusive of the Prepaid Warrants (Note 5),
3,195,000 Common Stock Purchase Warrants outstanding. Such warrants have
exercise prices ranging from $.60 to $72.00 per share and expire from March 2001
through January 2004. Based on the closing bid price ($1.50) of the Company's
Common Stock at June 30, 1999, there were, exclusive of the Prepaid Warrants,
currently exercisable in-the-money warrants outstanding for the purchase of
507,700 shares of Common Stock. Additionally, the Company has established an
employee stock option plan for the benefit of directors, employees, and
consultants to the Company. These options are intended to qualify as incentive
stock options within the meaning of Section 422 of the Internal Revenue Code, as
amended, or as nonqualified stock options. The options are partially exercisable
after one year from date of grant and no options may be granted after April 15,
2006. At June 30, 1999, there are options outstanding for the purchase of
285,901 shares of the Company's Common Stock. None of the warrants or options
have been included in the computation of diluted loss per share because their
inclusion would be antidilutive. (See Note 11 for a discussion of the Company's
stock option plans.)
7. INCOME TAXES
At June 30, 1999 and 1998, the Company has deferred tax assets as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Capitalized Start-up Costs $ 741,600 $ 1,112,500
Net Operating Loss Carryforwards 6,578,000 4,126,000
------------- ------------
$ 7,319,600 $ 5,238,500
============= ============
</TABLE>
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," the Company has established a valuation allowance
to fully reserve the future income tax benefit of these deferred tax assets due
to uncertainty about their future realization. The valuation allowance increased
to $7,319,600 at June 30, 1999 from $5,238,500 at June 30, 1998 and $3,540,000
at June 30, 1997.
At June 30, 1999, the Company has net operating loss carryforwards for Federal
income tax purposes of approximately $8,930,000 which expire in the years 2009
through 2013. As a result of the public issuance of stock by the Company on
March 21, 1996, and the resultant change in ownership pursuant to
F-29
<PAGE>
Internal Revenue Code Section 382, the utilization of net operating losses
incurred prior to this date may be limited.
8. LEASES
The Company leases office space for its Stamford, Connecticut headquarters under
a noncancelable lease. The lease includes escalation clauses for items such as
real estate taxes, building operation and maintenance expenses, and electricity
usage.
On May 1, 1997, the Company entered into a 3 year noncancelable capital lease
for certain computer equipment used to provide information services. The Company
also leases certain other computer equipment under operating leases which expire
through July 2000.
Rent expense amounted to approximately $290,600, $278,000, and $207,000 for the
years ended June 30, 1999, 1998, and 1997, respectively.
Minimum future rental payments at June 30, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
------------------------------------ CAPITAL
YEAR ENDING JUNE 30 PREMISES EQUIPMENT LEASE
----------------- --------------- ------------------
<S> <C> <C> <C>
2000 $ 179,700 $ 41,000 $ 75,341
2001 186,000 1,600 --
2002 192,300 -- --
2003 67,000 -- --
----------------- --------------- ------------------
$ 625,000 $ 42,600 75,341
================= ===============
Less amounts
representing interest
and executory costs 5,194
------------------
$ 70,147
==================
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
By letter dated April 10, 1998, Michael Fishman, then Vice President of Sales
for the Company, resigned his position. On or about April 24, 1998, Mr. Fishman
filed a complaint against the Company, Sebastian E. Cassetta and four other
defendants in the United States District Court for the District of Connecticut.
The complaint asserted claims under Sections 10(b) and 18 of the Securities
Exchange Act of 1934, as well as several state law claims, including breach of
contract, fraud and misrepresentation. Mr. Fishman alleged that the Company (1)
failed to pay him the benefits and compensation to which he was entitled and (2)
made material misrepresentations in its filings with the Securities and Exchange
Commission. On December 11, 1998, the Court granted the Company's motion to
dismiss Mr. Fishman's action without prejudice to the plaintiff to seek leave to
file an amended complaint within 30 days. On May 12, 1999, the Court denied the
plaintiff's subsequent motion for leave to file a substituted complaint on the
basis that the federal securities law claim, the only federal claim alleged by
the plaintiff, was still deficient. Accordingly, the federal securities claim
was dismissed with prejudice. On or about June 4, 1999, Mr. Fishman commenced an
action against the same defendants and added as a seventh defendant, the
Company's former President, Mr. Steven Francesco, in the Connecticut Superior
Court for the Judicial
F-30
<PAGE>
District of Stamford/Norwalk at Stamford alleging breach of contract, breach of
duty of good faith and fair dealing, fraudulent misrepresentation, negligent
misrepresentation, intentional misrepresentation and failure to pay wages. The
defendants have answered the complaint and filed counterclaims for fraudulent
inducement and breach of contract. Plaintiff's response to counterclaims was due
October 14, 1999 and has yet to be received. Although the Company is vigorously
defending this action, there can be no assurance that it will be successful.
By memorandum dated April 10, 1998, Jonathan Paschkes, then Vice President of
Marketing for the Company, resigned his position. On or about November 17, 1998,
Mr. Paschkes filed a complaint against the Company and Sebastian E. Cassetta in
the United States District Court, District of Connecticut. In the complaint, Mr.
Paschkes alleges (i) fraudulent inducement to him to accept his position with
the Company; (ii) breach of various terms of the Company's employment contract
with him; and (iii) failure by the Company to pay him wages and bonuses and
issue options to him pursuant to the terms of his employment contract. On or
about February 18, 1999, Mr. Paschkes filed an amended complaint. The Company
answered the amended complaint and asserted counterclaims against Mr. Paschkes
for fraudulent inducement, breach of contract, conversion and statutory theft.
On October 5, 1999, an agreement in principle was reached between the Company
and Mr. Paschkes in full settlement of these claims. The Company anticipates
executing a settlement agreement with Mr. Paschkes and filing a Stipulation of
Dismissal with prejudice before October 31, 1999. The Company has recorded a
charge for the settlement of such claims in the results of operations for the
year ended June 30, 1999.
On or about May 11, 1998, Ronald G. Weiner filed a complaint against the Company
and Mr. Francesco in the Supreme Court of the State of New York, County of New
York. The complaint alleges, among other things, that in May 1993, by letter
from Mr. Francesco, Mr. Weiner was offered a 10% equity stake in Smart Phone
Services, Inc. ("SPS"), a Subchapter S company of which Mr. Francesco allegedly
was the President and sole shareholder, in exchange for his active involvement
in, among other things, raising capital and managing the financial aspects of
SPS. The complaint alleges that, in November 1993, Mr. Francesco sent a letter
to Mr. Weiner in which he (i) represented that SPS had failed to attract a
single investor and (ii) withdrew his offer to Mr. Weiner of a 10% equity
position in SPS. The complaint further alleges that, in conversations with Mr.
Weiner beginning in November 1993, Mr. Francesco represented that he was ceasing
all efforts to capitalize SPS. The complaint alleges, among other things, that
Mr. Francesco and SPS breached their agreement with Mr. Weiner by withdrawing
their offer to him of a 10% equity stake in SPS, and that, at the time Mr.
Francesco represented that he was ceasing efforts to capitalize SPS, he had
actually formed the Company and was actively seeking investors for it. The
complaint further alleges that the Company is a successor entity to SPS and
that, therefore, the Company is liable for SPS' and Mr. Francesco's alleged
conduct in derogation of their alleged agreement with Mr. Weiner. The complaint
seeks, among other things, (i) a declaratory judgment declaring Mr. Weiner a 10%
equity shareholder of the Company, (ii) a constructive trust in Mr. Weiner's
favor for 10% for the Company's equity shares and (iii) restitution against Mr.
Francesco and the Company for unjust enrichment. On his unjust enrichment claim,
Mr. Weiner seeks unspecified damages that he alleges to be at least $250,000. In
its answer to the complaint, the Company has denied the material allegations of
the complaint, asserted affirmative defenses and also asserted cross-claims
against Mr. Francesco seeking indemnification from, or contribution towards, any
judgment that Mr. Weiner may obtain against the Company. In accordance with an
agreement dated November 11, 1998, the Company has filed a motion to discontinue
the cross-claims that it asserted against Mr. Francesco. No discovery in this
action has yet been taken. Although the Company is vigorously defending this
action there can be no assurance that it will be successful.
10. SIGNIFICANT RELATIONSHIPS
During the year ended June 30, 1999, the Company's relationship with DTN
accounted for 94.8% of its
F-31
<PAGE>
revenues. During the year ended June 30, 1998, three Strategic Marketing Partner
relationships accounted for 10.2%, 10.0% and 24.1%, respectively, of the
Company's revenues while during the year ended June 30, 1997, one Strategic
Marketing Partner relationship accounted for approximately 46.4% of the
Company's revenues.
11. EMPLOYEE STOCK OPTION PLAN
In April 1996, the Board of Directors approved the establishment of an Employee
Stock Option Plan authorizing stock option grants to directors, key employees,
and consultants of the Company. The options are intended to qualify as incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, or as nonqualified stock options. The Plan provides for the
issuance of up to 250,000 of such options at not less than the fair value of the
stock on the date of grant. The options are partially exercisable after one year
from date of grant and expire on the tenth anniversary of the date of grant.
On September 24, 1997, the Compensation Committee granted new stock options to
employees and non-employee directors conditional upon cancellation of all of
their existing stock options. Such options were exercisable at $12.00. On
October 8, 1998, the Board of Directors voted to cancel the outstanding employee
and non-employee director options and reissue options covering a like number of
shares to employees and non-employee directors at an exercise price not less
than the fair value at that date. The exercise price of the options issued to
employees and non-employee directors on October 8, 1998 was $1.29 per share.
Such options expire on October 7, 2008. In accordance with APB No. 25, the
Company has recorded the changes in the fair value of the shares underlying
177,201 of such options to reflect the compensatory nature of their issuance. On
November 20, 1998, the Board of Directors granted employees options to purchase
58,700 shares of Common Stock at $1.625 per share. Such options expire on
November 19, 2008.
On December 29, 1998, the Board approved a plan to compensate non-employee
directors for their service to the Company by granting to them options to
purchase 10,000 shares of the Company's Common Stock at the commencement of each
calendar year. Effective January 1, 1999, the Company issued options to such
persons to purchase 50,000 shares of Common Stock exercisable at $2.35 per share
through December 31, 2003.
On October 13, 1999, the Board of Directors authorized the establishment of the
Company's 1999 Employee Stock Option Plan ("1999 Plan"). The 1999 Plan provides
for the issuance of options to employees and directors for the purchase of a
maximum of 400,000 shares of Common Stock of the Company at not less than the
fair value of the Common Stock on the date of grant. The Board authorized the
issuance of 300,000 of such options to employees at the fair value of the Common
Stock on that date.
F-32
<PAGE>
Information concerning stock options for the Company is as follows:
<TABLE>
<CAPTION>
AVERAGE
EXERCISE
OPTIONS PRICE
-------------------- -----------------------
<S> <C> <C>
Balance at July 1, 1996 51,925 $ 38.82
Granted 70,829 31.38
Exercised -- --
Cancelled 66,362 37.32
-------------------- -----------------------
Balance at June 30, 1997 56,392 31.26
Granted 206,391 12.00
Exercised -- --
Cancelled 85,216 25.50
-------------------- -----------------------
Balance at June 30, 1998 177,567 12.00
Granted 463,858 1.92
Exercised -- --
Cancelled 355,524 7.26
-------------------- -----------------------
Balance at June 30, 1999 285,901 $ 1.54
==================== =======================
</TABLE>
The following table summarizes information about the Company's stock options
outstanding as of June 30, 1999.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -----------------------------------
AVERAGE
AVERAGE REMAINING AVERAGE
RANGE OF NUMBER OF EXERCISE CONTRACTUAL NUMBER OF EXERCISE
EXERCISE PRICES OPTIONS PRICE LIFE (YEARS) OPTIONS PRICE
--------------------------- ----------------- --------------- --------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
$1.29 - $2.35 285,901 $ 1.54 8.25 81,164 $ 1.96
=========================== ================= =============== =============== ================ ==================
</TABLE>
SUPPLEMENTAL AND PRO FORMA DISCLOSURE
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation." This Statement requires companies to recognize compensation
expense based on the respective fair values of the options at the date of grant.
Companies that choose not to adopt the new rules will continue to apply the
existing accounting rules contained in APB No. 25, but are required to disclose
the pro forma effects on net income and earnings per share, as if the fair value
based method of accounting had been applied.
The pro forma information regarding net loss and loss per share required by
Statement 123 has been determined as if the Company had accounted for its
employee stock option plan under the fair value methods described in that
Statement. The fair value of options granted under the Company's employee stock
option plan was estimated at the date of grant using the Black-Scholes option
pricing model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require
F-33
<PAGE>
the input of highly subjective assumptions including the expected dividend
yield, the expected life of the options, the expected stock price volatility,
and the risk-free interest rate.
Pertinent assumptions with regard to the determination of fair value of the
options and their impact on earnings per share are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- --------------- ------------------
<S> <C> <C> <C>
Weighted average dividend yield for options
granted 0.0% 0.0% 0.0%
Weighted average expected life in years 5.0 5.0 5.0
Weighted average volatility 147.0% 143.9% 70.8%
Risk-free interest rate 5.75% 6.0% 6.5%
Weighted average grant date fair value of
options $1.92 $10.92 $19.80
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. As such, the pro forma
net loss and loss per share are not indicative of future years.
The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ -- ----------------------------- -- -----------------------------
REPORTED PROFORMA REPORTED PROFORMA REPORTED PROFORMA
--------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net Loss $7,124,126 $7,308,036 $5,040,009 $5,654,512 $4,434,482 $5,209,947
=============== ============== ============== ============== ============== ==============
Loss per Share $6.44 $6.61 $7.65 $8.58 $7.20 $8.46
=============== ============== ============== ============== ============== ==============
</TABLE>
12. SUBSEQUENT EVENTS
On July 1, 1999, the Company entered into an agreement with ASB, a holder of
$325,000 of the Company's Prepaid Warrants, to settle the Company's obligation
to ASB pursuant to the default provisions of the Prepaid Warrants. Pursuant to
such agreement, the Company paid ASB $325,000 to redeem the Prepaid Warrants and
issued 180,000 shares of Common Stock in full settlement of all obligations to
ASB. The Company has agreed to file a registration statement with the Securities
and Exchange Commission covering such shares. Settlement costs of $268,695 have
been recorded as debt origination and other financing costs during the year
ended June 30, 1999.
On October 13, 1999, the Board of Directors agreed to enter into a restricted
stock purchase agreement with Mr. Robert Pearl, Director of Business
Development. Accordingly, Mr. Pearl has been granted 1% of the fully diluted
shares of Common Stock of the Company as of that date at the purchase price of
$.75 per share.
F-34
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SMARTSERV ONLINE, INC.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE NO.
------- ----------- --------
<S> <C>
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 Form of Warrant Agent Agreement
4.3 Form of Redeemable Warrant
4.4 Form of Warrant Agreement used by the Company for the warrants
issued to Alexandra Building Corp., John E. Herzog, Emanuel E.
Geduld, Andrew DaPonte, Anchung Sammy Chung and Fong-Chi
Allison Tsao
4.5 Form of Warrant Agreement used by the Company for the warrants
issued to Steven Rosner, Andrew Seybold Group, LLC, Michael
Kramer, Lindquist Global Advisors, LLC and Brauning Associates
4.6 Stock Purchase Agreement dated May 12, 2000 between the
Company and TecCapital, Ltd., The Abernathy Group and Conseco
Equity Fund
5.1 Opinion of Parker Chapin LLP
10.1 Information Distribution License Agreement dated as of July
18, 1994 between the Company and S&P ComStock, Inc.
10.2 New York Stock Exchange, Inc. Agreement for Receipt and Use of
Market Data dated as of August 11, 1994 between the Company
and the New York Stock Exchange, Inc.
10.3 The Nasdaq Stock Market, Inc. Vendor Agreement for Level 1
Service and Last Sale Service dated as of September 12, 1994
between the Company and The Nasdaq Stock Exchange, Inc.
("Nasdaq")
10.4 Amendment to Vendor Agreement for Level 1 Service and Last
Sale Service dated as of October 11, 1994 between the Company
and Nasdaq
10.5 Lease Agreement dated as of March 4, 1994, between the Company
and One Station Place, L.P. regarding the Company's Stamford,
Connecticut offices
10.6 Lease Modification and Extension Agreement, dated February 6,
1996, between the Company and One Station Place, L.P.
regarding the Company's Stamford, Connecticut offices
</TABLE>
<PAGE>
10.7 1996 Stock Option Plan
10.8 1999 Stock Option Plan
10.9 Asset Purchase and Software License and Service Agreements
between SmartServ Online, Inc. and Data Transmission Network
Corporation, dated April 23, 1998
10.10 Amendment to the Software and License Agreement between
SmartServ Online, Inc. and Data Transmission Network
Corporation, dated June 24, 1999. Portions of this exhibit
(indicated by asterisks) have been omitted pursuant to an
order by the Securities and Exchange Commission dated December
2, 1999, granting confidential treatment under the Securities
Exchange Act of 1934 and the omitted portions have been filed
separately with the Securities and Exchange Commission.
10.11 Letter agreement dated August 26, 1999, amending the Amendment
to the Software and License Agreement between SmartServ
Online, Inc. and Data Transmission Network Corporation, dated
June 24, 1999. Portions of this exhibit (indicated by
asterisks) have been omitted pursuant to an order by the
Securities and Exchange Commission dated December 2, 1999,
granting confidential treatment under the Securities Exchange
Act of 1934 and the omitted portions have been filed
separately with the Securities and Exchange Commission.
10.12 Amended and Restated Employment Agreement between SmartServ
Online, Inc. and Sebastian E. Cassetta, dated January 1, 1999
10.13 Restricted Stock Purchase Agreement between SmartServ Online,
Inc. and Sebastian E. Cassetta, dated December 29, 1998
10.14 Employment Agreement between SmartServ Online, Inc. and Mario
F. Rossi, dated January 1, 1999
10.15 Restricted Stock Purchase Agreement between SmartServ Online,
Inc. and Mario F. Rossi, dated December 29, 1998
10.16 Amended Restricted Stock Purchase Agreement between SmartServ
Online, Inc. and Sebastian E. Cassetta, dated December 31,
1999
10.17 Amended Promissory Note between SmartServ Online, Inc. and
Sebastian E. Cassetta, dated January 4, 2000
10.18 Amended Security Agreement between SmartServ Online, Inc. and
Sebastian E. Cassetta, dated January 4, 2000
10.19 Amended Restricted Stock Purchase Agreement between SmartServ
Online, Inc. and Mario F. Rossi, dated December 31, 1999
<PAGE>
10.20 Amended Promissory Note between SmartServ Online, Inc. and
Mario F. Rossi, dated January 4, 2000
10.21 Amended Security Agreement between SmartServ Online, Inc. and
Mario F. Rossi, dated January 4, 2000
10.22 Employment Agreement between SmartServ Online, Inc. and Alan
G. Bozian, dated May 29, 2000
23.1 Consent of Ernst & Young LLP
23.2 Consent of Parker Chapin LLP (Included in Exhibit 5.1)
24.1 Power of Attorney of certain directors and officers of
SmartServ (Included as part of the signature page beginning on
page II-7 of the filing)
