+As filed with the Securities and Exchange Commission on January 6, 2000
Registration No. 333-92599
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
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)
Sebastian E. Cassetta
Chief Executive Officer and Chairman of the Board
Smartserv Online, Inc.
One Station Place
Stamford, CT 06902
(203) 353-5950
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies of communications to:
Michael J. Shef, Esq.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
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 Proposed Maximum Amount of
Securities to be Registered Registered(1) Aggregate Offering Price (2) Registration Fee
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock, par value $.01 per share 1,453,970 $24,285,661(2) $6,411
----------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per share 1,104,112 $21,771,709(3) $5,748
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) All of the shares of common stock being registered hereby are being
offered by selling stockholders who acquired such shares in private
transactions. No other shares of the registrant's common stock are
being registered in this offering.
(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 bid and
asked price of the common stock reported on the Over-the-Counter (OTC)
Bulletin Board on December 9, 1999.
(3) 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 bid and
asked price of the common stock reported on the Over-the-Counter(OTC)
Bulletin Board on December 31, 1999.
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.
2,558,082 shares of common stock
. The selling stockholders are offering to sell 2,558,082
shares of common stock.
. We will not receive any proceeds from the offering of common
stock. We will receive approximately $6,414,000 if all of
the warrants are exercised. These proceeds will be used for
our general corporate purposes.
. Our common stock is traded and quoted on the
Over-the-Counter (OTC) Bulletin Board under the symbol
"SSOL". On December 31, 1999, the last reported bid price of
our common stock was $19.6875 and the last reported asked
price was $19.75.
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 January _____, 2000
-1-
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY...........................................................3
ABOUT OUR COMPANY............................................................3
SUMMARYFINANCIAL DATA........................................................3
RISK FACTORS.................................................................4
SPECIAL INFORMATION REGARDING FORWARD LOOKING STATEMENTS.....................8
USE OF PROCEEDS..............................................................8
MARKET PRICE OF OUR COMMON STOCK AND PUBLIC WARRANTS.........................9
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...................10
BUSINESS....................................................................16
MANAGEMENT..................................................................21
PRINCIPAL STOCKHOLDERS......................................................27
SELLING STOCKHOLDERS........................................................29
PLAN OF DISTRIBUTION........................................................31
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................32
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
-2-
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information included elsewhere in this
document. You should carefully review the more detailed information and
financial statements included in this document. The summary is not complete and
may not contain all of the information you may need to consider before investing
in our common stock. We urge you to carefully read this document, including the
"Risk Factors" section beginning on page 4 and the Financial Statements and
notes to those statements beginning on page F-1 of this document.
ABOUT OUR COMPANY
Please note that throughout this prospectus, the words "we", "our" or
"us" refer to SmartServ Online, Inc. and not to the selling stockholders.
SmartServ Online, Inc. was organized in 1993. We offer a range of
services designed to facilitate e-commerce by providing transactional and
information services to our alliance partners. We have developed online
financial, transactional and media applications using a unique "device
independent" delivery solution and make these services available to wireless
telephones and personal digital assistants, personal computers and the Internet
through our application software and communications architecture. Our services
facilitate stock trading and disseminate real-time stock quotes, business and
financial news, sports information, private-labeled electronic mail, national
weather reports and other business and entertainment information.
Our executive offices are located at One Station Place, Stamford,
Connecticut 06902 and our telephone number is (203) 353-5950.
SUMMARY FINANCIAL DATA
This summary financial data is derived from our financial statements
for the fiscal years ended June 30, 1999, June 30, 1998, and June 30, 1997, and
for the fiscal quarters ended September 30, 1999 and September 30, 1998 certain
of which are included elsewhere herein. You should read the following summary
financial data in conjunction with the financial statements and notes to those
statements.
<TABLE>
<CAPTION>
Quarters Ended
September 30 Years Ended June 30
---------------------------------------- -------------------------------------------------
Statement of Operations 1999 1998 1999 1998 1997
--------------------------------------- -------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 808,292 $ 349,705 $ 1,443,781 $ 873,476 $ 688,610
Loss from Operations (326,684) (715,283) (3,750,471) (4,488,307) (4,457,343)
Net Loss (315,667) (854,177) (7,124,126) (5,040,009) (4,434,482)
Basic and Diluted Loss per (.23) (.92) (6.44) (7.65) (7.20)
Share
Balance Sheet At September 30 At June 30
---------------------------------------- -------------------------------------------------
1999 1999 1998 1997
---------------------------------------- -------------------------------------------------
Cash and Cash Equivalents $ 1,103,443 $ 2,165,551 $ 354,225 $ 93,345
Working Capital Deficiency (2,181,401) (1,822,340) (1,850,287) (901,026)
Total Assets 2,840,462 3,820,598 1,276,853 1,246,689
Total Liabilities and Deferred
Revenues 7,321,783 8,527,898 2,523,714 1,945,017
Shareholders' Deficiency (4,481,321) (4,707,300) (1,246,861) (698,328)
</TABLE>
-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 $315,667 for the three month period ended September
30, 1999. At September 30, 1999, we had an accumulated deficit of $22,261,672
and a deficiency of net assets of $4,481,321. These conditions raise substantial
doubt about our ability to continue as a going concern. Losses have resulted
principally from costs incurred in connection with activities aimed at
developing our software, information and transactional services and from costs
associated with our marketing and administrative activities. We have incurred
substantial expenses and commitments and continue to operate at a deficit on a
monthly basis. No assurance can be provided that we will be able to develop
revenues sufficient to support our operations.
WE DEPEND ON ONE CUSTOMER, AND THE LOSS OF THIS CUSTOMER COULD ADVERSELY
AFFECT OUR OPERATING RESULTS
Currently, substantially all of our revenues are generated through our
licensing arrangement with Data Transmission Network Corporation, or DTN. Our
results of operations will depend upon numerous factors including sustained
revenues from our arrangement with DTN, the regulatory environment, introduction
and market acceptance of new services, establishing alliances with strategic
marketing partners and competition. If we default under the license agreement,
DTN may at its sole cost elect to provide its own maintenance to both the system
software and related hardware. Under these circumstances, DTN will have the
right to own the system software, including the source codes, and related
hardware, and DTN will have no further obligation to pay us licensing fees which
we currently rely on for a significant part of our revenues.We anticipate that
our results of operations in any given period will continue to depend to a
significant extent upon revenues from DTN and a small number of customers. In
order to increase our revenues, we will need to attract and retain additional
customers. Our failure to obtain a sufficient number of additional customers
could adversely affect our results of operations.
OUR CAPITAL REQUIREMENTS MAY REQUIRE ADDITIONAL FINANCING WHICH MAY NOT
BE AVAILABLE TO US
We estimate that we have sufficient cash resources to fund operations
through April, 2000. If our cash resources prove to be insufficient at that time
we may be required to seek additional debt or equity financing to fund the costs
of continuing operations until we achieve positive cash flow. We have no current
commitments or arrangements for additional financing and there can be no
assurance that any additional debt or equity financing will be available to us
on acceptable terms, or at all.
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
-4-
<PAGE>
a working capital deficiency which raises substantial doubt about our ability to
continue as a going concern. This report may make it more difficult for us to
raise additional debt or equity financing needed to run our business and is not
viewed favorably by analysts of, or investors in, our common stock. We urge
potential investors to review this report before making a decision to invest in
our company.
OUR SECURITIES WERE DELISTED FROM QUOTATION AND TRADING ON THE NASDAQ
SMALLCAP MARKET WHICH MAY HURT OUR ABILITY TO RAISE CAPITAL, THE PRICE OF OUR
COMMON STOCK, AND AN INVESTOR'S ABILITY TO SELL OUR COMMON STOCK
At the close of business on May 20, 1998, our common stock and public
warrants were delisted from quotation and trading on the Nasdaq SmallCap Market.
At present, trading of our securities is conducted on the NASD's
Over-the-Counter (OTC) Bulletin Board. As a result, an investor will likely find
it more difficult to dispose of our shares in the open market. Also, since we do
not have the liquidity and marketability associated with a Nasdaq listing, it
may be more difficult to raise capital from accredited and institutional
investors and our common stock price may be volatile.
OUR BUSINESS DEPENDS UPON STRATEGIC MARKETING ALLIANCES WHICH MAY NOT
MATERIALIZE
We intend to sell our services primarily by entering into non-exclusive
agreements with strategic marketing partners who would brand our "bundled"
information and transaction services with their own private label, promote the
packaged offering and then distribute our information and e-commence services to
their clients. Our success will depend on:
. our ability to enter into agreements with strategic marketing
partners;
. the ultimate success of these strategic marketing partners; and
. 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 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.
-5-
<PAGE>
WE COMPETE AGAINST LARGER, WELL KNOWN COMPANIES WITH GREATER RESOURCES
THAN WE HAVE
The market for Web-based information and transactional services is
highly competitive and involves rapid innovation and technological change,
shifting consumer preferences and frequent new service introductions. Most of
our competitors and potential competitors have substantially greater financial,
marketing and technical resources than we have. Increased competition in the
market for our services could materially and adversely affect our results of
operations through price reductions and loss of market share.
The principal competitive factors in both the online and wireless
services industry include content, product features and quality, ease of use,
access to distribution channels, brand recognition, reliability and price. We
believe that potential new competitors, including large multimedia and
information system companies, are increasing their focus on transaction
processing. We face increasing competition from other emerging services
delivered through personal computers and wireless devices such as developing
transactional services offered by Checkfree Corporation, Microsoft Corporation,
PC Quote.com, Hyperfeed Technologies, Inc., Intuit Inc., 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., CompuServe and Prodigy offer competing services
delivered through personal computers. Although in its infancy, the wireless
arena too has its competitors, such as Datalink Systems Corporation, Intelligent
Information, Inc., Aether Systems, Inc. (a/k/a Aether Technologies), Saraide.com
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
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
-6-
<PAGE>
otherwise receive a premium for their shares over then current market prices,
and may limit the ability of our stockholders to approve transactions that they
may deem to be in their best interests.
YOUR OWNERSHIP INTEREST, VOTING POWER AND THE MARKET PRICE OF OUR
COMMON STOCK MAY DECREASE BECAUSE WE HAVE ISSUED, AND MAY CONTINUE TO ISSUE, A
SUBSTANTIAL NUMBER OF SECURITIES CONVERTIBLE OR EXERCISABLE INTO OUR COMMON
STOCK
We have issued common stock, options and warrants to purchase our
common stock, and in the future we may issue additional shares of common stock,
options, warrants, preferred stock or other securities exercisable for or
convertible into our common stock. A substantial number of shares of common
stock are already available for sale in the public market under Rule 144 of the
Securities Act and additional shares may become available for sale in the near
future. In particular, 2,558,082 shares of our common stock issued or issuable
upon the exercise of warrants will be registered under this document and,
subject to legal or contractual restrictions with respect to 883,333 of such
shares, will be freely saleable by the selling stockholders. This represents
approximately 55.26% of the common stock that will be outstanding after the
exercise of such warrants. Sales of these shares or the market's perception that
these sales could occur may cause the market price of our common stock to fall
and may make it more difficult for us to sell equity securities in the future at
a time and price that we deem appropriate or to use equity securities as
consideration for future acquisitions. In addition, we have outstanding prepaid
warrants convertible into common stock at a discount to the market price of our
common stock. Depending upon market conditions at the time of conversion of our
prepaid warrants, the number of shares of common stock issuable upon such
conversion could increase significantly in the event of a decrease in the
trading price of the common stock. Holders of common stock could therefore
experience significant dilution upon conversion of these prepaid warrants.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS
We have designed and developed our own information platform,
"SmartServ", based on Sun Microsystems, Inc. computers and Oracle Corp.'s
version 7.X relational database manager, to support a variety of end user
devices. Although we intend to protect our rights vigorously, there can be no
assurance that any of the measures to protect our proprietary rights explained
below will be successful. In an effort to protect our proprietary rights, we
rely upon a combination of contract provisions and copyrights, trade secret laws
and a service mark. We license the use of our services to our strategic
marketing partners under agreements that contain terms and conditions
prohibiting the unauthorized reproduction of our software and services. We seek
to protect the source code of our application software and communications
architecture as a trade secret and as an unpublished copyrighted work.
We believe that our service mark "SmartServ Online" has significant
value and is important to the marketing of our services. There can be no
absolute assurance, however, that our mark does not or will not violate the
proprietary rights of others, that our mark would be upheld if challenged or
that we would not be prevented from using our mark, any of which could have an
adverse effect on us. In addition, there can be no assurance that we will have
the financial resources necessary to enforce or defend our mark. We believe that
our software, services, service mark and other proprietary rights do not
infringe on the proprietary rights of third parties. However, there can be no
assurance that third parties will not assert infringement claims against us with
respect to current features, content or services or that any such assertion may
not require us to enter into royalty arrangements or result in litigation.
OUR LICENSE ARRANGEMENT WITH DTN CONTAINS PROVISIONS WHICH ALLOW DTN TO
TERMINATE OUR RELATIONSHIP AND TAKE OWNERSHIP OF CERTAIN OF OUR PROPRIETARY
TECHNOLOGY UNDER CERTAIN CIRCUMSTANCES
-7-
<PAGE>
We granted DTN an exclusive perpetual worldwide license to our
Internet-based (1) real-time stock quote product, (2) online trading vehicle for
customers of small and medium sized brokerage companies, (3) administrative
reporting package for brokers of small and medium sized brokerage companies, and
(4) order entry/routing system. Under the license agreement, we are required to
maintain certain systems' performance standards and to satisfy other general
business requirements. Our inability to maintain compliance with the license
agreement could result in a default thereunder. In addition, a change of control
of SmartServ is an event of default under the license agreement. A change of
control includes a change in the majority of the members on our board of
directors. Under a letter agreement with Zanett Capital, Inc., Zanett Capital
may elect a majority of the board under certain circumstances, including the
failure of our common stock to be listed on Nasdaq. Moreover, Zanett Securities
Corporation and Zanett Lombardier, Ltd. and its affiliates own shares of common
stock and warrants to purchase common stock, which, if exercised, would equal
approximately 52.0% of the common stock that would be outstanding after the
exercise of such warrants, giving them the potential to effect a change of
control of SmartServ.
If an event of default occurs under the license agreement, DTN may at
its sole cost elect to provide its own maintenance to both the system software
and related hardware. Under these circumstances, DTN will have the right to own
the system software, including the source codes, and related hardware, and DTN
will have no further obligation to pay us licensing fees which we currently rely
on for a significant part of our revenues.
WE ARE INVOLVED IN SEVERAL PENDING LEGAL PROCEEDINGS WHICH, IF RESOLVED
AGAINST US, COULD CAUSE DILUTION TO OUR STOCKHOLDERS AND HAVE A MATERIAL
NEGATIVE IMPACT ON OUR OPERATIONS
From time to time we have been, and expect to continue to be, a party
to legal proceedings and claims in the ordinary course of our business. Our
ongoing legal proceedings with Mr. Michael Fishman and Mr. Ronald G. Weiner have
been set forth in the Business section of this document under the heading "Legal
Proceedings". In addition to unspecified damages of at least $250,000, Mr.
Weiner seeks 10% of our outstanding equity securities. While we expect to
contest these matters vigorously, litigation is inherently uncertain and an
adverse judgment on any of these claims could cause dilution to our stockholders
as well as harm our business. Even if not meritorious, any of these current and
future matters could require the expenditure of significant financial and
managerial resources.
SPECIAL INFORMATION REGARDING FORWARD LOOKING STATEMENTS
Some of the statements in this prospectus or in the documents we
incorporate by reference are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve certain known and unknown risks, uncertainties and other
factors which may cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by these forward-looking statements. These factors include,
among others, the factors set forth above under "Risk Factors." The words
"believe," "expect," "anticipate," "intend" and "plan" and similar expressions
identify forward-looking statements. We caution you not to place undue reliance
on these forward-looking statements. We undertake no obligation to update or
revise any forward-looking statements or to publicly announce the result of any
revisions to any of the forward-looking statements in this document to reflect
future events or developments.
USE OF PROCEEDS
We will not receive any proceeds from the sale by the selling
stockholders of the common stock offered by this prospectus. The shares of
common stock will be sold from time to time by the selling stockholders at
prevailing market prices. We will receive approximately $6,414,000 if all of the
Warrants for
-8-
<PAGE>
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
SmartServ's $.01 par value common stock commenced trading on March 21,
1996 on the National Association of Securities Dealers' Automated Quotation
System. Our Redeemable Common Stock Purchase Warrants, or public warrants, also
commenced trading on March 21, 1996 on the Nasdaq.
On May 20, 1998, we received notification from The Nasdaq Stock Market
that we no longer met the net tangible asset/market capitalization/net income
requirements for continued listing of our securities on The Nasdaq SmallCap
Market. Accordingly, at the close of business on May 20, 1998, our common stock
and public warrants were delisted from The Nasdaq SmallCap Market. Currently,
our securities trade on the OTC Bulletin Board as SSOL and SSOLW.
On October 15, 1998, our stockholders approved a one-for-six reverse
stock split which became effective on October 26, 1998.
The following table sets forth the high and low prices for the common
stock and public warrants during the periods indicated as reported by the Nasdaq
SmallCap Market and the OTC Bulletin Board, as applicable. Such amounts (and all
other share and price information contained in this document) have been adjusted
to reflect the reverse stock split.
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
------------ --------
HIGH LOW HIGH LOW
---- --- ---- ---
YEAR ENDING JUNE 30, 2000
- -------------------------
<S> <C> <C> <C> <C>
First Quarter $ 1.531 $ .719 $ .156 $ .063
Second Quarter 24.625 .719 6.500 .070
YEAR ENDED JUNE 30, 1999
- ------------------------
First Quarter $ 4.313 $ 1.875 $ 2.250 $ .375
Second Quarter 4.125 1.031 .531 .063
Third Quarter 4.875 1.500 .625 .063
Fourth Quarter 2.500 1.500 .250 .100
YEAR ENDED JUNE 30, 1998
- ------------------------
First Quarter $ 18.750 $ 6.750 $ 4.500 $ .750
Second Quarter 21.000 4.128 5.250 .750
Third Quarter 19.125 3.750 6.563 .938
Fourth Quarter 22.500 3.000 9.188 1.688
</TABLE>
As of January 4, 2000, we had 2,267,852 shares of common stock
outstanding held by 79 shareholders of record. We estimate that our common stock
is held by approximately 1,800 beneficial holders. As of such date, we had
1,725,000 public warrants outstanding held by 26 warrant holders of record.
-9-
<PAGE>
DIVIDENDS
We have never paid a cash dividend on our common stock. It is our
present policy to retain earnings, if any, to finance the development and growth
of our business. Accordingly, we do not anticipate that cash dividends will be
paid until our earnings and financial condition justify such dividends, and
there can be no assurance that we can achieve such earnings.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PLAN OF OPERATION
SmartServ delivers Internet-based content and trade order routing
solutions, as well as "Web-to-Wireless" applications that enable the processing
of transactions for its strategic alliances, or Strategic Marketing Partners,
and their customers. SmartServ has developed online financial, transactional and
media applications using a unique "device-independent" delivery solution.
SmartServ's plan of operation includes programs for the sale of its
information and transactional application services through Strategic Marketing
Partners utilizing a "business-to-business" strategy. Such a strategy provides
access to a large number of potential subscribers and allows SmartServ to
maximize its market reach at minimal operating costs. The flexibility of
SmartServ's application software and communications architecture enables the
customization of each information package offered to each Strategic Marketing
Partner, and in turn to their end users.
As an early entrant in the dynamic market of 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.
Management believes that most of SmartServ's revenues will continue to
be derived from consumers who purchase its services through Strategic Marketing
Partners. SmartServ anticipates that Strategic Marketing Partners will brand its
"bundled" information services with their own private label and promote and
distribute SmartServ's packaged offering to their clients. SmartServ has the
ability to customize the information package to be offered to each Strategic
Marketing Partner, by device. With the licensing of four of its Internet
products by DTN, SmartServ has discontinued efforts to develop a direct
subscriber base.
Management anticipates that staffing requirements associated with the
implementation of its plan of operation will result in the addition of a minimum
of six to ten people during the period ending June 30, 2000. Such personnel will
be added to assist with the programming requirements of Strategic Marketing
Partners' product offerings, for customer support and sales and marketing.
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RESULTS OF OPERATIONS
FISCAL QUARTER ENDED SEPTEMBER 30, 1999 VERSUS FISCAL QUARTER ENDED
SEPTEMBER 30, 1998
During the quarters ended September 30, 1999 and 1998, SmartServ's
revenues were $808,292 and $349,705, respectively. Substantially all of such
revenues were obtained from SmartServ's licensing agreement with DTN. At
September 30, 1999 and 1998, SmartServ recorded deferred revenues of $5,384,055
and $960,515, respectively. Such amounts resulted from SmartServ's relationship
with DTN and will be amortized to revenues over the term of the anticipated
revenue stream.
During the quarter ended September 30, 1999, SmartServ incurred costs
of services of $232,866. Such costs consisted primarily of information and
communication costs ($48,400), personnel costs ($55,800) and computer hardware
lease, depreciation and maintenance costs ($84,600). During the quarter ended
September 30, 1998, SmartServ incurred costs of services of $207,084. Such costs
consisted primarily of information and communication costs ($95,700), personnel
costs ($29,100), and computer hardware lease, depreciation and maintenance costs
($80,800). Product development costs were $46,845 and $27,046 for the quarters
ended September 30, 1999 and 1998, respectively. Such costs consisted primarily
of the amortization of 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" ("Statement 86"). During the quarters ended
September 30, 1999 and 1998, SmartServ capitalized $244,225 and $233,005,
respectively, of development costs in accordance with Statement 86.
During the quarter ended September 30, 1999, SmartServ incurred
selling, general and administrative expenses of $855,265 vs. $830,858 for the
quarter ended September 30, 1998. Such costs were incurred primarily for
personnel costs ($221,000), marketing and advertising costs ($76,400),
professional fees ($468,800), facilities ($50,000) and telecommunications costs
($17,000). Included in professional fees are noncash charges of $291,300
resulting from the amortization of costs ascribed to common stock purchase
warrants previously issued to financial consultants. Such common stock purchase
warrants were recorded in accordance with the Black-Scholes pricing methodology.
Selling, general and administrative expenses for the quarter ended September 30,
1998 were incurred primarily for personnel costs ($185,000), marketing and
advertising costs ($61,800), professional fees ($488,400), facilities ($49,000)
and telecommunications costs ($14,700). Included in professional fees are
noncash charges of $330,400 resulting from the amortization of costs ascribed to
common stock purchase warrants previously issued to financial consultants.
In accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" SmartServ must recognize the
compensatory nature of 173,239 options issued to employees pursuant to
SmartServ's employee stock option plan, as well as 892,319 shares issued or to
be issued to Messrs. Cassetta, Rossi and Pearl. Accordingly, SmartServ will be
required to record a noncash charge to earnings based on the difference between
the market price of its common stock at December 31,1999 and the exercise price
of the option or purchase price of the restricted stock. As a result of the
volatility of SmartServ's common stock, the magnitude of such a noncash charge
is unknown. However, based on a closing price ($18.00) of SmartServ's common
stock at December 3, 1999, it would be required to record a noncash charge to
earnings of approximately $16,500,000. Such charge will have no impact on
SmartServ's statement of financial condition at December 31, 1999 or cash flows
for the period then ended.
Interest income for the quarter ended September 30, 1999 and 1998
amounted to $11,017 and $2,202, respectively. Such amounts were earned primarily
from SmartServ's investments in short-term commercial paper and cash balances.
Interest and financing costs for the quarters ended September 30, 1999
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and 1998 were $0 and $141,096, respectively. During the quarter ended September
30, 1998, such costs were primarily attributable to the issuance of 50,000
shares of common stock to Zanett Lombardier, Ltd and Bruno Guazzoni, holders of
$1,669,000 of prepaid warrants, in consideration of such holders agreeing to
restrictions on the exercise of the prepaid warrants and the resale of the
shares of common stock issuable upon such exercise. The issuance of such shares
was recorded in the financial statements at fair market value.
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 results from the
capitalization of software development costs related to certain product
enhancements in accordance with Statement of Financial Accounting Standards No.
86. During the year ended June 30, 1999, SmartServ capitalized $765,000 of
development costs in accordance with Statement 86. No such costs were
capitalized during the year ended June 30, 1998. During the year ended June 30,
1999, product development costs consisted primarily of the amortization of
capitalized software development costs. During the year ended June 30, 1998,
product development costs consisted primarily of personnel costs ($541,400) and
computer system consultants ($335,000).
During the year ended June 30, 1999, SmartServ incurred selling,
general and administrative expenses of $4,006,599 vs. $3,221,940 for the year
ended June 30, 1998. During the year ended June 30, 1999, such costs were
incurred primarily for personnel costs ($1,148,400), facilities ($240,500),
marketing and advertising costs ($263,100), professional fees ($2,150,000), and
telecommunications costs ($69,500). During the year ended June 30, 1998, such
costs were incurred primarily for personnel costs ($1,349,000), facilities
($216,000), marketing and advertising costs ($240,400), professional fees
($1,051,400) and telecommunications costs ($73,100). Included in professional
fees are noncash charges of $1,349,020 in 1999 and $660,576 in 1998 representing
the amortization of deferred costs in connection with the issuance of warrants
to financial consultants.
Interest income for the year ended June 30, 1999 amounted to $4,767 vs.
$40,788 for the year ended June 30, 1998. Such amounts were earned primarily
from SmartServ's investments in highly liquid commercial paper. Interest and
financing costs for the year ended June 30, 1999 were $3,378,422. Such costs
were incurred primarily in connection with the issuance of the 8% convertible
notes ($2,254,700) and SmartServ's default pursuant to the prepaid warrants
($1,095,700). Of such amounts, $2,593,800 were noncash charges for the issuance
of common stock or warrants to purchase common stock as settlement of such
obligations. Interest and financing costs for the year ended June 30, 1998 were
$592,490. These costs were incurred in connection with the origination of
SmartServ's May 1997 line of credit. Of such amount,
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$463,600 represents the noncash charges associated with the issuance of certain
common stock purchase warrants.
Loss per share was $6.44 per share for year ended June 30, 1999 vs.
$7.65 per share for the year ended June 30, 1998. While the net loss increased
$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 is
$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.
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 year ended June 30, 1998 vs.
$7.20 per share for the year ended June 30, 1997. While the net loss increased
$605,527 SmartServ's weighted average shares of common stock outstanding
increased by 43,201 shares, thereby affecting the per share loss.
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CAPITAL RESOURCES AND LIQUIDITY
Since SmartServ's inception on August 20, 1993 through March 21, 1996,
the date of the initial public offering of securities ("IPO"), SmartServ funded
its operations through a combination of private debt and equity financings
totaling $4,160,000 and $12,877,500, respectively.
In May 1997, SmartServ arranged a line of credit facility with Zanett
Lombardier, Ltd. Such line of credit was originated for a maximum borrowing
amount of $550,000. In July and September 1997, the facility was amended to
allow for additional borrowings of up to $222,222. In conjunction with the
origination of the line of credit facility, SmartServ issued 56,627 common stock
purchase warrants to Zanett Lombardier, Ltd. Similarly, SmartServ issued 11,438
warrants for each of the July and September amendments. As a result of
SmartServ's default on the note in August 1997, SmartServ was required to issue
50,083 "default" warrants to Zanett Lombardier, Ltd.
In May 1997, SmartServ entered into a three year noncancelable capital
lease for certain computer equipment used to provide information services. The
cost of this equipment ($246,211) is being financed through the manufacturer's
finance division.
On September 30, 1997, Zanett Securities Corporation, acting as
placement agent for SmartServ, completed a private placement of $4 million of
its prepaid common stock purchase warrants. As part of the placement, Zanett
Lombardier, Ltd. converted a note payable of $772,222, issued pursuant to the
line of credit facility dated May 29, 1997, as amended, and accrued interest
thereon of $63,837 into prepaid warrants. The net proceeds of the placement of
$2,643,941 were used for general working capital requirements.
On April 23, 1998, SmartServ entered into a Software License and
Service Agreement with DTN, whereby SmartServ licensed to DTN the rights to
market three of SmartServ's Internet products. SmartServ received $850,000 upon
execution of the agreement and received minimum monthly payments of $100,000
through April 1999.
On June 24, 1999, SmartServ and DTN entered into a License Agreement
that amended the Software License and Service Agreement dated April 23, 1998. In
consideration of the receipt of $5.175 million, SmartServ granted DTN an
exclusive perpetual worldwide license to its Internet-based (1) real-time stock
quote product, (2) online trading vehicle for customers of small and medium
sized brokerage companies, (3) administrative reporting package for brokers of
small and medium sized brokerage companies, and (4) order entry/routing system.
Additionally, SmartServ received $324,000 in exchange for an agreement to issue
warrants to purchase 300,000 shares of its common stock at an exercise price of
$8.60 per share. SmartServ has agreed to continue to operate these products and
provide maintenance and enhancement services in exchange for a percentage of the
revenues earned by DTN therefrom. The cost of the SmartServ's commitment to
provide such maintenance and enhancement services is limited to a maximum of 20%
of the revenues earned by SmartServ. If 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. 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.
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On August 11, 1998, SmartServ entered into a letter of intent, as
amended on November 24, 1998, with Spencer Trask Securities, Inc. which provided
for the retention of Spencer Trask to act as exclusive placement agent in
connection with a private placement by SmartServ of a minimum of $5,000,000 and
a maximum of $10,000,000 of securities of SmartServ.
In anticipation of completing the private placement, SmartServ
completed an interim 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 are convertible and exercisable, respectively, at $.60
per share of common stock. Such notes were repaid in June 1999.
On July 1, 1999, SmartServ entered into an agreement with Arnhold & S.
Bleichroeder, Inc. to settle SmartServ's obligation to Arnhold & S. Bleichroeder
under the default provisions of the prepaid warrants. In accordance with that
agreement, SmartServ paid Arnhold & S. Bleichroeder $325,000 to redeem the
prepaid warrants and issued 180,000 shares of common stock in full settlement of
all obligations. SmartServ has agreed to file a registration statement with the
Securities and Exchange Commission covering such shares.
SmartServ's financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. SmartServ incurred
net losses of $7,124,126, $5,040,009, and $4,434,482 for the years ended June
30, 1999, 1998 and 1997, respectively. Additionally, we have incurred a net loss
of $315,667 for the three month period ended September 30, 1999. At September
30, 1999, we had an accumulated deficit of $22,261,672 and a deficiency of net
assets of $4,481,321. 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. These conditions raise substantial doubt about
SmartServ'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.
We estimate that we have sufficient cash resources to fund operations
through April, 2000. If our cash resources prove to be insufficient at that time
we may be required to seek additional debt or equity financing to fund the costs
of continuing operations until we achieve positive cash flow. We have no current
commitments or arrangements for additional financing and there can be no
assurance that any additional debt or equity financing will be available to us
on acceptable terms, or at all.
SmartServ's management believes that upon the successful implementation
of its marketing plan, sufficient revenues will be generated to meet operating
requirements. Management also believes that the successful execution of its
proposed plan of operations will generate sufficient cash flow from operations
to enable 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.
YEAR 2000 COMPLIANCE
SmartServ's information services are distributed via a combination of
third party computer hardware and software applications, as well as its designed
application software and communication networks. SmartServ has formed a task
force to assure that its products and services are Year 2000 ("Y2K") compliant.
As part of this process, SmartServ has queried its software vendors and third
party information providers and has updated certain hardware, third party
software and/or received letters of compliance from such third party information
providers. In addition, SmartServ has reviewed and modified its proprietary
application software for compliance.
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SmartServ is working diligently to ensure that all systems are Y2K
compliant and believes that its greatest risks would be the partial inability of
its systems to deliver accurate data caused by certain information vendors'
inability to supply Y2K compliant data. The inability of SmartServ's systems to
process non-Y2K compliant data could result in a substantial decline in both new
and existing customer subscriptions to its products. This would have a material
adverse effect on SmartServ's financial condition, results of operations, and
ability to continue as a going concern. SmartServ believes that the probability
of this occurrence is minimal as SmartServ is currently receiving and processing
Y2K data from its critical information providers.
BUSINESS
THE COMPANY
SmartServ Online, Inc. was organized in 1993. We deliver Internet-based
content and trade order routing solutions, as well as "Web-to-Wireless"
applications designed to facilitate transactions. We have developed online
financial, transactional and media applications using a unique
"device-independent" delivery solution. We have demonstrated ability in
developing applications utilizing the wireless application protocol (WAP)
towards enabling information and transactions on wireless telephones and
personal digital assistants.
SERVICES
Recognizing the call for mobility, we have developed an infrastructure
to integrate and deliver our Internet-based information and to effectuate
e-commerce transactions on wireless networks and devices. We are well positioned
to provide Web-based information and transaction applications and solutions for
Strategic Marketing Partners such as financial institutions, wireless carriers,
device manufacturers and value-added service providers and retailers. Our core
competency focuses on providing financial news and reports -- including
real-time stock quotes -- with the goal of facilitating online and wireless
stock trading and other transactions. To complement our financial offerings, we
also provide a host of personalized information services from local news, sports
and weather to traffic and entertainment services that can be accessed on demand
or as an alert. We plan to build a database of client interests and preferences
towards future e-commerce offerings. We are not dependent on one or a few
information providers as such redistribution agreements are generally available
on a non-exclusive basis.
We have invested in the development of a transaction engine and a
proprietary application software and communications architecture in an attempt
to make our services easy to use and visually appealing and to take advantage of
the different virtues and capabilities of established and emerging devices
capable of interacting with Web-based and Web-to-Wireless applications. We
believe that our application software and communications architecture, which
recognize multiple devices, format the information for the particular device and
present the information in a user-friendly manner, will be attractive in the
marketplace. Product development efforts are focused on providing enhancements
to the current information and transaction services, format modifications for
emerging devices, content and features improvements and customizations based on
market requirements. We intend to continue to invest in this area and believe
our transaction engine, application software and communications architecture
represent an important competitive advantage.
MARKETING STRATEGY
We believe our primary source of revenues will ultimately be derived
from the sale of our information and transactional application services through
Strategic Marketing Partners utilizing a "business-to-business" strategy.
Strategic Marketing Partners will brand our "bundled" services, acquired from
our "information platform" with their own private label, promote the packaged
offering, and then distribute our
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information and e-commerce services to their clients. Additionally, our
e-commerce platform will enable our Strategic Marketing Partners to offer
transaction services via the Internet and wireless networks. Our strategy of
forming alliances with Strategic Marketing Partners enables us to maximize our
market reach at minimal operating costs, improve product and services
performance and grow distribution channels to end-users.
In May 1998, we licensed to DTN the rights to market and service three
of our Internet products. DTN, which has over 150,000 subscribers for its
satellite-based information services, lacked an Internet-based product and
delivery system. We filled that need. In June 1999, we entered into an agreement
with DTN that expanded our relationship. In consideration of the receipt of
$5.175 million, we granted DTN an exclusive perpetual worldwide license to our
Internet-based (1) real-time stock quote product, (2) online trading vehicle for
customers of small and medium sized brokerage companies, (3) administrative
reporting package for brokers of small and medium sized brokerage companies, and
(4) order entry/routing system. We will continue to operate and support these
products in exchange for a percentage of the revenues earned by DTN therefrom.
None of our wireless products were included in this transaction. 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 and wireless devices, such as developing
transactional services offered by Checkfree Corporation, Microsoft Corporation,
Data Broadcasting Corporation, PC Quote.com, Hyperfeed Technologies, Inc.,
Intuit Inc., Electronic Data Systems Corp. and other Web-based software
companies. Established online information services including those offered by
America Online, Inc., CompuServe and Prodigy offer competing services delivered
through personal computers. Although in its infancy, the wireless arena too has
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its competitors, such as DataLink Systems Corporation, Intelligent Information,
Inc., Aether Systems, Inc. (a/k/a Aether Technologies), Saraide.com Inc. and
W-Trade Technologies, Inc. We expect competition to increase from existing
competitors and from new competitors, possibly including telecommunications
companies. Most of our competitors and potential competitors have substantially
greater financial, marketing and technical resources than we have. We believe
that potential new competitors, including large multimedia and information
system companies, are increasing their focus on transaction processing.
Increased competition in the market for our services could materially and
adversely affect our results of operations through price reductions and loss of
market share.
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 application software and
communications 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 is notable
for its visually appealing formats, which it has standardized across different
types of information. Subscribers are provided with several display options,
including text and graphics, according to their preferences.
During the fiscal years ended June 30, 1999, 1998 and 1997, we incurred
costs of $193,188, $923,082 and $1,150,224, respectively, for research and
project development activities. Additionally, during the fiscal year ended June
30, 1999, we capitalized software development costs amounting to $765,000; no
such costs were capitalized in either of the years ended June 30, 1998 or 1997.
PROPRIETARY RIGHTS
We have designed and developed our own "device independent" information
and transaction platform, "SmartServ", based on Sun Microsystems, Inc. computers
and Oracle Corp.'s version 7.X relational database manager, to support a variety
of end user devices. This platform formats information and the services'
interface for a particular device and presents it in a user friendly manner. We
rely upon a combination of contract provisions and copyrights, 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.
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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. Moreover, Zanett Securities
Corporation and Zanett Lombardier, Ltd. and its affiliates own shares of common
stock and warrants to purchase common stock, which, if exercised, would equal
approximately 52.0% of the common stock that would be outstanding after the
exercise of such warrants, giving them the potential to effect a change of
control of SmartServ.
If we default under the license agreement, DTN may at its sole cost
elect to provide its own maintenance to both the system software and related
hardware. Under these circumstances, DTN will have the right to own the system
software, including the source codes, and related hardware, and DTN will have no
further obligation to pay us licensing fees which we currently rely on for a
significant part of our revenues.
We believe that our software, services, service mark and other
proprietary rights do not infringe on the proprietary rights of third parties.
However, there can be no assurance that third parties will not assert
infringement claims against us with respect to current features, content or
services or that any such assertion may not require us to enter into royalty
arrangements or result in litigation.
GOVERNMENT REGULATION
We are not currently subject to direct regulation other than federal
and state regulation generally applicable to businesses. However, changes in the
regulatory environment relating to the telecommunications and media industry
could have an effect on our business, including regulatory changes which
directly or indirectly affect telecommunication costs or increase the likelihood
or scope of competition from regional telephone companies. Additionally,
legislative proposals from international, federal and state governmental bodies
in the areas of content regulation, intellectual property and privacy rights, as
well as federal and state tax issues could impose additional regulations and
obligations upon all online service providers. We cannot predict the likelihood
that any such legislation will pass, or the financial impact, if any, the
resulting regulation or taxation may have.
Moreover, the applicability to online service providers of existing
laws governing issues such as intellectual property ownership, libel and
personal privacy is uncertain. The use of the Internet for illegal activities
and the dissemination of pornography have increased public focus and could lead
to increased pressure on legislatures to impose regulations on online service
providers such as ourselves. The law relating to the liability of online service
companies for information carried on or disseminated through their systems is
currently unsettled. If an action were to be initiated against us, the costs
incurred as a result of such action could have a material adverse effect on our
business.
EMPLOYEES
We employ 21 people, 19 of whom are full-time employees. We anticipate
that staffing requirements associated with the implementation of our plan of
operation will result in the addition of a minimum of six to ten people during
the period ending June 30, 2000. Such personnel will be added to assist with the
programming requirements of Strategic Marketing Partners' product offerings, for
customer support
-19-
<PAGE>
and sales and marketing. None of our employees are covered by a collective
bargaining agreement, and we believe that our relationship with our employees is
satisfactory.
DESCRIPTION OF PROPERTY
We occupy approximately 6,300 square feet in a leased facility located
in Stamford, Connecticut. The lease expires in October 2002.
LEGAL PROCEEDINGS
By letter dated April 10, 1998, Michael Fishman, then our Vice
President of Sales resigned his position. On or about April 24, 1998, Mr.
Fishman filed a complaint against us, Sebastian E. Cassetta and four other
defendants in the United States District Court for the District of Connecticut.
The complaint asserted claims under Sections 10(b) and 18 of the Securities
Exchange Act of 1934, as well as several state law claims, including breach of
contract, fraud and misrepresentation. Mr. Fishman alleged that we (1) failed to
pay him the benefits and compensation to which he was entitled and (2) made
material misrepresentations in our filings with the Securities and Exchange
Commission. On December 11, 1998, the Court granted our motion to dismiss Mr.
Fishman's action without prejudice to the plaintiff to seek leave to file an
amended complaint within 30 days. On May 12, 1999, the Court denied the
plaintiff's subsequent motion for leave to file a substituted complaint on the
basis that the federal securities law claim, the only federal claim alleged by
the plaintiff, was still deficient. Accordingly, the federal securities claim
was dismissed with prejudice. On or about June 4, 1999, Mr. Fishman commenced an
action against the same defendants and added as a seventh defendant, our former
President, Steven Francesco, in the Connecticut Superior Court for the Judicial
District of Stamford/Norwalk at Stamford alleging breach of contract, breach of
duty of good faith and fair dealing, fraudulent misrepresentation, negligent
misrepresentation, intentional misrepresentation and failure to pay wages. The
defendants have answered the complaint and filed counterclaims for fraudulent
inducement and breach of contract. Plaintiff has responded to the counter-claim,
and discovery is proceeding. Although we are vigorously defending this action,
there can be no assurance that it will be successful.
By memorandum dated April 10, 1998, Jonathan Paschkes, then our Vice
President of Marketing resigned his position. On or about November 17, 1998, Mr.
Paschkes filed a complaint against us and Sebastian E. Cassetta in the United
States District Court, District of Connecticut. In the complaint, Mr. Paschkes
alleges (1) fraudulent inducement to him to accept his position with us; (2)
breach of various terms of our employment contract with him; and (3) failure by
us 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. We 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 Mr. Paschkes and us in full settlement of these claims. We have executed
a settlement agreement with Mr. Paschkes and have filed a Stipulation of
Dismissal with prejudice.
On or about May 11, 1998, Ronald G. Weiner filed a complaint against
Mr. Francesco and us in the Supreme Court of the State of New York, County of
New York. The complaint alleges, among other things, that in May 1993, by letter
from Mr. Francesco, Mr. Weiner was offered a 10% equity stake in Smart Phone
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
-20-
<PAGE>
SPS. The complaint alleges, among other things, that Mr. Francesco and SPS
breached their agreement with Mr. Weiner by withdrawing their offer to him of a
10% equity stake in SPS, and that, at the time Mr. Francesco represented that he
was ceasing efforts to capitalize SPS, he had actually formed SmartServ and was
actively seeking investors for it. The complaint further alleges that we are a
successor entity to SPS and that, therefore, we are liable for SPS' and Mr.
Francesco's alleged conduct in derogation of their alleged agreement with Mr.
Weiner. The complaint seeks, among other things, (1) a declaratory judgment
declaring Mr. Weiner a 10% equity shareholder of the Company, (2) a constructive
trust in Mr. Weiner's favor for 10% of our equity shares and (3) restitution
against Mr. Francesco and us for unjust enrichment. On his unjust enrichment
claim, Mr. Weiner seeks unspecified damages that he alleges to be at least
$250,000. In our answer to the complaint, we denied the material allegations of
the complaint and asserted affirmative defenses. No discovery in this action has
yet been taken. Although we are vigorously defending this action there can be no
assurance that we will be successful.
While we intend to vigorously defend these actions, the unfavorable
outcome of any such action could have a material adverse effect on our financial
condition, results of operations, and cash flows.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to the
executive officers and directors of SmartServ Online, Inc.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Sebastian E. Cassetta 51 Chief Executive Officer, Chairman of the Board, Secretary and Class
III Director
Mario F. Rossi 61 Vice President of Operations and Class II Director
Thomas W. Haller, CPA 45 Vice President, Treasurer and Chief Financial Officer
Claudio Guazzoni (3) 36 Class I Director
L. Scott Perry (2) 51 Class I Director
Robert Steele (1) (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
SEBASTIAN E. CASSETTA has been Chief Executive Officer, Chairman of the
Board, Secretary and a director of SmartServ since its inception. Mr. Cassetta
was also SmartServ's Treasurer from its inception until March 1996. From June
1987 to August 1992, Mr. Cassetta was the President of Burns and Roe Securacom
Inc., an engineering and large-scale systems integration firm. He is also a
former Director, Managing Director and Vice President of Brinks Inc. At Brinks,
he expanded international operations in over 15 countries and became the
youngest person to be appointed Vice President in Brinks' 140 year history.
Appointed by President Reagan and Department of Commerce Secretary Malcolm
Baldridge, he served on both the U.S. Export Council and The Industry Sector
Advisory Committee (ISAC) regarding GATT negotiations. He is a former member of
the Board of Directors of The Young President's Organization and the former
Chairman of the New York Chapter.
-21-
<PAGE>
MARIO F. ROSSI has been Vice President of Operations of SmartServ since
December 1994 and was appointed a director on February 23, 1998. Mr. Rossi has
business and operational management experience in the computer,
telecommunications and securities fields. He has an extensive background in
product development, operations and technical marketing. Prior to joining
SmartServ, Mr. Rossi was Vice President of Operations for MVS Inc., a fiber
optic company specializing in wireless technology. He also worked 17 years for
Philips Medical Systems, in both the U.S. and the Netherlands, directing the
development - from feasibility to production - of several computer-based medical
devices. He received a Bachelors Degree in Engineering and earned a Masters
Degree from Polytechnic Institute of Brooklyn.
THOMAS W. HALLER, CPA joined SmartServ as Vice President, Treasurer and
Chief Financial Officer in March 1996. From December 1992 to March 1996, Mr.
Haller was a Senior Manager at Kaufman Greenhut Forman, LLP, a public accounting
firm in New York City, where he was responsible for technical advisory services
and the firm's quality assurance program. Prior thereto, he was a Senior Manager
with Ernst & Young LLP, an international public accounting and consulting firm,
where he had responsibility for client services and new business development in
the firm's financial services practice.
CLAUDIO GUAZZONI became a director of SmartServ on January 11, 1998.
Since 1993, Mr. Guazzoni has been President of The Zanett Securities Corporation
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.
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 has been Senior Vice President of DTN since 1989 and President of its
Financial Services Division since 1996.
-22-
<PAGE>
BOARD OF DIRECTORS
The Board of Directors consists of seven directors divided into three
classes: Class I Directors, Class II Directors and Class III Directors. The
Class I and Class III Directors will serve until the 1999 annual meeting and the
Class II Directors will serve until the 2000 annual meeting or, in each case,
until their respective successors are duly elected and qualified or until their
earlier resignation or removal. Upon such annual meetings of stockholders, the
Class III Directors will serve until the annual meeting of SmartServ's
stockholders to be held in 2001, the Class I Directors will serve until the
annual meeting of SmartServ's stockholders to be held in 2002 and the Class II
Directors will serve until the annual meeting of SmartServ's stockholders to be
held in 2003. Directors of each Class are elected for a full term of three years
(or any lesser period representing the balance of the previous term of such
Class) and until their respective successors are duly elected and qualified or
until their earlier resignation or removal. Officers are appointed annually and
serve at the discretion of the Board for one year. As a result of the delisting
of SmartServ's common stock, Zanett Capital has the right to elect a majority of
the Board of Directors. Mr. Cassetta serves as Chief Executive Officer, Chairman
of the Board, and Secretary of SmartServ pursuant to an employment agreement.
Mr. Rossi serves as Vice President pursuant to an employment agreement.
BOARD COMMITTEES
The Compensation Committee, currently composed of Messrs. Wood and
Steele, has authority over officer compensation and administers our Amended and
Restated Stock Option Plan.
The Audit Committee, currently composed of Mr. 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.
COMPENSATION OF DIRECTORS
Each director who is not an officer or employee of SmartServ is
reimbursed for his or her out-of-pocket expenses incurred in connection with
attendance at meetings or other company business. Commencing December 29, 1998,
each non-employee director receives a $1,000 fee for each meeting he or she
attends during the year.
Between November 4, 1996 and April 24, 1998, each person who was not a
salaried employee of SmartServ was granted, on the date he or she became a
director, an option to purchase 5,000 shares of common stock and immediately
following each annual meeting of stockholders at which directors were elected,
each such person elected to serve as a director at that annual meeting or who
remained a director following that annual meeting was granted an option to
purchase 5,000 shares of common stock. Subsequent to April 24, 1998, the
Compensation Committee has had the discretionary authority to grant options to
non-employee directors. Pursuant to such authority, on December 28, 1998 and
October 13, 1999 it granted options to purchase 10,000 shares of common stock at
a price of $2.35 and $.9375, respectively, to each non-employee director. The
exercise price of each share of common stock under any option granted to a
director was equal to the fair market value of a share of common stock on the
date the option was granted.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning annual and
long-term compensation, paid or accrued, for the Chief Executive Officer and for
each other executive officer (the "Named Executive Officers") of SmartServ whose
compensation exceeded $100,000 in fiscal 1999 for services in all capacities to
SmartServ during the last three fiscal years.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-----------------------------------------------------------------------------------
RESTRICTED SECURITIES
NAME AND PRINCIPAL FISCAL OTHER ANNUAL STOCK AWARDS UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION (1) (2) OPTIONS COMPENSATION
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sebastian E. Cassetta 1999 $ 155,000 $ 5,414 $ 9,750 $ 185,471(3) 92,000 (5) $24,416(8)
Chief Executive 1998 125,000 -- 9,750 -- 37,500 (6) -- (9)
Officer 1997 125,000 -- 9,750 -- 16,666 (6) -- (9)
Mario F. Rossi 1999 122,500 3,249 6,000 61,824(4) 67,500 (7) -- (9)
Vice President 1998 92,400 -- 6,000 -- 20,834 (6) -- (9)
of Operations 1997 75,000 -- 6,000 -- 4,416 (6) -- (9)
</TABLE>
(1) Amounts shown consist of a non-accountable expense allowance.
(2) The Named Executive Officers did not receive any LTIP Payouts in 1999,
1998 or 1997.
(3) On December 29, 1998, the Board of Directors approved the sale to Mr.
Cassetta of 618,239 shares of restricted stock representing 9% of the
fully diluted shares of common stock of SmartServ. 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.
(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.
(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.
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<PAGE>
(9) The aggregate amount of personal benefits not included in the Summary
Compensation Table does not exceed the lesser of either $50,000 or 10%
of the total annual salary and bonus paid to the Named Executive
Officers.
STOCK OPTIONS
The following table sets forth information with respect to stock
options granted to the Named Executive Officers during fiscal year 1999:
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL 1999
(INDIVIDUAL GRANTS) (1)
--------------------------
NUMBER OF % OF TOTAL OPTIONS
SECURITIES UNDERLYING GRANTED TO EMPLOYEES IN EXERCISE EXPIRATION
NAME OPTIONS GRANTED FISCAL 1999 PRICE DATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sebastian E. Cassetta 17,000 3.66% $ 1.625 11/19/08
37,500 8.08 1.290 10/07/08
37,500 (2) 8.08 2.530 8/06/08
Mario F. Rossi 17,000 3.66 1.625 11/19/08
25,250 5.44 1.290 10/07/08
25,250 (2) 5.44 2.530 8/06/08
</TABLE>
(1) No stock appreciation rights ("SARs") were granted to the Named
Executive Officers during fiscal 1999.
(2) Cancelled on October 8, 1998.
The following table sets forth information as to the number of unexercised
shares of common stock underlying stock options and the value of unexercised
in-the-money stock options at fiscal year end:
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year End Option Value (1)(2)
---------------------------------------------------
Value of
Number of Unexercised In-
Unexercised The-Money
Securities Options at
Underlying Options Fiscal Year
at Fiscal Year End End
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <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.
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<PAGE>
EMPLOYMENT AGREEMENTS
SmartServ and Mr. Cassetta have entered into an employment agreement
("Cassetta Agreement"), effective January 1, 1999 and expiring on December 31,
2001, providing for (1) base compensation of $185,000 per annum, (2) additional
compensation of up to 100% of base compensation, (3) continuation of existing
life and disability insurance policies, (4) all benefits available to other
employees and (5) the sale to him of 618,239 shares of restricted stock
representing 9% of the fully diluted shares of common stock of SmartServ. Mr.
Cassetta's additional compensation will be equal to 10% of his base compensation
for each 10% increase in sales during the first year of the Cassetta Agreement,
subject to a maximum of 100% of base compensation. In each subsequent year of
the Cassetta Agreement, Mr. Cassetta will receive additional compensation equal
to 5% of his base compensation for each 5% increase in sales, subject again to a
maximum of 100% of base compensation. The purchase price ($2.20 per share) of
the restricted stock is 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.
SmartServ and Mr. Rossi have entered into an employment agreement
("Rossi Agreement"), effective January 1, 1999 and expiring on December 31,
2001, providing for (1) base compensation of $135,000 per annum, (2) additional
compensation of up to 50% of base compensation, (3) continuation of existing
life and disability insurance policies, (4) all benefits available to other
employees and (5) the sale to him of 206,080 shares of restricted stock
representing 3% of the fully diluted shares of common stock of SmartServ. Mr.
Rossi's additional compensation will be equal to 5% of his base compensation for
each 10% increase in sales during the first year of the Rossi Agreement, subject
to a maximum of 50% of base compensation. In each subsequent year of the Rossi
Agreement, Mr. Rossi will receive additional compensation equal to 2.5% of base
compensation for each 5% increase in sales, subject again to a maximum of 50% of
base compensation. The purchase price ($2.20 per share) of the restricted stock
is 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.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of January 4, 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 708,241 (4) 30.83%
c/o SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902
William P. Dioguardi 468,333 (5) 17.12%
c/o Spencer Trask Securities, Inc.
535 Madison Avenue
New York, New York 10022
Data Transmission Network Corporation 303,000 (6) 11.79%
9110 West Dodge Road
Omaha, Nebraska 68114
Mario F. Rossi 227,954 (7) 9.96%
c/o SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902
Arnhold & S. Bleichroeder, Inc. 196,470 8.66%
1345 Avenue of the Americas
New York, New York 10105
Steven Rosner 207,500 (8) 8.38%
1220 Mirabeau Lane
Gladwyn, Pennsylvania 19035
Claudio Guazzoni 117,499 (9) 4.99%
Charles R. Wood 28,874 (10) 1.26%
L. Scott Perry 25,833 (11) 1.13%
Catherine Cassel Talmadge 25,416 (11) 1.11%
Robert H. Steele 24,166 (12) 1.05%
All executive officers and directors
as a group (8 persons) 1,175,648 (13) 46.68%
</TABLE>
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<PAGE>
(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
January 4, 2000 by each named person or group, expressed as a percentage
of the sum of all of the shares of such class outstanding as of such date
and the number of shares not outstanding, but beneficially owned by such
named person or group.
(4) Includes 27,249 shares of common stock subject to currently exercisable
options. Also includes 2,051 shares held in trust for the benefit of Mr.
Cassetta's wife.
(5) Represents 468,333 shares of common stock subject to currently exercisable
warrants.
(6) Represents 303,000 shares of common stock subject to currently exercisable
warrants.
(7) Includes 21,124 shares of common stock subject to currently exercisable
options.
(8) Represents 207,500 shares of common stock subject to currently exercisable
warrants.
(9) Includes 24,166 shares of common stock subject to currently exercisable
options. Also includes 32,953 shares of common stock owned by Zanett and
60,380 shares of common stock subject to currently exercisable warrants
owned by Zanett. Mr. Guazzoni disclaims beneficial ownership of these
shares to the extent they exceed his interest in Zanett. Mr. Guazzoni is a
managing director and principal of Zanett.
(10) Includes 24,500 shares of common stock subject to currently exercisable
options. Does not include 303,000 shares beneficially owned by DTN of which
Mr. Wood is an officer. Mr. Wood disclaims beneficial ownership of these
shares.
(11) Includes 25,000 shares of common stock subject to currently exercisable
options.
(12) Represents 24,166 shares of common stock subject to currently exercisable
options.
(13) Includes 32,953 shares of common stock owned by Zanett and 60,380 shares of
common stock subject to currently exercisable warrants owned by Zanett,
2,051 shares held in trust for the benefit of Mr. Cassetta's wife and
188,204 shares of common stock subject to currently exercisable options
issued to all officers and directors.
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<PAGE>
CHANGES IN CONTROL
SmartServ and each of Messrs. Cassetta and Francesco have entered into
an agreement with Zanett Capital, Inc. dated September 29, 1997, as subsequently
amended, which provides, among other things, that for a period of 5 years, upon
an event of default under the prepaid warrants, SmartServ will, at the request
of Zanett Capital, Inc., appoint such number of designees of Zanett Capital,
Inc. to its Board of Directors so that the designees of Zanett Capital, Inc.,
will constitute a majority of the members of the Board of Directors of
SmartServ. Further, Messrs. Cassetta and Francesco have agreed to vote their
shares of common stock, representing approximately 33.25% of the outstanding
stock of SmartServ at January 4, 2000 in favor of the designees of Zanett
Capital, Inc., at each Annual Meeting of Stockholders of SmartServ at which
directors are elected. Although an event of default has occurred under the
prepaid warrants, Zanett Capital, Inc. has not at this time requested SmartServ
to appoint additional designees of Zanett Capital, Inc. to the Board of
Directors of SmartServ.
SELLING STOCKHOLDERS
The shares being offered for resale by the selling stockholders consist
of the shares of common stock held by Arnhold and S. Bleichroeder, Inc., and
shares of common stock underlying warrants to purchase common stock held by
Spencer Trask Securities Incorporated, Bruno Guazzoni, The Zanett Securities
Corporation, Zanett Lombardier, Ltd., Steven Rosner, Stephen P. Harrington,
Robert Rosner IRA, and Harvey and Donna Sternberg and William Dioguardi. Spencer
Trask Securities Incorporated has advised the Company that the beneficial owners
of the warrants held by it are the following: Adam Stern, Jackie Fabry, A.
Emerson Martin, William Dioguardi, Donna Baselice, Thomas Hutzel, Ronald Luken
and Spencer Trask Holdings Inc. Other than consulting arrangements with Bruno
Guazzoni and Steven Rosner and investment advisory relationships with The Zanett
Securities Corporation and Spencer Trask Securities Incorporated, none of the
selling stockholders have and, within the past three years have not 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 January 4, 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 Shares of Beneficial Ownership
Stock Beneficially Common Stock After Offering If All
Selling Stockholders Owned Sold Shares Are Sold
------------------- ------------------- -------------- -------------------
<S> <C> <C> <C>
Arnhold and S. Bleichroeder, Inc. 196,470 196,470 0
Adam Stern 89,750 89,750 0
Jackie Fabry 1,000 1,000 0
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Shares of Common Shares of Beneficial Ownership
Stock Beneficially Common Stock After Offering If All
Selling Stockholders Owned Sold Shares Are Sold
------------------- ------------------- -------------- -------------------
<S> <C> <C> <C>
A. Emerson Martin 8,250 8,250 0
William Dioguardi 468,333 468,333 0
Donna Baselice 1,833 1,833 0
Thomas Hutzel 1,167 1,167 0
Ronald Luken 1,000 1,000 0
Spencer Trask Holdings, Inc. 112,000 112,000 0
Bruno Guazzoni 888,703 888,703 0
Steven Rosner 407,500 407,500 0
Stephen P. Harrington 104,167 104,167 0
Robert Rosner IRA 41,667 41,667 0
Harvey and Donna Sternberg 20,833 20,833 0
The Zanett Securities Corporation 151,805 151,805 0
Zanett Lombardier, Ltd. 63,604 63,604 0
------------------ -------------- ---------
Total 2,558,082 2,558,082 0
- -----------------
</TABLE>
We agreed with Arnhold and S. Bleichroeder, Inc., a selling
stockholder, to file the registration statement, of which this prospectus is a
part, as soon as possible after July 1, 1999, use our best efforts to cause such
registration statement to be declared effective by the Securities and Exchange
Commission as soon as practical thereafter, and to keep the registration
statement effective for a period of one year following the date it is declared
effective. In the event that we fail to obtain the effectiveness of the
registration statement on or before September 29, 1999, or any stop order or
other suspension of the effectiveness of the registration statement occurs as a
result of our failure to have current filings under the Securities Exchange Act
of 1934, we have agreed to pay ASB $10,000 per month until we obtain
effectiveness of the registration statement. In a securities purchase agreement
among us and certain of the other selling stockholders, we have also agreed to
register the 1,016,667 shares of common stock underlying warrants issued to
them. Spencer Trask Securities Incorporated and Kevin Kimberlin Partners, LP
have agreed that they will not sell any of the 683,333 shares of common stock
issuable upon exercise of the warrants owned by them until May 15, 2000 and they
have further agreed that they will not sell more than 25% of such shares in each
succeeding quarter. These agreements are binding on their successors. Pursuant
to a consulting agreement with Steven Rosner, we have agreed to register 240,833
shares of common stock underlying warrants issued to him. Mr. Rosner has agreed
not to exercise 200,000 of such warrants for the 180 day period ending on April
21, 2000. We agreed with The Zanett Securities Corporation, Zanett Lombardier,
Ltd. and Bruno Guazzoni to register the shares of common stock underlying
warrants issued to them. They agreed that they
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<PAGE>
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:
. ordinary brokers transactions, which may include long or short sales,
. transactions involving cross or block trades or otherwise on the OTC
Bulletin Board,
. purchases by brokers, dealers or underwriters as principal and resale by
such purchasers for their own accounts pursuant to this prospectus,
. "at the market" to or through market makers or into an existing market for
the common stock,
. in other ways not involving market makers or established trading markets,
including direct sales to purchasers or sales effected through agents,
. through transactions in options, swaps or other derivatives (whether
exchange listed or otherwise), or
. 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 $40,000.
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<PAGE>
SmartServ has informed the selling stockholders that certain
anti-manipulative rules contained in Regulation M under the Securities Exchange
Act of 1934 may apply to their sales in the market and has furnished the selling
stockholders with a copy of such rules and has informed them of the need for
delivery of copies of this prospectus.
The selling stockholders may also use Rule 144 under the Securities Act
of 1933 to sell the shares if they meet the criteria and conform to the
requirements of such Rule.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 30, 1998, SmartServ entered into an agreement with, among
others, Zanett Capital Inc. and The Zanett Securities Corporation, in
contemplation of a specific financing transaction. The agreement provided that
upon 61 days written notice prior to the date of the Private Placement
Memorandum relating thereto, Zanett Securities Corporation could require that
SmartServ exchange some or all of the 111,700 warrants owned by it into a
pro-rata number of shares up to a maximum of 18,616. Such financing never
occurred and presently, there is disagreement as to each parties' relative
rights and obligations under this agreement. Claudio Guazzoni, a director of
SmartServ, is a principal of Zanett Capital Inc. and The Zanett Securities
Corporation.
On January 26, 1999, SmartServ and DTN signed a letter of intent
whereby SmartServ would be merged with a subsidiary of DTN. The transaction was
subject to the execution of a definitive merger agreement. On June 24, 1999,
SmartServ and DTN entered into an agreement that terminated the letter of intent
and amended the Software License and Service Agreement dated April 23, 1998. In
consideration of the receipt of $5.175 million, SmartServ granted DTN an
exclusive perpetual worldwide license to SmartServ's Internet-based (1)
real-time stock quote product, (2) online trading vehicle for customers of small
and medium sized brokerage companies, (3) administrative reporting package for
brokers of small and medium sized brokerage companies, and (4) order
entry/routing system. Additionally, SmartServ received $324,000 in exchange for
an agreement to issue warrants to purchase 300,000 shares of SmartServ's common
stock at an exercise price of $8.60 per share. SmartServ has agreed to continue
to operate these products and provide maintenance and enhancement services in
exchange for a percentage of the revenues earned by DTN therefrom. The cost of
SmartServ's commitment to provide such maintenance and enhancement services is
limited to a maximum of 20% of the revenues earned by SmartServ. Charles R.
Wood, a director of SmartServ, is a 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 the selling
stockholders and does not describe all of our 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 January 4, 2000, we had
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<PAGE>
2,267,852 shares of common stock issued and outstanding. No shares of preferred
stock are issued and outstanding. We have reserved 3,700,000 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 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
In connection with borrowings from Zanett Lombardier, Ltd. in May, July
and September 1997, we issued warrants to purchase 63,604 shares of our common
stock to Zanett Lombardier, Ltd. Warrants to purchase 45,302 shares exercisable
at $4.9667 per share expire on May 29, 2002, warrants to purchase 9,151 shares
exercisable at $4.9667 per share expire on July 21, 2002 and warrants to
purchase 9,151 shares exercisable at $6.0704 per share expire on September 16,
2002. In connection with such borrowings, we issued to The Zanett Securities
Corporation warrants to purchase 15,899 shares of our common stock. Warrants to
purchase 11,325 shares exercisable at $4.9667 per share expire on May 29, 2002,
warrants to purchase 2,287 shares exercisable at $4.9667 per share expire on
July 21, 2002 and warrants to purchase 2,287 shares exercisable at $6.0704 per
share expire on September 16, 2002. The exercise price and number of shares into
which such warrants are exercisable are subject to adjustment under certain
circumstances including the issuance or sale of our common stock or other equity
securities convertible or exchangeable into our common stock for less than the
current market price of our common stock, a stock split of, or stock dividend
on, or a reclassification of the common stock.
In September 1997 we commenced a private placement of prepaid common
stock purchase warrants. In connection with such private placement we issued to
The Zanett Securities Corporation warrants to purchase 135,906 shares of our
common stock at an exercise price of $4.9667 per share. These warrants expire on
September 29, 2002. The exercise price and number of shares into which such
warrants are exercisable are subject to adjustment under certain circumstances
including the issuance or sale of our common stock or other equity securities
convertible or exchangeable into our common stock for less than the
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<PAGE>
current market price of our common stock, a stock split of, or stock dividend
on, or a reclassification of the common stock.
In September 1997 we entered into a consulting agreement with Bruno
Guazzoni and agreed to issue to him warrants to purchase 805,370 shares of our
common stock at an exercise price of $4.9667 per share. Warrants to purchase
113,255 shares expire on September 29, 2002 and warrants to purchase 692,115
shares expire on April 24, 2003. The exercise price and number of shares into
which such warrants are exercisable are subject to adjustment under certain
circumstances including the issuance or sale of our common stock or other equity
securities convertible or exchangeable into our common stock for less than the
current market price of our common stock, a stock split of, or stock dividend
on, or a reclassification of the common stock.
On November 19, 1998, we commenced a private placement consisting of
$550,000 of 8% Convertible Notes due November 15, 1999. In connection with this
private placement, we entered into a securities purchase agreement with Spencer
Trask Securities Incorporated under which, in addition to the Convertible Notes,
we issued warrants to purchase 916,667 shares of our common stock to Spencer
Trask and certain other investors in the private placement at an exercise price
of $0.60 per share. These warrants expire on November 17, 2003. The exercise
price and number of shares into which such warrants are exercisable are subject
to adjustment under certain circumstances including the issuance or sale of our
common stock or other equity securities convertible or exchangeable into our
common stock, for less than the current exercise price or market price of our
common stock, a stock split of, or stock dividend on, or a reclassification of,
the common stock. In June 1999, we repaid the outstanding Convertible Notes in
full.
In connection with the private placement, we issued warrants to
purchase 183,333 shares of our common stock to Spencer Trask, as placement
agent, at an exercise price of $0.72 per share. These warrants expire on
November 17, 2005. The exercise price and number of shares into which such
warrants are exercisable are subject to adjustment under certain circumstances
including the issuance or sale of our common stock or other equity securities
convertible or exchangeable into our common stock, for less than the current
exercise price or market price of our common stock, a stock split of, or stock
dividend on, or a reclassification of, the common stock.
In addition to the above warrants, we issued warrants to purchase
240,833 shares of our common stock to Steven Rosner for consulting services and
for arranging our relationship with Spencer Trask at exercise prices ranging
from $.60 per share to $3.65 per share and expiring at various dates beginning
on March 3, 2003 through October 24, 2004. These warrants are subject to
adjustment of both price and amount in the event of subdivision, combination,
sale, merger or certain distributions.
With respect to each of the foregoing warrants, we have reserved an
equivalent number of shares of common stock for issuance on their exercise. 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.
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<PAGE>
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:
. 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;
. 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
. 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:
. for any breach of a director's duty of loyalty to the corporation or its
stockholders,
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
. pursuant to Section 174 of the DGCL (providing for liability of
directors for unlawful payment of dividends or unlawful stock purchases
or redemptions), or
. 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
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<PAGE>
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 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.
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<PAGE>
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 Flattau & Klimpl, LLP, 1211 Avenue
of the Americas, New York, New York 10036-8735. 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 reports thereon
(which contain an explanatory paragraph describing conditions that raise
substantial doubt about the Company's ability to continue as a going concern as
described in Note 1 to the financial statements) appearing elsewhere herein, and
are included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
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<PAGE>
- --------------------------------------------------------------------------------
[LOGO]
SMARTSERV ONLINE, INC.
2,558,082
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 PERMITED.
January ___,2000
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.
Section 145 of the General Corporation Law of Delaware ("DGCL")
provides that directors, officers, employees or agents of Delaware corporations
are entitled, under certain circumstances, to be indemnified against expenses
(including attorneys' fees) and other liabilities actually and reasonably
incurred by them in connection with any suit brought against them in their
capacity as a director, officer, employee or agent, if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, if they had no reasonable cause to believe their conduct was
unlawful. Section 145 also provides that directors, officers, employees and
agents may also be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by them in connection with a derivative suit
bought against them in their capacity as a director, if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification may be made without
court approval if such person was adjudged liable to the corporation.
Article Tenth of the registrant's Certificate of Incorporation provides
that the registrant shall indemnify any and all persons whom it shall have power
to indemnify to the fullest extent permitted by the DGCL. Article VI of the
registrant's by-laws provides that the registrant shall indemnify authorized
representatives of the registrant to the fullest extent permitted by the DGCL.
The registrant's by-laws also permit the registrant to purchase insurance on
behalf of any such person against any liability asserted against such person and
incurred by such person in any capacity, or out of such person's status as such,
whether or not the registrant would have the power to indemnify such person
against such liability under the foregoing provision of the by-laws.
The registrant maintains a directors and officers liability insurance
policy with National Union Fire Insurance Company of Pittsburgh, PA. The policy
insures the directors and officers of the registrant against loss arising from
certain claims made against such directors or officers by reason of certain
wrongful acts.
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with the
issuance and distribution of the securities being registered hereby. All such
expenses will be borne by the registrant; none shall be borne by any selling
stockholders.
Securities and Exchange
Commission registration fee $ 12,159
Legal fees and expenses (1) $ 20,000
Accounting fees and expenses (1) $ 12,500
Miscellaneous (1) $ 1,341
Total $ 46,000
- -------------------------------
(1) Estimated.
II-1
<PAGE>
Item 26. RECENT SALES OF UNREGISTERED SECURITIES.
On May 29, 1997, the Company issued a $550,000 promissory note and
warrants to purchase 45,302 shares of common stock to Zanett Lombardier, Ltd.
("ZLL") for $550,000. On each of July 21, 1997 and September 16, 1997, the
Company issued an additional $111,111 promissory note and warrants to purchase
an additional 9,151 shares of common stock to ZLL for $111,111. The warrants are
subject to antidilution provisions and have exercise prices of $4.97 and $6.07
per share. Zanett Securities Corporation ("Zanett") received fees of $78,576 for
its services in connection with such transactions. Additionally, Zanett received
warrants to purchase 15,899 shares of common stock. Such warrants are subject to
antidilution provisions and have exercise prices of $4.97 and $6.07. The
promissory notes and warrants were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On September 16, 1997, the Company issued warrants to purchase 50,083
shares of common stock to ZLL as a default penalty under the ZLL notes. The
warrants have an exercise price of 50% of the closing price of the Company's
common stock on the exercise date. On November 16, 1999, ZLL exercised on a
cashless basis all of such warrants in exchange for 25,042 shares of common
stock. No sales commissions were paid in connection with such transactions. The
warrants were issued in reliance upon the exemption from registration provided
by Section 4 (2) of the Securities Act. The shares were issued in reliance upon
the exemption from registration provided by Section 3 (a) (9) of the Securities
Act.
On September 29, 1997, the Company issued 4,000 prepaid common stock
purchase warrants ("Prepaid Warrants") to 12 investors for $4,000,000. Included
in such amount was $772,222 of the promissory notes issued to ZLL and $63,837 of
accrued interest thereon which were cancelled in connection with this
transaction. The Prepaid Warrants are convertible into a number of shares of
common stock of the Company that is equal to $1,000 divided by the applicable
exercise price. The exercise price is 70% of the average closing bid price of
the common stock for the 10 trading days ending on the day prior to exercise of
such warrants, reduced by 1% for each 60 day period the Prepaid Warrants remain
unexercised, but in no event above $8.40 per share. Zanett received a commission
of $400,000, an unaccountable expense allowance of $120,000, and warrants to
purchase 135,906 shares, subject to antidilution provisions, of common stock at
$4.97 per share in connection with such transaction. The Prepaid Warrants, and
the warrants issued to Zanett, were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On September 29, 1997, the Company issued 113,250 warrants to Bruno
Guazzoni and, subject to stockholder approval, agreed to issue to him warrants
to purchase an additional 692,120 shares of common stock. These additional
warrants were approved by the stockholders and issued in April 1998. The
warrants are subject to antidilution provisions and have an exercise price of
$4.97 per share. No sales commissions were paid in connection with such
transaction. The warrants were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
Between January 13, 1998 and November 19, 1999, an aggregate of 1,794
Prepaid Warrants were converted into an aggregate of 429,480 shares of common
stock of the Company. No sales commissions were paid in connection with such
conversions. The shares were issued in reliance upon the exemption from
registration provided by Section 3 (a) (9) of the Securities Act.
On January 2, 1998 and March 3, 1998, the Company issued warrants to
purchase 16,666 and 20,833 shares of common stock, respectively, in connection
with consulting contracts. The warrants have exercise prices of $3.75 and $15.75
to $19.50, respectively. No sales commissions were paid in
II-2
<PAGE>
connection with such transactions. The warrants were issued in reliance upon the
exemption from registration provided by Section 4 (2) of the Securities Act.
On August 31, 1998, the Company issued 32,953 shares of common stock to
ZLL and 17,047 shares of common stock to Bruno Guazzoni in consideration for
their agreeing to certain restrictions on the exercise of the Prepaid Warrants
and the resale of the shares of common stock issuable on exercise thereof. No
sales commissions were paid in connection with such transaction. The shares were
issued in reliance upon the exemption from registration provided by Section 4
(2) of the Securities Act.
On September 8, 1998, the Company issued warrants to purchase 3,000
shares of common stock to DTN for prepayment of certain guaranteed payments in
accordance with the Software License and Service Agreement between the parties
dated April 23, 1998. Such warrants are exercisable at $3.00 per share of common
stock. These warrants were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act. No sales
commissions were paid in connection with such transaction.
On November 17, 1998, the Company issued 125,000 shares of common stock
and warrants to purchase 16,667 shares of common stock, exercisable at $5.00 per
share until November 11, 2001, to Steven Francesco, a former officer of the
Company, as partial consideration for the settlement of his claims against the
Company and certain of its officers and directors. The shares and warrants were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act. No sales commissions were paid in connection with such
transaction.
Between November 20, 1998 and December 3, 1998, the Company issued
convertible promissory notes in the amount of $500,000 and warrants to purchase
833,333 shares of common stock to 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 June 24, 1999, the Company agreed to issue to DTN a warrant for the
purchase of 300,000 shares of the Company's common stock at $8.60 per share in
exchange for $324,000. The warrant will expire on the earlier of April 30, 2003,
or the date one year after the market price of a share of common stock reaches
$8.60. No sales commissions were paid in connection with such transaction. The
warrant will be issued in reliance upon the exemption from registration provided
by Section 4 (2) of the Securities Act.
On July 6, 1999, the Company issued 180,000 shares of common stock to
ASB to settle the Company's obligation to ASB pursuant to the default provisions
of the Prepaid Warrants. No sales commissions were paid in connection with such
transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
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
other 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.
Item 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
-------------------------------------------
(a) Exhibits:
The following exhibits are filed as part of this registration
statement:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<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 Letter agreement dated July 1, 1999 between the Company and Arnhold and S. Bleichroeder,
Inc.********
4.3 Securities Purchase Agreement dated as of November 19, 1998 among the Company and the investors
listed therein.********
4.4 Settlement Agreement dated June 28, 1999 between the Company, Spencer Trask Securities
Incorporated and Kevin Kimberlin Partners, LP********
4.5 Warrant Agreement dated as of among the Company and the investors listed therein.********
4.6 Consulting Agreement dated October 25, 1999 between the Company and Steven Rosner********
4.7 Form of warrant issued to Steven Rosner********
4.8 Consulting Agreement with Bruno Guazzoni*****
4.9 Warrant issued to Bruno Guazzoni dated September 29,1997*****
4.10 Warrant issued to The Zanett Securities Corporation dated September 29, 1997*****
4.11 Form of Warrant issued to Zanett Lombardier, Ltd.+
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
4.12 Form of Default Warrant issued to Zanett Lombardier Ltd.+
4.13 Form of Warrant issued to The Zanett Securities Corporation+
4.14 Registration Rights Agreement dated September 29, 1997+
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP+
10.1 Information Distribution License Agreement dated as of July 18, 1994 between the Company and
S&P ComStock, Inc.***
10.2 New York Stock Exchange, Inc. Agreement for Receipt and Use of Market Data dated as of August
11, 1994 between the Company and the New York Stock Exchange, Inc.***
10.3 The Nasdaq Stock Market, Inc. Vendor Agreement for Level 1 Service and Last Sale Service dated
as of September 12, 1994 between the Company and The Nasdaq Stock Exchange, Inc. ("Nasdaq")***
10.4 Amendment to Vendor Agreement for Level 1 Service and Last Sale Service dated as of October 11,
1994 between the Company and Nasdaq***
10.5 Lease Agreement dated as of March 4, 1994, between the Company and One Station Place, L.P.
regarding the Company's Stamford, Connecticut offices***
10.6 Lease Modification and Extension Agreement, dated February
6, 1996, between the Company and One Station Place, L.P.
regarding the Company's Stamford, Connecticut offices****
10.7 Form of Registration Rights Agreement between the Company and certain investors***
10.8 Form of 1996 Stock Option Plan******
10.9 Form of Registration Rights Agreement issued to purchasers of Prepaid Common Stock Purchase
Warrants*****
10.10 Agreement between Sprint/United Management Company and SmartServ Online, Inc. dated September 26, 1997 **
10.11 Asset Purchase and Software License and Service Agreements between SmartServ Online, Inc. and
Data Transmission Network Corporation, dated April 23, 1998*******
10.12 Amendment to the Software and License Agreement between SmartServ Online, Inc. and Data
Transmission Network Corporation, dated June 24, 1999. Portions of this exhibit (indicated by
asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule
24b-2 and the omitted portions have been filed separately with the Securities and Exchange
Commission *
10.13 Letter agreement dated August 26, 1999, amending the Amendment to the Software and License
Agreement between SmartServ Online, Inc. and Data Transmission Network Corporation, dated June
24, 1999. Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a
request for confidential treatment pursuant to Rule 24b-2 and the omitted portions have been
filed separately with the Securities and Exchange Commission *
10.14 Amended and Restated Employment Agreement between SmartServ Online, Inc. and Sebastian E.
Cassetta, dated January 1, 1999*
10.15 Restricted Stock Purchase Agreement between SmartServ Online, Inc. and Sebastian E. Cassetta,
dated December 29, 1998*
10.16 Employment Agreement between SmartServ Online, Inc. and Mario F. Rossi, dated January 1, 1999*
10.17 Restricted Stock Purchase Agreement between SmartServ Online, Inc. and Mario F. Rossi, dated
December 29, 1998*
23.1 Consent of Ernst & Young LLP+
23.2 Consent of Parker Chapin Flattau & Klimpl, LLP (Included in Exhibit 5.1)
24.1 Power of Attorney of certain directors and officers of SmartServ (Included as part of the
signature page beginning on page II-7 of the initial filing)
- ------------
II-5
<PAGE>
+ Filed herewith
* Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the fiscal year ended
June 30, 1999
** Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the fiscal year ended
June 30, 1997
*** Filed as an exhibit to the Company's registration statement on Form SB-2 (Registration No.
333-114)
**** Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the fiscal year ended
June 30, 1996
***** Filed as an exhibit to the Company's Current Report on Form 8-K/A for an event dated September
30, 1997
****** Filed as an exhibit to the Company's Proxy Statement dated October 10, 1996
******* Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the period ended March
31, 1998
******** Filed with the initial filing of this Registration Statement
</TABLE>
Item 28. UNDERTAKINGS.
------------
(A) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement to:
(i) Include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental
change in the information set forth in the
registration statement; and
(iii) Include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering therein, and
the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(B) Undertaking Required by Regulation S-B, Item 512(e).
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or controlling persons
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel that the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(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 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-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on the 5th day of January, 2000.
SmartServ Online, Inc.
By: /S/ SEBASTIAN E. CASSETTA
-------------------------
Sebastian E. Cassetta
Chairman of the Board, Chief Executive
Officer and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
amendment 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, January 5, 2000
- --------------------------------------- Chief Executive Officer,
Sebastian E. Cassetta Secretary and Director
/s/ MARIO F. ROSSI* Vice President and January 5, 2000
- --------------------------------------- Director
Mario F. Rossi
/s/ THOMAS W. HALLER Vice President, Treasurer January 5, 2000
- --------------------------------------- (Chief Financial Officer and Chief
Thomas W. Haller Accounting Officer)
- --------------------------------------- Director January __, 2000
Claudio Guazzoni
/s/ ROBERT H. STEELE* Director January 5, 2000
- ---------------------------------------
Robert H. Steele
/s/ L. SCOTT PERRY* Director January 5, 2000
- ---------------------------------------
L. Scott Perry
/s/ CATHERINE CASSEL TALMADGE* Director January 5, 2000
- ---------------------------------------
Catherine Cassel Talmadge
/s/ CHARLES R. WOOD* Director January 5, 2000
- ---------------------------------------
Charles R. Wood
*By: /S/ THOMAS W. HALLER
----------------------------------
Thomas W. Haller as attorney-in-fact.
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
PAGE
<S> <C>
UNAUDITED INTERIM FINANCIAL STATEMENTS FOR THREE MONTHS ENDED SEPTEMBER 30, 1999
Balance Sheets as of June 30, 1999 and September 30, 1999 (unaudited) F-2
Statements of Operations for the three months
ended September 30, 1999 and 1998 (unaudited) F-4
Statement of Changes in Stockholders' Deficiency
for the three months ended September 30, 1999 (unaudited) F-5
Statements of Cash Flows for the three months
ended September 30, 1999 and 1998 (unaudited) F-6
Notes to Unaudited Financial Statements F-7
FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDING JUNE 30, 1999 AND JUNE 30, 1998
AND JUNE 30, 1997
Report of Independent Auditors F-12
Balance Sheets as of June 30, 1999 and 1998 F-13
Statements of Operations for the years
ended June 30, 1999, 1998 and 1997 F-15
Statement of Stockholders' Equity (Deficiency)
for the years ended June 30, 1997, 1998 and 1999 F-16
Statements of Cash Flows for the years
ended June 30, 1999, 1998 and 1997 F-20
Notes to Financial Statements F-21
</TABLE>
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
1999 1999
----------- ----------
(UNAUDITED) (Note 2)
ASSETS
Current assets
Cash and cash equivalents $1,103,443 $2,165,551
Accounts receivable 268,851 348,278
Prepaid expenses 40,665 50,150
---------- ----------
Total current assets 1,412,959 2,563,979
---------- ----------
Property and equipment, net 473,412 498,448
Other assets
Capitalized software development costs,
net of accumulated amortization of $128,953 at
September 30, 1999 and $82,108 at June 30, 1999 880,717 683,337
Security deposits 73,374 74,834
---------- ----------
954,091 758,171
---------- ----------
Total Assets $2,840,462 $3,820,598
========== ==========
F-2
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
------------ ------------
(UNAUDITED) (Note 2)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
<S> <C> <C>
Current liabilities
Accounts payable $ 622,788 $ 780,543
Accrued liabilities 480,786 474,189
Accrued liabilities to warrant holders 717,670 1,311,365
Salaries payable 69,047 93,443
Capital lease obligation - current portion 47,437 70,147
Deferred revenues - current portion 1,656,632 1,656,632
------------ ------------
Total current liabilities 3,594,360 4,386,319
------------ ------------
Deferred revenues - long-term portion 3,727,423 4,141,579
COMMITMENTS AND CONTINGENCIES - NOTE 6
STOCKHOLDERS' DEFICIENCY
Preferred stock - $0.01 par value
Authorized - 1,000,000 shares
Issued and outstanding - None
Common stock - $.01 par value
Authorized - 40,000,000 shares
Issued and outstanding - 1,199,787 shares at June 30, 1999
and 1,379,787 shares at September 30, 1999 13,798 11,998
Common stock subscribed 1,812,554 1,812,554
Notes receivable from officers (1,812,554) (1,812,554)
Additional paid-in capital 20,928,202 20,679,611
Unearned compensation (3,161,649) (3,452,904)
Accumulated deficit (22,261,672) (21,946,005)
------------ ------------
Total stockholders' deficiency (4,481,321) (4,707,300)
------------ ------------
Total Liabilities and Stockholders' Deficiency $ 2,840,462 $ 3,820,598
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS
ENDED SEPTEMBER 30
--------------------------
1999 1998
--------------------------
Revenues $ 808,292 $ 349,705
----------- -----------
Costs and expenses:
Costs of services 232,866 207,084
Product development expenses 46,845 27,046
Selling, general and administrative
expenses 855,265 830,858
----------- -----------
Total costs and expenses 1,134,976 1,064,988
----------- -----------
Loss from operations (326,684) (715,283)
----------- -----------
Other income (expense):
Interest income 11,017 2,202
Interest expense and other financing costs -- (141,096)
----------- -----------
11,017 (138,894)
----------- -----------
Net loss $ (315,667) $ (854,177)
=========== ===========
Comprehensive loss $ (315,667) $ (854,177)
=========== ===========
Basic and diluted earnings per share $ (0.23) $ (0.92)
=========== ===========
Weighted average shares outstanding 1,368,046 931,093
=========== ===========
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
THREE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
NOTES
COMMON STOCK COMMON RECEIVABLE ADDITIONAL
PAR STOCK FROM PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED OFFICERS CAPITAL COMPENSATION DEFICIT
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1999 1,199,787 $11,998 $1,812,554 $(1,812,554) $20,679,611 $(3,452,904) $(21,946,005)
Issuance of Common Stock in
connection with the
settlement of obligations
to a Prepaid Warrant holder 180,000 1,800 -- -- 266,895 -- --
Amortization of unearned
compensation over the
term of the consulting -- -- -- -- -- 291,255 --
agreement
Change in market value of
employee stock options -- -- -- -- (18,304) -- --
Net loss for the period -- -- -- -- -- -- (315,667)
------------------------------------------------------------------------------------------------
Balances at September 30, 1999 1,379,787 $13,798 $1,812,554 $(1,812,554) $20,928,202 $(3,161,649) $(22,261,672)
================================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS
ENDED SEPTEMBER 30
----------------------------------------
1999 1998
------------------ ------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (315,667) $ (854,177)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization 96,266 47,703
Noncash interest expense and other financing costs -- 128,175
Noncash compensation costs (18,304) --
Noncash consulting costs 291,255 330,421
Amortization of unearned revenues (414,156) (15,534)
Changes in operating assets and liabilities
Accounts receivable 79,427 33,995
Prepaid expenses 9,485 (83,636)
Accounts payable and accrued liabilities (476,158) 161,062
Salaries payable (24,396) 5
Unearned revenues -- 200,000
Security deposit 1,460 --
----------- -----------
Net cash used for operating activities (770,788) (51,986)
----------- -----------
INVESTING ACTIVITIES
Purchase of equipment (24,385) (11,638)
Capitalization of software development costs (244,225) (233,005)
----------- -----------
Net cash used for investing activities (268,610) (244,643)
----------- -----------
FINANCING ACTIVITIES
Repayment of capital lease obligation (22,710) (19,837)
----------- -----------
Net cash used for financing activities (22,710) (19,837)
----------- -----------
Decrease in cash and cash equivalents (1,062,108) (316,466)
Cash and cash equivalents - beginning of period 2,165,551 354,225
----------- -----------
Cash and cash equivalents - end of period $ 1,103,443 $ 37,759
=========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
SMARTSERV ONLINE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. ORGANIZATION
SmartServ Online, Inc. (the "Company") commenced operations on August 20, 1993.
The Company offers a range of services designed to facilitate e-commerce by
providing transactional and information services to its alliance partners
("Strategic Marketing Partners"). The Company has developed online financial,
transactional and media applications using a unique "device independent"
delivery solution and makes these services available through its application
software and communication architecture to wireless telephones and personal
digital assistants, personal computers and the Internet. The Company's services
include stock trading, real-time stock quotes, business and financial news,
sports information, private-labeled electronic mail, national weather reports
and other business and entertainment information.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
- ---------------------
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information,
the instructions of Form 10-QSB and Rule 310 of Regulation SB and, therefore, do
not include all information and notes necessary for a presentation of results of
operations, financial position and cash flows in conformity with generally
accepted accounting principles. The balance sheet at June 30, 1999 has been
derived from the audited financial statements at that date, but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial statements should be
read in conjunction with the Company's audited financial statements included
elsewhere herein. In the opinion of the Company, all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation have been made.
Results of operations for the three months ended September 30, 1999 are not
necessarily indicative of those expected for the year ending June 30, 2000.
The Company has completed development of its core applications software and
communications architecture; however, it has yet to generate revenues in an
amount sufficient to support its operations. The Company has incurred recurring
operating losses and its operations have not produced a positive cash flow.
Additionally, there is no assurance that the Company will generate future
revenues or cash flow from operations. The Company's financial statements for
the period ended September 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 September 30, 1999 had an
accumulated deficit of $22,261,672 and a deficiency of net assets of $4,481,321.
The Company is also a defendant in several legal proceedings (see Note 6) which
could have a material adverse effect on the Company's financial position, cash
flow, and results of operations. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of these uncertainties.
F-7
<PAGE>
The Company's stockholders approved a one-for-six reverse stock split at a
Special Meeting on October 15, 1998. Such reverse stock split became effective
on October 26, 1998. All applicable financial statement amounts and related
disclosures have been restated to give effect to this transaction.
USE OF ESTIMATES
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
REVENUE RECOGNITION
- -------------------
Revenues are recognized as services are provided. Deferred revenues, resulting
from customer prepayments, are recognized as services are provided throughout
the term of the agreement. Deferred revenues resulting from the Company's
agreements with DTN are being amortized over the term of the anticipated future
revenue stream, a period of 42 months.
BASIC AND DILUTED EARNINGS PER SHARE
- ------------------------------------
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("Statement 128"). Statement
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted 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.
COMPREHENSIVE INCOME
- --------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Comprehensive Income" ("Statement 130")
which requires companies to report a new, additional measure of income on the
income statement in a full set of general purpose financial statements.
Comprehensive Income includes foreign currency translation gains and losses and
unrealized gains and losses on equity securities that have been previously
excluded from income and reflected instead in equity. There were no components
of comprehensive income excluded from income and reflected in equity for the
three month periods ended September 30, 1999 and 1998.
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.
F-8
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
----------- -----------
<S> <C> <C>
Data processing equipment $ 724,595 $ 700,210
Data processing equipment purchased under a capital lease 246,211 246,211
Office furniture and equipment 71,423 71,423
Display equipment 9,635 9,635
Leasehold improvements 36,678 36,678
----------- -----------
1,088,542 1,064,157
Accumulated depreciation, including $119,002 and $106,691 at
September 30, 1999 and June 30, 1999, respectively, for
equipment purchased under a capital lease (615,130) (565,709)
----------- -----------
$ 473,412 $ 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. The Company has agreed to file a
registration statement with the Securities and Exchange Commission covering such
shares. Settlement costs of $268,695 were recorded during the year ended June
30, 1999.
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED SEPTEMBER 30
-------------------------------
1999 1998
------------ -------------
Numerator:
Net loss $ (315,667) $ (854,177)
============= =============
Denominator:
Weighted average shares 1,368,046 931,093
============= =============
Basic and diluted earnings per common share $ (0.23) $ (0.92)
============= =============
At September 30, 1999 there were, exclusive of the Prepaid Warrants, 3,195,000
Common Stock Purchase Warrants outstanding. Such warrants have exercise prices
ranging from $.60 to $72.00 per share and expire from March 2001 through January
2004. Based on the closing price ($.75) of the Company's Common Stock at
September 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
F-9
<PAGE>
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 September 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.
6. COMMITMENTS AND CONTINGENCIES
By letter dated April 10, 1998, Michael Fishman, then Vice President of Sales
for the Company, resigned his position. On or about April 24, 1998, Mr. Fishman
filed a complaint against the Company, Sebastian E. Cassetta and four other
defendants in the United States District Court for the District of Connecticut.
The complaint asserted claims under Sections 10(b) and 18 of the Securities
Exchange Act of 1934, as well as several state law claims, including breach of
contract, fraud and misrepresentation. Mr. Fishman alleged that the Company (1)
failed to pay him the benefits and compensation to which he was entitled and (2)
made material misrepresentations in its filings with the Securities and Exchange
Commission. On December 11, 1998, the Court granted the Company's motion to
dismiss Mr. Fishman's action without prejudice to the plaintiff to seek leave to
file an amended complaint within 30 days. On May 12, 1999, the Court denied the
plaintiff's subsequent motion for leave to file a substituted complaint on the
basis that the federal securities law claim, the only federal claim alleged by
the plaintiff, was still deficient. Accordingly, the federal securities claim
was dismissed with prejudice. On or about June 4, 1999, Mr. Fishman commenced an
action against the same defendants and added as a seventh defendant, the
Company's former President, Steven Francesco, in the Connecticut Superior Court
for the Judicial District of Stamford/Norwalk at Stamford alleging breach of
contract, breach of duty of good faith and fair dealing, fraudulent
misrepresentation, negligent misrepresentation, intentional misrepresentation
and failure to pay wages. The defendants have answered the complaint and filed
counterclaims for fraudulent inducement and breach of contract. Plaintiff has
responded to the counterclaims and discovery is proceeding. Although the Company
is vigorously defending this action, there can be no assurance that it will be
successful.
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 has executed a
settlement agreement with Mr. Paschkes and anticipates filing a Stipulation of
Dismissal with prejudice before November 30, 1999. The Company 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
F-10
<PAGE>
he was ceasing all efforts to capitalize SPS. The complaint alleges, among other
things, that Mr. Francesco and SPS breached their agreement with Mr. Weiner by
withdrawing their offer to him of a 10% equity stake in SPS, and that, at the
time Mr. Francesco represented that he was ceasing efforts to capitalize SPS, he
had actually formed the Company and was actively seeking investors for it. The
complaint further alleges that the Company is a successor entity to SPS and
that, therefore, the Company is liable for SPS' and Mr. Francesco's alleged
conduct in derogation of their alleged agreement with Mr. Weiner. The complaint
seeks, among other things, (i) a declaratory judgment declaring Mr. Weiner a 10%
equity shareholder of the Company, (ii) a constructive trust in Mr. Weiner's
favor for 10% of the Company's equity shares and (iii) restitution against Mr.
Francesco and the Company for unjust enrichment. On his unjust enrichment claim,
Mr. Weiner seeks unspecified damages that he alleges to be at least $250,000. In
its answer to the complaint, the Company has denied the material allegations of
the complaint and asserted affirmative defenses. No discovery in this action has
yet been taken. Although the Company is vigorously defending this action, there
can be no assurance that it will be successful.
7. SUBSEQUENT EVENTS
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.
Also on October 13, 1999, the Board of Directors authorized the Company to enter
into a restricted stock agreement with Robert Pearl, Director of Business
Development, pursuant to which Mr. Pearl will be awarded 1% of the fully diluted
shares of Common Stock of the Company as of that date at the purchase price of
$.75 per share. Additionally, the Board of Directors agreed to reprice the
restricted shares granted to Messrs. Cassetta and Rossi to $.75 per share, the
fair value of the shares at that date.
In November 1999, $87,803 of the Company's Prepaid Warrants were converted into
an aggregate of 30,525 shares of Common Stock.
In November 1999, Zanett Lombardier, Ltd., converted certain warrants held by it
into an aggregate of 25,042 shares of Common Stock.
F-11
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
SmartServ Online, Inc.
We have audited the accompanying balance sheets of SmartServ Online, Inc. as of
June 30, 1999 and 1998, and the related statements of operations, stockholders'
equity (deficiency), and cash flows for each of the three years in the period
ended June 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SmartServ Online, Inc. at June
30, 1999 and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 1999, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that SmartServ
Online, Inc. will continue as a going concern. As more fully described in Note
1, the Company has incurred recurring operating losses and has a working capital
deficiency. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/S/ ERNST & YOUNG LLP
Stamford, Connecticut
October 13, 1999
F-12
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
JUNE 30
----------------------------
1999 1998
------------- --------------
ASSETS
Current assets
Cash and cash equivalents $2,165,551 $ 354,225
Accounts receivable 348,278 111,051
Prepaid expenses 50,150 130,603
---------- ----------
Total current assets 2,563,979 595,879
---------- ----------
Property and equipment, net 498,448 610,537
Other assets
Capitalized software development costs,
net of accumulated amortization of $82,108 683,337 --
Security deposit 74,834 70,437
---------- ----------
758,171 70,437
---------- ----------
Total Assets $3,820,598 $1,276,853
========== ==========
F-13
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
JUNE 30
-----------------------------------------
1999 1998
-----------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Accounts payable $ 780,543 $ 800,545
Accrued liabilities 474,189 736,137
Accrued liabilities to warrant holders 1,311,365 --
Salaries payable 93,443 57,308
Capital lease obligation - current portion 70,147 76,127
Deferred revenues - current portion 1,656,632 776,049
-----------------------------------------
Total current liabilities 4,386,319 2,446,166
-----------------------------------------
Capital lease obligation - long-term portion -- 77,548
Deferred revenues - long-term portion 4,141,579 --
COMMITMENTS AND CONTINGENCIES - NOTE 9
STOCKHOLDERS' DEFICIENCY
Preferred stock - $0.01 par value
Authorized - 1,000,000 shares
Issued and outstanding - None
Common Stock - $0.01 par value
Authorized - 40,000,000 shares
Issued and outstanding - 1,199,787 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
=========================================
See accompanying notes.
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
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-15
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
NOTES
COMMON STOCK COMMON RECEIVABLE ADDITIONAL
PAR STOCK FROM PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED OFFICERS CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 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 -- -- -- -- 75,000 -- --
services
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)
----------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
F-16
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
COMMON STOCK NOTES ADDITIONAL
PAR COMMON STOCK RECEIVABLE PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED FROM OFFICERS CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1997 615,832 $ 6,158 $ -- $ -- $ 9,077,384 $ -- $ (9,781,870)
Issuance of 4,000 Prepaid
Common Stock Purchase
Warrants; net of direct
costs of $545,000 -- -- -- -- 3,455,000 -- --
Conversion of 1,429.33
Prepaid Common Stock
Purchase Warrants into 220,395 2,204 -- -- (2,204) -- --
Common Stock
Issuance of Common Stock
Purchase Warrants to a
financial consultant in
connection with the
issuance of 4,000 Prepaid
Common Stock Purchase -- -- -- -- 5,145,500 (5,145,500) --
Warrants
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-17
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
COMMON STOCK NOTES ADDITIONAL
PAR COMMON STOCK RECEIVABLE PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED FROM OFFICERS CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1998 836,227 $ 8,362 $ -- $ -- $ 18,184,580 $ (4,617,924) $ (14,821,879)
Conversion of 276.67 Prepaid
Common Stock Purchase
Warrants into Common Stock 178,560 1,786 -- -- (1,786) -- --
Issuance of Common Stock to
Prepaid Warrant holders
as consideration for
amending certain terms
and conditions of the 60,000 600 -- -- 146,713 -- --
Prepaid Warrants
Issuance of Common Stock
Purchase Warrants in
connection with 6,300
prepayments made by a -- -- -- -- -- --
marketing partner
Issuance of Common Stock
Purchase Warrants in
connection with the
issuance of 8% -- -- -- -- 1,573,000 -- --
convertible notes
Beneficial conversion 550,000
feature of 8% convertible -- -- -- -- -- --
notes
Issuance of Common Stock and
warrants to purchase
Common Stock in partial 144,500
settlement of litigation 125,000 1,250 -- -- -- --
Amortization of unearned
compensation over the
term of the consulting -- -- -- -- -- 1,165,020 --
agreement
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-18
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
COMMON STOCK NOTES ADDITIONAL
PAR COMMON STOCK RECEIVABLE PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED FROM OFFICERS CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Authorization of the
issuance of Common Stock
Purchase Warrants in
connection with a -- -- -- -- 324,000 -- --
licensing agreement
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-19
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30
-----------------------------------------------------
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (7,124,126) $(5,040,009) $ (4,434,482)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization 278,646 193,601 149,182
Provision for losses on and write-off of receivables -- (1,300) 29,248
Noncash interest costs 12,524 52,837 --
Noncash debt origination and other financing costs 2,593,808 475,527 30,449
Noncash compensation costs 18,304 -- 188,293
Noncash consulting services 1,349,020 660,576 75,000
Amortization of unearned revenues (1,112,138) (251,058) --
Settlement of litigation -- 145,750 --
Changes in operating assets and liabilities
Accounts receivable (237,227) 40,031 (121,040)
Prepaid expenses (44,547) (25,878) (22,415)
Accounts payable and accrued liabilities 781,264 349,764 558,317
Accrued interest -- (5,323) 16,323
Payroll taxes payable 1,696 (16,089) 5,482
Salaries payable 34,439 6,996 1,364
Unearned revenues 6,121,776 1,002,193 24,914
Security deposit (4,397) 10,781 --
-----------------------------------------------------
Net cash provided by (used for) operating activities 2,669,042 (2,401,601) (3,499,365)
-----------------------------------------------------
INVESTING ACTIVITIES
Capitalization of software development costs (765,445) -- --
Purchase of equipment (84,449) (60,424) (351,786)
-----------------------------------------------------
Net cash used for investing activities (849,894) (60,424) (351,786)
-----------------------------------------------------
FINANCING ACTIVITIES
Proceeds from the issuance of warrants 324,000 2,643,941 --
Proceeds from the issuance of short-term notes 478,500 196,500 493,646
Repayment of short-term notes (691,794) -- --
Repayment of capital lease obligation (83,528) (92,536) --
Proceeds of advances from DTN 2,058,300 -- --
Repayment of advances from DTN (2,058,300) -- --
Costs of issuing securities (35,000) (25,000) (10,000)
-----------------------------------------------------
Net cash provided by (used for) financing activities (7,822) 2,722,905 483,646
-----------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,811,326 260,880 (3,367,505)
Cash and cash equivalents - beginning of year 354,225 93,345 3,460,850
=====================================================
Cash and cash equivalents - end of year $ 2,165,551 $ 354,225 $ 93,345
=====================================================
</TABLE>
See accompanying notes.
F-20
<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-21
<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) an order entry/routing system. Additionally,
the Company received $324,000 in exchange for an agreement to issue warrants to
purchase 300,000 shares of the Company's Common Stock at an exercise price of
$8.60 per share. The Company has agreed to continue to operate these products
and provide maintenance and enhancement services in exchange for a percentage of
the revenues earned by DTN therefrom. The cost of the Company's commitment to
provide such maintenance and enhancement services is limited to a maximum of 20%
of the revenues earned by the Company. None of the Company's wireless products
were included in this transaction.
The market for online information and transactional services is highly
competitive and subject to rapid innovation and technological change, shifting
consumer preferences and frequent new service introductions. The Company
believes that potential new competitors, including large multimedia and
information systems companies, are increasing their focus on transaction
processing. Increased competition in the market for the Company's services could
materially and adversely affect the Company's results of operations through
price reductions and loss of potential market share. The Company's ability to
compete in the future depends on its ability to maintain the technological and
performance advantages of its current distribution platform and to introduce new
applications that achieve market acceptance.
Notwithstanding the execution of the DTN agreements and the continual
discussions with potential Strategic Marketing Partners about future
relationships, the Company's ability to generate fee revenue and working capital
may not be sufficient to meet management's objectives as presently structured.
Management recognizes that the Company must generate additional revenues or
consider additional modifications to its sales and marketing program or
institute cost reductions to allow it to continue to operate with available cash
resources. There is no assurance that the Company will generate future revenues
or cash flow from operations or that the Company's products and services will
continue to be accepted in the marketplace by the ultimate consumers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
- ---------------------
The financial statements are prepared in conformity with generally accepted
accounting principles.
The Company's stockholders approved a one-for-six reverse stock split at a
Special Meeting on October 15, 1998. Such reverse stock split became effective
on October 26, 1998. All applicable financial statement amounts and related
disclosures have been restated to give effect to this transaction.
USE OF ESTIMATES
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
REVENUE RECOGNITION
- -------------------
Revenues are recognized as services are provided. Deferred revenues, resulting
from customer prepayments, are recognized as services are provided throughout
the term of the agreement. Deferred revenues resulting from the Company's
agreements with DTN are being amortized over the anticipated future revenue
stream, a period of 42 months.
F-22
<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-23
<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-24
<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-25
<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
F-26
<PAGE>
nature of their issuance. On October 13, 1999, the Board of Directors agreed to
reprice the shares granted to Mr. Cassetta to $.75 per share, the fair value of
the shares at that date.
The Company and Mr. Rossi have also entered into an employment agreement ("Rossi
Agreement"), effective January 1, 1999 and expiring on December 31, 2001,
providing for, among other things, the sale to him of 206,080 shares of
restricted stock representing 3% of the fully diluted shares of Common Stock of
the Company. The purchase price ($2.20 per share) of the restricted stock is
equal to 110% of fair market value for the 30 days preceding the date of the
stock purchase agreement ("Rossi Stock Purchase Agreement") 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-27
<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:
1999 1998
---- ----
Capitalized Start-up Costs $ 741,600 $ 1,112,500
Net Operating Loss Carryforwards 6,578,000 4,126,000
------------- ------------
$ 7,319,600 $ 5,238,500
============= ============
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," the Company has established a valuation allowance
to fully reserve the future income tax benefit of these deferred tax assets due
to uncertainty about their future realization. The valuation allowance increased
to $7,319,600 at June 30, 1999 from $5,238,500 at June 30, 1998 and $3,540,000
at June 30, 1997.
At June 30, 1999, the Company has net operating loss carryforwards for Federal
income tax purposes of approximately $8,930,000 which expire in the years 2009
through 2013. As a result of the public issuance of stock by the Company on
March 21, 1996, and the resultant change in ownership pursuant to
F-28
<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:
OPERATING LEASES CAPITAL
------------------------------------
YEAR ENDING JUNE 30 PREMISES EQUIPMENT LEASE
- ------------------- ----------------- --------------- ---------------
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 5,194
and executory costs ---------------
$ 70,147
===============
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-29
<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.
F-30
<PAGE>
10. SIGNIFICANT RELATIONSHIPS
During the year ended June 30, 1999, the Company's relationship with DTN
accounted for 94.8% of its revenues. During the year ended June 30, 1998, three
Strategic Marketing Partner relationships accounted for 10.2%, 10.0% and 24.1%,
respectively, of the Company's revenues while during the year ended June 30,
1997, one Strategic Marketing Partner relationship accounted for approximately
46.4% of the Company's revenues.
11. EMPLOYEE STOCK OPTION PLAN
In April 1996, the Board of Directors approved the establishment of an Employee
Stock Option Plan authorizing stock option grants to directors, key employees,
and consultants of the Company. The options are intended to qualify as incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, or as nonqualified stock options. The Plan provides for the
issuance of up to 250,000 of such options at not less than the fair value of the
stock on the date of grant. The options are partially exercisable after one year
from date of grant and expire on the tenth anniversary of the date of grant.
On September 24, 1997, the Compensation Committee granted new stock options to
employees and non-employee directors conditional upon cancellation of all of
their existing stock options. Such options were exercisable at $12.00. On
October 8, 1998, the Board of Directors voted to cancel the outstanding employee
and non-employee director options and reissue options covering a like number of
shares to employees and non-employee directors at an exercise price not less
than the fair value at that date. The exercise price of the options issued to
employees and non-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-31
<PAGE>
Information concerning stock options for the Company is as follows:
AVERAGE
EXERCISE
OPTIONS PRICE
-------------------- -----------------------
Balance at July 1, 1996 51,925 $ 38.82
Granted 70,829 31.38
Exercised -- --
Cancelled 66,362 37.32
-------------------- -----------------------
Balance at June 30, 1997 56,392 31.26
Granted 206,391 12.00
Exercised -- --
Cancelled 85,216 25.50
-------------------- -----------------------
Balance at June 30, 1998 177,567 12.00
Granted 463,858 1.92
Exercised -- --
Cancelled 355,524 7.26
==================== =======================
Balance at June 30, 1999 285,901 $ 1.54
==================== =======================
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-32
<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-33
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SMARTSERV ONLINE, INC.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE NO.
- ------- ----------- --------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation of the Company***
3.2 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation filed on June 1, 1998*
3.3 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation filed on October 16, 1998*
3.4 By-laws of the Company, as amended***
4.1 Specimen Certificate of the Company's Common Stock***
4.2 Letter agreement dated July 1, 1999 between the Company and
Arnhold and S. Bleichroeder, Inc.********
4.3 Securities Purchase Agreement dated as of November 19, 1998 among
the Company and the investors listed therein.********
4.4 Settlement Agreement dated as of June 28, 1999 between the
Company, Spencer Trask Securities Incorporated and Kevin
Kimberlin Partners, LP********
4.5 Warrant Agreement dated as of among the Company and the investors
listed therein.********
4.6 Consulting Agreement dated October 25, 1999 between the Company
and Steven Rosner********
4.7 Form of warrant issued to Steven Rosner********
4.8 Consulting Agreement with Bruno Guazzoni*****
4.9 Warrant issued to Bruno Guazzoni dated September 29, 1997*****
4.10 Warrant issued to The Zanett Securities Corporation dated
September 29, 1997*****
4.11 Form of Warrant issued to Zanett Lombardier, Ltd.+
4.12 Form of Default Warrant issued to Zanett Lombardier Ltd.+
4.13 Form of Warrant issued to The Zanett Securities Corporation+
4.14 Registration Rights Agreement dated September 29, 1997+
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP+
10.1 Information Distribution License Agreement dated as of July 18,
1994 between the Company and S&P ComStock, Inc.***
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.2 New York Stock Exchange, Inc. Agreement for Receipt and Use of
Market Data dated as of August 11, 1994 between the Company and
the New York Stock Exchange, Inc.***
10.3 The Nasdaq Stock Market, Inc. Vendor Agreement for Level 1
Service and Last Sale Service dated as of September 12, 1994
between the Company and The Nasdaq Stock Exchange, Inc.
("Nasdaq")***
10.4 Amendment to Vendor Agreement for Level 1 Service and Last Sale
Service dated as of October 11, 1994 between the Company and
Nasdaq***
10.5 Lease Agreement dated as of March 4, 1994, between the Company
and One Station Place, L.P. regarding the Company's Stamford,
Connecticut offices***
10.6 Lease Modification and Extension Agreement, dated February 6,
1996, between the Company and One Station Place, L.P. regarding
the Company's Stamford, Connecticut offices***
10.7 Form of Registration Rights Agreement between the Company and
certain investors***
10.8 Form of 1996 Stock Option Plan******
10.9 Form of Registration Rights Agreement issued to purchasers of
Prepaid Common Stock Purchase Warrants*****
10.10 Agreement between Sprint/United Management Company and SmartServ
Online, Inc. dated September 26, 1997**
10.11 Asset Purchase and Software License and Service Agreements
between SmartServ Online, Inc. and Data Transmission Network
Corporation, dated April 23, 1998*******
10.12 Amendment to the Software and License Agreement between SmartServ
Online, Inc. and Data Transmission Network Corporation, dated
June 24, 1999. Portions of this exhibit (indicated by asterisks)
have been omitted pursuant to a request for confidential
treatment pursuant to Rule 24b-2 and the omitted portions have
been filed separately with the Securities and Exchange
Commission*
10.13 Letter agreement dated August 26, 1999, amending the Amendment to
the Software and License Agreement between SmartServ Online, Inc.
and Data Transmission Network Corporation, dated June 24, 1999.
Portions of this exhibit (indicated by asterisks) have been
omitted pursuant to a request for confidential treatment pursuant
to Rule 24b-2 and the omitted portions have been filed separately
with the Securities and Exchange Commission*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.14 Amended and Restated Employment Agreement between SmartServ
Online, Inc. and Sebastian E. Cassetta, dated January 1, 1999*
10.15 Restricted Stock Purchase Agreement between SmartServ Online,
Inc. and Sebastian E. Cassetta, dated December 29, 1998*
10.16 Employment Agreement between SmartServ Online, Inc. and Mario F.
Rossi, dated January 1, 1999*
10.17 Restricted Stock Purchase Agreement between SmartServ Online,
Inc. and Mario F. Rossi, dated December 29, 1998*
23.1 Consent of Ernst & Young LLP+
23.2 Consent of Parker Chapin Flattau & Klimpl, LLP (Included in
Exhibit 5.1)
24.1 Power of Attorney of certain directors and officers of SmartServ
(Included as part of the signature page beginning on page II-7 of
the initial filing)
* Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1999
** Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1997
*** Filed as an exhibit to the Company's registration statement on Form
SB-2 (Registration No. 333-114)
**** Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1996
***** Filed as an exhibit to the Company's Current Report on Form 8-K/A for
an event dated September 30, 1997
****** Filed as an exhibit to the Company's Proxy Statement dated October 10,
1996
******* Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for the period ended March 31, 1998
</TABLE>
EXHIBIT 4.11
VOID AFTER 5:00 P.M. NEW YORK CITY
TIME ON ____, 200_
THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES
REPRESENTED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED
UNLESS THE SECURITIES ARE REGISTERED UNDER THE SECURITIES ACT AND
APPLICABLE STATE SECURITIES LAWS, OR ANY SUCH OFFER, SALE OR TRANSFER
IS MADE PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THOSE LAWS.
Right to Purchase ________ Shares of
Common Stock
Date: ____, 199_
SMARTSERV ONLINE, INC.
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, Zanett Lombardier, Ltd. or its
registered assigns, is entitled to purchase from SmartServ Online, Inc., a
Delaware corporation (the "COMPANY"), at any time or from time to time during
the period specified in Section 2 hereof, ____________________________(________)
fully paid and nonassessable shares of the Company's common stock, par value
$.01 per share ("COMMON STOCK"), at an exercise price per share equal to $2.825
(the "EXERCISE PRICE"); provided, however, that following the occurrence of an
Event of Default (as defined in the Note (as defined below)) under the Note, the
Exercise Price shall be equal to the lesser of (i) the Exercise Price which
would have been in effect on the date of exercise hereof but for the operation
of this proviso and (ii) the lowest Closing Price (as defined in Section
4(l)(iii) below) during the longer of (A) the three (3) month period commencing
on the date of the occurrence of such Event of Default and (B) the period
commencing on the date of the occurrence of such Event of Default and ending on
the date on which the Company pays the Default Amount (as defined in the Note).
The Company shall immediately notify the holder of this Warrant, in writing, of
the occurrence of any Event of Default under the Note and thereafter, of the
date of the Company's payment of the Default Amount. The number of shares of
Common Stock purchasable hereunder (the "WARRANT SHARES") and the Exercise Price
are subject to adjustment as provided in Section 4 hereof. That certain Line of
Credit Agreement, dated as of May 29, 1997, pursuant to which this Warrant was
originally issued is referred to herein as the "Line of Credit Agreement." That
certain Promissory Note in the principal amount of Five Hundred Thousand Dollars
($550,000) originally issued pursuant to the Line of Credit Agreement is
referred to herein as the "Note."
<PAGE>
This Warrant is subject to the following terms, provisions, and
conditions:
1. MANNER OF EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
Subject to the provisions hereof, including, without limitation, the limitations
contained in Section 7 hereof, this Warrant may be exercised by the holder
hereof, in whole or in part, by the surrender of this Warrant, together with a
completed exercise agreement in the form attached hereto (the "EXERCISE
Agreement"), to the Company during normal business hours on any business day at
the Company's principal executive offices (or such other office or agency of the
Company as it may designate by notice to the holder hereof), and upon (i)
payment to the Company in cash, by certified or official bank check or by wire
transfer for the account of the Company, of the Exercise Price for the Warrant
Shares specified in the Exercise Agreement or (ii) if the holder is effectuating
a Cashless Exercise (as defined in Section 10(c) below) pursuant to Section
10(c) hereof, delivery to the Company of a written notice of an election to
effect a Cashless Exercise for the Warrant Shares specified in the Exercise
Agreement. The Warrant Shares so purchased shall be deemed to be issued to the
holder hereof or such holder's designee, as the record owner of such shares, as
of the close of business on the date on which this Warrant shall have been
surrendered, the completed Exercise Agreement shall have been delivered, and
payment shall have been made for such shares as set forth above. Certificates
for the Warrant Shares so purchased, representing the aggregate number of shares
specified in the Exercise Agreement, shall be delivered to the holder hereof
within a reasonable time, not exceeding two (2) business days, after this
Warrant shall have been so exercised (the "DELIVERY PERIOD"). The certificates
so delivered shall be in such denominations as may be requested by the holder
hereof and shall be registered in the name of such holder or such other name as
shall be designated by such holder. If this Warrant shall have been exercised
only in part, then, unless this Warrant has expired, the Company shall, at its
expense, at the time of delivery of such certificates, deliver to the holder a
new Warrant representing the number of shares with respect to which this Warrant
shall not then have been exercised.
If, at any time, a holder of this Warrant submits this Warrant, an
Exercise Agreement and payment to the Company of the Exercise Price for each of
the Warrant Shares specified in the Exercise Agreement (including pursuant to a
Cashless Exercise), and the Company fails for any reason to deliver, on or prior
to the fourth business day following the expiration of the Delivery Period for
such exercise, the number of shares of Common Stock to which the holder is
entitled upon such exercise (an "EXERCISE DEFAULT"), then the Company shall pay
to the holder payments ("EXERCISE DEFAULT PAYMENTS") for an Exercise Default in
the amount of (a) (N/365), multiplied by (b) the difference between the Market
Price (as defined in Section 4(l)(ii) hereof) on the date the Exercise Agreement
giving rise to the Exercise Default is transmitted in accordance with Section 1
(the "EXERCISE DEFAULT DATE") less the Exercise Price, multiplied by (c) the
number of shares of Common Stock the Company failed to so deliver in such
Exercise Default, multiplied by (d) .24, where N = the number of days from the
Exercise Default Date to the date that the Company effects the full exercise of
this Warrant which gave rise to the Exercise Default. The accrued Exercise
Default Payment for each calendar month shall be paid in cash or shall be
convertible into Common Stock at the Exercise Price, at the holder's option, as
follows:
2
<PAGE>
(a) In the event holder elects to take such payment in cash, cash
payment shall be made to holder by the fifth (5th) day of the month following
the month in which it has accrued; and
(b) In the event holder elects to take such payment in Common Stock,
the holder may convert such payment amount into Common Stock at the Exercise
Price (as in effect at the time of conversion) at any time after the fifth (5th)
day of the month following the month in which it has accrued.
Nothing herein shall limit the holder's right to pursue actual
damages for the Company's failure to maintain a sufficient number of authorized
shares of Common Stock as required pursuant to the terms of Section 3(b) hereof,
or to otherwise issue shares of Common Stock upon exercise of this Warrant in
accordance with the terms hereof, and each holder shall have the right to pursue
all remedies available at law or in equity (including a decree of specific
performance and/or injunctive relief).
2. PERIOD OF EXERCISE. This Warrant is exercisable at any time or from
time to time on or after the date hereof and before 5:00 p.m., New York City
time on the fifth (5th) anniversary of the date hereof (the "EXERCISE PERIOD").
3. CERTAIN AGREEMENTS OF THE COMPANY. The Company hereby covenants and
agrees as follows:
(A) SHARES TO BE FULLY PAID. All Warrant Shares will, upon issuance
in accordance with the terms of this Warrant, be validly issued, fully paid, and
nonassessable and free from all taxes, liens, claims and encumbrances.
(B) RESERVATION OF SHARES. During the Exercise Period, the Company
shall at all times have authorized, and reserved for the purpose of issuance
upon exercise of this Warrant, a sufficient number of shares of Common Stock to
provide for the exercise of this Warrant.
(C) LISTING. The Company shall promptly secure the listing of the
shares of Common Stock issuable upon exercise of this Warrant upon each national
securities exchange or automated quotation system, if any, upon which shares of
Common Stock are then listed or become listed (subject to official notice of
issuance upon exercise of this Warrant) and shall maintain, so long as any other
shares of Common Stock shall be so listed, such listing of all shares of Common
Stock from time to time issuable upon the exercise of this Warrant; and the
Company shall so list on each national securities exchange or automated
quotation system, as the case may be, and shall maintain such listing of, any
other shares of capital stock of the Company issuable upon the exercise of this
Warrant if and so long as any shares of the same class shall be listed on such
national securities exchange or automated quotation system.
3
<PAGE>
(D) CERTAIN ACTIONS PROHIBITED. The Company will not, by amendment
of its charter or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. Without limiting the generality of the foregoing, the Company (i)
will not increase the par value of any shares of Common Stock receivable upon
the exercise of this Warrant above the Exercise Price then in effect, and (ii)
will take all such actions as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant.
(E) SUCCESSORS AND ASSIGNS. This Warrant will be binding upon any
entity succeeding to the Company by merger, consolidation, or acquisition of all
or substantially all of the Company's assets.
(F) BLUE SKY LAWS. The Company shall, on or before the date of
issuance of any Warrant Shares, take such actions as the Company shall
reasonably determine are necessary to qualify the Warrant Shares for, or obtain
exemption for the Warrant Shares for, sale to the holder of this Warrant upon
the exercise hereof under applicable securities or "blue sky" laws of the states
of the United States, and shall provide evidence of any such action so taken to
the holder of this Warrant prior to such date; provided, however, that the
Company shall not be required to qualify as a foreign corporation or file a
general consent to service of process in any such jurisdiction.
4. ANTIDILUTION PROVISIONS. During the Exercise Period, the Exercise
Price and the number of Warrant Shares shall be subject to adjustment from time
to time as provided in this Section 4.
In the event that any adjustment of the Exercise Price as required
herein results in a fraction of a cent, such Exercise Price shall be rounded up
or down to the nearest cent.
(A) ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES UPON ISSUANCE
OF COMMON STOCK. Except as otherwise provided in Sections 4(c) and 4(e) hereof,
if and whenever after the initial issuance of this Warrant, the Company issues
or sells, or in accordance with Section 4(b) hereof is deemed to have issued or
sold, any shares of Common Stock for no consideration or for a consideration per
share less than the Market Price on the date of issuance (a "DILUTIVE
ISSUANCE"), then effective immediately upon the Dilutive Issuance, the Exercise
Price will be adjusted in accordance with the following formula:
4
<PAGE>
E' = E x ___O + P/M____
CSDO
where:
E' = the adjusted Exercise Price;
E = the then current Exercise Price;
M = the then current Market Price (as defined in Section 4(1)(ii));
O = the number of shares of Common Stock outstanding
immediately prior to the Dilutive Issuance;
P = the aggregate consideration, calculated as set forth in
Section 4(b) hereof, received by the Company upon such
Dilutive Issuance; and
CSDO = the total number of shares of Common Stock Deemed Outstanding
(as defined in Section 4(l)(i)) immediately after the Dilutive
Issuance.
(B) EFFECT ON EXERCISE PRICE OF CERTAIN EVENTS. For purposes of
determining the adjusted Exercise Price under Section 4(a) hereof, the following
will be applicable:
(i) ISSUANCE OF RIGHTS OR OPTIONS. If the Company in any manner
issues or grants any warrants, rights or options, whether or not immediately
exercisable, to subscribe for or to purchase Common Stock or other securities
exercisable, convertible into or exchangeable for Common Stock ("CONVERTIBLE
SECURITIES") (such warrants, rights and options to purchase Common Stock or
Convertible Securities are hereinafter referred to as "OPTIONS") and the price
per share for which Common Stock is issuable upon the exercise of such Options
is less than the Market Price on the date of issuance ("BELOW MARKET OPTIONS"),
then the maximum total number of shares of Common Stock issuable upon the
exercise of all such Below Market Options (assuming full exercise, conversion or
exchange of Convertible Securities, if applicable) will, as of the date of the
issuance or grant of such Below Market Options, be deemed to be outstanding and
to have been issued and sold by the Company for such price per share. For
purposes of the preceding sentence, the "price per share for which Common Stock
is issuable upon the exercise of such Below Market Options" is determined by
dividing (i) the total amount, if any, received or receivable by the Company as
consideration for the issuance or granting of all such Below Market Options,
plus the minimum aggregate amount of additional consideration, if any, payable
to the Company upon the exercise of all such Below Market Options, plus, in the
case of Convertible Securities issuable upon the exercise of such Below Market
Options, the minimum aggregate amount of additional consideration payable upon
the exercise, conversion or exchange thereof at the time such Convertible
Securities first become exercisable, convertible or exchangeable, by (ii) the
maximum total number of shares of Common Stock issuable upon the exercise of all
such Below Market Options (assuming full conversion of Convertible Securities,
if applicable). No further adjustment to the Exercise Price will be made upon
the actual issuance of such Common Stock upon the exercise of such Below Market
Options or upon the exercise, conversion or exchange of Convertible Securities
issuable upon exercise of such Below Market Options.
5
<PAGE>
(ii) ISSUANCE OF CONVERTIBLE SECURITIES.
(A) If the Company in any manner issues or sells any
Convertible Securities, whether or not immediately convertible (other than where
the same are issuable upon the exercise of Options) and the price per share for
which Common Stock is issuable upon such exercise, conversion or exchange (as
determined pursuant to Section 4(b)(ii)(B) if applicable) is less than the
Market Price on the date of issuance, then the maximum total number of shares of
Common Stock issuable upon the exercise, conversion or exchange of all such
Convertible Securities will, as of the date of the issuance of such Convertible
Securities, be deemed to be outstanding and to have been issued and sold by the
Company for such price per share. For the purposes of the preceding sentence,
the "price per share for which Common Stock is issuable upon such exercise,
conversion or exchange" is determined by dividing (i) the total amount, if any,
received or receivable by the Company as consideration for the issuance or sale
of all such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the exercise,
conversion or exchange thereof at the time such Convertible Securities first
become exercisable, convertible or exchangeable, by (ii) the maximum total
number of shares of Common Stock issuable upon the exercise, conversion or
exchange of all such Convertible Securities. No further adjustment to the
Exercise Price will be made upon the actual issuance of such Common Stock upon
exercise, conversion or exchange of such Convertible Securities.
(B) If the Company in any manner issues or sells any
Convertible Securities with a fluctuating conversion or exercise price or
exchange ratio (a "VARIABLE RATE CONVERTIBLE SECURITY"), then the "price per
share for which Common Stock is issuable upon such exercise, conversion or
exchange" for purposes of the calculation contemplated by Section 4(b)(ii)(A)
shall be deemed to be the lowest price per share which would be applicable
(assuming all holding period and other conditions to any discounts contained in
such Convertible Security have been satisfied) if the Market Price on the date
of issuance of such Convertible Security was 75% of the Market Price on such
date (the "ASSUMED VARIABLE MARKET PRICE"). Further, if the Market Price at any
time or times thereafter is less than or equal to the Assumed Variable Market
Price last used for making any adjustment under this Section 4 with respect to
any Variable Rate Convertible Security, the Exercise Price in effect at such
time shall be readjusted to equal the Exercise Price which would have resulted
if the Assumed Variable Market Price at the time of issuance of the Variable
Rate Convertible Security had been 75% of the Market Price existing at the time
of the adjustment required by this sentence.
(iii) CHANGE IN OPTION PRICE OR CONVERSION RATE. If there is a
change at any time in (i) the amount of additional consideration payable to the
Company upon the exercise of any Options; (ii) the amount of additional
consideration, if any, payable to the Company upon the exercise, conversion or
exchange of any Convertible Securities; or (iii) the rate at which any
Convertible Securities are convertible into or exchangeable for Common Stock (in
each such case, other than under or by reason of provisions designed to protect
against dilution), the Exercise Price in effect at the time of such change will
be readjusted to the
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Exercise Price which would have been in effect at such time had such Options or
Convertible Securities still outstanding provided for such changed additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold.
(iv) TREATMENT OF EXPIRED OPTIONS AND UNEXERCISED CONVERTIBLE
SECURITIES. If, in any case, the total number of shares of Common Stock issuable
upon exercise of any Option or upon exercise, conversion or exchange of any
Convertible Securities is not, in fact, issued and the rights to exercise such
Option or to exercise, convert or exchange such Convertible Securities shall
have expired or terminated, the Exercise Price then in effect will be readjusted
to the Exercise Price which would have been in effect at the time of such
expiration or termination had such Option or Convertible Securities, to the
extent outstanding immediately prior to such expiration or termination (other
than in respect of the actual number of shares of Common Stock issued upon
exercise or conversion thereof), never been issued.
(v) CALCULATION OF CONSIDERATION RECEIVED. If any Common Stock,
Options or Convertible Securities are issued, granted or sold for cash, the
consideration received therefor for purposes of this Warrant will be the amount
received by the Company therefor, before deduction of reasonable commissions,
underwriting discounts or allowances or other reasonable expenses paid or
incurred by the Company in connection with such issuance, grant or sale. In case
any Common Stock, Options or Convertible Securities are issued or sold for a
consideration part or all of which shall be other than cash, the amount of the
consideration other than cash received by the Company will be the fair market
value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the Company
will be the Market Price thereof as of the date of receipt. In case any Common
Stock, Options or Convertible Securities are issued in connection with any
merger or consolidation in which the Company is the surviving corporation, the
amount of consideration therefor will be deemed to be the fair market value of
such portion of the net assets and business of the non-surviving corporation as
is attributable to such Common Stock, Options or Convertible Securities, as the
case may be. The fair market value of any consideration other than cash or
securities will be determined in good faith by an investment banker or other
appropriate expert of national reputation selected by the Company and reasonably
acceptable to the holder hereof, with the costs of such appraisal to be borne by
the Company.
(vi) EXCEPTIONS TO ADJUSTMENT OF EXERCISE PRICE. No adjustment to
the Exercise Price will be made (i) upon the exercise of any warrants, options
or convertible securities issued and outstanding on the date hereof in
accordance with the terms of such securities as of such date; (ii) upon the
grant or exercise of any stock or options which may hereafter be granted or
exercised under any employee benefit plan of the Company now existing or to be
implemented in the future, so long as the issuance of such stock or options is
approved by a majority of the non-employee members of the Board of Directors of
the Company or a majority of the members of a committee of non-employee
directors established for such purpose; (iii) upon the issuance of any warrants
in accordance with terms of the Line of Credit Agreement and the Note or upon
the exercise of such warrants; or (iv) upon the issuance of any securities in
connection with that certain rights offering in the aggregate amount of
$2,875,000 conducted on behalf of the Company by Coleman and Company Securities,
Inc.
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(C) SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company,
at any time after the initial issuance of this Warrant, subdivides (by any stock
split, stock dividend, recapitalization, reorganization, reclassification or
otherwise) its shares of Common Stock into a greater number of shares, then,
after the date of record for effecting such subdivision, the Exercise Price in
effect immediately prior to such subdivision will be proportionately reduced. If
the Company, at any time after the initial issuance of this Warrant, combines
(by reverse stock split, recapitalization, reorganization, reclassification or
otherwise) its shares of Common Stock into a smaller number of shares, then,
after the date of record for effecting such combination, the Exercise Price in
effect immediately prior to such combination will be proportionately increased.
(D) ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Section 4, the number of
shares of Common Stock issuable upon exercise of this Warrant shall be adjusted
by multiplying a number equal to the Exercise Price in effect immediately prior
to such adjustment by the number of shares of Common Stock issuable upon
exercise of this Warrant immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
(E) CONSOLIDATION, MERGER OR SALE. In case of any consolidation
of the Company with, or merger of the Company into any other corporation, or in
case of any sale or conveyance of all or substantially all of the assets of the
Company other than in connection with a plan of complete liquidation of the
Company at any time after the initial issuance of this Warrant, then as a
condition of such consolidation, merger or sale or conveyance, adequate
provision will be made whereby the holder of this Warrant will have the right to
acquire and receive upon exercise of this Warrant in lieu of the shares of
Common Stock immediately theretofore acquirable upon the exercise of this
Warrant, such shares of stock, securities or assets as may be issued or payable
with respect to or in exchange for the number of shares of Common Stock
immediately theretofore acquirable and receivable upon exercise of this Warrant
had such consolidation, merger or sale or conveyance not taken place. In any
such case, the Company will make appropriate provision to insure that the
provisions of this Section 4 hereof will thereafter be applicable as nearly as
may be in relation to any shares of stock or securities thereafter deliverable
upon the exercise of this Warrant. The Company will not effect any
consolidation, merger or sale or conveyance unless prior to the consummation
thereof, the successor corporation (if other than the Company) assumes by
written instrument the obligations under this Section 4 and the obligations to
deliver to the holder of this Warrant such shares of stock, securities or assets
as, in accordance with the foregoing provisions, the holder may be entitled to
acquire.
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(F) DISTRIBUTION OF ASSETS. In case the Company shall declare or
make any distribution of its assets (or rights to acquire its assets) to holders
of Common Stock as a dividend, by way of return of capital or otherwise
(including any dividend or distribution to the Company's shareholders of cash or
shares (or rights to acquire shares) of capital stock of a subsidiary) (a
"DISTRIBUTION"), at any time after the initial issuance of this Warrant, then
the holder of this Warrant shall be entitled upon exercise of this Warrant for
the purchase of any or all of the shares of Common Stock subject hereto, to
receive the amount of such assets (or rights) which would have been payable to
the holder had such holder been the holder of such shares of Common Stock on the
record date for the determination of shareholders entitled to such Distribution.
(G) NOTICE OF ADJUSTMENT. Upon the occurrence of any event which
requires any adjustment of the Exercise Price, then, and in each such case, the
Company shall give notice thereof to the holder of this Warrant, which notice
shall state the Exercise Price resulting from such adjustment and the increase
or decrease in the number of Warrant Shares purchasable at such price upon
exercise, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. Such calculation shall be certified
by the chief financial officer of the Company.
(H) MINIMUM ADJUSTMENT OF EXERCISE PRICE. No adjustment of the
Exercise Price shall be made in an amount of less than 1% of the Exercise Price
in effect at the time such adjustment is otherwise required to be made, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.
(I) NO FRACTIONAL SHARES. No fractional shares of Common Stock
are to be issued upon the exercise of this Warrant, but the Company shall pay a
cash adjustment in respect of any fractional share which would otherwise be
issuable in an amount equal to the same fraction of the Market Price of a share
of Common Stock on the date of such exercise.
(J) OTHER NOTICES. In case at any time:
(i) the Company shall declare any dividend upon the Common
Stock payable in shares of stock of any class or make any other distribution
(other than dividends or distributions payable in cash out of retained earnings
consistent with the Company's past practices with respect to declaring dividends
and making distributions) to the holders of the Common Stock;
(ii) the Company shall offer for subscription pro rata to the
holders of the Common Stock any additional shares of stock of any class or other
rights;
(iii) there shall be any capital reorganization of the Company,
or reclassification of the Common Stock, or consolidation or merger of the
Company with or into, or sale of all or substantially all of its assets to,
another corporation or entity; or
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(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the holder of this Warrant
(a) notice of the date on which the books of the Company shall close or a record
shall be taken for determining the holders of Common Stock entitled to receive
any such dividend, distribution, or subscription rights or for determining the
holders of Common Stock entitled to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up and (b) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, notice of
the date (or, if not then known, a reasonable approximation thereof by the
Company) when the same shall take place. Such notice shall also specify the date
on which the holders of Common Stock shall be entitled to receive such dividend,
distribution, or subscription rights or to exchange their Common Stock for stock
or other securities or property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, or
winding-up, as the case may be. Such notice shall be given at least 30 days
prior to the record date or the date on which the Company's books are closed in
respect thereto. Failure to give any such notice or any defect therein shall not
affect the validity of the proceedings referred to in clauses (i), (ii), (iii)
and (iv) above.
(K) CERTAIN EVENTS. If, at any time after the initial issuance of
this Warrant, any event occurs of the type contemplated by the adjustment
provisions of this Section 4 but not expressly provided for by such provisions,
the Company will give notice of such event as provided in Section 4(g) hereof,
and the Company's Board of Directors will make an appropriate adjustment in the
Exercise Price and the number of shares of Common Stock acquirable upon exercise
of this Warrant so that the rights of the holder shall be neither enhanced nor
diminished by such event.
(L) CERTAIN DEFINITIONS.
(i) "COMMON STOCK DEEMED OUTSTANDING" shall mean the number of
shares of Common Stock actually outstanding (not including shares of Common
Stock held in the treasury of the Company), plus (x) in the case of any
adjustment required by Section 4(a) resulting from the issuance of any Options,
the maximum total number of shares of Common Stock issuable upon the exercise of
the Options for which the adjustment is required (including any Common Stock
issuable upon the conversion of Convertible Securities issuable upon the
exercise of such Options), and (y) in the case of any adjustment required by
Section 4(a) resulting from the issuance of any Convertible Securities, the
maximum total number of shares of Common Stock issuable upon the exercise,
conversion or exchange of the Convertible Securities for which the adjustment is
required, as of the date of issuance of such Convertible Securities, if any.
(ii) "MARKET PRICE," as of any date, (i) means the average of
the closing bid prices for the shares of Common Stock as reported on the Nasdaq
SmallCap Market by Bloomberg Financial Markets ("BLOOMBERG") for the five (5)
trading days
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immediately preceding such date, or (ii) if the Nasdaq SmallCap Market is not
the principal trading market for the shares of Common Stock, the average of the
last bid prices reported by Bloomberg on the principal trading market for the
Common Stock during the same period, or, if there is no bid price for such
period, the last sales price reported by Bloomberg for such period, or (iii) if
the foregoing do not apply, the last closing bid price of such security in the
over-the-counter market on the pink sheets or bulletin board for such security
as reported by Bloomberg, or if no closing bid price is so reported for such
security, the last closing trade price of such security as reported by
Bloomberg, or (iv) if market value cannot be calculated as of such date on any
of the foregoing bases, the Market Price shall be the average fair market value
as reasonably determined by an investment banking firm selected by the Company
and reasonably acceptable to the holder, with the costs of the appraisal to be
borne by the Company. The manner of determining the Market Price of the Common
Stock set forth in the foregoing definition shall apply with respect to any
other security in respect of which a determination as to market value must be
made hereunder.
(iii) "CLOSING PRICE," as of any date, (i) means the closing
bid price for the shares of Common Stock as reported on the Nasdaq SmallCap
Market by Bloomberg for the trading day immediately preceding such date, or (ii)
if the Nasdaq SmallCap Market is not the principal trading market for the shares
of Common Stock, the last bid price reported by Bloomberg on the principal
trading market for the Common Stock on the trading day immediately preceding
such date, or, if there is no bid price for such period, the last sales price
reported by Bloomberg on trading day immediately preceding such date, or (iii)
if the foregoing do not apply, the last closing bid price of such security in
the over-the-counter market on the pink sheets or bulletin board for such
security as reported by Bloomberg on the trading day immediately preceding such
date, or if no closing bid price is so reported for such security, the last
closing trade price of such security as reported by Bloomberg on the trading day
immediately preceding such date, or (iv) if market value cannot be calculated as
of such date on any of the foregoing bases, the Closing Price shall be the fair
market value as reasonably determined by an investment banking firm selected by
the Company and reasonably acceptable to the holder, with the costs of the
appraisal to be borne by the Company.
(iv) "COMMON STOCK," for purposes of this Section 4, includes
the Common Stock and any additional class of stock of the Company having no
preference as to dividends or distributions on liquidation, provided that the
shares purchasable pursuant to this Warrant shall include only Common Stock, par
value $.01 per share, in respect of which this Warrant is exercisable, or shares
resulting from any subdivision or combination of such Common Stock, or in the
case of any reorganization, reclassification, consolidation, merger, or sale of
the character referred to in Section 4(e) hereof, the stock or other securities
or property provided for in such Section.
5. ISSUE TAX. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax or other costs in respect thereof,
provided that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than the holder of this Warrant.
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6. NO RIGHTS OR LIABILITIES AS A SHAREHOLDER. This Warrant shall not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
7. TRANSFER, EXCHANGE, REDEMPTION AND REPLACEMENT OF WARRANT.
(A) RESTRICTION ON TRANSFER. This Warrant and the rights granted to
the holder hereof are transferable, in whole or in part, upon surrender of this
Warrant, together with a properly executed assignment in the form attached
hereto, at the office or agency of the Company referred to in Section 7(e)
below, provided, however, that any transfer or assignment shall be subject to
the conditions set forth in Sections 7(f) and (g) hereof and to the provisions
of Sections 2(f) and (g) of the Line of Credit Agreement. Until due presentment
for registration of transfer on the books of the Company, the Company may treat
the registered holder hereof as the owner and holder hereof for all purposes,
and the Company shall not be affected by any notice to the contrary.
(B) WARRANT EXCHANGEABLE FOR DIFFERENT DENOMINATIONS. This Warrant
is exchangeable, upon the surrender hereof by the holder hereof at the office or
agency of the Company referred to in Section 7(e) below, for new Warrants of
like tenor of different denominations representing in the aggregate the right to
purchase the number of shares of Common Stock which may be purchased hereunder,
each of such new Warrants to represent the right to purchase such number of
shares as shall be designated by the holder hereof at the time of such
surrender.
(C) REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of any such loss, theft, or destruction, upon
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
(D) CANCELLATION; PAYMENT OF EXPENSES. Upon the surrender of this
Warrant in connection with any transfer, exchange, or replacement as provided in
this Section 7, this Warrant shall be promptly canceled by the Company. The
Company shall pay all taxes (other than securities transfer taxes) and all other
expenses (other than legal expenses, if any, incurred by the Holder or
transferees) and charges payable in connection with the preparation, execution,
and delivery of Warrants pursuant to this Section 7. The Company shall indemnify
and reimburse the holder of this Warrant for all costs and expenses (including
legal fees) incurred by such holder in connection with the enforcement of its
rights hereunder.
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(E) WARRANT REGISTER. The Company shall maintain, at its principal
executive offices (or such other office or agency of the Company as it may
designate by notice to the holder hereof), a register for this Warrant, in which
the Company shall record the name and address of the person in whose name this
Warrant has been issued, as well as the name and address of each transferee and
each prior owner of this Warrant.
(F) EXERCISE OR TRANSFER WITHOUT REGISTRATION. If, at the time of
the surrender of this Warrant in connection with any exercise, transfer, or
exchange of this Warrant, this Warrant (or, in the case of any exercise, the
Warrant Shares issuable hereunder), shall not be registered under the Securities
Act and under applicable state securities or blue sky laws, the Company may
require, as a condition of allowing such exercise, transfer, or exchange, (i)
that the holder or transferee of this Warrant, as the case may be, furnish to
the Company a written opinion of counsel (which opinion shall be in form,
substance and scope customary for opinions of counsel in comparable
transactions) to the effect that such exercise, transfer, or exchange may be
made without registration under the Securities Act and under applicable state
securities or blue sky laws (the cost of which shall be borne by the Company if
the Company's counsel renders such opinion and up to $250 of such cost shall be
borne by the Company if the holder's counsel renders such opinion), (ii) that
the holder or transferee execute and deliver to the Company an investment letter
in form and substance acceptable to the Company and (iii) that the transferee be
an "ACCREDITED INVESTOR" as defined in Rule 501(a) promulgated under the
Securities Act. With respect to any opinion to be provided pursuant to clause
(i) above, the holder shall be entitled to request that the Company's counsel
render such opinion and the Company shall cause its counsel to render such
opinion if requested by the holder.
(G) ADDITIONAL RESTRICTIONS ON EXERCISE OR TRANSFER. Notwithstanding
anything contained herein to the contrary, this Warrant shall not be exercisable
by a holder hereof to the extent (but only to the extent) that, if exercisable
by such holder, such holder would beneficially own in excess of 4.9% of the
outstanding shares of Common Stock. To the extent the above limitation applies,
the determination of whether and to what extent this Warrant shall be
exercisable vis-a-vis other securities owned by such holder shall be in the sole
discretion of the holder and submission of this Warrant for full or partial
exercise shall be deemed to be the holder's determination of whether and the
extent to which this Warrant is exercisable, in each case subject to such
aggregate percentage limitation. No prior inability to exercise the Warrant
pursuant to this Section shall have any effect on the applicability of the
provisions of this Section with respect to any subsequent determination of
exerciseability. For purposes of the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulation 13D-G thereunder. The
restrictions contained in this Section 7(g) may not be amended without the
consent of the holder of this Warrant and the holders of a majority of the
Company's then outstanding Common Stock. The first holder of this Warrant, by
taking and holding the same, represents to the Company that such holder is
acquiring this Warrant for investment only and not with a view to the
distribution thereof, except pursuant to sales that are exempt from the
registration requirements of the Securities Act and/or sales registered under
the Securities Act.
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8. NOTICES. Any notices required or permitted to be given under the
terms of this Warrant shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier or by confirmed
telecopy, and shall be effective five days after being placed in the mail, if
mailed, or upon receipt or refusal of receipt, if delivered personally or by
courier or confirmed telecopy, in each case addressed to a party. The addresses
for such communications shall be:
If to the Company:
SMARTSERV ONLINE, INC.
One Station Place
Stamford, CT 06902
Telecopy: (202) 353-5962
Attention: Chairman of the Board
With a copy to:
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, NY 10036
Telecopy: (212) 704-6288
Attention: Michael J. Shef, Esquire
and if to the holder, at such address as such holder shall have provided in
writing to the Company, or at such other address as each such party furnishes by
notice given in accordance with this Section 8.
9. GOVERNING LAW; JURISDICTION. This Warrant shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in the State of Delaware. The Company
irrevocably consents to the jurisdiction of the United States federal courts
located in the City of New York in the State of New York, in any suit or
proceeding based on or arising under this Warrant and irrevocably agrees that
all claims in respect of such suit or proceeding may be determined in such
courts. The Company irrevocably waives the defense of an inconvenient forum to
the maintenance of such suit or proceeding. The Company agrees that service of
process upon the Company mailed by first class mail shall be deemed in every
respect effective service of process upon the Company in any such suit or
proceeding. Nothing herein shall affect the holder's right to serve process in
any other manner permitted by law. The Company agrees that a final
non-appealable judgment in any such suit or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on such judgment or in any other
lawful manner.
10. MISCELLANEOUS.
(A) AMENDMENTS. This Warrant and any provision hereof may only be
amended by an instrument in writing signed by the Company and the holder hereof.
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(B) DESCRIPTIVE HEADINGS. The descriptive headings of the several
Sections of this Warrant are inserted for purposes of reference only, and shall
not affect the meaning or construction of any of the provisions hereof.
(C) CASHLESS EXERCISE. Notwithstanding anything to the contrary
contained in this Warrant, if the resale of the Warrant Shares by the holder is
not then registered pursuant to an effective registration statement under the
Securities Act, this Warrant may be exercised at any time after the first (1st)
anniversary of the date hereof until the end of the Exercise Period, by
presentation and surrender of this Warrant to the Company at its principal
executive offices with a written notice of the holder's intention to effect a
cashless exercise, including a calculation of the number of shares of Common
Stock to be issued upon such exercise in accordance with the terms hereof (a
"CASHLESS EXERCISE"). In the event of a Cashless Exercise, in lieu of paying the
Exercise Price in cash, the holder shall surrender this Warrant for that number
of shares of Common Stock determined by multiplying the number of Warrant Shares
to which it would otherwise be entitled by a fraction, the numerator of which
shall be the difference between the then current Market Price per share of the
Common Stock and the Exercise Price, and the denominator of which shall be the
then current Market Price per share of Common Stock.
11. REGISTRATION OF WARRANT SHARES.
(A) As used in this Section 11, the following terms shall have the
following meanings:
(i) "INVESTORS" means the holder of this Warrant and any
transferees or assignees hereof in accordance with Section 7 hereof.
(ii) "REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering securities on a
continuous basis ("RULE 415"), and the declaration or ordering of effectiveness
of such Registration Statement by the United States Securities and Exchange
Commission (the "SEC").
(iii) "REGISTRABLE SECURITIES" means the Warrant Shares issued or
issuable upon exercise hereof and any shares of capital stock issued or
issuable, from time to time (with any adjustments), on or in exchange for or
otherwise with respect to the foregoing.
(iv) "REGISTRATION STATEMENT" means a registration statement of
the Company under the Securities Act.
(B) In connection with any registration of the resale of the
Registrable Securities by Investors, the Company shall have the following
obligations:
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(i) The Company shall furnish to each Investor whose Registrable
Securities are included in the Registration Statement covering the resale of the
Registrable Securities and its legal counsel (i) promptly after the same is
prepared and publicly distributed, filed with the SEC, or received by the
Company, one copy of the Registration Statement and any amendment thereto, each
preliminary prospectus and prospectus and each amendment or supplement thereto,
and (ii) such number of copies of a prospectus, including a preliminary
prospectus, and all amendments and supplements thereto and such other documents
as such Investor may reasonably request in order to facilitate the disposition
of the Registrable Securities owned by such Investor.
(ii) As promptly as practicable after becoming aware of such
event, the Company shall notify each Investor of the happening of any event, of
which the Company has knowledge, as a result of which the prospectus included in
the Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and use its best
efforts promptly to prepare a supplement or amendment to the Registration
Statement to correct such untrue statement or omission, and deliver such number
of copies of such supplement or amendment to each Investor as such Investor may
reasonably request.
(iii) The Company shall use reasonable commercial efforts to
prevent the issuance of any stop order or other suspension of effectiveness of a
Registration Statement, and, if such an order is issued, to obtain the
withdrawal of such order at the earliest practicable moment and to notify each
Investor who holds Registrable Securities being sold (or, in the event of an
underwritten offering, the managing underwriters) of the issuance of such order
and the resolution thereof.
(iv) The Company shall permit a single firm of counsel designated
by the Investors to review the Registration Statement and all amendments and
supplements thereto a reasonable period of time prior to their filing with the
SEC, and not file any document to which such counsel reasonably objects.
(v) The Company shall hold in confidence and not make any
disclosure of information concerning an Investor provided to the Company unless
(i) disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other order
from a court or governmental body of competent jurisdiction, (iv) such
information has been made generally available to the public other than by
disclosure in violation of this or any other agreement, or (v) such Investor
consents to the form and content of any such disclosure. The Company agrees that
it shall, upon learning that disclosure of such information concerning an
Investor is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to such Investor prior
to making such disclosure, and allow the Investor, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information.
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(C) In connection with the registration of the resale of Registrable
Securities by Investors, the Investors shall have the following obligations:
(i) Each Investor shall furnish to the Company such information
regarding itself, the Registrable Securities held by it and the intended method
of disposition of the Registrable Securities held by it as shall be reasonably
required to effect the registration of such Registrable Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request. At least three (3) business days prior to the first
anticipated filing date of the Registration Statement, the Company shall notify
each Investor of the information the Company requires from each such Investor.
(ii) Each Investor, by such Investor's acceptance of the
Registrable Securities, agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statement hereunder.
(iii) Each Investor agrees that, upon receipt of any notice from
the Company of the happening of any event of the kind described in Sections
11(b)(ii) and (iii) hereof, such Investor will immediately discontinue
disposition of Registrable Securities pursuant to the Registration Statement
covering such Registrable Securities until such Investor's receipt of the copies
of the supplemented or amended prospectus contemplated by Sections 11(b)(ii) and
(iii) hereof, and, if so directed by the Company, such Investor shall deliver to
the Company (at the expense of the Company) or destroy (and deliver to the
Company a certificate of destruction) all copies in such Investor's possession,
of the prospectus covering such Registrable Securities current at the time of
receipt of such notice.
(D) All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to this Section 11, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees and
the fees and disbursements of counsel for the Company, shall be borne by the
Company. The Investors shall be responsible for all cost incurred by them or
their advisors and other professionals (including, without limitation, their
legal counsel, accountants and investment bankers) in connection with any
registration hereunder.
(E) In the event any Registrable Securities are included in a
Registration Statement under this Section 11:
(i) To the extent permitted by law, the Company will indemnify,
hold harmless and defend (i) each Investor who holds such Registrable
Securities, and (ii) the directors, officers, partners, members, employees,
agents and each person who controls any Investor within the meaning of Section
15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934,
as amended (the "EXCHANGE ACT"), if any, (each, an "INDEMNIFIED PERSON"),
against any joint or several losses, claims, damages, liabilities or expenses
(collectively, together with actions, proceedings or inquiries by any regulatory
or self-regulatory organization, whether commenced or threatened, in respect
thereof, "CLAIMS") to which any of them may become subject insofar as such
Claims arise out of or are based upon: (i) any untrue
17
<PAGE>
statement or alleged untrue statement of a material fact in a Registration
Statement or the omission or alleged omission to state therein a material fact
required to be stated or necessary to make the statements therein not
misleading, (ii) any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus if used prior to the effective date
of such Registration Statement, or contained in the final prospectus (as amended
or supplemented, if the Company files any amendment thereof or supplement
thereto with the SEC) or the omission or alleged omission to state therein any
material fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading, or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any other law, including, without limitation, any state
securities law, or any rule or regulation thereunder relating to the offer or
sale of the Registrable Securities (the matters in the foregoing clauses (i)
through (iii) being, collectively, "VIOLATIONS"). Subject to the restrictions
set forth in Section 11(e)(iii) with respect to the number of legal counsel, the
Company shall reimburse the Investors and each such underwriter or controlling
person, promptly as such expenses are incurred and are due and payable, for any
reasonable legal fees or other reasonable expenses incurred by them in
connection with investigating or defending any such Claim. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 11(e)(i): (i) shall not apply to a Claim arising out
of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by such Indemnified Person
expressly for use in the Registration Statement or any such amendment thereof or
supplement thereto; (ii) shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of the
Company, which consent shall not be unreasonably withheld; and (iii) with
respect to any preliminary prospectus, shall not inure to the benefit of any
Indemnified Person if the untrue statement or omission of material fact
contained in the preliminary prospectus was corrected on a timely basis in the
prospectus, as then amended or supplemented, if such corrected prospectus was
timely made available by the Company pursuant hereto, and the Indemnified Person
was promptly advised in writing not to use the incorrect prospectus prior to the
use giving rise to a Violation and such Indemnified Person, notwithstanding such
advice, used it. Such indemnity shall remain in full force and effect regardless
of any investigation made by or on behalf of the Indemnified Person and shall
survive the transfer of the Registrable Securities by the Investors.
(ii) In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees severally and not jointly
to indemnify, hold harmless and defend, to the same extent and in the same
manner set forth in Section 11(e)(i) hereof, the Company, each of its directors,
each of its officers who signs the Registration Statement, its employees, agents
and each person, if any, who controls the Company within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act, and any other
stockholder selling securities pursuant to the Registration Statement or any of
its directors or officers or any person who controls such stockholder or
underwriter within the meaning of the Securities Act or the Exchange Act
(collectively and together with an Indemnified Person, an "INDEMNIFIED PARTY"),
against any Claim to which any of them may become subject, under the Securities
Act, the Exchange Act or otherwise, insofar as such Claim arises out of or is
based upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs
18
<PAGE>
in reliance upon and in conformity with written information furnished to the
Company by such Investor expressly for use in connection with such Registration
Statement; and subject to Section 11(e)(iii) such Investor will reimburse any
legal or other expenses (promptly as such expenses are incurred and are due and
payable) reasonably incurred by them in connection with investigating or
defending any such Claim; provided, however, that the indemnity agreement
contained in this Section 11(e)(ii) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of such Investor, which consent shall not be unreasonably withheld;
provided, further, however, that the Investor shall be liable under this Section
11(e)(ii) and under Section 11(f) for only that amount as does not exceed the
net proceeds actually received by such Investor as a result of the sale of
Registrable Securities pursuant to such Registration Statement. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of such Indemnified Party and shall survive the transfer of the
Registrable Securities by the Investors. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 11(e)(ii) with respect to any preliminary prospectus shall not inure to
the benefit of any Indemnified Party if the untrue statement or omission of
material fact contained in the preliminary prospectus was corrected on a timely
basis in the prospectus, as then amended or supplemented, and the Indemnified
Party failed to utilize such corrected prospectus.
(iii) Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 11(e) of notice of the commencement of any
action (including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to made against any
indemnifying party under this Section 11(e), deliver to the indemnifying party a
written notice of the commencement thereof, and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as the
case may be; provided, however, that such indemnifying party shall not be
entitled to assume such defense and an Indemnified Person or Indemnified Party
shall have the right to retain its own counsel with the fees and expenses to be
paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential conflicts of interest between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding or the actual or potential defendants in, or targets
of, any such action include both the Indemnified Person or the Indemnified Party
and the indemnifying party and any such Indemnified Person or Indemnified Party
reasonably determines that there may be legal defenses available to such
Indemnified Person or Indemnified Party which are different from or in addition
to those available to such indemnifying party. The indemnifying party shall pay
for only one separate legal counsel for the Indemnified Persons or the
Indemnified Parties, as applicable, and such legal counsel shall be selected by
Investors holding a majority-in-interest of the Registrable Securities included
in the Registration Statement to which the Claim relates, if the Company is not
a party entitled to indemnification hereunder, or by the Company, if the Company
is a party entitled to indemnification hereunder, as applicable. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any
19
<PAGE>
such action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 11(e), except to the
extent that the indemnifying party is actually prejudiced in its ability to
defend such action. The indemnification required by this Section 11(e) shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
(F) To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 11(e) to the fullest extent permitted by law; provided, however,
that (i) no contribution shall be made under circumstances where the maker would
not have been liable for indemnification under the fault standards set forth in
Section 11(e), (ii) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any seller of Registrable Securities who was not guilty of
such fraudulent misrepresentation, and (iii) contribution (together with any
indemnification or other obligations hereunder) by any seller of Registrable
Securities shall be limited in amount to the net amount of proceeds received by
such seller from the sale of such Registrable Securities.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
20
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer.
SMARTSERV ONLINE, INC.
By: ________________________
Name:___________________
Title:____________________
<PAGE>
FORM OF EXERCISE AGREEMENT
(TO BE EXECUTED BY THE HOLDER IN ORDER TO EXERCISE THE WARRANT)
The undersigned hereby irrevocably exercises the right to purchase
_____________ of the shares of common stock of SmartServ Online, Inc., a
Delaware corporation (the "COMPANY"), evidenced by the attached Warrant, and
herewith makes payment of the Exercise Price with respect to such shares in
full, all in accordance with the conditions and provisions of said Warrant.
ii. The undersigned agrees not to offer, sell, transfer or otherwise
dispose of any Common Stock obtained on exercise of the Warrant, except under
circumstances that will not result in a violation of the Securities Act of 1933,
as amended, or any state securities laws, and agrees that the following legend
may be affixed to the stock certificate for the Common Stock hereby subscribed
for if resale of such Common Stock is not registered or if Rule 144 is
unavailable for the immediate resale of such shares:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT OR
UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT, OR THE
COMPANY RECEIVES AN OPINION OF COUNSEL, IN FORM, SUBSTANCE AND
SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE
TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER SAID
ACT.
iii. The undersigned requests that stock certificates for such shares
be issued, and a Warrant representing any unexercised portion hereof be issued,
pursuant to the Warrant in the name of the Holder and delivered to the
undersigned at the address set forth below:
Dated:_________________ _____________________________________
Signature of Holder
_____________________________________
Name of Holder (Print)
Address:
_____________________________________
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers all the rights of the undersigned under the within Warrant, with
respect to the number of shares of Common Stock covered thereby set forth
hereinbelow, to:
Name of Assignee Address No of Shares
- ---------------- ------- ------------
, and hereby irrevocably constitutes and appoints ______________
________________________ as agent and attorney-in-fact to transfer said Warrant
on the books of the within-named corporation, with full power of substitution in
the premises.
Dated: _____________________, ____,
In the presence of
_____________________
Name: ____________________________
Signature: _______________________
Title of Signing Officer or Agent (if any):
________________________
Address: ________________________
________________________
Note: The above signature should
correspond exactly with the name on
the face of the within Warrant.
EXHIBIT 4.12
VOID AFTER 5:00 P.M. NEW YORK CITY
TIME ON _______ __, 200_
THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES
REPRESENTED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED
UNLESS THE SECURITIES ARE REGISTERED UNDER THE SECURITIES ACT AND
APPLICABLE STATE SECURITIES LAWS, OR ANY SUCH OFFER, SALE OR TRANSFER
IS MADE PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THOSE LAWS.
Right to Purchase ______ Shares of
Common Stock
Date: __________, 199_
SMARTSERV ONLINE, INC.
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, Zanett Lombardier, Ltd. or its
registered assigns, is entitled to purchase from SmartServ Online, Inc., a
Delaware corporation (the "COMPANY"), at any time or from time to time during
the period specified in Section 2 hereof, ___________ (______) fully paid and
nonassessable shares of the Company's common stock, par value $.01 per share
("COMMON STOCK"), at an exercise price per share (the "EXERCISE PRICE") equal to
the product of (i) .50 and (ii) the Closing Price (as defined in Section 4(h)(i)
below) as of the Exercise Date (as defined below). The number of shares of
Common Stock purchasable hereunder (the "WARRANT SHARES") is subject to
adjustment as provided in Section 4 hereof.
This Warrant is subject to the following terms, provisions, and
conditions:
1. MANNER OF EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
Subject to the provisions hereof, including, without limitation, the limitations
contained in Section 7 hereof, this Warrant may be exercised by the holder
hereof, in whole or in part, by the surrender of this Warrant, together with a
completed exercise agreement in the form attached hereto (the "EXERCISE
AGREEMENT"), to the Company during normal business hours on any business day at
the Company's principal executive offices (or such other office or agency of the
Company as it
<PAGE>
may designate by notice to the holder hereof), and upon (i) payment to the
Company in cash, by certified or official bank check or by wire transfer for the
account of the Company, of the Exercise Price for the Warrant Shares specified
in the Exercise Agreement or (ii) if the holder is effectuating a Cashless
Exercise (as defined in Section 10(c) below) pursuant to Section 10(c) hereof,
delivery to the Company of a written notice of an election to effect a Cashless
Exercise for the Warrant Shares specified in the Exercise Agreement. The Warrant
Shares so purchased shall be deemed to be issued to the holder hereof or such
holder's designee, as the record owner of such shares, as of the close of
business on the date (the "EXERCISE DATE") on which this Warrant shall have been
surrendered, the completed Exercise Agreement shall have been delivered, and
payment shall have been made for such shares as set forth above. Certificates
for the Warrant Shares so purchased, representing the aggregate number of shares
specified in the Exercise Agreement, shall be delivered to the holder hereof
within a reasonable time, not exceeding two (2) business days, after this
Warrant shall have been so exercised (the "DELIVERY PERIOD"). The certificates
so delivered shall be in such denominations as may be requested by the holder
hereof and shall be registered in the name of such holder or such other name as
shall be designated by such holder. If this Warrant shall have been exercised
only in part, then, unless this Warrant has expired, the Company shall, at its
expense, at the time of delivery of such certificates, deliver to the holder a
new Warrant representing the number of shares with respect to which this Warrant
shall not then have been exercised.
If, at any time, a holder of this Warrant submits this Warrant, an
Exercise Agreement and payment to the Company of the Exercise Price for each of
the Warrant Shares specified in the Exercise Agreement (including pursuant to a
Cashless Exercise), and the Company fails for any reason to deliver, on or prior
to the fourth business day following the expiration of the Delivery Period for
such exercise, the number of shares of Common Stock to which the holder is
entitled upon such exercise (an "EXERCISE DEFAULT"), then the Company shall pay
to the holder payments ("EXERCISE DEFAULT PAYMENTS") for an Exercise Default in
the amount of (a) (N/365), multiplied by (b) the difference between the Closing
Price on the date the Exercise Agreement giving rise to the Exercise Default is
transmitted in accordance with Section 1 (the "EXERCISE DEFAULT DATE ") less the
Exercise Price, multiplied by (c) the number of shares of Common Stock the
Company failed to so deliver in such Exercise Default multiplied by (d) .24,
where N = the number of days from the Exercise Default Date to the date that the
Company effects the full exercise of this Warrant which gave rise to the
Exercise Default. The accrued Exercise Default Payment for each calendar month
shall be paid in cash or shall be convertible into Common Stock at the Exercise
Price, at the holder's option, as follows:
(a) In the event holder elects to take such payment in cash,
cash payment shall be made to holder by the fifth (5th) day of the month
following the month in which it has accrued; and
(b) In the event holder elects to take such payment in Common
Stock, the holder may convert such payment amount into Common Stock at the
Exercise Price (as in effect at the time of conversion) at any time after the
fifth (5th) day of the month following the month in which it has accrued.
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<PAGE>
Nothing herein shall limit the holder's right to pursue actual
damages for the Company's failure to maintain a sufficient number of authorized
shares of Common Stock as required pursuant to the terms of Section 3(b) hereof,
or to otherwise issue shares of Common Stock upon exercise of this Warrant in
accordance with the terms hereof, and each holder shall have the right to pursue
all remedies available at law or in equity (including a decree of specific
performance and/or injunctive relief).
2. PERIOD OF EXERCISE. This Warrant is exercisable at any time or from
time to time on or after the date hereof and before 5:00 p.m., New York City
time on the fifth (5th) anniversary of the date hereof (the "EXERCISE PERIOD").
3. CERTAIN AGREEMENTS OF THE COMPANY. The Company hereby covenants and
agrees as follows:
(a) SHARES TO BE FULLY PAID. All Warrant Shares will, upon
issuance in accordance with the terms of this Warrant, be validly issued, fully
paid, and nonassessable and free from all taxes, liens, claims and encumbrances.
(b) RESERVATION OF SHARES. During the Exercise Period, the
Company shall at all times have authorized, and reserved for the purpose of
issuance upon exercise of this Warrant, a sufficient number of shares of Common
Stock to provide for the exercise of this Warrant.
(c) LISTING. The Company shall promptly secure the listing of the
shares of Common Stock issuable upon exercise of this Warrant upon each national
securities exchange or automated quotation system, if any, upon which shares of
Common Stock are then listed or become listed (subject to official notice of
issuance upon exercise of this Warrant) and shall maintain, so long as any other
shares of Common Stock shall be so listed, such listing of all shares of Common
Stock from time to time issuable upon the exercise of this Warrant; and the
Company shall so list on each national securities exchange or automated
quotation system, as the case may be, and shall maintain such listing of, any
other shares of capital stock of the Company issuable upon the exercise of this
Warrant if and so long as any shares of the same class shall be listed on such
national securities exchange or automated quotation system.
(d) CERTAIN ACTIONS PROHIBITED. The Company will not, by
amendment of its charter or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities, or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed by it hereunder, but will at all times in
good faith assist in the carrying out of all the provisions of this Warrant and
in the taking of all such action as may reasonably be requested by the holder of
this Warrant in order to protect the exercise privilege of the holder of this
Warrant against dilution or other impairment, consistent with the tenor and
purpose of this Warrant. Without limiting the generality of the foregoing, the
Company (i) will not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the Exercise Price then in
effect, and (ii) will take all such actions as may be necessary or appropriate
in order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of this Warrant.
-3-
<PAGE>
(e) SUCCESSORS AND ASSIGNS. This Warrant will be binding upon any
entity succeeding to the Company by merger, consolidation, or acquisition of all
or substantially all of the Company's assets.
(f) BLUE SKY LAWS. The Company shall, on or before the date of
issuance of any Warrant Shares, take such actions as the Company shall
reasonably determine are necessary to qualify the Warrant Shares for, or obtain
exemption for the Warrant Shares for, sale to the holder of this Warrant upon
the exercise hereof under applicable securities or "blue sky" laws of the states
of the United States, and shall provide evidence of any such action so taken to
the holder of this Warrant prior to such date; provided, however, that the
Company shall not be required to qualify as a foreign corporation or file a
general consent to service of process in any such jurisdiction.
4. ANTIDILUTION PROVISIONS. During the Exercise Period, the number of
Warrant Shares shall be subject to adjustment from time to time as provided in
this Section 4.
(a) SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company,
at any time after the initial issuance of this Warrant, subdivides (by any stock
split, stock dividend, recapitalization, reorganization, reclassification or
otherwise) its shares of Common Stock into a greater number of shares, then,
after the date of record for effecting such subdivision, the number of shares of
Common Stock issuable upon exercise of this Warrant shall be increased to
reflect such subdivision. If the Company, at any time after the initial issuance
of this Warrant, combines (by reverse stock split, recapitalization,
reorganization, reclassification or otherwise) its shares of Common Stock into a
smaller number of shares, then, after the date of record for effecting such
combination, the number of shares of Common Stock issuable upon exercise of this
Warrant shall be decreased to reflect such combination.
-4-
<PAGE>
(b) CONSOLIDATION, MERGER OR SALE. In case of any consolidation
of the Company with, or merger of the Company into any other corporation, or in
case of any sale or conveyance of all or substantially all of the assets of the
Company other than in connection with a plan of complete liquidation of the
Company at any time after the initial issuance of this Warrant, then as a
condition of such consolidation, merger or sale or conveyance, adequate
provision will be made whereby the holder of this Warrant will have the right to
acquire and receive upon exercise of this Warrant in lieu of the shares of
Common Stock immediately theretofore acquirable upon the exercise of this
Warrant, such shares of stock, securities or assets as may be issued or payable
with respect to or in exchange for the number of shares of Common Stock
immediately theretofore acquirable and receivable upon exercise of this Warrant
had such consolidation, merger or sale or conveyance not taken place. In any
such case, the Company will make appropriate provision to insure that the
provisions of this Section 4 hereof will thereafter be applicable as nearly as
may be in relation to any shares of stock or securities thereafter deliverable
upon the exercise of this Warrant. The Company will not effect any
consolidation, merger or sale or conveyance unless prior to the consummation
thereof, the successor corporation (if other than the Company) assumes by
written instrument the obligations under this Section 4 and the obligations to
deliver to the holder of this Warrant such shares of stock, securities or assets
as, in accordance with the foregoing provisions, the holder may be entitled to
acquire.
(c) DISTRIBUTION OF ASSETS. In case the Company shall declare or
make any distribution of its assets (or rights to acquire its assets) to holders
of Common Stock as a dividend, by way of return of capital or otherwise
(including any dividend or distribution to the Company's shareholders of cash or
shares (or rights to acquire shares) of capital stock of a subsidiary) (a
"DISTRIBUTION"), at any time after the initial issuance of this Warrant, then
the holder of this Warrant shall be entitled upon exercise of this Warrant for
the purchase of any or all of the shares of Common Stock subject hereto, to
receive the amount of such assets (or rights) which would have been payable to
the holder had such holder been the holder of such shares of Common Stock on the
record date for the determination of shareholders entitled to such Distribution.
(d) NOTICE OF ADJUSTMENT. Upon the occurrence of any event which
requires any adjustment to the number of shares of Common Stock issuable upon
exercise of this Warrant, then, and in each such case, the Company shall give
notice thereof to the holder of this Warrant, which notice shall state the
increase or decrease in the number of Warrant Shares purchasable upon exercise,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based. Such calculation shall be certified by the
chief financial officer of the Company.
(e) NO FRACTIONAL SHARES. No fractional shares of Common Stock
are to be issued upon the exercise of this Warrant, but the Company shall pay a
cash adjustment in respect of any fractional share which would otherwise be
issuable in an amount equal to the same fraction of the Closing Price of a share
of Common Stock on the date of such exercise.
(f) OTHER NOTICES. In case at any time:
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<PAGE>
(i) the Company shall declare any dividend upon the Common
Stock payable in shares of stock of any class or make any other distribution
(other than dividends or distributions payable in cash out of retained earnings
consistent with the Company's past practices with respect to declaring dividends
and making distributions) to the holders of the Common Stock;
(ii) the Company shall offer for subscription pro rata to
the holders of the Common Stock any additional shares of stock of any class or
other rights;
(iii) there shall be any capital reorganization of the
Company, or reclassification of the Common Stock, or consolidation or merger of
the Company with or into, or sale of all or substantially all of its assets to,
another corporation or entity; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the holder of this Warrant
(a) notice of the date on which the books of the Company shall close or a record
shall be taken for determining the holders of Common Stock entitled to receive
any such dividend, distribution, or subscription rights or for determining the
holders of Common Stock entitled to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up and (b) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, notice of
the date (or, if not then known, a reasonable approximation thereof by the
Company) when the same shall take place. Such notice shall also specify the date
on which the holders of Common Stock shall be entitled to receive such dividend,
distribution, or subscription rights or to exchange their Common Stock for stock
or other securities or property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, or
winding-up, as the case may be. Such notice shall be given at least thirty (30)
days prior to the record date or the date on which the Company's books are
closed in respect thereto. Failure to give any such notice or any defect therein
shall not affect the validity of the proceedings referred to in clauses (i),
(ii), (iii) and (iv) above.
(g) CERTAIN EVENTS. If, at any time after the initial issuance of
this Warrant, any event occurs of the type contemplated by the adjustment
provisions of this Section 4 but not expressly provided for by such provisions,
the Company will give notice of such event as provided in Section 4(d) hereof,
and the Company's Board of Directors will make an appropriate adjustment in the
number of shares of Common Stock acquirable upon exercise of this Warrant so
that the rights of the holder shall be neither enhanced nor diminished by such
event.
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<PAGE>
(h) CERTAIN DEFINITIONS.
(i) "CLOSING PRICE," as of any date, (i) means the closing
bid price for the shares of Common Stock as reported on the Nasdaq SmallCap
Market by Bloomberg Financial Markets ("BLOOMBERG") for the trading day
immediately preceding such date, or (ii) if the Nasdaq SmallCap Market is not
the principal trading market for the shares of Common Stock, the last bid price
reported by Bloomberg on the principal trading market for the Common Stock on
the trading day immediately preceding such date, or, if there is no bid price
for such period, the last sales price reported by Bloomberg on trading day
immediately preceding such date, or (iii) if the foregoing do not apply, the
last closing bid price of such security in the over-the-counter market on the
pink sheets or bulletin board for such security as reported by Bloomberg on the
trading day immediately preceding such date, or if no closing bid price is so
reported for such security, the last closing trade price of such security as
reported by Bloomberg on trading day immediately preceding such date, or (iv) if
market value cannot be calculated as of such date on any of the foregoing bases,
the Closing Price shall be the fair market value as reasonably determined by an
investment banking firm selected by the Company and reasonably acceptable to the
holder, with the costs of the appraisal to be borne by the Company.
(ii) "COMMON STOCK," for purposes of this Section 4,
includes the Common Stock and any additional class of stock of the Company
having no preference as to dividends or distributions on liquidation, provided
that the shares purchasable pursuant to this Warrant shall include only Common
Stock, par value $.01 per share, in respect of which this Warrant is
exercisable, or shares resulting from any subdivision or combination of such
Common Stock, or in the case of any reorganization, reclassification,
consolidation, merger, or sale of the character referred to in Section 4(b)
hereof, the stock or other securities or property provided for in such Section.
5. ISSUE TAX. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax or other costs in respect thereof,
provided that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than the holder of this Warrant.
6. NO RIGHTS OR LIABILITIES AS A SHAREHOLDER. This Warrant shall not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
-7-
<PAGE>
7. TRANSFER, EXCHANGE, REDEMPTION AND REPLACEMENT OF WARRANT.
(a) RESTRICTION ON TRANSFER. This Warrant and the rights granted
to the holder hereof are transferable, in whole or in part, upon surrender of
this Warrant, together with a properly executed assignment in the form attached
hereto, at the office or agency of the Company referred to in Section 7(e)
below, provided, however, that any transfer or assignment shall be subject to
the conditions set forth in Sections 7(f) and (g) hereof and to the provisions
of Sections 2(f) and (g) of that certain Line of Credit Agreement, dated May 29,
1997, pursuant to which this Warrant was originally issued. Until due
presentment for registration of transfer on the books of the Company, the
Company may treat the registered holder hereof as the owner and holder hereof
for all purposes, and the Company shall not be affected by any notice to the
contrary.
(b) WARRANT EXCHANGEABLE FOR DIFFERENT DENOMINATIONS. This
Warrant is exchangeable, upon the surrender hereof by the holder hereof at the
office or agency of the Company referred to in Section 7(e) below, for new
Warrants of like tenor of different denominations representing in the aggregate
the right to purchase the number of shares of Common Stock which may be
purchased hereunder, each of such new Warrants to represent the right to
purchase such number of shares as shall be designated by the holder hereof at
the time of such surrender.
(c) REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of any such loss, theft, or destruction, upon
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
(d) CANCELLATION; PAYMENT OF EXPENSES. Upon the surrender of this
Warrant in connection with any transfer, exchange, or replacement as provided in
this Section 7, this Warrant shall be promptly canceled by the Company. The
Company shall pay all taxes (other than securities transfer taxes) and all other
expenses (other than legal expenses, if any, incurred by the Holder or
transferees) and charges payable in connection with the preparation, execution,
and delivery of Warrants pursuant to this Section 7. The Company shall indemnify
and reimburse the holder of this Warrant for all costs and expenses (including
legal fees) incurred by such holder in connection with the enforcement of its
rights hereunder.
(e) WARRANT REGISTER. The Company shall maintain, at its
principal executive offices (or such other office or agency of the Company as it
may designate by notice to the holder hereof), a register for this Warrant, in
which the Company shall record the name and address of the person in whose name
this Warrant has been issued, as well as the name and address of each transferee
and each prior owner of this Warrant.
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<PAGE>
(f) EXERCISE OR TRANSFER WITHOUT REGISTRATION. If, at the time of
the surrender of this Warrant in connection with any exercise, transfer, or
exchange of this Warrant, this Warrant (or, in the case of any exercise, the
Warrant Shares issuable hereunder), shall not be registered under the Securities
Act and under applicable state securities or blue sky laws, the Company may
require, as a condition of allowing such exercise, transfer, or exchange, (i)
that the holder or transferee of this Warrant, as the case may be, furnish to
the Company a written opinion of counsel (which opinion shall be in form,
substance and scope customary for opinions of counsel in comparable
transactions) to the effect that such exercise, transfer, or exchange may be
made without registration under the Securities Act and under applicable state
securities or blue sky laws (the cost of which shall be borne by the Company if
the Company's counsel renders such opinion and up to $250 of such cost shall be
borne by the Company if the holder's counsel renders such opinion), (ii) that
the holder or transferee execute and deliver to the Company an investment letter
in form and substance acceptable to the Company and (iii) that the transferee be
an "ACCREDITED INVESTOR" as defined in Rule 501(a) promulgated under the
Securities Act. With respect to any opinion to be provided pursuant to clause
(i) above, the holder shall be entitled to request that the Company's counsel
render such opinion and the Company shall cause its counsel to render such
opinion if requested by the holder.
(g) ADDITIONAL RESTRICTIONS ON EXERCISE OR TRANSFER.
Notwithstanding anything contained herein to the contrary, this Warrant shall
not be exercisable by a holder hereof to the extent (but only to the extent)
that, if exercisable by such holder, such holder would beneficially own in
excess of 4.9% of the outstanding shares of Common Stock. To the extent the
above limitation applies, the determination of whether and to what extent this
Warrant shall be exercisable vis-a-vis other securities owned by such holder
shall be in the sole discretion of the holder and submission of this Warrant for
full or partial exercise shall be deemed to be the holder's determination of
whether and the extent to which this Warrant is exercisable, in each case
subject to such aggregate percentage limitation. No prior inability to exercise
the Warrant pursuant to this Section shall have any effect on the applicability
of the provisions of this Section with respect to any subsequent determination
of exerciseability. For purposes of the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13D-G thereunder.
The restrictions contained in this Section 7(g) may not be amended without the
consent of the holder of this Warrant and the holders of a majority of the
Company's then outstanding Common Stock. The first holder of this Warrant, by
taking and holding the same, represents to the Company that such holder is
acquiring this Warrant for investment only and not with a view to the
distribution thereof, except pursuant to sales that are exempt from the
registration requirements of the Securities Act and/or sales registered under
the Securities Act.
8. NOTICES. Any notices required or permitted to be given under the
terms of this Warrant shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier or by confirmed
telecopy, and shall be effective five days after being placed in the mail, if
mailed, or upon receipt or refusal of receipt, if delivered personally or by
courier or confirmed telecopy, in each case addressed to a party. The addresses
for such communications shall be:
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<PAGE>
If to the Company:
SMARTSERV ONLINE, INC.
One Station Place
Stamford, CT 06902
Telecopy: (202) 353-5962
Attention: Chairman of the Board
With a copy to:
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, NY 10036
Telecopy: (212) 704-6288
Attention: Michael J. Shef, Esquire
and if to the holder, at such address as such holder shall have provided in
writing to the Company, or at such other address as each such party furnishes by
notice given in accordance with this Section 8.
9. GOVERNING LAW; JURISDICTION. This Warrant shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in the State of Delaware. The Company
irrevocably consents to the jurisdiction of the United States federal courts
located in the City of New York in the State of New York, in any suit or
proceeding based on or arising under this Warrant and irrevocably agrees that
all claims in respect of such suit or proceeding may be determined in such
courts. The Company irrevocably waives the defense of an inconvenient forum to
the maintenance of such suit or proceeding. The Company agrees that service of
process upon the Company mailed by first class mail shall be deemed in every
respect effective service of process upon the Company in any such suit or
proceeding. Nothing herein shall affect the holder's right to serve process in
any other manner permitted by law. The Company agrees that a final
non-appealable judgment in any such suit or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on such judgment or in any other
lawful manner.
10. MISCELLANEOUS.
(a) AMENDMENTS. This Warrant and any provision hereof may only be
amended by an instrument in writing signed by the Company and the holder hereof.
(b) DESCRIPTIVE HEADINGS. The descriptive headings of the several
Sections of this Warrant are inserted for purposes of reference only, and shall
not affect the meaning or construction of any of the provisions hereof.
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<PAGE>
(c) CASHLESS EXERCISE. Notwithstanding anything to the contrary
contained in this Warrant, if the resale of the Warrant Shares by the holder is
not then registered pursuant to an effective registration statement under the
Securities Act, this Warrant may be exercised at any time after the first (1st)
anniversary of the date hereof until the end of the Exercise Period, by
presentation and surrender of this Warrant to the Company at its principal
executive offices with a written notice of the holder's intention to effect a
cashless exercise, including a calculation of the number of shares of Common
Stock to be issued upon such exercise in accordance with the terms hereof (a
"CASHLESS EXERCISE"). In the event of a Cashless Exercise, in lieu of paying the
Exercise Price in cash, the holder shall surrender this Warrant for that number
of shares of Common Stock determined by multiplying the number of Warrant Shares
to which it would otherwise be entitled by a fraction, the numerator of which
shall be the difference between the then current Closing Price per share of the
Common Stock and the Exercise Price, and the denominator of which shall be the
then current Closing Price per share of Common Stock.
11. REGISTRATION OF WARRANT SHARES.
(a) As used in this Section 11, the following terms shall have
the following meanings:
(i) "INVESTORS" means the holder of this Warrant and any
transferees or assignees hereof in accordance with Section 7 hereof.
(ii) "REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering securities on a
continuous basis ("RULE 415"), and the declaration or ordering of effectiveness
of such Registration Statement by the United States Securities and Exchange
Commission (the "SEC").
(iii) "REGISTRABLE SECURITIES" means the Warrant Shares
issued or issuable upon exercise hereof and any shares of capital stock issued
or issuable, from time to time (with any adjustments), on or in exchange for or
otherwise with respect to the foregoing.
(iv) "REGISTRATION STATEMENT" means a registration statement
of the Company under the Securities Act.
(b) In connection with any registration of the resale of the
Registrable Securities by Investors, the Company shall have the following
obligations:
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(i) The Company shall furnish to each Investor whose
Registrable Securities are included in the Registration Statement covering the
resale of the Registrable Securities and its legal counsel (i) promptly after
the same is prepared and publicly distributed, filed with the SEC, or received
by the Company, one copy of the Registration Statement and any amendment
thereto, each preliminary prospectus and prospectus and each amendment or
supplement thereto, and (ii) such number of copies of a prospectus, including a
preliminary prospectus, and all amendments and supplements thereto and such
other documents as such Investor may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by such Investor.
(ii) As promptly as practicable after becoming aware of such
event, the Company shall notify each Investor of the happening of any event, of
which the Company has knowledge, as a result of which the prospectus included in
the Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and use its best
efforts promptly to prepare a supplement or amendment to the Registration
Statement to correct such untrue statement or omission, and deliver such number
of copies of such supplement or amendment to each Investor as such Investor may
reasonably request.
(iii) The Company shall use reasonable commercial efforts to
prevent the issuance of any stop order or other suspension of effectiveness of a
Registration Statement, and, if such an order is issued, to obtain the
withdrawal of such order at the earliest practicable moment and to notify each
Investor who holds Registrable Securities being sold (or, in the event of an
underwritten offering, the managing underwriters) of the issuance of such order
and the resolution thereof.
(iv) The Company shall permit a single firm of counsel
designated by the Investors to review the Registration Statement and all
amendments and supplements thereto a reasonable period of time prior to their
filing with the SEC, and not file any document to which such counsel reasonably
objects.
(v) The Company shall hold in confidence and not make any
disclosure of information concerning an Investor provided to the Company unless
(i) disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other order
from a court or governmental body of competent jurisdiction, (iv) such
information has been made generally available to the public other than by
disclosure in violation of this or any other agreement, or (v) such Investor
consents to the form and content of any such disclosure. The Company agrees that
it shall, upon learning that disclosure of such information concerning an
Investor is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to such Investor prior
to making such disclosure, and allow the Investor, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information.
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<PAGE>
(c) In connection with the registration of the resale of
Registrable Securities by Investors, the Investors shall have the following
obligations:
(i) Each Investor shall furnish to the Company such
information regarding itself, the Registrable Securities held by it and the
intended method of disposition of the Registrable Securities held by it as shall
be reasonably required to effect the registration of such Registrable Securities
and shall execute such documents in connection with such registration as the
Company may reasonably request. At least three (3) business days prior to the
first anticipated filing date of the Registration Statement, the Company shall
notify each Investor of the information the Company requires from each such
Investor.
(ii) Each Investor, by such Investor's acceptance of the
Registrable Securities, agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statement hereunder.
(iii) Each Investor agrees that, upon receipt of any notice
from the Company of the happening of any event of the kind described in Sections
11(b)(ii) and (iii) hereof, such Investor will immediately discontinue
disposition of Registrable Securities pursuant to the Registration Statement
covering such Registrable Securities until such Investor's receipt of the copies
of the supplemented or amended prospectus contemplated by Sections 11(b)(ii) and
(iii) hereof, and, if so directed by the Company, such Investor shall deliver to
the Company (at the expense of the Company) or destroy (and deliver to the
Company a certificate of destruction) all copies in such Investor's possession,
of the prospectus covering such Registrable Securities current at the time of
receipt of such notice.
(d) All reasonable expenses, other than underwriting discounts
and commissions, incurred in connection with registrations, filings or
qualifications pursuant to this Section 11, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees and
the fees and disbursements of counsel for the Company, shall be borne by the
Company. The Investors shall be responsible for all cost incurred by them or
their advisors and other professionals (including, without limitation, their
legal counsel, accountants and investment bankers) in connection with any
registration hereunder.
(e) In the event any Registrable Securities are included in a
Registration Statement under this Section 11:
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(i) To the extent permitted by law, the Company will indemnify,
hold harmless and defend (i) each Investor who holds such Registrable
Securities, and (ii) the directors, officers, partners, members, employees,
agents and each person who controls any Investor within the meaning of Section
15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934,
as amended (the "EXCHANGE ACT"), if any, (each, an "INDEMNIFIED PERSON"),
against any joint or several losses, claims, damages, liabilities or expenses
(collectively, together with actions, proceedings or inquiries by any regulatory
or self-regulatory organization, whether commenced or threatened, in respect
thereof, "CLAIMS") to which any of them may become subject insofar as such
Claims arise out of or are based upon: (i) any untrue statement or alleged
untrue statement of a material fact in a Registration Statement or the omission
or alleged omission to state therein a material fact required to be stated or
necessary to make the statements therein not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus if used prior to the effective date of such Registration
Statement, or contained in the final prospectus (as amended or supplemented, if
the Company files any amendment thereof or supplement thereto with the SEC) or
the omission or alleged omission to state therein any material fact necessary to
make the statements made therein, in light of the circumstances under which the
statements therein were made, not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any other law,
including, without limitation, any state securities law, or any rule or
regulation thereunder relating to the offer or sale of the Registrable
Securities (the matters in the foregoing clauses (i) through (iii) being,
collectively, "VIOLATIONS"). Subject to the restrictions set forth in Section
11(e)(iii) with respect to the number of legal counsel, the Company shall
reimburse the Investors and each such underwriter or controlling person,
promptly as such expenses are incurred and are due and payable, for any
reasonable legal fees or other reasonable expenses incurred by them in
connection with investigating or defending any such Claim. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 11(e)(i): (i) shall not apply to a Claim arising out
of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by such Indemnified Person
expressly for use in the Registration Statement or any such amendment thereof or
supplement thereto; (ii) shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of the
Company, which consent shall not be unreasonably withheld; and (iii) with
respect to any preliminary prospectus, shall not inure to the benefit of any
Indemnified Person if the untrue statement or omission of material fact
contained in the preliminary prospectus was corrected on a timely basis in the
prospectus, as then amended or supplemented, if such corrected prospectus was
timely made available by the Company pursuant hereto, and the Indemnified Person
was promptly advised in writing not to use the incorrect prospectus prior to the
use giving rise to a Violation and such Indemnified Person, notwithstanding such
advice, used it. Such indemnity shall remain in full force and effect regardless
of any investigation made by or on behalf of the Indemnified Person and shall
survive the transfer of the Registrable Securities by the Investors.
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<PAGE>
(ii) In connection with any Registration Statement in which an Investor is
participating, each such Investor agrees severally and not jointly to indemnify,
hold harmless and defend, to the same extent and in the same manner set forth in
Section 11(e)(i) hereof, the Company, each of its directors, each of its
officers who signs the Registration Statement, its employees, agents and each
person, if any, who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, and any other stockholder
selling securities pursuant to the Registration Statement or any of its
directors or officers or any person who controls such stockholder or underwriter
within the meaning of the Securities Act or the Exchange Act (collectively and
together with an Indemnified Person, an "INDEMNIFIED PARTY"), against any Claim
to which any of them may become subject, under the Securities Act, the Exchange
Act or otherwise, insofar as such Claim arises out of or is based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished to the Company by such Investor expressly for use in connection with
such Registration Statement; and subject to Section 11(e)(iii) such Investor
will reimburse any legal or other expenses (promptly as such expenses are
incurred and are due and payable) reasonably incurred by them in connection with
investigating or defending any such Claim; provided, however, that the indemnity
agreement contained in this Section 11(e)(ii) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of such Investor, which consent shall not be unreasonably withheld;
provided, further, however, that the Investor shall be liable under this Section
11(e)(ii) and under Section 11(f) for only that amount as does not exceed the
net proceeds actually received by such Investor as a result of the sale of
Registrable Securities pursuant to such Registration Statement. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of such Indemnified Party and shall survive the transfer of the
Registrable Securities by the Investors. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 11(e)(ii) with respect to any preliminary prospectus shall not inure to
the benefit of any Indemnified Party if the untrue statement or omission of
material fact contained in the preliminary prospectus was corrected on a timely
basis in the prospectus, as then amended or supplemented, and the Indemnified
Party failed to utilize such corrected prospectus.
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<PAGE>
(iii) Promptly after receipt by an Indemnified Person or Indemnified Party under
this Section 11(e) of notice of the commencement of any action (including any
governmental action), such Indemnified Person or Indemnified Party shall, if a
Claim in respect thereof is to made against any indemnifying party under this
Section 11(e), deliver to the indemnifying party a written notice of the
commencement thereof, and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume control of the
defense thereof with counsel mutually satisfactory to the indemnifying party and
the Indemnified Person or the Indemnified Party, as the case may be; provided,
however, that such indemnifying party shall not be entitled to assume such
defense and an Indemnified Person or Indemnified Party shall have the right to
retain its own counsel with the fees and expenses to be paid by the indemnifying
party, if, in the reasonable opinion of counsel retained by the indemnifying
party, the representation by such counsel of the Indemnified Person or
Indemnified Party and the indemnifying party would be inappropriate due to
actual or potential conflicts of interest between such Indemnified Person or
Indemnified Party and any other party represented by such counsel in such
proceeding or the actual or potential defendants in, or targets of, any such
action include both the Indemnified Person or the Indemnified Party and the
indemnifying party and any such Indemnified Person or Indemnified Party
reasonably determines that there may be legal defenses available to such
Indemnified Person or Indemnified Party which are different from or in addition
to those available to such indemnifying party. The indemnifying party shall pay
for only one separate legal counsel for the Indemnified Persons or the
Indemnified Parties, as applicable, and such legal counsel shall be selected by
Investors holding a majority-in-interest of the Registrable Securities included
in the Registration Statement to which the Claim relates, if the Company is not
a party entitled to indemnification hereunder, or by the Company, if the Company
is a party entitled to indemnification hereunder, as applicable. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person or Indemnified Party under this Section
11(e), except to the extent that the indemnifying party is actually prejudiced
in its ability to defend such action. The indemnification required by this
Section 11(e) shall be made by periodic payments of the amount thereof during
the course of the investigation or defense, as such expense, loss, damage or
liability is incurred and is due and payable.
(f) To the extent any indemnification by an indemnifying
party is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under Section 11(e) to the fullest extent permitted by law; provided,
however, that (i) no contribution shall be made under circumstances where the
maker would not have been liable for indemnification under the fault standards
set forth in Section 11(e), (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any seller of Registrable Securities who
was not guilty of such fraudulent misrepresentation, and (iii) contribution
(together with any indemnification or other obligations hereunder) by any seller
of Registrable Securities shall be limited in amount to the net amount of
proceeds received by such seller from the sale of such Registrable Securities.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer.
SMARTSERV ONLINE, INC.
By: ________________________________
Name:___________________________
Title:__________________________
<PAGE>
FORM OF EXERCISE AGREEMENT
(TO BE EXECUTED BY THE HOLDER IN ORDER TO EXERCISE THE WARRANT)
The undersigned hereby irrevocably exercises the right to purchase
_____________ of the shares of common stock of SmartServ Online, Inc., a
Delaware corporation (the "COMPANY"), evidenced by the attached Warrant, and
herewith makes payment of the Exercise Price with respect to such shares in
full, all in accordance with the conditions and provisions of said Warrant.
ii. The undersigned agrees not to offer, sell, transfer or otherwise
dispose of any Common Stock obtained on exercise of the Warrant, except under
circumstances that will not result in a violation of the Securities Act of 1933,
as amended, or any state securities laws, and agrees that the following legend
may be affixed to the stock certificate for the Common Stock hereby subscribed
for if resale of such Common Stock is not registered or if Rule 144 is
unavailable for the immediate resale of such shares:
THE SECURITIES REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE
SOLD, TRANSFERRED OR ASSIGNED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER SAID
ACT OR UNLESS SOLD PURSUANT TO RULE 144
UNDER SAID ACT, OR THE COMPANY RECEIVES
AN OPINION OF COUNSEL, IN FORM,
SUBSTANCE AND SCOPE CUSTOMARY FOR
OPINIONS OF COUNSEL IN COMPARABLE
TRANSACTIONS, THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT.
iii. The undersigned requests that stock certificates for such shares be issued,
and a Warrant representing any unexercised portion hereof be issued, pursuant to
the Warrant in the name of the Holder and delivered to the undersigned at the
address set forth below:
Dated:_________________
_____________________________________
Signature of Holder
----------------------------
Name of Holder (Print)
Address:
----------------------------
----------------------------
----------------------------
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers all the rights of the undersigned under the within Warrant, with
respect to the number of shares of Common Stock covered thereby set forth
hereinbelow, to:
Name of Assignee Address No of Shares
- ---------------- ------- ------------
, and hereby irrevocably constitutes and appoints ______________
________________________ as agent and attorney-in-fact to transfer said Warrant
on the books of the within-named corporation, with full power of substitution in
the premises.
Dated: _____________________, ____,
In the presence of
______________________
Name: ____________________________
Signature: _______________________
Title of Signing Officer or Agent (if any):
________________________
Address: ________________________
________________________
Note: The above signature should
correspond exactly with the name
on the face of the within Warrant.
EXHIBIT 4.13
VOID AFTER 5:00 P.M. NEW YORK CITY
TIME ON ______ __, 200_
THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES
REPRESENTED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED
UNLESS THE SECURITIES ARE REGISTERED UNDER THE SECURITIES ACT AND
APPLICABLE STATE SECURITIES LAWS, OR ANY SUCH OFFER, SALE OR TRANSFER
IS MADE PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THOSE LAWS.
Right to Purchase ______ Shares of
Common Stock
Date: ______ __, 199_
SMARTSERV ONLINE, INC.
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, The Zanett Securities
Corporation or its registered assigns, is entitled to purchase from SmartServ
Online, Inc., a Delaware corporation (the "Company"), at any time or from time
to time during the period specified in Section 2 hereof, _____________ (_______)
fully paid and nonassessable shares of the Company's common stock, par value
$.01 per share ("Common Stock"), at an exercise price per share equal to $2.825
(the "Exercise Price"); provided, however, that following the occurrence of an
Event of Default (as defined in the Note (as defined below)) under the Note, the
Exercise Price shall be equal to the lesser of (i) the Exercise Price which
would have been in effect on the date of exercise hereof but for the operation
of this proviso and (ii) the lowest Closing Price (as defined in Section
4(l)(iii) below) during the longer of (A) the three (3) month period commencing
on the date of the occurrence of such Event of Default and (B) the period
commencing on the date of the occurrence of such Event of Default and ending on
the date on which the Company pays the Default Amount (as defined in the Note).
The Company shall immediately notify the holder of this Warrant, in writing, of
the occurrence of any Event of Default under the Note and thereafter, of the
date of the Company's payment of the Default Amount. The number of shares of
Common Stock purchasable hereunder (the "Warrant Shares") and the Exercise Price
are subject to adjustment as provided in Section 4 hereof. That certain Line of
Credit Agreement, dated as of May 29, 1997, pursuant to which this Warrant was
originally issued is referred to herein as the "Line of Credit Agreement." That
certain Promissory Note in the principal amount of Five Hundred Thousand Dollars
($550,000) originally issued pursuant to the Line of Credit Agreement is
referred to herein as the "Note."
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This Warrant is subject to the following terms, provisions, and
conditions:
1. Manner of Exercise; Issuance of Certificates; Payment for Shares.
Subject to the provisions hereof, including, without limitation, the limitations
contained in Section 7 hereof, this Warrant may be exercised by the holder
hereof, in whole or in part, by the surrender of this Warrant, together with a
completed exercise agreement in the form attached hereto (the "Exercise
Agreement"), to the Company during normal business hours on any business day at
the Company's principal executive offices (or such other office or agency of the
Company as it may designate by notice to the holder hereof), and upon (i)
payment to the Company in cash, by certified or official bank check or by wire
transfer for the account of the Company, of the Exercise Price for the Warrant
Shares specified in the Exercise Agreement or (ii) if the holder is effectuating
a Cashless Exercise (as defined in Section 10(c) below) pursuant to Section
10(c) hereof, delivery to the Company of a written notice of an election to
effect a Cashless Exercise for the Warrant Shares specified in the Exercise
Agreement. The Warrant Shares so purchased shall be deemed to be issued to the
holder hereof or such holder's designee, as the record owner of such shares, as
of the close of business on the date on which this Warrant shall have been
surrendered, the completed Exercise Agreement shall have been delivered, and
payment shall have been made for such shares as set forth above. Certificates
for the Warrant Shares so purchased, representing the aggregate number of shares
specified in the Exercise Agreement, shall be delivered to the holder hereof
within a reasonable time, not exceeding two (2) business days, after this
Warrant shall have been so exercised (the "Delivery Period"). The certificates
so delivered shall be in such denominations as may be requested by the holder
hereof and shall be registered in the name of such holder or such other name as
shall be designated by such holder. If this Warrant shall have been exercised
only in part, then, unless this Warrant has expired, the Company shall, at its
expense, at the time of delivery of such certificates, deliver to the holder a
new Warrant representing the number of shares with respect to which this Warrant
shall not then have been exercised.
If, at any time, a holder of this Warrant submits this Warrant, an
Exercise Agreement and payment to the Company of the Exercise Price for each of
the Warrant Shares specified in the Exercise Agreement (including pursuant to a
Cashless Exercise), and the Company fails for any reason to deliver, on or prior
to the fourth business day following the expiration of the Delivery Period for
such exercise, the number of shares of Common Stock to which the holder is
entitled upon such exercise (an "Exercise Default"), then the Company shall pay
to the holder payments ("Exercise Default Payments") for an Exercise Default in
the amount of (a) (N/365), multiplied by (b) the difference between the Market
Price (as defined in Section 4(l)(ii) hereof) on the date the Exercise Agreement
giving rise to the Exercise Default is transmitted in accordance with Section 1
(the "Exercise Default Date") less the Exercise Price, multiplied by (c) the
number of shares of Common Stock the Company failed to so deliver in such
Exercise Default, multiplied by (d) .24, where N = the number of days from the
Exercise Default Date to the date that the Company effects the full exercise of
this Warrant which gave rise to the Exercise Default. The accrued Exercise
Default Payment for each calendar month shall be paid in cash or shall be
convertible into Common Stock at the Exercise Price, at the holder's option, as
follows:
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(a) In the event holder elects to take such payment in cash,
cash payment shall be made to holder by the fifth (5th) day of the month
following the month in which it has accrued; and
(b) In the event holder elects to take such payment in Common
Stock, the holder may convert such payment amount into Common Stock at the
Exercise Price (as in effect at the time of conversion) at any time after the
fifth (5th) day of the month following the month in which it has accrued.
Nothing herein shall limit the holder's right to pursue actual
damages for the Company's failure to maintain a sufficient number of authorized
shares of Common Stock as required pursuant to the terms of Section 3(b) hereof,
or to otherwise issue shares of Common Stock upon exercise of this Warrant in
accordance with the terms hereof, and each holder shall have the right to pursue
all remedies available at law or in equity (including a decree of specific
performance and/or injunctive relief).
2. Period of Exercise. This Warrant is exercisable at any time or from
time to time on or after the date hereof and before 5:00 p.m., New York City
time on the fifth (5th) anniversary of the date hereof (the "Exercise Period").
3. Certain Agreements of the Company. The Company hereby covenants and
agrees as follows:
(a) Shares to be Fully Paid. All Warrant Shares will, upon
issuance in accordance with the terms of this Warrant, be validly issued, fully
paid, and nonassessable and free from all taxes, liens, claims and encumbrances.
(b) Reservation of Shares. During the Exercise Period, the
Company shall at all times have authorized, and reserved for the purpose of
issuance upon exercise of this Warrant, a sufficient number of shares of Common
Stock to provide for the exercise of this Warrant.
(c) Listing. The Company shall promptly secure the listing of the
shares of Common Stock issuable upon exercise of this Warrant upon each national
securities exchange or automated quotation system, if any, upon which shares of
Common Stock are then listed or become listed (subject to official notice of
issuance upon exercise of this Warrant) and shall maintain, so long as any other
shares of Common Stock shall be so listed, such listing of all shares of Common
Stock from time to time issuable upon the exercise of this Warrant; and the
Company shall so list on each national securities exchange or automated
quotation system, as the case may be, and shall maintain such listing of, any
other shares of capital stock of the Company issuable upon the exercise of this
Warrant if and so long as any shares of the same class shall be listed on such
national securities exchange or automated quotation system.
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(d) Certain Actions Prohibited. The Company will not, by
amendment of its charter or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities, or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed by it hereunder, but will at all times in
good faith assist in the carrying out of all the provisions of this Warrant and
in the taking of all such action as may reasonably be requested by the holder of
this Warrant in order to protect the exercise privilege of the holder of this
Warrant against dilution or other impairment, consistent with the tenor and
purpose of this Warrant. Without limiting the generality of the foregoing, the
Company (i) will not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the Exercise Price then in
effect, and (ii) will take all such actions as may be necessary or appropriate
in order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of this Warrant.
(e) Successors and Assigns. This Warrant will be binding upon any
entity succeeding to the Company by merger, consolidation, or acquisition of all
or substantially all of the Company's assets.
(f) Blue Sky Laws. The Company shall, on or before the date of
issuance of any Warrant Shares, take such actions as the Company shall
reasonably determine are necessary to qualify the Warrant Shares for, or obtain
exemption for the Warrant Shares for, sale to the holder of this Warrant upon
the exercise hereof under applicable securities or "blue sky" laws of the states
of the United States, and shall provide evidence of any such action so taken to
the holder of this Warrant prior to such date; provided, however, that the
Company shall not be required to qualify as a foreign corporation or file a
general consent to service of process in any such jurisdiction.
4. Antidilution Provisions. During the Exercise Period, the Exercise
Price and the number of Warrant Shares shall be subject to adjustment from time
to time as provided in this Section 4.
In the event that any adjustment of the Exercise Price as required
herein results in a fraction of a cent, such Exercise Price shall be rounded up
or down to the nearest cent.
(a) Adjustment of Exercise Price and Number of Shares upon
Issuance of Common Stock. Except as otherwise provided in Sections 4(c) and 4(e)
hereof, if and whenever after the initial issuance of this Warrant, the Company
issues or sells, or in accordance with Section 4(b) hereof is deemed to have
issued or sold, any shares of Common Stock for no consideration or for a
consideration per share less than the Market Price on the date of issuance (a
"Dilutive Issuance"), then effective immediately upon the Dilutive Issuance, the
Exercise Price will be adjusted in accordance with the following formula:
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E' = E x ___O + P/M____
CSDO
where:
E' = the adjusted Exercise Price;
E = the then current Exercise Price;
M = the then current Market Price (as defined in
Section 4(1)(ii));
O = the number of shares of Common Stock
outstanding immediately prior to the
Dilutive Issuance;
P = the aggregate consideration, calculated as
set forth in Section 4(b) hereof, received
by the
Company upon such Dilutive Issuance; and
CSDO = the total number of shares of Common Stock
Deemed Outstanding (as defined in Section
4(l)(i)) immediately after the Dilutive
Issuance.
(b) Effect on Exercise Price of Certain Events. For purposes of
determining the adjusted Exercise Price under Section 4(a) hereof, the following
will be applicable:
(i) Issuance of Rights or Options. If the Company in any
manner issues or grants any warrants, rights or options, whether or not
immediately exercisable, to subscribe for or to purchase Common Stock or other
securities exercisable, convertible into or exchangeable for Common Stock
("Convertible Securities") (such warrants, rights and options to purchase Common
Stock or Convertible Securities are hereinafter referred to as "Options") and
the price per share for which Common Stock is issuable upon the exercise of such
Options is less than the Market Price on the date of issuance ("Below Market
Options"), then the maximum total number of shares of Common Stock issuable upon
the exercise of all such Below Market Options (assuming full exercise,
conversion or exchange of Convertible Securities, if applicable) will, as of the
date of the issuance or grant of such Below Market Options, be deemed to be
outstanding and to have been issued and sold by the Company for such price per
share. For purposes of the preceding sentence, the "price per share for which
Common Stock is issuable upon the exercise of such Below Market Options" is
determined by dividing (i) the total amount, if any, received or receivable by
the Company as consideration for the issuance or granting of all such Below
Market Options, plus the minimum aggregate amount of additional consideration,
if any, payable to the Company upon the exercise of all such Below Market
Options, plus, in the case of Convertible Securities issuable upon the exercise
of such Below Market Options, the minimum aggregate amount of additional
consideration payable upon the exercise, conversion or exchange thereof at the
time such Convertible Securities first become exercisable, convertible or
exchangeable, by (ii) the maximum total number of shares of Common Stock
issuable upon the exercise of all such Below Market Options (assuming full
conversion of Convertible Securities, if applicable). No further adjustment to
the Exercise Price will be made upon the actual issuance of such Common Stock
upon the exercise of such Below Market Options or upon the exercise, conversion
or exchange of Convertible Securities issuable upon exercise of such Below
Market Options.
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(ii) Issuance of Convertible Securities.
(A) If the Company in any manner issues or sells any
Convertible Securities, whether or not immediately convertible (other than where
the same are issuable upon the exercise of Options) and the price per share for
which Common Stock is issuable upon such exercise, conversion or exchange (as
determined pursuant to Section 4(b)(ii)(B) if applicable) is less than the
Market Price on the date of issuance, then the maximum total number of shares of
Common Stock issuable upon the exercise, conversion or exchange of all such
Convertible Securities will, as of the date of the issuance of such Convertible
Securities, be deemed to be outstanding and to have been issued and sold by the
Company for such price per share. For the purposes of the preceding sentence,
the "price per share for which Common Stock is issuable upon such exercise,
conversion or exchange" is determined by dividing (i) the total amount, if any,
received or receivable by the Company as consideration for the issuance or sale
of all such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the exercise,
conversion or exchange thereof at the time such Convertible Securities first
become exercisable, convertible or exchangeable, by (ii) the maximum total
number of shares of Common Stock issuable upon the exercise, conversion or
exchange of all such Convertible Securities. No further adjustment to the
Exercise Price will be made upon the actual issuance of such Common Stock upon
exercise, conversion or exchange of such Convertible Securities.
(B) If the Company in any manner issues or sells any
Convertible Securities with a fluctuating conversion or exercise price or
exchange ratio (a "Variable Rate Convertible Security"), then the "price per
share for which Common Stock is issuable upon such exercise, conversion or
exchange" for purposes of the calculation contemplated by Section 4(b)(ii)(A)
shall be deemed to be the lowest price per share which would be applicable
(assuming all holding period and other conditions to any discounts contained in
such Convertible Security have been satisfied) if the Market Price on the date
of issuance of such Convertible Security was 75% of the Market Price on such
date (the "Assumed Variable Market Price"). Further, if the Market Price at any
time or times thereafter is less than or equal to the Assumed Variable Market
Price last used for making any adjustment under this Section 4 with respect to
any Variable Rate Convertible Security, the Exercise Price in effect at such
time shall be readjusted to equal the Exercise Price which would have resulted
if the Assumed Variable Market Price at the time of issuance of the Variable
Rate Convertible Security had been 75% of the Market Price existing at the time
of the adjustment required by this sentence.
(iii) Change in Option Price or Conversion Rate. If there is a
change at any time in (i) the amount of additional consideration payable to the
Company upon the exercise of any Options; (ii) the amount of additional
consideration, if any, payable to the Company upon the exercise, conversion or
exchange of any Convertible Securities; or (iii) the rate at which any
Convertible Securities are convertible into or exchangeable for Common Stock (in
each such case, other than under or by reason of provisions designed to protect
against dilution), the Exercise Price in effect at the time of such change will
be readjusted to the Exercise
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Price which would have been in effect at such time had such Options or
Convertible Securities still outstanding provided for such changed additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold.
(iv) Treatment of Expired Options and Unexercised Convertible
Securities. If, in any case, the total number of shares of Common Stock issuable
upon exercise of any Option or upon exercise, conversion or exchange of any
Convertible Securities is not, in fact, issued and the rights to exercise such
Option or to exercise, convert or exchange such Convertible Securities shall
have expired or terminated, the Exercise Price then in effect will be readjusted
to the Exercise Price which would have been in effect at the time of such
expiration or termination had such Option or Convertible Securities, to the
extent outstanding immediately prior to such expiration or termination (other
than in respect of the actual number of shares of Common Stock issued upon
exercise or conversion thereof), never been issued.
(v) Calculation of Consideration Received. If any Common Stock,
Options or Convertible Securities are issued, granted or sold for cash, the
consideration received therefor for purposes of this Warrant will be the amount
received by the Company therefor, before deduction of reasonable commissions,
underwriting discounts or allowances or other reasonable expenses paid or
incurred by the Company in connection with such issuance, grant or sale. In case
any Common Stock, Options or Convertible Securities are issued or sold for a
consideration part or all of which shall be other than cash, the amount of the
consideration other than cash received by the Company will be the fair market
value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the Company
will be the Market Price thereof as of the date of receipt. In case any Common
Stock, Options or Convertible Securities are issued in connection with any
merger or consolidation in which the Company is the surviving corporation, the
amount of consideration therefor will be deemed to be the fair market value of
such portion of the net assets and business of the non-surviving corporation as
is attributable to such Common Stock, Options or Convertible Securities, as the
case may be. The fair market value of any consideration other than cash or
securities will be determined in good faith by an investment banker or other
appropriate expert of national reputation selected by the Company and reasonably
acceptable to the holder hereof, with the costs of such appraisal to be borne by
the Company.
(vi) Exceptions to Adjustment of Exercise Price. No adjustment to
the Exercise Price will be made (i) upon the exercise of any warrants, options
or convertible securities issued and outstanding on the date hereof in
accordance with the terms of such securities as of such date; (ii) upon the
grant or exercise of any stock or options which may hereafter be granted or
exercised under any employee benefit plan of the Company now existing or to be
implemented in the future, so long as the issuance of such stock or options is
approved by a majority of the non-employee members of the Board of Directors of
the Company or a majority of the members of a committee of non-employee
directors established for such purpose; (iii) upon the issuance of any warrants
in accordance with terms of the Line of Credit Agreement and the Note or upon
the exercise of such warrants; or (iv) upon the issuance of any securities in
connection with that certain rights offering in the aggregate amount of
$2,875,000 conducted on behalf of the Company by Coleman and Company Securities,
Inc.
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(c) Subdivision or Combination of Common Stock. If the Company, at any
time after the initial issuance of this Warrant, subdivides (by any stock split,
stock dividend, recapitalization, reorganization, reclassification or otherwise)
its shares of Common Stock into a greater number of shares, then, after the date
of record for effecting such subdivision, the Exercise Price in effect
immediately prior to such subdivision will be proportionately reduced. If the
Company, at any time after the initial issuance of this Warrant, combines (by
reverse stock split, recapitalization, reorganization, reclassification or
otherwise) its shares of Common Stock into a smaller number of shares, then,
after the date of record for effecting such combination, the Exercise Price in
effect immediately prior to such combination will be proportionately increased.
(d) Adjustment in Number of Shares. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Section 4, the number of
shares of Common Stock issuable upon exercise of this Warrant shall be adjusted
by multiplying a number equal to the Exercise Price in effect immediately prior
to such adjustment by the number of shares of Common Stock issuable upon
exercise of this Warrant immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
(e) Consolidation, Merger or Sale. In case of any consolidation of the
Company with, or merger of the Company into any other corporation, or in case of
any sale or conveyance of all or substantially all of the assets of the Company
other than in connection with a plan of complete liquidation of the Company at
any time after the initial issuance of this Warrant, then as a condition of such
consolidation, merger or sale or conveyance, adequate provision will be made
whereby the holder of this Warrant will have the right to acquire and receive
upon exercise of this Warrant in lieu of the shares of Common Stock immediately
theretofore acquirable upon the exercise of this Warrant, such shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for the number of shares of Common Stock immediately theretofore acquirable and
receivable upon exercise of this Warrant had such consolidation, merger or sale
or conveyance not taken place. In any such case, the Company will make
appropriate provision to insure that the provisions of this Section 4 hereof
will thereafter be applicable as nearly as may be in relation to any shares of
stock or securities thereafter deliverable upon the exercise of this Warrant.
The Company will not effect any consolidation, merger or sale or conveyance
unless prior to the consummation thereof, the successor corporation (if other
than the Company) assumes by written instrument the obligations under this
Section 4 and the obligations to deliver to the holder of this Warrant such
shares of stock, securities or assets as, in accordance with the foregoing
provisions, the holder may be entitled to acquire.
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(f) Distribution of Assets. In case the Company shall declare or make
any distribution of its assets (or rights to acquire its assets) to holders of
Common Stock as a dividend, by way of return of capital or otherwise (including
any dividend or distribution to the Company's shareholders of cash or shares (or
rights to acquire shares) of capital stock of a subsidiary) (a "Distribution"),
at any time after the initial issuance of this Warrant, then the holder of this
Warrant shall be entitled upon exercise of this Warrant for the purchase of any
or all of the shares of Common Stock subject hereto, to receive the amount of
such assets (or rights) which would have been payable to the holder had such
holder been the holder of such shares of Common Stock on the record date for the
determination of shareholders entitled to such Distribution.
(g) Notice of Adjustment. Upon the occurrence of any event which
requires any adjustment of the Exercise Price, then, and in each such case, the
Company shall give notice thereof to the holder of this Warrant, which notice
shall state the Exercise Price resulting from such adjustment and the increase
or decrease in the number of Warrant Shares purchasable at such price upon
exercise, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. Such calculation shall be certified
by the chief financial officer of the Company.
(h) Minimum Adjustment of Exercise Price. No adjustment of the
Exercise Price shall be made in an amount of less than 1% of the Exercise Price
in effect at the time such adjustment is otherwise required to be made, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.
(i) No Fractional Shares. No fractional shares of Common Stock are to
be issued upon the exercise of this Warrant, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the Market Price of a share of Common
Stock on the date of such exercise.
(j) Other Notices. In case at any time:
(i) the Company shall declare any dividend upon the Common Stock
payable in shares of stock of any class or make any other distribution (other
than dividends or distributions payable in cash out of retained earnings
consistent with the Company's past practices with respect to declaring dividends
and making distributions) to the holders of the Common Stock;
(ii) the Company shall offer for subscription pro rata to the
holders of the Common Stock any additional shares of stock of any class or other
rights;
(iii) there shall be any capital reorganization of the Company,
or reclassification of the Common Stock, or consolidation or merger of the
Company with or into, or sale of all or substantially all of its assets to,
another corporation or entity; or
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(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the holder of this Warrant
(a) notice of the date on which the books of the Company shall close or a record
shall be taken for determining the holders of Common Stock entitled to receive
any such dividend, distribution, or subscription rights or for determining the
holders of Common Stock entitled to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up and (b) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, notice of
the date (or, if not then known, a reasonable approximation thereof by the
Company) when the same shall take place. Such notice shall also specify the date
on which the holders of Common Stock shall be entitled to receive such dividend,
distribution, or subscription rights or to exchange their Common Stock for stock
or other securities or property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, or
winding-up, as the case may be. Such notice shall be given at least 30 days
prior to the record date or the date on which the Company's books are closed in
respect thereto. Failure to give any such notice or any defect therein shall not
affect the validity of the proceedings referred to in clauses (i), (ii), (iii)
and (iv) above.
(k) Certain Events. If, at any time after the initial issuance of this
Warrant, any event occurs of the type contemplated by the adjustment provisions
of this Section 4 but not expressly provided for by such provisions, the Company
will give notice of such event as provided in Section 4(g) hereof, and the
Company's Board of Directors will make an appropriate adjustment in the Exercise
Price and the number of shares of Common Stock acquirable upon exercise of this
Warrant so that the rights of the holder shall be neither enhanced nor
diminished by such event.
(l) Certain Definitions.
(i) "Common Stock Deemed Outstanding" shall mean the number of
shares of Common Stock actually outstanding (not including shares of Common
Stock held in the treasury of the Company), plus (x) in the case of any
adjustment required by Section 4(a) resulting from the issuance of any Options,
the maximum total number of shares of Common Stock issuable upon the exercise of
the Options for which the adjustment is required (including any Common Stock
issuable upon the conversion of Convertible Securities issuable upon the
exercise of such Options), and (y) in the case of any adjustment required by
Section 4(a) resulting from the issuance of any Convertible Securities, the
maximum total number of shares of Common Stock issuable upon the exercise,
conversion or exchange of the Convertible Securities for which the adjustment is
required, as of the date of issuance of such Convertible Securities, if any.
(ii) "Market Price," as of any date, (i) means the average of the
closing bid prices for the shares of Common Stock as reported on the Nasdaq
SmallCap Market by Bloomberg Financial Markets ("Bloomberg") for the five (5)
trading days immediately
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preceding such date, or (ii) if the Nasdaq SmallCap Market is not the principal
trading market for the shares of Common Stock, the average of the last bid
prices reported by Bloomberg on the principal trading market for the Common
Stock during the same period, or, if there is no bid price for such period, the
last sales price reported by Bloomberg for such period, or (iii) if the
foregoing do not apply, the last closing bid price of such security in the
over-the-counter market on the pink sheets or bulletin board for such security
as reported by Bloomberg, or if no closing bid price is so reported for such
security, the last closing trade price of such security as reported by
Bloomberg, or (iv) if market value cannot be calculated as of such date on any
of the foregoing bases, the Market Price shall be the average fair market value
as reasonably determined by an investment banking firm selected by the Company
and reasonably acceptable to the holder, with the costs of the appraisal to be
borne by the Company. The manner of determining the Market Price of the Common
Stock set forth in the foregoing definition shall apply with respect to any
other security in respect of which a determination as to market value must be
made hereunder.
(iii) "Closing Price," as of any date, (i) means the closing bid
price for the shares of Common Stock as reported on the Nasdaq SmallCap Market
by Bloomberg for the trading day immediately preceding such date, or (ii) if the
Nasdaq SmallCap Market is not the principal trading market for the shares of
Common Stock, the last bid price reported by Bloomberg on the principal trading
market for the Common Stock on the trading day immediately preceding such date,
or, if there is no bid price for such period, the last sales price reported by
Bloomberg on trading day immediately preceding such date, or (iii) if the
foregoing do not apply, the last closing bid price of such security in the
over-the-counter market on the pink sheets or bulletin board for such security
as reported by Bloomberg on the trading day immediately preceding such date, or
if no closing bid price is so reported for such security, the last closing trade
price of such security as reported by Bloomberg on the trading day immediately
preceding such date, or (iv) if market value cannot be calculated as of such
date on any of the foregoing bases, the Closing Price shall be the fair market
value as reasonably determined by an investment banking firm selected by the
Company and reasonably acceptable to the holder, with the costs of the appraisal
to be borne by the Company.
(iv) "Common Stock," for purposes of this Section 4, includes the
Common Stock and any additional class of stock of the Company having no
preference as to dividends or distributions on liquidation, provided that the
shares purchasable pursuant to this Warrant shall include only Common Stock, par
value $.01 per share, in respect of which this Warrant is exercisable, or shares
resulting from any subdivision or combination of such Common Stock, or in the
case of any reorganization, reclassification, consolidation, merger, or sale of
the character referred to in Section 4(e) hereof, the stock or other securities
or property provided for in such Section.
5. Issue Tax. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax or other costs in respect thereof,
provided that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than the holder of this Warrant.
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6. No Rights or Liabilities as a Shareholder. This Warrant shall not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
7. Transfer, Exchange, Redemption and Replacement of Warrant.
(a) Restriction on Transfer. This Warrant and the rights granted
to the holder hereof are transferable, in whole or in part, upon surrender of
this Warrant, together with a properly executed assignment in the form attached
hereto, at the office or agency of the Company referred to in Section 7(e)
below, provided, however, that any transfer or assignment shall be subject to
the conditions set forth in Sections 7(f) and (g) hereof and to the provisions
of Sections 2(f) and (g) of the Line of Credit Agreement. Until due presentment
for registration of transfer on the books of the Company, the Company may treat
the registered holder hereof as the owner and holder hereof for all purposes,
and the Company shall not be affected by any notice to the contrary.
(b) Warrant Exchangeable for Different Denominations. This
Warrant is exchangeable, upon the surrender hereof by the holder hereof at the
office or agency of the Company referred to in Section 7(e) below, for new
Warrants of like tenor of different denominations representing in the aggregate
the right to purchase the number of shares of Common Stock which may be
purchased hereunder, each of such new Warrants to represent the right to
purchase such number of shares as shall be designated by the holder hereof at
the time of such surrender.
(c) Replacement of Warrant. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of any such loss, theft, or destruction, upon
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
(d) Cancellation; Payment of Expenses. Upon the surrender of this
Warrant in connection with any transfer, exchange, or replacement as provided in
this Section 7, this Warrant shall be promptly canceled by the Company. The
Company shall pay all taxes (other than securities transfer taxes) and all other
expenses (other than legal expenses, if any, incurred by the Holder or
transferees) and charges payable in connection with the preparation, execution,
and delivery of Warrants pursuant to this Section 7. The Company shall indemnify
and reimburse the holder of this Warrant for all costs and expenses (including
legal fees) incurred by such holder in connection with the enforcement of its
rights hereunder.
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<PAGE>
(e) Warrant Register. The Company shall maintain, at its
principal executive offices (or such other office or agency of the Company as it
may designate by notice to the holder hereof), a register for this Warrant, in
which the Company shall record the name and address of the person in whose name
this Warrant has been issued, as well as the name and address of each transferee
and each prior owner of this Warrant.
(f) Exercise or Transfer Without Registration. If, at the time of
the surrender of this Warrant in connection with any exercise, transfer, or
exchange of this Warrant, this Warrant (or, in the case of any exercise, the
Warrant Shares issuable hereunder), shall not be registered under the Securities
Act and under applicable state securities or blue sky laws, the Company may
require, as a condition of allowing such exercise, transfer, or exchange, (i)
that the holder or transferee of this Warrant, as the case may be, furnish to
the Company a written opinion of counsel (which opinion shall be in form,
substance and scope customary for opinions of counsel in comparable
transactions) to the effect that such exercise, transfer, or exchange may be
made without registration under the Securities Act and under applicable state
securities or blue sky laws (the cost of which shall be borne by the Company if
the Company's counsel renders such opinion and up to $250 of such cost shall be
borne by the Company if the holder's counsel renders such opinion), (ii) that
the holder or transferee execute and deliver to the Company an investment letter
in form and substance acceptable to the Company and (iii) that the transferee be
an "accredited investor" as defined in Rule 501(a) promulgated under the
Securities Act. With respect to any opinion to be provided pursuant to clause
(i) above, the holder shall be entitled to request that the Company's counsel
render such opinion and the Company shall cause its counsel to render such
opinion if requested by the holder.
(g) Additional Restrictions on Exercise or Transfer.
Notwithstanding anything contained herein to the contrary, this Warrant shall
not be exercisable by a holder hereof to the extent (but only to the extent)
that, if exercisable by such holder, such holder would beneficially own in
excess of 4.9% of the outstanding shares of Common Stock. To the extent the
above limitation applies, the determination of whether and to what extent this
Warrant shall be exercisable vis-a-vis other securities owned by such holder
shall be in the sole discretion of the holder and submission of this Warrant for
full or partial exercise shall be deemed to be the holder's determination of
whether and the extent to which this Warrant is exercisable, in each case
subject to such aggregate percentage limitation. No prior inability to exercise
the Warrant pursuant to this Section shall have any effect on the applicability
of the provisions of this Section with respect to any subsequent determination
of exerciseability. For purposes of the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13D-G thereunder.
The restrictions contained in this Section 7(g) may not be amended without the
consent of the holder of this Warrant and the holders of a majority of the
Company's then outstanding Common Stock. The first holder of this Warrant, by
taking and holding the same, represents to the Company that such holder is
acquiring this Warrant for investment only and not with a view to the
distribution thereof, except pursuant to sales that are exempt from the
registration requirements of the Securities Act and/or sales registered under
the Securities Act.
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<PAGE>
8. Notices. Any notices required or permitted to be given under the
terms of this Warrant shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier or by confirmed
telecopy, and shall be effective five days after being placed in the mail, if
mailed, or upon receipt or refusal of receipt, if delivered personally or by
courier or confirmed telecopy, in each case addressed to a party. The addresses
for such communications shall be:
If to the Company:
SMARTSERV ONLINE, INC.
One Station Place
Stamford, CT 06902
Telecopy: (202) 353-5962
Attention: Chairman of the Board
With a copy to:
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, NY 10036
Telecopy: (212) 704-6288
Attention: Michael J. Shef, Esquire
and if to the holder, at such address as such holder shall have provided in
writing to the Company, or at such other address as each such party furnishes by
notice given in accordance with this Section 8.
9. Governing Law; Jurisdiction. This Warrant shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in the State of Delaware. The Company
irrevocably consents to the jurisdiction of the United States federal courts
located in the City of New York in the State of New York, in any suit or
proceeding based on or arising under this Warrant and irrevocably agrees that
all claims in respect of such suit or proceeding may be determined in such
courts. The Company irrevocably waives the defense of an inconvenient forum to
the maintenance of such suit or proceeding. The Company agrees that service of
process upon the Company mailed by first class mail shall be deemed in every
respect effective service of process upon the Company in any such suit or
proceeding. Nothing herein shall affect the holder's right to serve process in
any other manner permitted by law. The Company agrees that a final
non-appealable judgment in any such suit or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on such judgment or in any other
lawful manner.
10. Miscellaneous.
(a) Amendments. This Warrant and any provision hereof may only be
amended by an instrument in writing signed by the Company and the holder hereof.
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<PAGE>
(b) Descriptive Headings. The descriptive headings of the several
Sections of this Warrant are inserted for purposes of reference only, and shall
not affect the meaning or construction of any of the provisions hereof.
(c) Cashless Exercise. Notwithstanding anything to the contrary
contained in this Warrant, if the resale of the Warrant Shares by the holder is
not then registered pursuant to an effective registration statement under the
Securities Act, this Warrant may be exercised at any time after the first (1st)
anniversary of the date hereof until the end of the Exercise Period, by
presentation and surrender of this Warrant to the Company at its principal
executive offices with a written notice of the holder's intention to effect a
cashless exercise, including a calculation of the number of shares of Common
Stock to be issued upon such exercise in accordance with the terms hereof (a
"Cashless Exercise"). In the event of a Cashless Exercise, in lieu of paying the
Exercise Price in cash, the holder shall surrender this Warrant for that number
of shares of Common Stock determined by multiplying the number of Warrant Shares
to which it would otherwise be entitled by a fraction, the numerator of which
shall be the difference between the then current Market Price per share of the
Common Stock and the Exercise Price, and the denominator of which shall be the
then current Market Price per share of Common Stock.
11. Registration of Warrant Shares.
(a) As used in this Section 11, the following terms shall have
the following meanings:
(i) "Investors" means the holder of this Warrant and any
transferees or assignees hereof in accordance with Section 7 hereof.
(ii) "register," "registered," and "registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering securities on a
continuous basis ("Rule 415"), and the declaration or ordering of effectiveness
of such Registration Statement by the United States Securities and Exchange
Commission (the "SEC").
(iii) "Registrable Securities" means the Warrant Shares
issued or issuable upon exercise hereof and any shares of capital stock issued
or issuable, from time to time (with any adjustments), on or in exchange for or
otherwise with respect to the foregoing.
(iv) "Registration Statement" means a registration statement
of the Company under the Securities Act.
(b) In connection with any registration of the resale of the
Registrable Securities by Investors, the Company shall have the following
obligations:
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(i) The Company shall furnish to each Investor whose
Registrable Securities are included in the Registration Statement covering the
resale of the Registrable Securities and its legal counsel (i) promptly after
the same is prepared and publicly distributed, filed with the SEC, or received
by the Company, one copy of the Registration Statement and any amendment
thereto, each preliminary prospectus and prospectus and each amendment or
supplement thereto, and (ii) such number of copies of a prospectus, including a
preliminary prospectus, and all amendments and supplements thereto and such
other documents as such Investor may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by such Investor.
(ii) As promptly as practicable after becoming aware of such
event, the Company shall notify each Investor of the happening of any event, of
which the Company has knowledge, as a result of which the prospectus included in
the Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and use its best
efforts promptly to prepare a supplement or amendment to the Registration
Statement to correct such untrue statement or omission, and deliver such number
of copies of such supplement or amendment to each Investor as such Investor may
reasonably request.
(iii) The Company shall use reasonable commercial efforts to
prevent the issuance of any stop order or other suspension of effectiveness of a
Registration Statement, and, if such an order is issued, to obtain the
withdrawal of such order at the earliest practicable moment and to notify each
Investor who holds Registrable Securities being sold (or, in the event of an
underwritten offering, the managing underwriters) of the issuance of such order
and the resolution thereof.
(iv) The Company shall permit a single firm of counsel
designated by the Investors to review the Registration Statement and all
amendments and supplements thereto a reasonable period of time prior to their
filing with the SEC, and not file any document to which such counsel reasonably
objects.
(v) The Company shall hold in confidence and not make any
disclosure of information concerning an Investor provided to the Company unless
(i) disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other order
from a court or governmental body of competent jurisdiction, (iv) such
information has been made generally available to the public other than by
disclosure in violation of this or any other agreement, or (v) such Investor
consents to the form and content of any such disclosure. The Company agrees that
it shall, upon learning that disclosure of such information concerning an
Investor is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to such Investor prior
to making such disclosure, and allow the Investor, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information.
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<PAGE>
(c) In connection with the registration of the resale of Registrable
Securities by Investors, the Investors shall have the following obligations:
(i) Each Investor shall furnish to the Company such
information regarding itself, the Registrable Securities held by it and the
intended method of disposition of the Registrable Securities held by it as shall
be reasonably required to effect the registration of such Registrable Securities
and shall execute such documents in connection with such registration as the
Company may reasonably request. At least three (3) business days prior to the
first anticipated filing date of the Registration Statement, the Company shall
notify each Investor of the information the Company requires from each such
Investor.
(ii) Each Investor, by such Investor's acceptance of the
Registrable Securities, agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statement hereunder.
(iii) Each Investor agrees that, upon receipt of any notice
from the Company of the happening of any event of the kind described in Sections
11(b)(ii) and (iii) hereof, such Investor will immediately discontinue
disposition of Registrable Securities pursuant to the Registration Statement
covering such Registrable Securities until such Investor's receipt of the copies
of the supplemented or amended prospectus contemplated by Sections 11(b)(ii) and
(iii) hereof, and, if so directed by the Company, such Investor shall deliver to
the Company (at the expense of the Company) or destroy (and deliver to the
Company a certificate of destruction) all copies in such Investor's possession,
of the prospectus covering such Registrable Securities current at the time of
receipt of such notice.
(d) All reasonable expenses, other than underwriting discounts
and commissions, incurred in connection with registrations, filings or
qualifications pursuant to this Section 11, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees and
the fees and disbursements of counsel for the Company, shall be borne by the
Company. The Investors shall be responsible for all cost incurred by them or
their advisors and other professionals (including, without limitation, their
legal counsel, accountants and investment bankers) in connection with any
registration hereunder.
(e) In the event any Registrable Securities are included in a
Registration Statement under this Section 11:
(i) To the extent permitted by law, the Company will
indemnify, hold harmless and defend (i) each Investor who holds such Registrable
Securities, and (ii) the directors, officers, partners, members, employees,
agents and each person who controls any Investor within the meaning of Section
15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), if any, (each, an "Indemnified Person"),
against any joint or several losses, claims, damages, liabilities or expenses
(collectively, together with actions, proceedings or inquiries by any regulatory
or self-regulatory organization, whether commenced or threatened, in respect
thereof, "Claims") to which any of them may become subject insofar as such
Claims arise out of or are based upon: (i) any untrue
17
<PAGE>
statement or alleged untrue statement of a material fact in a Registration
Statement or the omission or alleged omission to state therein a material fact
required to be stated or necessary to make the statements therein not
misleading, (ii) any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus if used prior to the effective date
of such Registration Statement, or contained in the final prospectus (as amended
or supplemented, if the Company files any amendment thereof or supplement
thereto with the SEC) or the omission or alleged omission to state therein any
material fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading, or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any other law, including, without limitation, any state
securities law, or any rule or regulation thereunder relating to the offer or
sale of the Registrable Securities (the matters in the foregoing clauses (i)
through (iii) being, collectively, "Violations"). Subject to the restrictions
set forth in Section 11(e)(iii) with respect to the number of legal counsel, the
Company shall reimburse the Investors and each such underwriter or controlling
person, promptly as such expenses are incurred and are due and payable, for any
reasonable legal fees or other reasonable expenses incurred by them in
connection with investigating or defending any such Claim. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 11(e)(i): (i) shall not apply to a Claim arising out
of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by such Indemnified Person
expressly for use in the Registration Statement or any such amendment thereof or
supplement thereto; (ii) shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of the
Company, which consent shall not be unreasonably withheld; and (iii) with
respect to any preliminary prospectus, shall not inure to the benefit of any
Indemnified Person if the untrue statement or omission of material fact
contained in the preliminary prospectus was corrected on a timely basis in the
prospectus, as then amended or supplemented, if such corrected prospectus was
timely made available by the Company pursuant hereto, and the Indemnified Person
was promptly advised in writing not to use the incorrect prospectus prior to the
use giving rise to a Violation and such Indemnified Person, notwithstanding such
advice, used it. Such indemnity shall remain in full force and effect regardless
of any investigation made by or on behalf of the Indemnified Person and shall
survive the transfer of the Registrable Securities by the Investors.
(ii) In connection with any Registration Statement in which an Investor is
participating, each such Investor agrees severally and not jointly to indemnify,
hold harmless and defend, to the same extent and in the same manner set forth in
Section 11(e)(i) hereof, the Company, each of its directors, each of its
officers who signs the Registration Statement, its employees, agents and each
person, if any, who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, and any other stockholder
selling securities pursuant to the Registration Statement or any of its
directors or officers or any person who controls such stockholder or underwriter
within the meaning of the Securities Act or the Exchange Act (collectively and
together with an Indemnified Person, an "Indemnified Party"), against any Claim
to which any of them may become subject, under the Securities Act, the Exchange
Act or otherwise, insofar as such Claim arises out of or is based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs
18
<PAGE>
in reliance upon and in conformity with written information furnished to the
Company by such Investor expressly for use in connection with such Registration
Statement; and subject to Section 11(e)(iii) such Investor will reimburse any
legal or other expenses (promptly as such expenses are incurred and are due and
payable) reasonably incurred by them in connection with investigating or
defending any such Claim; provided, however, that the indemnity agreement
contained in this Section 11(e)(ii) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of such Investor, which consent shall not be unreasonably withheld;
provided, further, however, that the Investor shall be liable under this Section
11(e)(ii) and under Section 11(f) for only that amount as does not exceed the
net proceeds actually received by such Investor as a result of the sale of
Registrable Securities pursuant to such Registration Statement. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of such Indemnified Party and shall survive the transfer of the
Registrable Securities by the Investors. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 11(e)(ii) with respect to any preliminary prospectus shall not inure to
the benefit of any Indemnified Party if the untrue statement or omission of
material fact contained in the preliminary prospectus was corrected on a timely
basis in the prospectus, as then amended or supplemented, and the Indemnified
Party failed to utilize such corrected prospectus.
(iii) Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 11(e) of notice of the commencement of any
action (including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to made against any
indemnifying party under this Section 11(e), deliver to the indemnifying party a
written notice of the commencement thereof, and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as the
case may be; provided, however, that such indemnifying party shall not be
entitled to assume such defense and an Indemnified Person or Indemnified Party
shall have the right to retain its own counsel with the fees and expenses to be
paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential conflicts of interest between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding or the actual or potential defendants in, or targets
of, any such action include both the Indemnified Person or the Indemnified Party
and the indemnifying party and any such Indemnified Person or Indemnified Party
reasonably determines that there may be legal defenses available to such
Indemnified Person or Indemnified Party which are different from or in addition
to those available to such indemnifying party. The indemnifying party shall pay
for only one separate legal counsel for the Indemnified Persons or the
Indemnified Parties, as applicable, and such legal counsel shall be selected by
Investors holding a majority-in-interest of the Registrable Securities included
in the Registration Statement to which the Claim relates, if the Company is not
a party entitled to indemnification hereunder, or by the Company, if the Company
is a party entitled to indemnification hereunder, as applicable. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any
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<PAGE>
such action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 11(e), except to the
extent that the indemnifying party is actually prejudiced in its ability to
defend such action. The indemnification required by this Section 11(e) shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
(f) To the extent any indemnification by an indemnifying
party is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under Section 11(e) to the fullest extent permitted by law; provided,
however, that (i) no contribution shall be made under circumstances where the
maker would not have been liable for indemnification under the fault standards
set forth in Section 11(e), (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any seller of Registrable Securities who
was not guilty of such fraudulent misrepresentation, and (iii) contribution
(together with any indemnification or other obligations hereunder) by any seller
of Registrable Securities shall be limited in amount to the net amount of
proceeds received by such seller from the sale of such Registrable Securities.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer.
SMARTSERV ONLINE, INC.
By: ________________________
Name:___________________
Title:____________________
<PAGE>
FORM OF EXERCISE AGREEMENT
(To be Executed by the Holder in order to Exercise the Warrant)
The undersigned hereby irrevocably exercises the right to purchase
_____________ of the shares of common stock of SmartServ Online, Inc., a
Delaware corporation (the "Company"), evidenced by the attached Warrant, and
herewith makes payment of the Exercise Price with respect to such shares in
full, all in accordance with the conditions and provisions of said Warrant.
ii. The undersigned agrees not to offer, sell, transfer or otherwise dispose of
any Common Stock obtained on exercise of the Warrant, except under circumstances
that will not result in a violation of the Securities Act of 1933, as amended,
or any state securities laws, and agrees that the following legend may be
affixed to the stock certificate for the Common Stock hereby subscribed for if
resale of such Common Stock is not registered or if Rule 144 is unavailable for
the immediate resale of such shares:
THE SECURITIES REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE
SOLD, TRANSFERRED OR ASSIGNED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER SAID
ACT OR UNLESS SOLD PURSUANT TO RULE 144
UNDER SAID ACT, OR THE COMPANY RECEIVES
AN OPINION OF COUNSEL, IN FORM,
SUBSTANCE AND SCOPE CUSTOMARY FOR
OPINIONS OF COUNSEL IN COMPARABLE
TRANSACTIONS, THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT.
iii. The undersigned requests that stock certificates for such shares be issued,
and a Warrant representing any unexercised portion hereof be issued, pursuant to
the Warrant in the name of the Holder and delivered to the undersigned at the
address set forth below:
Dated:_________________
_____________________________________
Signature of Holder
----------------------------------
Name of Holder (Print)
Address:
----------------------------------
----------------------------------
----------------------------------
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers all the rights of the undersigned under the within Warrant, with
respect to the number of shares of Common Stock covered thereby set forth
hereinbelow, to:
Name of Assignee Address No of Shares
- ---------------- ------- ------------
, and hereby irrevocably constitutes and appoints ______________
________________________ as agent and attorney-in-fact to transfer said Warrant
on the books of the within-named corporation, with full power of substitution in
the premises.
Dated: _____________________, ____,
In the presence of
________________________
Name: ____________________________
Signature: _______________________
Title of Signing Officer or Agent (if
any):
________________________
Address: ________________________
________________________
Note: The above signature should
correspond exactly with the
name on the face of the
within Warrant.
EXHIBIT 4.14
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of September
29, 1997, by and among SMARTSERV ONLINE, INC., a corporation organized under the
laws of the State of Delaware, with headquarters located at One Station Place,
Stamford, Connecticut 06902 (the "COMPANY"), and the undersigned (together with
affiliates, the "INITIAL INVESTORS").
WHEREAS:
A. In connection with that certain Line of Credit Agreement, dated as May 29,
1997, as amended by that certain Amendment to Line of Credit Agreement dated as
of July 2 1, 1997 and that certain Second Amendment to Line of Credit Agreement
dated as of September 16, 1997, by and between Zanett Lombardier, Ltd.
("LOMBARDIER") and the Company (as amended, the "LINE OF CREDIT Agreement"), the
Company issued to Lombardier warrants (the "LINE OF CREDIT WARRANTS") to acquire
581,300 shares of the Company's Common Stock, par value $.01 per share (the
"COMMON STOCK");
B. As compensation for placement services (the "PLACEMENT SERVICES") rendered in
connection with the Line of Credit Agreement, the Company issued to The Zanett
Securities Corporation ("ZSC") warrants (the "ZSC WARRANTS") to acquire 70,200
shares of Common Stock;
C. In connection with that certain Placement Agency Agreement, dated as of
September 3, 1997, by and between ZSC and the Company (the "PLACEMENT AGENCY
AGREEMENT"), the Company agreed to issue to ZSC warrants (the "ZSC PLACEMENT
AGENT WARRANTS") to acquire 600,000 shares of Common Stock;
D. In connection with that certain Consulting Agreement of even date herewith by
and between Bruno Guazzoni ("GUAZZONI") and the Company (the "CONSULTING
AGREEMENT"), the Company has agreed to issue to Guazzoni warrants (the "GUAZZONI
WARRANTS" and, together with the Line of Credit Warrants, the ZSC Warrants and
the ZSC Placement Agent Warrants, the "WARRANTS") to purchase 3,555,555 shares
of Common Stock;
E. To induce Lombardier and Guazzoni to execute and deliver the Line of Credit
Agreement and the Consulting Agreement, respectively, the Company has agreed to
provide Lombardier and Guazzoni certain registration rights under the Securities
Act of 1933, as amended, and the rules and regulations thereunder, or any
similar successor statute (collectively, the "SECURITIES ACT"), and applicable
state securities laws; and
F. To induce ZSC to execute and deliver the Placement Agency Agreement and
provide the Placement Services, the Company has agreed to provide ZSC certain
registration rights under the Securities Act and applicable state securities
laws.
<PAGE>
NOW, THEREFORE, IN consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Initial Investors hereby agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms shall have
the following meanings:
a. "INVESTORS" means the Initial Investors and any transferees or
assignees who agree to become bound by the provisions of this Agreement in
accordance with Section 9 hereof.
b. "REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering securities on a
continuous basis ("RULE 415"), and the declaration or ordering of effectiveness
of such Registration Statement by the United States Securities and Exchange
Commission (the "SEC").
c. "REGISTRABLE SECURITIES" means the shares (the "WARRANT SHARES") of
Common Stock issued or issuable upon exercise of or otherwise with respect to
the Warrants (including any Warrant Shares issuable with respect to Exercise
Default Payments under the Warrants) and any shares of capital stock issued or
issuable, from time to time (with any adjustments), as a distribution on or in
exchange for or otherwise with respect to any of the foregoing.
d. "REGISTRATION STATEMENT" means a registration statement of the
Company under the Securities Act.
2. REGISTRATION.
------------
a. Mandatory Registration. The Company shall prepare, and, on or
before the twentieth (20th) day after the date hereof (the "FILING DATE"), file
with the SEC a Registration Statement on Form S-3 (or, if Form S-3 is not then
available, on such form of Registration Statement as is then available to effect
a registration of all of the Registrable Securities, subject to the consent of
the Initial Investors (as determined pursuant to Section 11(j) hereof)) covering
the resale of at least 6,000,000 Registrable Securities, which Registration
Statement, to the extent allowable under the Securities Act and the Rules
promulgated thereunder (including Rule 416), shall state that such Registration
Statement also covers such indeterminate number of additional shares of Common
Stock as may become issuable upon exercise of the Warrants to prevent dilution
resulting from stock splits, stock dividends or similar transactions. The
Registrable Securities included in the Registration Statement shall be allocated
to the Investors as set forth in Section 1 l(k) hereof. The Registration
Statement (and each amendment or supplement thereto, and each request for
acceleration of effectiveness thereof) shall be provided to (and subject to the
approval of) the Initial Investors and their counsel prior to its filing or
other submission.
b. UNDERWRITTEN OFF. If any offering pursuant to a Registration
Statement pursuant to Section 2(a) hereof involves an underwritten offering, the
Investors who hold a majority in interest of the Registrable Securities subject
to such underwritten offering, with the
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consent of the Initial Investors, shall have the right to select one legal
counsel to represent the Investors and an investment banker or bankers and
manager or managers to administer the offering, which investment banker or
bankers or manager or managers shall be reasonably satisfactory to the Company.
In the event that any Investors elect not to participate in such underwritten
offering, the Registration Statement covering all of the Registrable Securities
shall contain appropriate plans of distribution reasonably satisfactory to the
Investors participating in such underwritten offering and the Investors electing
not to participate in such underwritten offering (including, without limitation,
the ability of nonparticipating Investors to sell from time to time and at any
time during the effectiveness of such Registration Statement).
c. PAYMENTS BY THE COMPANY. The Company shall cause the Registration
Statement required to be filed pursuant to Section 2(a) hereof to become
effective as soon as practicable, but in no event later than November 28, 1997.
If (i) the Registration Statement(s) covering the Registrable Securities
required to be filed by the Company pursuant to Section 2(a) hereof is not filed
with the SEC by the Filing Date or is not declared effective by the SEC on or
before December 28, 1997 (the "REGISTRATION DEADLINE") or if, after the
Registration Statement has been declared effective by the SEC, sales of all of
the Registrable Securities cannot be made pursuant to the Registration Statement
(by reason of a stop order or the Company's failure to update the Registration
Statement or any other reason outside the control of the Investors) or (ii) the
Common Stock is not listed or included for quotation on the Nasdaq SmallCap
Market (the "SMALLCAP"), the Nasdaq National Market (the "NNM"), the New York
Stock Exchange (the "NYSE") or the American Stock Exchange (the "AMEX") at any
time after the Registration Deadline, then the Company will make payments to the
Investors in such amounts and at such times as shall be determined pursuant to
this Section 2(c) as partial relief for the damages to the Investors by reason
of any such delay in or reduction of their ability to sell the Registrable
Securities (which remedy shall not be exclusive of any other remedies available
at law or in equity). The Company shall pay to each Investor an amount equal to
the product of (i) the aggregate Exercise Price of the Warrants held by such
Investor (including, without limitation, Warrants that have been exercised for
Warrant Shares then held by such Investor) (the "AGGREGATE EXERCISE PRICE"),
multiplied by (ii) one hundredth (.01), for the first thirty (30) day period (or
portion thereof) (A) after the Filing Date and prior to the date on which the
Registration Statement required to be filed pursuant to Section 2(a) hereof is
filed with the SEC, (B) after the Registration Deadline and prior to the date on
which the Registration Statement required to be filed pursuant to Section 2(a)
hereof is declared effective by the SEC, and (C) during which sales of any
Registrable Securities cannot be made pursuant to the Registration Statement
after the Registration Statement has been declared effective or the Common Stock
is not listed or included for quotation on the SmallCap, NNM, NYSE or AMEX. In
addition, the Company shall pay to each Investor an amount equal to the product
of (i) the Aggregate Exercise Price, multiplied by (ii) two hundredths (.02),
for each additional thirty (30) day period (or portion thereof) following the
initial thirty (30) day period referred to in the preceding sentence (A) after
the Filing Date and prior to the date the Registration Statement required to be
filed pursuant to Section 2(a) hereof is filed with the SEC, (B) after the
Registration Deadline and prior to the date the Registration Statement tiled
pursuant to Section 2(a) hereof is declared effective by the SEC and (C) during
which sales of any Registrable Securities cannot be made pursuant to the
Registration Statement after the Registration Statement has been declared
effective or the Common Stock is not listed or included for quotation on the
SmallCap, NNM, NYSE or AMEX; provided, however, that there shall be excluded
from each such period any delays which are solely attributable to changes (other
than corrections of Company mistakes with respect to information previously
provided by the Investors) required by the Investors in the Registration
Statement with respect to information relating
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to the Investors, including, without limitation, changes to the plan of
distribution. (For example, if the Registration Statement is not effective by
the Registration Deadline, the Company would pay $10,000 for the first thirty
(30) days and $20,000 for each thirty (30) day period thereafter for each
$l,000,000 of Aggregate Exercise Price until the Registration Statement becomes
effective). Such amounts shall be paid in cash or, at each Investor's option,
may be convertible into Common Stock at the "EXERCISE PRICE" then in effect. Any
shares of Common Stock issued upon conversion of such amounts shall be
Registrable Securities. If the Investor desires to convert the amounts due
hereunder into Registrable Securities it shall so notify the Company in writing
within two (2) business days after the date on which, such amounts are first
payable in cash and such amounts shall be so convertible beginning on the last
day upon which the cash amount would otherwise be due in accordance with the
following sentence. Payments of cash pursuant hereto shall be made within five
(5) days after the end of each period that gives rise to such obligation,
provided that, if any such period extends for more than thirty (30) days,
interim payments shall be made for each such thirty (30) day period.
d. PIGGY-BACK REGISTRATIONS. If at any time prior to the expiration of
the Registration Period (as hereinafter defined) the Company shall file with the
SEC a Registration Statement relating to an offering for its own account or the
account of others under the Securities Act of any of its equity securities
(other than on Form S-4 or Form S-8 or their then equivalents relating to equity
securities to be issued solely in connection with any acquisition of any entity
or business or equity securities issuable in connection with stock option or
other employee benefit plans), the Company shall send to each Investor who is
entitled to registration rights under this Section 2(d) written notice of such
determination and, if within fifteen (15) days after the date of such notice,
such Investor shall so request in writing, the Company shall include in such
Registration Statement all or any part of the Registrable Securities such
Investor requests to be registered, except that if, in connection with any
underwritten public offering for the account of the Company, the managing
underwriter(s) thereof shall impose a limitation on the number of shares of
Common Stock which may be included in the Registration Statement because, in
such underwriter(s) judgment, marketing or other factors dictate such limitation
is necessary to facilitate public distribution, then the Company shall be
obligated to include in such Registration Statement only such limited portion of
the Registrable Securities with respect to which such Investor has requested
inclusion hereunder as the underwriter shall permit. Any exclusion of
Registrable Securities shall be made pro rata among the Investors seeking to
include Registrable Securities, in proportion to the number of Registrable
Securities sought to be included by such Investors; PROVIDED, HOWEVER, that the
Company shall not exclude any Registrable Securities unless the Company has
first excluded all outstanding securities, the holders of which are not entitled
to inclusion of such securities in such Registration Statement or are not
entitled to pro rata inclusion with the Registrable Securities; and PROVIDED,
FURTHER, HOWEVER, that, after giving effect to the immediately preceding
proviso, any exclusion of Registrable Securities shall be made pro rata with
holders of other securities having the right to include such securities in the
Registration Statement other than holders of securities entitled to inclusion of
their securities in such Registration Statement by reason of demand registration
rights. No right to registration of Registrable Securities under this Section
2(d) shall be construed to limit any registration required under Section 2(a)
hereof. If an offering in connection with which an Investor is entitled to
registration under this Section 2(d) is an underwritten offering, then each
Investor whose Registrable Securities are included in such Registration
Statement shall, unless otherwise agreed by the Company, offer and sell such
Registrable Securities in an underwritten offering using the same underwriter or
underwriters and,
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<PAGE>
subject to the provisions of this Agreement, on the same terms and conditions as
other shares of Common Stock included in such underwritten offering.
e. ELIGIBILITY FOR FORM S-3. The Company represents and warrants that
it meets the requirements for the use of Form S-3 for registration of the sale
by the Initial Investors and any other Investor of the Registrable Securities
and the Company shall file all reports required to be filed by the Company with
the SEC in a timely manner so as to maintain such eligibility for the use of
Form S-3.
3. OBLIGATIONS OF THE COMPANY.
In connection with the registration of the Registrable Securities, the
Company shall have the following obligations:
a. The Company shall prepare promptly and file with the SEC the
Registration Statement required by Section 2(a) as soon as practicable after the
date hereof (but in no event later than the Filing Date), and cause such
Registration Statement relating to Registrable Securities to become effective as
soon as practicable after such filing (but in no event later than November 28,
1997), and keep the Registration Statement effective pursuant to Rule 415 at all
times until such date as is the earlier of (i) the date on which all of the
Registrable Securities have been sold and (ii) the date on which all of the
Registrable Securities (in the reasonable opinion of counsel to the Initial
Investors) may be immediately sold to the public without registration or
restriction pursuant to Rule 144(k) under the Securities Act or any successor
provision (the "REGISTRATION PERIOD"), which Registration Statement (including
any amendments or supplements thereto and prospectuses contained therein and all
documents incorporated by reference therein) shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein, or necessary to make the statements therein not misleading.
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to the Registration
Statement and the prospectus used in connection with the Registration Statement
as may be necessary to keep the Registration Statement effective at all times
during the Registration Period, and, during such period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statement
until such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof as set forth in the Registration Statement.
c. The Company shall furnish to each Investor whose Registrable
Securities are included in the Registration Statement and their legal counsel
(i) promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the Company, one copy of the Registration Statement and any
amendment thereto, each preliminary prospectus and prospectus and each amendment
or supplement thereto, and, in the case of the Registration Statement referred
to in Section 2(a), each letter written by or on behalf of the Company to the
SEC or the staff of the SEC (including, without limitation, any request to
accelerate the effectiveness of any Registration Statement or amendment
thereto), and each item of correspondence from the SEC or the staff of the SEC,
in each case relating to such Registration Statement (other than any portion, if
any, thereof which contains information for which the Company has sought
confidential treatment), (ii) on the date of effectiveness of the Registration
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<PAGE>
Statement or any amendment thereto, a notice stating that the Registration
Statement or amendment has been declared effective, and (iii) such number of
copies of a prospectus, including a preliminary prospectus, and all amendments
and supplements thereto and such other documents as such Investor may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Investor.
d. The Company shall use its best efforts to (i) register and qualify
the Registrable Securities covered by the Registration Statement under such
other securities or "blue sky" laws of such jurisdictions in the United States
as each Investor who holds Registrable Securities being offered reasonably
requests, (ii) prepare and file in those jurisdictions such amendments
(including post-effective amendments) and supplements to such registrations and
qualifications as may be necessary to maintain the effectiveness thereof during
the Registration Period, (iii) take such other actions as may be necessary to
maintain such registrations and qualifications in effect at all times during the
Registration Period, and (iv) take all other actions reasonably necessary or
advisable to qualify the Registrable Securities for sale in such jurisdictions;
PROVIDED, HOWEVER that the Company shall not be required in connection therewith
or as a condition thereto to (a) qualify to do business in any jurisdiction
where it would not otherwise be required to qualify but for this Section 3(d),
(b) subject itself to general taxation in any such jurisdiction, (c) file a
general consent to service of process in any such jurisdiction, (d) provide any
undertakings that cause the Company undue expense or burden, or (e) make any
change in its charter or bylaws, which in each case the Board of Directors of
the Company determines to be contrary to the best interests of the Company and
its stockholders.
e. In the event the Investors who hold a majority in interest of the
Registrable Securities being offered in an offering select underwriters for the
offering, the Company shall enter into and perform its obligations under an
underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
underwriters of such offering.
f. As promptly as practicable after becoming aware of such event, the
Company shall notify each Investor of the happening of any event, of which the
Company has knowledge, as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and use its best
efforts promptly to prepare a supplement or amendment to the Registration
Statement to correct such untrue statement or omission, and deliver such number
of copies of such supplement or amendment to each Investor as such Investor may
reasonably request.
g. The Company shall use its best efforts to prevent the issuance of
any stop order or other suspension of effectiveness of a Registration Statement,
and, if such an order is issued, to obtain the withdrawal of such order at the
earliest practicable moment (including in each case by amending or supplementing
such Registration Statement) and to notify each Investor who holds Registrable
Securities being sold (or, in the event of an underwritten offering, the
managing underwriters) of the issuance of such order and the resolution thereof
(and if such Registration Statement is supplemented or amended, deliver such
number of copies of such supplement or amendment to each Investor as such
Investor may reasonably request).
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h. The Company shall permit a single firm of counsel designated by the
Initial Investors to review the Registration Statement and all amendments and
supplements thereto a reasonable period of time prior to their filing with the
SEC, and not file any document in a form to which such counsel reasonably
objects.
i. The Company shall make generally available to its security holders
as soon as practical, but not later than ninety (90) days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 under the Securities Act) covering a twelve-month period
beginning not later than the first day of the Company's fiscal quarter next
following the effective date of the Registration Statement.
j. At the request of any Investor, the Company shall furnish, on the
date of effectiveness of the Registration Statement (i) an opinion, dated as of
such date, from counsel representing the Company addressed to the Investors and
in form, scope and substance as is customarily given in an underwritten public
offering and (ii) in the case of an underwriting, a letter, dated such date,
from the Company's independent certified public accountants in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and the Investors.
k. The Company shall make available for inspection by (i) any
Investor, (ii) any underwriter participating in any disposition pursuant to the
Registration Statement, (iii) one firm of attorneys and one firm of accountants
or other agents retained by the Investors, and (iv) one firm of attorneys
retained by all such underwriters (collectively, the "INSPECTORS") all pertinent
financial and other records, and pertinent corporate documents and properties of
the Company (collectively, the "RECORDS"), as shall be reasonably deemed
necessary by each Inspector to enable each Inspector to exercise its due
diligence responsibility, and cause the Company's officers, directors and
employees to supply all information which any Inspector may reasonably request
for purposes of such due diligence; PROVIDED, HOWEVER, that each Inspector shall
hold in confidence and shall not make any disclosure (except to an Investor) of
any Record or other information which the Company determines in good faith to be
confidential, and of which determination the Inspectors are so notified, unless
(a) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (b) the release of such
Records is ordered pursuant to a subpoena or other order from a court or
government body of competent jurisdiction, or (c) the information in such
Records has been made generally available to the public other than by disclosure
in violation of this or any other agreement. The Company shall not be required
to disclose any confidential information in such Records to any Inspector until
and unless such Inspector shall have entered into confidentiality agreements (in
form and substance satisfactory to the Company) with the Company with respect
thereto, substantially in the form of this Section 3(k). Each Investor agrees
that it shall, upon learning that disclosure of such Records is sought in or by
a court or governmental body of competent jurisdiction or through other means,
give prompt notice to the Company and allow the Company, at its expense, to
undertake appropriate action to prevent disclosure of, or to obtain a protective
order for, the Records deemed confidential. Nothing herein shall be deemed to
limit the Investors' ability to sell Registrable Securities in a manner which is
otherwise consistent with applicable laws and regulations.
l. The Company shall hold in confidence and not make any disclosure of
information concerning an Investor provided to the Company unless (i) disclosure
of such information is necessary to comply with federal or state securities
laws, (ii) the disclosure of such
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information is necessary to avoid or correct a misstatement or omission in any
Registration Statement, (iii) the release of such information is ordered
pursuant to a subpoena or other order from a court or governmental body of
competent jurisdiction, (iv) such information has been made generally available
to the public other than by disclosure in violation of this or any other
agreement, or (v) such Investor consents to the form and content of any such
disclosure. The Company agrees that it shall, upon learning that disclosure of
such information concerning an Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
notice to such Investor prior to making such disclosure, and allow the Investor,
at its expense, to undertake appropriate action to prevent disclosure of, or to
obtain a protective order for, such information.
m. The Company shall use its best efforts to promptly either (i) cause
all the Registrable Securities covered by the Registration Statement to be
listed on the NYSE or the AMEX or another national securities exchange and on
each additional national securities exchange on which securities of the same
class or series issued by the Company are then listed, if any, if the listing of
such Registrable Securities is then permitted under the rules of such exchange,
or (ii) secure the designation and quotation of all of the Registrable
Securities covered by the Registration Statement on the NNM or the SmallCap and,
without limiting the generality of the foregoing, to arrange for or maintain at
least two market makers to register with the National Association of Securities
Dealers, Inc. ("NASD") as such with respect to such Registrable Securities.
n. The Company shall provide a transfer agent and registrar, which may
be a single entity, for the Registrable Securities not later than the effective
date of the Registration Statement.
o. The Company shall cooperate with the Investors who hold Registrable
Securities being offered and the managing underwriter or underwriters, if any,
to facilitate the timely preparation and delivery of certificates (not bearing
any restrictive legends) representing Registrable Securities to be offered
pursuant to the Registration Statement and enable such certificates to be in
such denominations or amounts, as the case may be, as the managing underwriter
or underwriters, if any, or the Investors may reasonably request and registered
in such names as the managing underwriter or underwriters, if any, or the
Investors may request, and, within three (3) business days after a Registration
Statement which includes Registrable Securities is ordered effective by the SEC,
the Company shall deliver, and shall cause legal counsel selected by the Company
to deliver, to the transfer agent for the Registrable Securities (with copies to
the Investors whose Registrable Securities are included in such Registration
Statement) an opinion of such counsel in the form attached hereto as EXHIBIT 1.
p. At the request of any Investor, the Company shall prepare and file
with the SEC such amendments (including post-effective amendments) and
supplements to a Registration Statement and the prospectus used in connection
with the Registration Statement as may be necessary in order to change the plan
of distribution set forth in such Registration Statement.
q. The Company shall comply with all applicable laws related to a
Registration Statement and offering and sale of securities and all applicable
rules and regulations of governmental authorities in connection therewith
(including, without limitation, the Securities Act and the Securities Exchange
Act of 1934, as amended, and the rules and regulations promulgated by the SEC.)
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r. The Company shall take all such other actions as any Investor or
the underwriters, if any, reasonably request in order to expedite or facilitate
the disposition of the Registrable Securities.
s. From and after the date of this Agreement, the Company shall not,
and shall not agree to, allow the holders of any securities of the Company to
include any of their securities in any Registration Statement under Section 2(a)
hereof or any amendment or supplement thereto under Section 3(b) hereof without
the consent of the holders of a majority in interest of the Registrable
Securities; PROVIDED, HOWEVER, that the Investors hereby acknowledge and agree
that the Company may include in any Registration Statement under Section 2(a)
hereof (including any amendment or supplement thereto) (i) any and all
securities required to be registered by the Company pursuant to the terms of
that certain Registration Rights Agreement of even date herewith by and among
the Company and the holders of the Company's Prepaid Common Stock Purchase
Warrants; and (ii) the securities owned by, or issuable to, those persons or
entities identified as having piggyback registration rights with respect to such
securities on Schedule 1 attached hereto.
4. OBLIGATIONS OF THE INVESTORS.
In connection with the registration of the Registrable Securities, the
Investors shall have the following obligations:
a. It shall be a condition precedent to the obligations of the Company
to complete the registration pursuant to this Agreement with respect to the
Registrable Securities of a particular Investor that such Investor shall furnish
to the Company such information regarding itself, the Registrable Securities
held by it and the intended method of disposition of the Registrable Securities
held by it as shall be reasonably required to effect the registration of such
Registrable Securities and shall execute such documents in connection with such
registration as the Company may reasonably request. At least five (5) business
days prior to the first anticipated filing date of the Registration Statement,
the Company shall notify each Investor of the information the Company requires
from each such Investor.
b. Each Investor, by such Investor's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement.
c. In the event Investors holding a majority in interest of the
Registrable Securities being offered determine to engage the services of an
underwriter, each Investor agrees to enter into and perform such Investor's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of the Registrable Securities, unless such Investor has notified the
Company in writing of such Investor's election not to participate in such
underwritten distribution.
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d. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(f) or
3(g), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice.
e. No Investor may participate in any underwritten distribution
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements in usual and
customary form entered into by the Company, (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements, and (iii) agrees to pay its pro rata share of all underwriting
discounts and commissions and any expenses in excess of those payable by the
Company pursuant to Section 5 below.
5. EXPENSES OF REGISTRATION.
------------------------
All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees, the
fees and disbursements of counsel for the Company, the fees and disbursements
contemplated by Section 3(j) hereof, and the reasonable fees and disbursements
of one counsel selected by the Investors pursuant to Section 2(b) hereof shall
be borne by the Company. In addition, the Company shall pay all of the
Investors' costs and expenses (including legal fees) incurred in connection with
the enforcement of the rights of the Investors hereunder.
6. INDEMNIFICATION.
---------------
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
a. To the extent permitted by law, the Company will indemnify, hold
harmless and defend (i) each Investor who holds such Registrable Securities, and
(ii) the directors, officers, partners, members, employees, agents and each
person who controls any Investor within the meaning of Section 15 of the
Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT"), if any, (each, an "INDEMNIFIED PERSON"), against any joint
or several losses, claims, damages, liabilities or expenses (collectively,
together with actions, proceedings or inquiries by any regulatory or
self-regulatory organization, whether commenced or threatened, in respect
thereof, "CLAIMS") to which any of them may become subject insofar as such
Claims arise out of or are based upon: (i) any untrue statement or alleged
untrue statement of a material fact in a Registration Statement or the omission
or alleged omission to state therein a material fact required to be stated or
necessary to make the statements therein not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus if used prior to the effective date of such Registration
Statement, or contained in the final prospectus (as amended or supplemented, if
the Company files any amendment thereof or supplement thereto with the SEC) or
the omission or alleged omission to state therein any material
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fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading, or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any other law, including, without limitation, any state
securities law, or any rule or regulation thereunder relating to the offer or
sale of the Registrable Securities (the matters in the foregoing clauses (i)
through (iii) being, collectively, "VIOLATIONS"). Subject to the restrictions
set forth in Section 6(c) with respect to the number of legal counsel, the
Company shall reimburse the Investors and each other Indemnified Person,
promptly as such expenses are incurred and are due and payable, for any
reasonable legal fees or other reasonable expenses incurred by them in
connection with investigating or defending any such Claim. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 6(a): (i) shall not apply to a Claim arising out of or
based upon a Violation which occurs in reliance upon and in conformity with
information furnished in writing to the Company by such Indemnified Person
expressly for use in the Registration Statement or any such amendment thereof or
supplement thereto; (ii) shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of the
Company, which consent shall not be unreasonably withheld; and (iii) with
respect to any prospectus, shall not inure to the benefit of any Indemnified
Person if the untrue statement or omission of material fact contained in the
prospectus was corrected on a timely basis in the prospectus, as then amended or
supplemented, if such corrected prospectus was timely made available by the
Company pursuant to Section 3(c) hereof, and the Indemnified Person was promptly
advised in writing not to use the incorrect prospectus prior to the use giving
rise to a Violation and such Indemnified Person, notwithstanding such advice,
used it. Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Indemnified Person and shall survive
the transfer of the Registrable Securities by the Investors pursuant to Section
9 hereof
b. In connection with any Registration Statement in which an Investor
is participating, each such Investor agrees severally and not jointly to
indemnify, hold harmless and defend, to the same extent and in the same manner
set forth in Section 6(a), the Company, each of its directors, each of its
officers who signs the Registration Statement, its employees, agents and each
person, if any, who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, and any other stockholder
selling securities pursuant to the Registration Statement or any of its
directors or officers or any person who controls such stockholder within the
meaning of the Securities Act or the Exchange Act (collectively and together
with an Indemnified Person, an "INDEMNIFIED PARTY"), against any Claim to which
any of them may become subject, under the Securities Act, the Exchange Act or
otherwise, insofar as such Claim arises out of or is based upon any Violation,
in each case to the extent (and only to the extent) that such Violation occurs
in reliance upon and in conformity with written information furnished to the
Company by such Investor expressly for use in connection with such Registration
Statement; and subject to Section 6(c) such Investor will reimburse any legal or
other expenses (promptly as such expenses are incurred and are due and payable)
reasonably incurred by them in connection with investigating or defending any
such Claim; provided, however, that the indemnity agreement contained in this
Section 6(b) shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of such Investor, which
consent shall not be unreasonably withheld; provided, further, however, that the
Investor shall be liable under this Agreement (including this Section 6(b) and
Section 7) for only that amount as does not exceed the net proceeds actually
received by such Investor as a result of the sale of Registrable Securities
pursuant to such Registration Statement. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of such
Indemnified Party and shall
11
<PAGE>
survive the transfer of the Registrable Securities by the Investors pursuant to
Section 9 hereof Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(b) with respect to any
preliminary prospectus shall not inure to the benefit of any Indemnified Party
if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected on a timely basis in the prospectus, as
then amended or supplemented, and the Indemnified Party failed to utilize such
corrected prospectus.
c. Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action
(including any governmental action), such Indemnified Person or Indemnified
Party shall, if a Claim in respect thereof is to made against any indemnifying
party under this Section 6, deliver to the indemnifying party a written notice
of the commencement thereof, and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume control of the
defense thereof with counsel mutually satisfactory to the indemnifying party and
the Indemnified Person or the Indemnified Party, as the case may be; PROVIDED,
HOWEVER, that such indemnified party shall not be entitled to assume such
defense and an Indemnified Person or Indemnified Party shall have the right to
retain its own counsel with the fees and expenses to be paid by the indemnifying
party, if in the reasonable opinion of counsel retained by the indemnifying
party, the representation by such counsel of the Indemnified Person or
Indemnified Party and the indemnifying party would be inappropriate due to
actual or potential conflicts of interest between such Indemnified Person or
Indemnified Party and any other party represented by such counsel in such
proceeding or the actual or potential defendants in, or targets of, any such
action include both the Indemnified Person or the Indemnified Party and the
indemnifying party and any such Indemnified Person or Indemnified Party
reasonably determines that there may be legal defenses available to such
Indemnified Person or Indemnified Party which are different from or in addition
to those available to such indemnifying party. The indemnifying party shall pay
for only one separate legal counsel for the Indemnified Persons or the
Indemnified Parties, as applicable, and such legal counsel shall be selected by
Investors holding a majority-in-interest of the Registrable Securities included
in the Registration Statement to which the Claim relates (with the approval of
the Initial Investors if they hold Registrable Securities included in such
Registration Statement), if the Investors are entitled to indemnification
hereunder, or by the Company, if the Company is entitled to indemnification
hereunder, as applicable. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 6, except to the
extent that the indemnifying party is actually prejudiced in its ability to
defend such action. The indemnification required by this Section 6 shall be made
by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
7. CONTRIBUTION.
------------
To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that
(i) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in
Section 6, (ii) no person guilty of fraudulent misrepresentation (within the
meaning of Section 1 l(f) of the Securities Act) shall be entitled to
contribution corn any seller of Registrable Securities who was not guilty of
such fraudulent
12
<PAGE>
misrepresentation, and (iii) contribution (together with any indemnification or
other obligations under this Agreement) by any seller of Registrable Securities
shall be limited in amount to the net amount of proceeds received by such seller
from the sale of such Registrable Securities.
8. REPORTS UNDER THE EXCHANGE ACT.
------------------------------
With a view to making available to the Investors the benefits of Rule 144
promulgated under the Securities Act or any other similar rule or regulation of
the SEC that may at any time permit the Investors to sell securities, of the
Company to the public without registration ("RULE 144"), the Company agrees to:
a. File with the SEC in a timely manner and make and keep available
all reports and other documents required of the Company under the Securities Act
and the Exchange Act so long as the Company remains subject to such requirements
(it being understood that nothing herein shall limit the Company's obligations
under the Warrants) and the filing and availability of such reports and other
documents is required for the applicable provisions of Rule 144; and
b. Furnish to each Investor so long as such Investor owns Warrants or
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144, the
Securities Act and the Exchange Act, (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company, and (iii) such other information as may be reasonably requested to
permit the Investors to sell such securities under Rule 144 without
registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
---------------------------------
The rights of the Investors hereunder, including the right to have the
Company register Registrable Securities pursuant to this Agreement, shall be
automatically assignable by each Investor to any transferee of all or any
portion of the Warrants or the Registrable Securities if: (i) the Investor
agrees in writing with the transferee or assignee to assign such rights, and a
copy of such agreement is furnished to the Company after such assignment, (ii)
the Company is furnished with written notice of (a) the name and address of such
transferee or assignee, and (b) the securities with respect to which such
registration rights are being transferred or assigned, (iii) following such
transfer or assignment, the further disposition of such securities by the
transferee or assignee is restricted under the Securities Act and applicable
state securities laws, (iv) the transferee or assignee agrees in writing for the
benefit of the Company to be bound by all of the provisions contained herein,
and (v) such transfer shall have been made in accordance with the applicable
requirements of the Warrants.
10 AMENDMENT OF REGISTRATION RIGHTS.
---------------------------------
Provisions of this Agreement may be amended and the observance thereof
may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with written consent of the Company and
Investors who hold a majority in interest of the Registrable Securities;
provided, however, that no amendment hereto which restricts the ability of an
Investor to elect not to participate in an underwritten offering shall be
effective against any Investor which does not consent in writing to such
amendment. Any amendment or waiver effected in accordance with this Section 10
shall be binding upon each Investor and the Company.
13
<PAGE>
11. MISCELLANEOUS.
--------------
a. A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
b. Any notices required or permitted to be given under the terms of
this Agreement shall be sent by certified or registered mail (return receipt
requested) or delivered personally or by courier or by confirmed telecopy, and
shall be effective five (5) days after being placed in the mail, if mailed, or
upon receipt or refusal of receipt, if delivered personally or by courier or
confirmed telecopy, in each case addressed to a party. The addresses for such
communications shall be:
If to the Company:
SmartServ Online, Inc.
One Station Place
Stamford, CT 06902
Telecopy: (203) 353-5962
Attention: Chairman of the Board
With a copy to:
Parker Chapin Flattau &Klimpl, LLP
1211 Avenue of the Americas
New York, NY 10036
Telecopy: (2 12) 704-6288
Attention: Michael J. Shef, Esquire
and if to any Investor, at such address as such Investor shall have provided in
writing to the Company, or at such other address as each such party furnishes by
notice given in accordance with this Section 1 l(b).
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
d. This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware applicable to contracts made and to be
performed in the State of Delaware. The Company irrevocably consents to the
jurisdiction of the United States federal courts and the state courts located in
the City of New York in the State of New York in any suit or proceeding based on
or arising under this Agreement and irrevocably agrees that all claims in
respect of such suit or proceeding may be determined in such courts. The Company
irrevocably waives the defense of an inconvenient forum to the maintenance of
such suit or proceeding. The Company further agrees that service of process upon
the Company, mailed by first class mail shall be deemed in every respect
effective service of process upon the Company in any such suit or
14
<PAGE>
proceeding. Nothing herein shall affect the Investors' right to serve process in
any other manner permitted by law. The Company agrees that a final
non-appealable judgment in any such suit or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on such judgment or in any other
lawful manner.
e. This Agreement, the Line of Credit Agreement, the Placement Agency
Agreement, the Consulting Agreement and the Warrants (including all schedules
and exhibits thereto) constitute the entire agreement among the parties hereto
with respect to the subject matter hereof and thereof This Agreement, the Line
of Credit Agreement, the Placement Agency Agreement, the Consulting Agreement
and the Warrants supersede all prior agreements and understandings among the
parties hereto with respect to the subject matter hereof and thereof
f. Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
g. The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered to
the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and performed,
all such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other party may
reasonably request in order to carry out the intent and accomplish the purposes
of this Agreement and the consummation of the transactions contemplated hereby.
j. All consents, approvals and other determinations to be made by the
Investors or the Initial Investors pursuant to this Agreement shall be made by
the Investors or the Initial Investors holding a majority in interest of the
Registrable Securities (determined as if all Warrants then outstanding had been
exercised for Registrable Securities) held by all Investors or Initial
Investors, as the case may be.
k. The initial number of Registrable Securities included on any
Registration Statement and each increase (if any) to the number of Registrable
Securities included thereon shall be allocated pro rata among the Investors
based on the number of Registrable Securities held by each Investor at the time
of such establishment or increase, as the case may be. In the event an Investor
shall sell or otherwise transfer any of such holder's Registrable Securities,
each transferee shall be allocated a pro rata portion of the number of
Registrable Securities included on a Registration Statement for such transferor.
Any shares of Common Stock included on a Registration Statement and which remain
allocated to any person or entity which does not hold any Registrable Securities
shall be allocated to the remaining Investors, pro rata based on the number of
shares of Registrable Securities then held by such Investors. For the avoidance
of doubt, the number of Registrable Securities held by any Investor shall be
determined as if all Warrants then outstanding were exercised for Registrable
Securities.
15
<PAGE>
l. For purposes of this Agreement, the term "business day" means any
day other than a Saturday or Sunday or a day on which banking institutions in
the State of New York are authorized or obligated by law, regulation or
executive order to close.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
16
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
SMARTSERV ONLINE, INC.
By: ____________________________
Name:___________________________
Its: ___________________________
INITIAL INVESTORS:
ZANETT LOMBARDIER, LTD.
By: ____________________________
Name:___________________________
Its: ___________________________
THE ZANETT SECURITIES CORPORATION
By: ___________________________
Name:__________________________
Its: __________________________
BRUNO GUAZZONI
___________________________
17
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
SMARTSERV ONLINE, INC.
By: ___________________________
Name:__________________________
Its: __________________________
INITIAL INVESTORS:
ZANETT LOMBARDIER, LTD.
By: ___________________________
Name:__________________________
Its: __________________________
THE ZANETT SECURITIES CORPORATION
By: ___________________________
Name:__________________________
Its: __________________________
BRUNO GUAZZONI
_____________________________
18
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
SMARTSERV ONLINE, INC.
By: ___________________________
Name:__________________________
Its: __________________________
INITIAL INVESTORS:
ZANETT LOMBARDIER, LTD.
By: ___________________________
Name:__________________________
Its: __________________________
THE ZANETT SECURITIES CORPORATION
By: ___________________________
Name:__________________________
Its: __________________________
BRUNO GUAZZONI
___________________________
19
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
SMARTSERV ONLINE, INC.
By: ___________________________
Name:__________________________
Its: __________________________
INITIAL INVESTORS:
ZANETT LOMBARDIER, LTD.
By: ___________________________
Name:__________________________
Its: __________________________
THE ZANETT SECURITIES CORPORATION
By: ___________________________
Name:__________________________
Its: __________________________
BRUNO GUAZZONI
______________________________
20
<PAGE>
EXHIBIT 1
TO
REGISTRATION
RIGHTS
AGREEMENT
[Date]
[Name and address
of transfer agent]
RE: SMARTSERV ONLINE, INC.
Ladies and Gentlemen:
We are counsel to SmartServ Online, Inc., a corporation organized under
the laws of the State of Delaware (the "COMPANY"), and we understand that [Name
of Investor](the "HOLDER") has acquired from the Company warrants (the
"WARRANTS") to acquire shares of the Company's common stock, par value $.01 per
share. Pursuant to a Registration Rights Agreement, dated as of September __,
1997, by and among the Company, the Holder and the other signatories thereto
(the "REGISTRATION RIGHTS AGREEMENT"), the Company agreed with the Holder, among
other things, to register the Registrable Securities (as that term is defined in
the Registration Rights Agreement) under the Securities Act of 1933, as amended
(the "SECURITIES ACT"), upon the terms provided in the Registration Rights
Agreement. In connection with the Company's obligations under the Registration
Rights Agreement, on , 1997, the Company filed a Registration Statement on Form
S-__ (File No. 333-___) (the "REGISTRATION STATEMENT") with the Securities and
Exchange Commission (the "SEC") relating to the Registrable Securities, which
names the Holder as a selling stockholder thereunder. The Registration Statement
was declared effective by the SEC on _______, 1997.
[Other customary introductory and scope of examination language to be
inserted]
Based on the foregoing, we are of the opinion that the Registrable
Securities have been registered under the Securities Act.
[Other customary language to be included.]
Very truly yours,
cc: [Name of Investor]
21
<PAGE>
SCHEDULE 1
SmartServ Online, Inc.
Securities To Be Registered
September 26, 1997
<TABLE>
Warrants/Warrant Shares
Herzog Group
<S> <C> <C>
I. Herzog Group 25,000 Exercisable at $4 per share
B. Geduld 12,500 Exercisable at $4 per share
A. Daponte 22,500 Exercisable at $4 per share
S. Chung 7,500 67,500 Exercisable at $4 per share
-------------
Henry Snow 100,000 Bridge Warrant - Exercisable at $4 per share
Alexandra Building Corporation 5,000 Exercisable at $4.00 per share
Rickel & Associates (1) 150,000 Underwriter's Warrant - Exercisable at $8.25 per share
Rickel & Associates 25,000 Exercisable at $2.00 per share
25,000 Exercisable at $2.25 per share
25,000 Exercisable at $2.75 per share
50,000 Exercisable at $3.00 per share
25,000 Exercisable at $3.50 per share
25,000 Exercisable at $3.75 per share
25,000 200,000 Exercisable at $4.00 per share
-------------
Meyers Pollock Robbins
Michael Ploshnick 2,500 Exercisable at $2.00 per share
2,500 Exercisable at $2.50 per share
5,000 Exercisable at $3.00 per share
10,000 Exercisable at $5.00 per share
4,500 Exercisable at $2.00 per share
4,500 Exercisable at $2.50 per share
9,000 Exercisable at $3.00 per share
18,000 Exercisable at $5.00 per share
Steven Finklestein 4,500 Exercisable at $2.00 per share
4,500 Exercisable at $2.50 per share
9,000 Exercisable at $3.00 per share
18,000 Exercisable at $5.00 per share
Howard Schwartz 4,500 Exercisable at $2.00 per share
4,500 Exercisable at $2.50 per share
9,000 Exercisable at $3.00 per share
18,000 Exercisable at $5.00 per share
David Ganz 4,500 Exercisable at $2.00 per share
4,500 Exercisable at $2.50 per share
9,000 Exercisable at $3.00 per share
18,000 Exercisable at $5.00 per share
Anthony Imbo 4,500 Exercisable at $2.00 per share
4,500 Exercisable at $2.50 per share
9,000 Exercisable at $3.00 per share
18,000 200,000 Exercisable at $5.00 per share
-------------
<PAGE>
Common Shares
Herzog Group
J. Herzog 25,000
B. Geduld 12,500
A. Daponte 12,500
S. Chung 7,500 57,500
-------------
Interbank Companies 10,000 Shares underlying registered warrants
Interbank Companies 194,250
Electronic Trading Corp. 20,000
Rickel & Associates, Inc. 17,735
---------------
1,021,985
---------------
</TABLE>
(1) Excludes 150,000 warrants underlying the Underwriter's Warrant purchasable
by Rickel upon exercise of the Underwriter's Warrant. Such Warrants are
exercisable at $8.60 per share.
[PARKER CHAPIN FLATTAU & KLIMPL LLP LETTERHEAD]
Exhibit 5.1
January 6, 2000
SmartServ Online, Inc.
One Station Place
Stamford, CT 06902
Gentlemen:
We have acted as counsel for SmartServ Online, Inc., a Delaware
corporation (the "Company"), in connection with its Registration Statement on
Form SB-2 (the "Registration Statement") filed with the Securities and Exchange
Commission relating to the registration of 2,558,082 shares of Common Stock, par
value $ .01 per share (the "Shares"), of which 196,470 are outstanding and
2,361,612 are issuable upon exercise of warrants granted by the Company (the
"Warrants").
In connection with the foregoing, we have examined, among other
things, the Registration Statement, the Warrants and originals or copies,
satisfactory to us, of all such other other corporate records and of all such
other agreements, certificates and documents as we have deemed relevant and
necessary as a basis for the opinion hereinafter expressed. In such examination,
we have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals and the conformity with the original
documents of documents submitted to us as copies. As to any facts material to
such opinion, we have, to the extent that relevant facts were not independently
established by us, relied on certificates of public officials and certificates,
oaths and declarations of officers or other representatives of the Company.
Based upon and subject to the foregoing, we are of the opinion that
the 196,470 outstanding Shares being registered pursuant to the Registration
Statement are validly issued, fully paid and non-assessable and the 2,361,612
Shares issuable upon exercise of the Warrants will be, when issued pursuant to
the terms and provisions of the Warrants, validly issued, fully paid and
non-assessable.
We hereby consent to the filing of a copy of this opinion as an exhibit
to the Registration Statement.
Very truly yours,
/s/ Parker Chapin Flattau & Klimpl, LLP
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated October 13, 1999 in Amendment No.1 to the Registration
Statement (Form SB-2 No. 333-92599) and related Prospectus of SmartServ Online,
Inc. for the registration of 2,558,082 shares of its common stock.
/s/Ernst & Young LLP
Stamford, Connecticut
January 6, 2000
