Filed pursuant to Rule 424(b)(3)
Registration No. 333-34940
PROSPECTUS
SMARTSERV ONLINE, INC.
824,496 SHARES OF COMMON STOCK
o The selling stockholders are offering to sell 824,496 shares
of common stock.
o We will not receive any proceeds from the offering of common
stock. Of the 824,490 shares of common stock, 491,496
represent shares of common stock underlying warrants to
purchase common stock. We will receive approximately
$5,480,584 if all of the warrants are exercised. These
proceeds will be used for our general corporate purposes.
o Our common stock is traded and quoted on the Nasdaq National
Market (NMS) under the symbol "SSOL". On May 17, 2000, the
last reported bid price of our common stock was $70.1875 and
the last reported asked price was $70.5000.
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 5.
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 May 22, 2000
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PROSPECTUS SUMMARY..................................................................................3
ABOUT OUR COMPANY...................................................................................3
SUMMARY FINANCIAL DATA..............................................................................3
RECENT DEVELOPMENTS.................................................................................4
RISK FACTORS........................................................................................5
SPECIAL INFORMATION REGARDING FORWARD LOOKING STATEMENTS............................................9
USE OF PROCEEDS.....................................................................................9
MARKET PRICE OF OUR COMMON STOCK AND PUBLIC WARRANTS................................................10
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...........................................11
BUSINESS............................................................................................16
MANAGEMENT..........................................................................................21
PRINCIPAL STOCKHOLDERS..............................................................................27
SELLING STOCKHOLDERS................................................................................29
PLAN OF DISTRIBUTION................................................................................32
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................................33
DESCRIPTION OF CAPITAL STOCK........................................................................33
DELAWARE BUSINESS COMBINATION PROVISIONS............................................................35
INDEMNIFICATION OF DIRECTORS AND OFFICERS...........................................................35
WHERE YOU CAN FIND MORE INFORMATION.................................................................36
TRANSFER AGENT......................................................................................37
LEGAL MATTERS.......................................................................................37
EXPERTS.............................................................................................37
INDEX TO FINANCIAL STATEMENTS......................................................................F-1
</TABLE>
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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 5 and the Financial
Statements and notes to those statements beginning on page F-1 of this
document.
ABOUT OUR COMPANY
Please note that throughout this prospectus, the words "we", "our" or
"us" refer to SmartServ Online, Inc. and not to the selling stockholders.
SmartServ Online, Inc. was organized in 1993. We offer a range of
services based on a business-to-business model designed to facilitate
web-to-wireless e-commerce by providing transactional and information
services to our alliance partners. We have developed online financial,
transactional and media applications using a unique "device independent"
delivery solution and make these services available to wireless telephones
and personal digital assistants, personal computers and the Internet
through our application software and communications architecture. Our
services facilitate stock trading and disseminate real-time stock quotes,
business and financial news, sports information, private-labeled electronic
mail, national weather reports and other business and entertainment
information.
Our executive offices are located at One Station Place, Stamford,
Connecticut 06902 and our telephone number is (203) 353-5950.
SUMMARY FINANCIAL DATA
This summary financial data is derived from our financial statements
for the fiscal years ended June 30, 1999, June 30, 1998 and June 30, 1997,
and for the fiscal quarters ended December 31, 1999 and December 31, 1998
certain of which are included elsewhere herein. You should read the
following summary financial data in conjunction with the financial
statements and notes to those statements.
<TABLE>
<CAPTION>
Six Months Ended
December 31 Years Ended June 30
----------------------------------------- ------------------------------------------------
STATEMENT OF OPERATIONS 1998 1999 1997 1998 1999
------------ -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 693,729 $ 1,720,913 688,610 $ 873,476 $ 1,443,781
Loss from Operations (1,579,563) (21,769,714)* (4,457,343) (4,488,307) (3,750,471)
Net Loss (2,387,452) (21,096,231)* (4,434,482) (5,040,009) (7,124,126)
Basic and Diluted Loss per
Share (2.36) (15.19) (7.20) (7.65) (6.44)
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET At December 31 At June 30
---------------------------------------- ---------------------------------------------------
1999 1997 1998 1999
------------------ ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents $ 371,581 $ 93,345 $ 354,225 $ 2,165,551
Working Capital Deficiency (2,163,957) (901,026) (1,850,287) (1,822,340)
Total Assets 2,459,843 1,246,689 1,276,853 3,820,598
Total Liabilities and
Deferred Revenues 6,286,589 1,945,017 2,523,714 8,527,898
Shareholders' Deficiency (3,826,746) (698,328) (1,246,861) (4,707,300)
</TABLE>
* Included in such amount are noncash charges for stock-based compensation
costs of $21,635,019.
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RECENT DEVELOPMENTS
On May 15, 2000, SmartServ sold 353,535 shares of common stock at
$49.50 per share, resulting in gross proceeds of $17,500,000.
On May 16, 2000, SmartServ's common stock and public warrants
commenced trading on the Nasdaq National Market as SSOL and SSOLW, respectively.
For the three months ended March 31, 2000, SmartServ anticipates
reporting revenues of $989,943, loss from operations of $14,022,545, net loss of
$13,987,008 and basic and diluted loss per share of $4.33, as compared with
revenues of $334,624, loss from operations of $959,228, net loss of $2,378,910
and basic and diluted loss per share of $1.98, for the three months ended March
31, 1999. Included in both the loss from operations and the net loss for the
three months ended March 31, 2000 abd 1999 are non cash charges for stock-based
compensation of $14,001,000 and $399,100, respectively.
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RISK FACTORS
An investment in our common stock is highly speculative and involves a
high degree of risk. Therefore, you should consider all of the risk factors
discussed below, as well as the other information contained in this document.
You should not invest in our common stock unless you can afford to lose your
entire investment and you are not dependent on the funds you are investing.
WE HAVE A HISTORY OF LOSSES AND IF WE DO NOT ACHIEVE PROFITABILITY WE
MAY NOT BE ABLE TO CONTINUE OUR BUSINESS
We have incurred net losses of $7,124,126 for the year ended June 30,
1999, $5,040,009 for the year ended June 30, 1998, $4,434,482 for the year ended
June 30, 1997 and $2,966,287 for the year ended June 30, 1996. Additionally, we
have incurred a net loss of $21,096,231 for the six month period ended December
31, 1999. However, included in the December 31, 1999 operating results were
noncash charges for stock-based compensation of $21,635,019. At December 31,
1999, we had an accumulated deficit of $43,042,236 and a deficiency of net
assets of $3,826,746. Losses have resulted principally from costs incurred in
connection with activities aimed at developing our software, information and
transactional services and from costs associated with our marketing and
administrative activities. We have incurred substantial expenses and commitments
and continue to operate at a deficit on a monthly basis. No assurance can be
provided that we will be able to develop revenues sufficient to support our
operations.
WE DEPEND ON ONE CUSTOMER, AND THE LOSS OF THIS CUSTOMER COULD
ADVERSELY AFFECT OUR OPERATING RESULTS
Currently, substantially all of our revenues are generated through our
licensing arrangement with Data Transmission Network Corporation, or DTN. Our
results of operations will depend upon numerous factors including sustained
revenues from our arrangement with DTN, the regulatory environment, introduction
and market acceptance of new services, establishing alliances with strategic
marketing partners and competition. If we default under the license agreement,
DTN may at its sole cost elect to provide its own maintenance to both the system
software and related hardware. Under these circumstances, DTN will have the
right to own the system software, including the source codes, and related
hardware, and DTN will have no further obligation to pay us licensing fees which
we currently rely on for a significant part of our revenues. We anticipate that
our results of operations for the immediate future will continue to depend to a
significant extent upon revenues from DTN and a small number of customers. In
order to increase our revenues, we will need to attract and retain additional
customers. Our failure to obtain a sufficient number of additional customers
could adversely affect our results of operations.
OUR INDEPENDENT AUDITORS HAVE ISSUED A REPORT WHICH MAY HURT OUR
ABILITY TO RAISE ADDITIONAL FINANCING AND THE PRICE OF OUR COMMON STOCK
The report of our independent auditors on our financial statements for
the years ended June 30, 1999 and 1998 contains an explanatory paragraph which
indicates that we have had recurring operating losses and a working capital
deficiency which raise substantial doubt about our ability to continue as a
going concern. This report may make it more difficult for us to raise additional
debt or equity financing needed to run our business and is not viewed favorably
by analysts of, or investors in, our common stock. We urge potential investors
to review this report before making a decision to invest in our company.
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OUR BUSINESS DEPENDS UPON STRATEGIC MARKETING PARTNERSHIPS WHICH MAY
NOT MATERIALIZE
We intend to sell our services primarily by entering into non-exclusive
agreements with strategic marketing partners who would brand our "bundled"
information and transaction services with their own private label, promote the
packaged offering and then distribute our information and e-commence services to
their clients. Our success will depend on:
o our ability to enter into agreements with strategic marketing
partners;
o the ultimate success of these strategic marketing partners;
and
o the ability of the strategic marketing partners to
successfully market our services.
Our failure to complete our strategic alliance strategy or the failure
of the strategic marketing partners to develop and sustain a market for our
services would have a material adverse affect on our overall performance.
Although we view strategic marketing alliances as a major factor in the
successful commercialization of our services, there can be no assurance that the
strategic marketing partners would view an alliance with us as significant to
their businesses and any potential benefits from these arrangements may not
materialize.
THE MARKET FOR OUR BUSINESS IS DEVELOPING AND MAY NOT ACHIEVE THE
GROWTH WE EXPECT
Online information and transactional services, as well as the
convergence of wireless and Internet technologies, are developing markets. Our
future growth and profitability will depend, in part, upon consumer acceptance
of online information and transactional services in general and a significant
expansion in the consumer market for the delivery of such services via wireless
telephones and personal digital assistants, and personal computers. Even if
these markets experience substantial growth, there can be no assurance that our
services will be commercially successful or will benefit from such growth.
Further, even if initially successful, any continued development and expansion
of a market for our services will depend in part upon our ability to create and
develop additional services and adjust existing services in accordance with
changing consumer preferences, all at competitive prices. Our failure to develop
new services and generate revenues could have a material adverse effect on our
financial condition and operating results.
WE COMPETE AGAINST LARGER, WELL KNOWN COMPANIES WITH GREATER RESOURCES
THAN WE HAVE
The market for Web-based information and transactional services is
highly competitive and involves rapid innovation and technological change,
shifting consumer preferences and frequent new service introductions. Most of
our competitors and potential competitors have substantially greater financial,
marketing and technical resources than we have. Increased competition in the
market for our services could limit our ability to expand and materially and
adversely affect our results of operations.
The principal competitive factors in both the Internet-based and
wireless services industry include content, product features and quality, ease
of use, access to distribution channels, brand recognition, reliability and
price. We believe that potential new competitors, including large multimedia and
information system companies, are increasing their focus on transaction
processing. We face increasing competition from other emerging services
delivered through personal computers and wireless devices such as developing
transactional services offered by Data Broadcasting Corporation, Electronic Data
Systems Corp. and other
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<PAGE>
Web-based software and online companies. Established online information services
including those offered by America Online, Inc., offer competing services
delivered through personal computers. Although in its infancy, the wireless
arena too has its competitors, such as Datalink Systems Corporation, I 3 Mobile,
Inc., Aether Systems, Inc. (a/k/a Aether Technologies), 724 Solutions, Inc. and
W-Trade Technologies, Inc. We expect competition to increase from existing
competitors and from new competitors, including telecommunications companies.
The information content provided through our software and communication
architecture is generally purchased through non-exclusive distribution
agreements. While we are not dependent on any single content provider, existing
and potential competitors may enter into agreements with these and other such
providers and thereby acquire the ability to deliver online information and
transactional services substantially similar to those provided by us.
WE ARE HIGHLY DEPENDENT ON OUR EXECUTIVE OFFICERS AND SEVERAL TECHNICAL
EMPLOYEES, THE LOSS OF ANY OF WHOM COULD HAVE AN ADVERSE IMPACT ON OUR FUTURE
OPERATIONS
We believe that due to the rapid pace of innovation within our
industry, factors such as the technological and creative skills of our personnel
are more important in establishing and maintaining a leadership position within
the industry than legal protections of our technology. We are dependent on our
ability to recruit, retain and motivate high quality personnel. However,
competition for such personnel is intense and the inability to attract and
retain additional qualified employees or the loss of current key employees could
materially and adversely affect our business, operating results and financial
condition. We maintain and are the sole beneficiary of a key-person life
insurance policy on the life of (1) Mr. Sebastian E. Cassetta, our Chief
Executive Officer, in the amount of $1,000,000 and (2) Mr. Mario F. Rossi, our
Senior Vice President of Technology, in the amount of $500,000. The loss of the
services of either Mr. Cassetta or Mr. Rossi would have a material adverse
effect upon our business, financial condition and results of operations.
PROVISIONS IN OUR CHARTER MAY MAKE IT MORE DIFFICULT FOR A PERSON TO
ACQUIRE US AT A PREMIUM TO OUR CURRENT MARKET VALUE
Our charter restricts the ability of our stockholders to call a
stockholders meeting and provides that our stockholders may not act by written
consent or change the number of directors and classes of our board of directors.
These provisions may have the effect of deterring or delaying certain
transactions involving an actual or potential change in control of SmartServ,
including transactions in which our stockholders might otherwise receive a
premium for their shares over then current market prices, and may limit the
ability of our stockholders to approve transactions that they may deem to be in
their best interests.
YOUR OWNERSHIP INTEREST, VOTING POWER AND THE MARKET PRICE OF OUR
COMMON STOCK MAY DECREASE BECAUSE WE HAVE ISSUED, AND MAY CONTINUE TO ISSUE, A
SUBSTANTIAL NUMBER OF SECURITIES CONVERTIBLE OR EXERCISABLE INTO OUR COMMON
STOCK
We have issued common stock, options and warrants to purchase our
common stock, and in the future we may issue additional shares of common stock,
options, warrants, preferred stock or other securities exercisable for or
convertible into our common stock. A substantial number of shares of common
stock are already available for sale in, or have been sold into, the public
market pursuant to a registration statement covering 2,558,082 shares of common
stock. We also have obligations to the holders of warrants representing
1,274,144 shares, to register such shares for resale. Additional shares are
available for sale under Rule 144 of the Securities Act. In addition, 824,496
shares of our common stock will be registered
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<PAGE>
under this document and will be freely saleable by the selling stockholders.
Sales of these shares or the market's perception that these sales could occur
may cause the market price of our common stock to fall and may make it more
difficult for us to sell equity securities in the future at a time and price
that we deem appropriate or to use equity securities as consideration for future
acquisitions. In addition, we have outstanding prepaid warrants convertible into
common stock at a discount to the market price of our common stock. Such prepaid
warrants are currently convertible into 437,142 shares of our common stock;
however, the number of shares of common stock issuable upon such conversion
could increase significantly in the event of a decrease in the trading price of
the common stock below $2.30 per share. Holders of common stock could
potentially experience significant dilution upon conversion of these prepaid
warrants.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS
We have designed and developed our own information platform,
"SmartServ", based on Sun Microsystems, Inc. computers and Oracle Corp.'s
version 7.X relational database manager, to support a variety of end user
devices. Although we intend to protect our rights vigorously, there can be no
assurance that any of the measures to protect our proprietary rights explained
below will be successful. In an effort to protect our proprietary rights, we
rely upon a combination of contract provisions and copyrights, trade secret laws
and a service mark. We license the use of our services to our strategic
marketing partners under agreements that contain terms and conditions
prohibiting the unauthorized reproduction of our software and services. We seek
to protect the source code of our application software and communications
architecture as a trade secret and as an unpublished copyrighted work.
We believe that our service mark "SmartServ Online" has significant
value and is important to the marketing of our services. There can be no
absolute assurance, however, that our mark does not or will not violate the
proprietary rights of others, that our mark would be upheld if challenged or
that we would not be prevented from using our mark, any of which could have an
adverse effect on us. In addition, there can be no assurance that we will have
the financial resources necessary to enforce or defend our mark. We believe that
our software, services, service mark and other proprietary rights do not
infringe on the proprietary rights of third parties. However, there can be no
assurance that third parties will not assert infringement claims against us with
respect to current features, content or services or that any such assertion may
not require us to enter into royalty arrangements or result in litigation.
OUR LICENSE ARRANGEMENT WITH DTN CONTAINS PROVISIONS WHICH ALLOW DTN TO
TERMINATE OUR RELATIONSHIP AND TAKE OWNERSHIP OF CERTAIN OF OUR PROPRIETARY
TECHNOLOGY UNDER CERTAIN CIRCUMSTANCES
We granted DTN an exclusive perpetual worldwide license to our
Internet-based (1) real-time stock quote product, (2) online trading vehicle for
customers of small and medium sized brokerage companies, (3) administrative
reporting package for brokers of small and medium sized brokerage companies and
(4) order entry/routing system. Under the license agreement, we are required to
maintain certain systems' performance standards and to satisfy other general
business requirements. Our inability to maintain compliance with the license
agreement could result in a default thereunder. In addition, a change of control
of SmartServ is an event of default under the license agreement. A change of
control includes a change in the majority of the members on our board of
directors. Under a letter agreement with Zanett Capital, Inc., Zanett Capital
may elect a majority of the board under certain circumstances, including the
failure of our common stock to be listed on Nasdaq.
If an event of default occurs under the license agreement, DTN may at
its sole cost elect to provide its own maintenance to both the system software
and related hardware. Under these circumstances, DTN will have the right to own
the system software, including the source codes, and related hardware, and DTN
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<PAGE>
will have no further obligation to pay us licensing fees which we currently rely
on for a significant part of our revenues.
WE ARE INVOLVED IN SEVERAL PENDING LEGAL PROCEEDINGS WHICH, IF RESOLVED
AGAINST US, COULD CAUSE DILUTION TO OUR STOCKHOLDERS AND HAVE A MATERIAL
NEGATIVE IMPACT ON OUR OPERATIONS
From time to time we have been, and expect to continue to be, a party
to legal proceedings and claims in the ordinary course of our business. Our
ongoing legal proceedings with Michael Fishman, Ronald G. Weiner and
Commonwealth Associates, L.P. have been set forth in the Business section of
this document under the heading "Legal Proceedings". In addition to unspecified
damages of at least $250,000, Mr. Weiner seeks 10% of our outstanding equity
securities. Commonwealth seeks 13,333 shares of our common stock or damages of
at least $1,770,000. While we expect to contest these matters vigorously,
litigation is inherently uncertain and an adverse judgment on any of these
claims could cause dilution to our stockholders as well as harm our business.
Even if not meritorious, any of these current and future matters could require
the expenditure of significant financial and managerial resources.
SPECIAL INFORMATION REGARDING FORWARD LOOKING STATEMENTS
Some of the statements in this prospectus or in the documents we
incorporate by reference are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve certain known and unknown risks, uncertainties and other
factors which may cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by these forward-looking statements. These factors include,
among others, the factors set forth above under "Risk Factors." The words
"believe," "expect," "anticipate," "intend" and "plan" and similar expressions
identify forward-looking statements. We caution you not to place undue reliance
on these forward-looking statements. We undertake no obligation to update or
revise any forward-looking statements or to publicly announce the result of any
revisions to any of the forward-looking statements in this document to reflect
future events or developments.
USE OF PROCEEDS
We will not receive any proceeds from the sale by the selling
stockholders of the common stock offered by this prospectus. The shares of
common stock will be sold from time to time by the selling stockholders at
prevailing market prices. We will receive up to $5,480,584 upon exercise of the
warrants to purchase 491,496 shares of common stock. We expect to use these
proceeds, if any, for general coporate purposes.
MARKET PRICE OF OUR COMMON STOCK AND PUBLIC WARRANTS
On May 16, 2000, SmartServ's $.01 par value common stock commenced
trading on the Nasdaq National Market as SSOL. On this date, our Redeemable
Common Stock Purchase Warrants, or public warrants, also commenced trading on
the Nasdaq National Market as SSOLW.
Due to SmartServ's inability to sustain the net tangible asset/market
capitalization/net income requirements for continued listing on the Nasdaq
SmallCap Market, SmartServ's common stock and public warrants were delisted from
the Nasdaq SmallCap Market on May 20, 1998. Consequently, from May 20, 1998 to
May 16, 2000, SmartServ's securities traded on the OTC Bulletin Board. From
March 21, 1996 to May 20, 1998 our securities traded on the Nasdaq SmallCap
Market.
From May 20, 1998 to May 16, 2000 our securities traded on the OTC
Bulletin Board. From March 21, 1996 to May 20, 1998 our securities traded on the
Nasdaq SmallCap Market.
On October 15, 1998, our stockholders approved a one-for-six reverse
stock split which became effective on October 26, 1998.
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The following table sets forth the high and low prices for the common
stock and public warrants during the periods indicated as reported by the Nasdaq
National Market, the OTC Bulletin Board and the Nasdaq SmallCap Market, as
applicable. Such amounts (and all other share and price information contained in
this document) have been adjusted to reflect the reverse stock split.
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
------------ --------
HIGH LOW HIGH LOW
---- --- ---- ---
Year Ending June 30, 2000
- -------------------------
<S> <C> <C> <C> <C>
First Quarter $ 1.531 $ .719 $ .156 $ .063
Second Quarter 24.625 .719 6.500 .070
Third Quarter 186.000 17.625 64.000 5.000
Fourth Quarter 129.000 25.000 47.031 10.500
(through April 10, 2000)
Year Ended June 30, 1999
- ------------------------
First Quarter $ 4.313 $ 1.875 $ 2.250 $ .375
Second Quarter 4.125 1.031 .531 .063
Third Quarter 4.875 1.500 .625 .063
Fourth Quarter 2.500 1.500 .250 .100
Year Ended June 30, 1998
- ------------------------
First Quarter $ 18.750 $ 6.750 $ 4.500 $ .750
Second Quarter 21.000 4.128 5.250 .750
Third Quarter 19.125 3.750 6.563 .938
Fourth Quarter 22.500 3.000 9.188 1.688
</TABLE>
As of May 17, 2000, we had 5,271,811 shares of common stock outstanding
held by 115 shareholders of record. We estimate that our common stock is held by
approximately 2,000 beneficial holders. As of such date, we had 1,725,000 public
warrants outstanding held by 17 warrant holders of record.
DIVIDENDS
We have never paid a cash dividend on our common stock. It is our
present policy to retain earnings, if any, to finance the development and growth
of our business. Accordingly, we do not anticipate that cash dividends will be
paid until our earnings and financial condition justify such dividends, and
there can be no assurance that we can achieve such earnings.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PLAN OF OPERATION
SmartServ delivers Internet-based and wireless content and trade order
routing solutions that enable the processing of transactions for its strategic
alliances, or Strategic Marketing Partners, and their customers. SmartServ has
developed online financial, transactional and media applications using a unique
"device-independent" delivery solution.
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SmartServ's plan of operation includes programs for the sale of its
information and transactional application services through Strategic Marketing
Partners utilizing a "business-to-business" strategy. Such a strategy provides
access to a large number of potential subscribers and allows SmartServ to
maximize its market reach at minimal operating costs. The flexibility of
SmartServ's application software and communications architecture enables the
customization of each information package offered to each Strategic Marketing
Partner, and in turn to their end users.
As an early entrant in the dynamic market for the distribution of
financial information and transaction services via wireless telephones and
personal digital assistants, or PDAs, SmartServ is developing strategic
marketing relationships with wireless equipment manufacturers, carriers and
other value-added service providers and potential corporate partners. SmartServ
continuously seeks to increase product performance and widen its distribution by
building and maintaining this network of Strategic Marketing Partners. Combining
SmartServ's application development and data platform with the core competencies
of its Strategic Marketing Partners, SmartServ is offering a packaged turnkey
solution for extending content and transactions to the wireless environment.
Management believes the wireless area has tremendous potential for distribution
of SmartServ's information products and as a source of revenues from "fee based"
transactions such as routing stock order entries; however, we have yet to derive
any revenues from such efforts.
Management believes that most of SmartServ's revenues will continue to
be derived from consumers who purchase its services through Strategic Marketing
Partners. SmartServ anticipates that Strategic Marketing Partners will brand its
bundled information services with their own private label and promote and
distribute SmartServ's packaged offering to their clients. SmartServ has the
ability to customize the information package to be offered to each Strategic
Marketing Partner, by device. With the licensing of four of its Internet
products by DTN in 1998, SmartServ has discontinued efforts to develop a direct
subscriber base.
Management anticipates that staffing requirements associated with the
implementation of its plan of operation will result in the addition of a minimum
of six to ten people during the period ending June 30, 2000. Such personnel will
be added to assist with the programming requirements of Strategic Marketing
Partners' product offerings, for customer support and sales and marketing.
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1999 VS. SIX MONTHS ENDED DECEMBER 31, 1998
During the six months ended December 31, 1999 and 1998, SmartServ
recorded revenues of $1,720,913 and $693,729. Substantially all of such revenues
were earned through SmartServ's licensing agreement with DTN.
During the six months ended December 31, 1999, SmartServ incurred costs
of revenues of $445,412. Such costs consisted primarily of information and
communication costs ($87,300), personnel costs ($123,500), and computer hardware
leases, depreciation and maintenance costs ($161,300). During the six months
ended December 31, 1998, SmartServ incurred costs of revenues of $389,521. These
costs consist primarily of information and communication costs ($164,800),
personnel costs ($62,000), and computer hardware leases, depreciation and
maintenance costs ($160,800). Product development expenses were $134,222 and
$51,216 for the six months ended December 31, 1999 and 1998, respectively. In
1999 such costs consisted primarily of personnel costs of $13,500 and
amortization expense relating to capitalized software development costs of
$120,700. In 1998 such costs consisted primarily of personnel costs ($4,500),
amortization expense relating to capitalized software development costs
($19,400) and computer system
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consultants ($18,800). During the six months ended December 31, 1999 and 1998,
SmartServ capitalized $553,295 and $495,815, respectively, of development costs
in accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed", or Statement 86.
During the six months ended December 31, 1999, SmartServ incurred
selling, general and administrative expenses of $1,302,974, primarily for
personnel costs ($613,500), facilities ($97,100), marketing and advertising
costs ($159,400) and professional fees ($347,800). During the six months ended
December 31, 1998, SmartServ incurred selling, general and administrative
expenses of $1,167,130. Such expenses were incurred primarily for personnel
costs ($395,300), marketing and advertising costs ($156,600), professional fees
($397,300), facilities ($115,600) and telecommunication costs ($33,700).
During the six months ended December 31, 1999, SmartServ incurred
noncash compensation costs of $21,635,019 in connection with the grant of stock
options, warrants and other compensation arrangements. Certain of the stock
option arrangements are subject to adjustment based on changes in the fair value
of SmartServ's common stock. SmartServ recorded noncash compensation costs of
$664,425 during the six months ended December 31, 1998.
Interest income for the six months ended December 31, 1999 and 1998
amounted to $13,033 and $2,908, respectively. During the six months ended
December 31, 1999 and 1998, interest income was earned primarily from
SmartServ's cash balances. Interest and financing costs for the six months ended
December 31, 1999 and 1998 were $30,250 and $810,797, respectively. At December
31, 1999, SmartServ received a waiver of certain events of default under its
prepaid warrants, and accordingly, reversed previously recorded penalties
amounting to $717,700. During the six months ended December 31, 1998, such costs
were incurred in connection with the $500,000 interim financing in December
1998, and the issuance of 50,000 shares of common stock to holders of $1,669,000
of prepaid warrants, in consideration of such holders agreeing to restrictions
on the exercise of the prepaid warrants and the resale of the shares of common
stock issuable upon such exercise.
FISCAL YEAR ENDED JUNE 30, 1999 VERSUS FISCAL YEAR ENDED JUNE 30, 1998
During the year ended June 30, 1999, SmartServ recorded revenues of
$1,443,781. Substantially all of such revenues were earned through its licensing
agreement with DTN. During the year ended June 30, 1998, SmartServ earned
revenues of $873,476. Of such amount, $210,000 was earned through the
relationship with DTN, while $454,000 was earned from the sale of the SmartServ
Pro stock quote services.
During the year ended June 30, 1999, SmartServ incurred costs of
services of $994,465. Such costs consisted primarily of information and
communication costs ($267,600), personnel costs ($290,100), computer hardware
leases and maintenance ($339,400) and systems consultants ($97,300). During the
year ended June 30, 1998, SmartServ incurred costs of revenues of $1,216,761.
Such costs consisted primarily of information and communication costs
($551,700), personnel costs ($310,600), and computer hardware leases and
maintenance ($339,300). Information and communication costs decreased in 1999
compared to 1998 as a result of the licensing agreement entered into between
SmartServ and DTN. Personnel costs decreased in 1999 compared to 1998 as a
result of the migration of personnel resources into product development areas in
1999. Product development costs were $193,188 vs. $923,082 for the year ended
June 30, 1998. The decrease in the product development costs resulted from the
capitalization of software development costs related to certain product
enhancements in accordance with Statement of Financial Accounting Standards No.
86. During the year ended June 30, 1999, SmartServ capitalized $765,000 of
development costs in accordance with Statement 86. No such costs were
capitalized during the year ended June 30, 1998. During the year ended June 30,
1999, product development costs consisted primarily of the amortization of
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capitalized software development costs. During the year ended June 30, 1998,
product development costs consisted primarily of personnel costs ($541,400) and
computer system consultants ($335,000).
During the year ended June 30, 1999, SmartServ incurred selling,
general and administrative expenses of $4,006,599 vs. $3,221,940 for the year
ended June 30, 1998. During the year ended June 30, 1999, such costs were
incurred primarily for personnel costs ($1,148,400), facilities ($240,500),
marketing and advertising costs ($263,100), professional fees ($2,150,000), and
telecommunications costs ($69,500). During the year ended June 30, 1998, such
costs were incurred primarily for personnel costs ($1,349,000), facilities
($216,000), marketing and advertising costs ($240,400), professional fees
($1,051,400) and telecommunications costs ($73,100). Included in professional
fees are noncash charges of $1,349,020 in 1999 and $660,576 in 1998 representing
the amortization of deferred costs in connection with the issuance of warrants
to financial consultants.
Interest income for the year ended June 30, 1999 amounted to $4,767 vs.
$40,788 for the year ended June 30, 1998. Such amounts were earned primarily
from SmartServ's investments in highly liquid commercial paper. Interest and
financing costs for the year ended June 30, 1999 were $3,378,422. Such costs
were incurred primarily in connection with the issuance of the 8% convertible
notes ($2,254,700) and SmartServ's default pursuant to the prepaid warrants
($1,095,700). Of such amounts, $2,593,800 were noncash charges for the issuance
of common stock or warrants to purchase common stock as settlement of such
obligations. Interest and financing costs for the year ended June 30, 1998 were
$592,490. These costs were incurred in connection with the origination of
SmartServ's May 1997 line of credit. Of such amount, $463,600 represents the
noncash charges associated with the issuance of certain common stock purchase
warrants.
Loss per share was $6.44 per share for the year ended June 30, 1999 vs.
$7.65 per share for the year ended June 30, 1998. While the net loss increased
by $2,084,117, SmartServ's weighted average shares of common stock outstanding
in 1999 increased by 446,569 shares, thereby affecting the per share loss.
FISCAL YEAR ENDED JUNE 30, 1998 VERSUS FISCAL YEAR ENDED JUNE 30, 1997
During the year ended June 30, 1998, SmartServ recorded revenues of
$873,476 from the sale of its information services vs. $688,610 during the year
ended June 30, 1997. Included in revenues for the year ended June 30, 1998 was
$210,000 resulting from SmartServ's licensing agreement with DTN and $454,000
from the sale of the SmartServ Pro stock quote services. During the year ended
June 30, 1997, SmartServ earned revenues from the enhancement, implementation
and marketing of services to Schroder & Co. Inc. of $342,200.
During the year ended June 30, 1998, SmartServ incurred costs of
services of $1,216,761. Such costs consisted primarily of information and
communication costs ($551,700), personnel costs ($310,600) and computer hardware
leases and maintenance ($339,300). During the year ended June 30, 1997, with
SmartServ's departure from the development stage, it incurred costs of revenues
of $1,133,884. Such costs consisted primarily of information and communication
costs ($390,000), personnel costs ($417,500), computer hardware leases and
maintenance ($201,800) and screenphone purchases ($95,300). Product development
costs were $923,082 vs. $1,150,224 for the year ended June 30, 1997. During the
year ended June 30, 1998, such costs consisted primarily of personnel costs
($541,400) and computer system consultants ($335,000). During the year ended
June 30, 1997 such costs consisted primarily of personnel costs ($686,100) and
computer system consultants ($454,000). Included in personnel costs in 1997 is a
noncash charge of approximately $73,000 for the change in market value of
employee stock options.
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,
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1998, such costs were incurred primarily for personnel costs ($1,349,000),
facilities ($216,000), advertising and marketing costs ($240,400), professional
fees ($1,051,400) and telecommunications costs ($73,100). During the year ended
June 30, 1998, selling, general and administrative costs increased $360,095 from
the prior year as a result of increases in professional fees ($593,000),
personnel costs ($403,500) and facilities costs ($55,700). Such increases were
offset by a decrease in advertising and marketing expenses of $600,900.
Professional fees includes a noncash charge of $527,576, representing
amortization of deferred compensation in connection with the issuance of 592,592
common stock purchase warrants to a financial consultant.
Interest income for the year ended June 30, 1998 amounted to $40,788
vs. $74,507 for the year ended June 30, 1997. Such amounts were earned primarily
from SmartServ's investments in highly liquid commercial paper. Interest and
financing costs for the year ended June 30, 1998 were $592,490. These costs were
incurred in connection with the origination of SmartServ's May 1997 line of
credit. Of such amount, $463,600 represents the noncash charges associated with
the revaluation of certain common stock purchase warrants granted to Zanett
Securities Corporation. Interest and financing costs for the year ended June 30,
1997 were $54,646. Such amounts were incurred in connection with SmartServ's May
1997 line of credit.
Loss per share was $7.65 per share for the year ended June 30, 1998 vs.
$7.20 per share for the year ended June 30, 1997. While the net loss increased
by $605,527, SmartServ's weighted average shares of common stock outstanding
increased by 43,201 shares, thereby affecting the per share loss.
CAPITAL RESOURCES AND LIQUIDITY
Since SmartServ's inception on August 20, 1993 through March 21, 1996,
the date of the initial public offering of securities ("IPO"), SmartServ funded
its operations through a combination of private debt and equity financings
totaling $4,160,000 and $12,877,500, respectively.
In May 1997, SmartServ arranged a line of credit facility with Zanett
Lombardier, Ltd. Such line of credit was originated for a maximum borrowing
amount of $550,000. In July and September 1997, the facility was amended to
allow for additional borrowings of up to $222,222. In conjunction with the
origination of the line of credit facility, SmartServ issued 56,627 common stock
purchase warrants to Zanett Lombardier, Ltd. Similarly, SmartServ issued 11,438
warrants for each of the July and September amendments.
In May 1997, SmartServ entered into a three year noncancelable capital
lease for certain computer equipment used to provide information services. The
cost of this equipment ($246,211) is being financed through the manufacturer's
finance division.
On September 30, 1997, Zanett Securities Corporation, now known as
Planet Zanett Internet Incubator, acting as placement agent for SmartServ,
completed a private placement of $4 million of its prepaid common stock purchase
warrants. The prepaid warrants expire on September 30, 2000. As part of the
placement, Zanett Lombardier, Ltd. converted a note payable of $772,222, issued
pursuant to the line of credit facility dated May 29, 1997, as amended, and
accrued interest thereon of $63,837 into prepaid warrants. The net proceeds of
the placement of $2,643,941 were used for general working capital requirements.
On April 23, 1998, SmartServ entered into a Software License and
Service Agreement with DTN, whereby SmartServ licensed to DTN the rights to
market three of SmartServ's Internet products. SmartServ received $850,000 upon
execution of the agreement and received minimum monthly payments of $100,000
through April 1999.
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On June 24, 1999, SmartServ and DTN entered into a License Agreement
that amended the Software License and Service Agreement dated April 23, 1998. In
consideration of the receipt of $5.175 million, SmartServ granted DTN an
exclusive perpetual worldwide license to its Internet-based (1) real-time stock
quote product, (2) online trading vehicle for customers of small and medium
sized brokerage companies, (3) administrative reporting package for brokers of
small and medium sized brokerage companies and (4) order entry/routing system.
Additionally, SmartServ received $324,000 in exchange for an agreement to issue
warrants to purchase 300,000 shares of its common stock at an exercise price of
$8.60 per share. SmartServ has agreed to continue to operate these products and
provide maintenance and enhancement services in exchange for a percentage of the
revenues earned by DTN therefrom. The cost of the SmartServ's commitment to
provide such maintenance and enhancement services is limited to a maximum of 20%
of the revenues earned by SmartServ. If SmartServ defaults under the license
agreement, DTN may at its sole cost elect to provide its own maintenance to both
the system software and related hardware. Under these circumstances, DTN will
have the right to own the system software, including the source codes, and
related hardware, and DTN will have no further obligation to pay SmartServ
licensing fees which SmartServ currently relies on for a significant part of its
revenues. None of SmartServ's wireless products were included in this
transaction. Although SmartServ believes that DTN has the experience and the
financial ability to distribute its services to thousands of potential
customers, there can be no assurance that the products and services will be
accepted by the ultimate consumer on a widespread basis.
In November 1998, SmartServ completed a financing of $550,000 of its
securities. SmartServ sold five and one-half (5.5) units, each consisting of a
secured convertible 8% note in the principal amount of $100,000 and warrants to
purchase common stock. The notes and the warrants were initially convertible and
exercisable, respectively, at $.60 per share of common stock. Such notes were
repaid in June 1999.
On July 1, 1999, SmartServ entered into an agreement with Arnhold & S.
Bleichroeder, Inc. to settle SmartServ's obligation to Arnhold & S. Bleichroeder
under the default provisions of the prepaid warrants. In accordance with that
agreement, SmartServ paid Arnhold & S. Bleichroeder $325,000 to redeem the
prepaid warrants and issued 180,000 shares of common stock in full settlement of
all obligations.
In January 2000, SmartServ issued 306,667 shares of common stock to
certain investors in the November 1998 interim financing upon the exercise of
warrants to purchase such shares. Proceeds from the exercise of these warrants
were $184,000.
On January 18, 2000, America First Associates Corp., acting as
placement agent for SmartServ, completed a private placement of 233,000 shares
of common stock at $15.00 a share. The net proceeds of the placement of
$3,215,400 were used for general working capital requirements. In addition, on
January 18, 2000, SmartServ completed a private placement of an additional
100,000 shares of common stock at $15.00 a share. There was no placement agent
for these shares. The net proceeds of the placement of $1,500,000 were used for
general working capital requirements.
On May 15, 2000, Chase Securities Inc., acting as placement agent for
SmartServ, completed a private placement of 353,535 shares of common stock at
$49.50 a share. The net proceeds of the placement of $16,750,000 were used for
general working capital requirements.
SmartServ's financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. SmartServ incurred
net losses of $7,124,126, $5,040,009, and $4,434,482 for the years ended June
30, 1999, 1998 and 1997, respectively. Additionally, we have incurred a net loss
of $21,096,231 for the six month period ended December 31, 1999. Included in
such amount were noncash charges for stock-based compensation costs of
$21,635,019. At December 31, 1999, we had an accumulated deficit of $43,042,236
and a deficiency of net assets of $3,826,746. However, giving effect to the
January 2000 private placements,
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SmartServ had stockholders' equity at December 31, 1999, on a pro-forma basis,
of approximately $863,700. SmartServ is also a defendant in several legal
proceedings that could have a material adverse effect on its financial position,
cash flows and results of operations. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.
Management believes that upon the successful implementation of its
marketing plan, sufficient revenues will be generated to meet operating
requirements. Management also believes that the successful execution of its
proposed plan of operations will generate sufficient cash flow from operations
to enable SmartServ to offer its services on an economically sound basis. No
assurance can be given that such goals will be obtained or that any expected
revenues or cash flows will be achieved.
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 an
application software and communications architecture in an attempt to make our
services easy to use and visually appealing, as well as to take advantage of the
different virtues and capabilities of established and emerging devices capable
of interacting with Web-based and Web-to-Wireless applications. We believe that
our application software and communications architecture, which recognize
multiple devices, format the information for the particular device and present
the information in a user-friendly manner, will be attractive in the
marketplace. Product development efforts are focused on providing enhancements
to the current information and transaction services, format modifications for
emerging devices, content and features improvements and customizations based on
market requirements. We intend to continue to invest in this area and believe
our transaction engine, application software and communications architecture
represent an important competitive advantage.
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MARKETING STRATEGY
We believe our primary source of revenues will ultimately be derived
from the sale of our information and transactional application services through
Strategic Marketing Partners utilizing a "business-to-business" strategy.
Strategic Marketing Partners will brand our information and transaction services
with their own private label, promote the packaged offering, and then distribute
these information and e-commerce services to their clients. Additionally, our
e-commerce platform will enable our Strategic Marketing Partners to offer
transaction services via the Internet and wireless networks. Our strategy of
forming alliances with Strategic Marketing Partners enables us to maximize our
market reach at minimal operating costs, improve product and services
performance and grow distribution channels to end-users.
In May 1998, we licensed to DTN the rights to market and service three
of our Internet products. DTN, which has over 150,000 subscribers for its
satellite-based information services, lacked an Internet-based product and
delivery system. We filled that need. In June 1999, we entered into an agreement
with DTN that expanded our relationship. In consideration of the receipt of
$5.175 million, we granted DTN an exclusive perpetual worldwide license to our
Internet-based (1) real-time stock quote product, (2) online trading vehicle for
customers of small and medium sized brokerage companies, (3) administrative
reporting package for brokers of small and medium sized brokerage companies and
(4) order entry/routing system. We will continue to operate and support these
products in exchange for a percentage of the revenues earned by DTN therefrom.
None of our wireless products were included in these transactions. During the
year ended June 30, 1998, we discontinued our efforts to sell products directly
to the retail market via our own marketing programs.
As an early entrant in the dynamic market of distribution of financial
information and transaction services via wireless telephones and personal
digital assistants, we are developing strategic marketing relationships with the
wireless equipment manufacturers, carriers, other value-added service providers
and potential corporate partners. We continuously seek to increase product
performance and widen our distribution by building and maintaining this network
of Strategic Marketing Partners. Combining our application development and data
platform with the core competencies of our Strategic Marketing Partners we are
offering a packaged turnkey solution for extending content and transactions to
the wireless environment. Management believes the wireless area has tremendous
potential for distribution of our information products and as a source of
revenues from "fee based" transactions such as routing stock order entries and
other e-commerce offerings.
The market for wireless services is exploding alongside the market for
Internet access, and Management believes that these markets are about to
converge. The majority of wireless data penetration will result from the
distribution of telephones and other PCS devices equipped with wireless modems
and 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
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computers and wireless devices, such as developing transactional services
offered by Data Broadcasting Corporation, Electronic Data Systems Corp. and
other Web-based software companies. Established online information services
including those offered by America Online, Inc., offer competing services
delivered through personal computers. Although in its infancy, the wireless
arena too has its competitors, such as DataLink Systems Corporation, I 3 Mobile,
Inc., Aether Systems, Inc. (a/k/a Aether Technologies), 724 Solutions, Inc. and
W-Trade Technologies, Inc. We expect competition to increase from existing
competitors and from new competitors, possibly including telecommunications
companies. Most of our competitors and potential competitors have substantially
greater financial, marketing and technical resources than we have. We believe
that potential new competitors, including large multimedia and information
system companies, are increasing their focus on transaction processing.
Increased competition in the market for our services could limit our ability to
expand and materially and adversely affect our results of operations.
The information content provided through our application software and
communication architecture is generally purchased through non-exclusive
distribution agreements. While we are not dependent on any one content provider,
existing and potential competitors may enter into agreements with these and
other such providers and thereby acquire the ability to deliver online
information and transactional services substantially similar to those provided
us.
The principal competitive factors in both the online and wireless
industries include content, product features and quality, ease of use, access to
distribution channels, brand recognition, reliability and price. Our strategy of
establishing alliances with potential Strategic Marketing Partners and our
ability to provide what we believe to be unique software applications and
communications architecture should enable us to compete effectively.
SOFTWARE
We have developed an application software and communications
architecture that we believe makes our services easy to use and visually
appealing, and which maximize the capabilities of various devices.
Our user-friendly front-end application software provides instant
access to information and flexibility to the varying needs of multiple users.
Subscribers are empowered to create their own groupings of information they
routinely request and are able to navigate directly to the information they seek
with the software's easy to read menu systems and search capabilities. Our
transaction engine has been designed to facilitate various forms of e-commerce.
Our application software employs common user interface techniques, such as
icons, pull-down menus, spreadsheet formats, tree structures and the use of
"key" words, to make our product intuitive to our users. Our software is notable
for its visually appealing formats, which we have standardized across different
types of information. Subscribers are provided with several display options,
including text and graphics, according to their preferences.
During the fiscal years ended June 30, 1999, 1998 and 1997, we incurred
costs of $193,188, $923,082 and $1,150,224, respectively, for research and
project development activities. Additionally, during the fiscal year ended June
30, 1999, we capitalized software development costs amounting to $765,000; no
such costs were capitalized in either of the years ended June 30, 1998 or 1997.
PROPRIETARY RIGHTS
We have designed and developed our own "device independent" information
and transaction platform, "SmartServ", based on Sun Microsystems, Inc. computers
and Oracle Corp.'s version 7.X relational database manager, to support a variety
of end user devices. This platform formats information and the services'
interface for a particular device and presents it in a user friendly manner. We
rely upon a
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combination of contract provisions, trade secret laws and a service mark to
attempt to protect our proprietary rights. We license the use of our services to
Strategic Marketing Partners under agreements that contain terms and conditions
prohibiting the unauthorized reproduction of our software and services. Although
we intend to protect our rights vigorously, there can be no assurance that any
of the foregoing measures will be successful.
We granted DTN an exclusive perpetual worldwide license to our
Internet-based (1) real-time stock quote product, (2) online trading vehicle for
customers of small and medium sized brokerage companies, (3) administrative
reporting package for brokers of small and medium sized brokerage companies and
(4) order entry/routing system. Under the license agreement, we are required to
maintain certain systems' performance standards and to satisfy other general
business requirements. Our inability to maintain compliance with the license
agreement could result in a default thereunder. In addition, a change of control
of SmartServ is an event of default under the license agreement. A change of
control includes a change in the majority of the members on our board of
directors. Under a letter agreement with Zanett Capital, Inc., Zanett Capital
may elect a majority of the board under certain circumstances, including the
failure of our common stock to be listed on Nasdaq.
If we default under the license agreement, DTN may at its sole cost
elect to provide its own maintenance to both the system software and related
hardware. Under these circumstances, DTN will have the right to own the system
software, including the source codes, and related hardware, and DTN will have no
further obligation to pay us licensing fees which we currently rely on for a
significant part of our revenues.
We believe that our software, services, service mark and other
proprietary rights do not infringe on the proprietary rights of third parties.
However, there can be no assurance that third parties will not assert
infringement claims against us with respect to current features, content or
services or that any such assertion may not require us to enter into royalty
arrangements or result in litigation.
GOVERNMENT REGULATION
We are not currently subject to direct regulation other than federal
and state regulation generally applicable to businesses. However, changes in the
regulatory environment relating to the telecommunications and media industry
could have an effect on our business, including regulatory changes which
directly or indirectly affect telecommunication costs or increase the likelihood
or scope of competition from regional telephone companies. Additionally,
legislative proposals from international, federal and state governmental bodies
in the areas of content regulation, intellectual property and privacy rights, as
well as 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.
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EMPLOYEES
We employ 30 people, 29 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 three to eight people
during the period ending June 30, 2000. Such personnel will be added to assist
with the programming requirements of Strategic Marketing Partners' product
offerings, for customer support and sales and marketing. None of our employees
are covered by a collective bargaining agreement, and we believe that our
relationship with our employees is satisfactory.
DESCRIPTION OF PROPERTY
We occupy approximately 6,300 square feet in a leased facility located
in Stamford, Connecticut. The lease expires in October 2002.
LEGAL PROCEEDINGS
By letter dated April 10, 1998, Michael Fishman, then our Vice
President of Sales, resigned his position. On or about April 24, 1998, Mr.
Fishman filed a complaint against us, Sebastian E. Cassetta and four other
defendants in the United States District Court for the District of Connecticut.
The complaint asserted claims under Sections 10(b) and 18 of the Securities
Exchange Act of 1934, as well as several state law claims, including breach of
contract, fraud and misrepresentation. Mr. Fishman alleged that we (1) failed to
pay him the benefits and compensation to which he was entitled and (2) made
material misrepresentations in our filings with the Securities and Exchange
Commission. On December 11, 1998, the Court granted our motion to dismiss Mr.
Fishman's action without prejudice to the plaintiff to seek leave to file an
amended complaint within 30 days. On May 12, 1999, the Court denied the
plaintiff's subsequent motion for leave to file a substituted complaint on the
basis that the federal securities law claim, the only federal claim alleged by
the plaintiff, was still deficient. Accordingly, the federal securities claim
was dismissed with prejudice. On or about June 4, 1999, Mr. Fishman commenced an
action against the same defendants and added as a seventh defendant, our former
President, Steven Francesco, in the Connecticut Superior Court for the Judicial
District of Stamford/Norwalk at Stamford alleging breach of contract, breach of
duty of good faith and fair dealing, fraudulent misrepresentation, negligent
misrepresentation, intentional misrepresentation and failure to pay wages. The
defendants have answered the complaint and filed counterclaims for fraudulent
inducement and breach of contract. Plaintiff has responded to the counter-claim,
and discovery is proceeding. By pleading dated February 29, 2000, Mr. Fishman
filed an application with the Court seeking entry of a prejudgment remedy in
the amount of $19,250,000. To date, Mr. Fishman's application has not been acted
on by the Court and no hearing date has been set. Although we are vigorously
defending this action, there can be no assurance that we will be successful.
On or about May 11, 1998, Ronald G. Weiner filed a complaint against
Mr. Francesco and us in the Supreme Court of the State of New York, County of
New York. The complaint alleges, among other things, that in May 1993, by letter
from Mr. Francesco, Mr. Weiner was offered a 10% equity stake in Smart Phone
Services, Inc. ("SPS"), a Subchapter S company of which Mr. Francesco allegedly
was the President and sole shareholder, in exchange for his active involvement
in, among other things, raising capital and managing the financial aspects of
SPS. The complaint alleges that, in November 1993, Mr. Francesco sent a letter
to Mr. Weiner in which he (1) represented that SPS had failed to attract a
single investor and (2) withdrew his offer to Mr. Weiner of a 10% equity
position in SPS. The complaint further alleges that, in conversations with Mr.
Weiner beginning in November 1993, Mr. Francesco represented that he was ceasing
all efforts to capitalize SPS. The complaint alleges, among other things, that
Mr. Francesco and SPS breached their agreement with Mr. Weiner by withdrawing
their offer to him of a 10% equity stake in SPS, and that, at the time Mr.
Francesco represented that he was ceasing efforts to capitalize SPS, he had
actually formed SmartServ and was actively seeking investors for it. The
complaint further alleges that we are a successor entity to SPS and
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<PAGE>
that, therefore, we are liable for SPS' and Mr. Francesco's alleged conduct in
derogation of their alleged agreement with Mr. Weiner. The complaint seeks,
among other things, (1) a declaratory judgment declaring Mr. Weiner a 10% equity
shareholder of the Company, (2) a constructive trust in Mr. Weiner's favor for
10% of our equity shares and (3) restitution against Mr. Francesco and us for
unjust enrichment. On his unjust enrichment claim, Mr. Weiner seeks unspecified
damages that he alleges to be at least $250,000. In our answer to the complaint,
we denied the material allegations of the complaint and asserted affirmative
defenses. No discovery in this action has yet been taken. Although we are
vigorously defending this action there can be no assurance that we will be
successful.
On or about February 29, 2000, Commonwealth Associates, L.P. filed a
complaint against us in the Supreme Court of the State of New York, County of
New York. The complaint alleges that on or about August 19, 1999 Commonwealth
and SmartServ entered into an engagement letter pursuant to which Commonwealth
was to provide financial advisory and investment banking services to SmartServ
in connection with a possible combination between SmartServ and Data Link
Systems Corporation. The engagement letter provided for a nonrefundable fee of
$15,000 payable in cash or common stock at SmartServ's option. The complaint
alleges that notwithstanding the terms of the engagement letter the fee was to
be paid in stock and seeks 13,333 shares of common stock or at least $1,770,000
together with interest and costs. In our answer to the complaint, we denied the
material allegations of the complaint. No discovery in this action has yet been
taken. Although we are vigorously defending this action there can be no
assurance that we will be successful.
While we intend to vigorously defend these actions, the unfavorable
outcome of either such action could have a material adverse effect on our
financial condition, results of operations and cash flows.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to the
executive officers and directors of SmartServ Online, Inc.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Sebastian E. Cassetta 51 Chief Executive Officer, Chairman of the Board,
Secretary and Class III Director
Mario F. Rossi (4) 61 Vice President of Operations and Class II Director
Thomas W. Haller, CPA 45 Vice President, Treasurer and Chief Financial Officer
Claudio Guazzoni (3) 36 Class I Director
Charles R. Klotz 58 Class II Director
Stephen Lawler (4) 36 Class III Director
L. Scott Perry (2) 51 Class I Director
Robert Steele (1) (2) (3) 60 Class II Director
Catherine Cassel Talmadge (2) (3) 47 Class I Director
Charles R. Wood (1) 58 Class III Director
</TABLE>
- ---------------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Member of the Finance Committee
(4) Member of the Technology Advisory Committee
-21-
<PAGE>
SEBASTIAN E. CASSETTA has been Chief Executive Officer, Chairman of the
Board, Secretary and a director of SmartServ since its inception. Mr. Cassetta
was also SmartServ's Treasurer from its inception until March 1996. From June
1987 to August 1992, Mr. Cassetta was the President of Burns and Roe Securacom
Inc., an engineering and large-scale systems integration firm. He is also a
former Director, Managing Director and Vice President of Brinks Inc. At Brinks,
he expanded international operations in over 15 countries and became the
youngest person to be appointed Vice President in Brinks' 150 year history.
Appointed by President Reagan and Department of Commerce Secretary Malcolm
Baldridge, he served on both the U.S. Export Council and The Industry Sector
Advisory Committee (ISAC) regarding GATT negotiations. He is a former member of
the Board of Directors of The Young President's Organization and the former
Chairman of the New York Chapter.
MARIO F. ROSSI has been Vice President of Operations of SmartServ since
December 1994 and was appointed a director on February 23, 1998. Mr. Rossi has
business and operational management experience in the computer,
telecommunications and securities fields. He has an extensive background in
product development, operations and technical marketing. Prior to joining
SmartServ, Mr. Rossi was Vice President of Operations for MVS Inc., a fiber
optic company specializing in wireless technology. He also worked 17 years for
Philips Medical Systems, in both the U.S. and the Netherlands, directing the
development - from feasibility to production - of several computer-based medical
devices.
THOMAS W. HALLER, CPA joined SmartServ as Vice President, Treasurer and
Chief Financial Officer in March 1996. From December 1992 to March 1996, Mr.
Haller was a Senior Manager at Kaufman Greenhut Forman, LLP, a public accounting
firm in New York City, where he was responsible for technical advisory services
and the firm's quality assurance program. Prior thereto, he was a Senior Manager
with Ernst & Young LLP, an international public accounting and consulting firm,
where he had responsibility for client services and new business development in
the firm's financial services practice.
CLAUDIO GUAZZONI became a director of SmartServ on January 11, 1998.
Since 1993, Mr. Guazzoni has been President of The Zanett Securities Corporation
(now known as the Planet Zanett Internet Incubator) and Zanett Capital, Inc.
providing financial and strategic consulting services to growth companies. Prior
to joining the Zanett organization, Mr. Guazzoni was a Money Manager with Delphi
Capital Management, Inc. (1992) and an associate with Salomon Brothers, Inc.
from 1985 to 1991.
CHARLES R. KLOTZ became a director of SmartServ on May 15, 2000. Since
1985, Mr. Klotz has been a director of a number of private and public companies
ultimately associated with David R. Barclay and Frederick H. Barclay. He was
President and Chief Executive Officer of Gulf Resources & Chemical Corporation
from 1985-1998 and he was Chairman and Chief Executive Officer of Gotaas Larsen
Shipping Corporation from 1988-1997. Prior thereto, he was with Bank of Boston
where he held a number of positions including Head of Corporate Banking in
London and Deputy Head of Specialized Corporate Finance which covered
acquisition finance and venture capital.
STEPHEN LAWLER was elected a director of SmartServ on December 28,
1999. He has been the Group Product Manager for the Mobile Internet Business
Unit at Microsoft Corporation since April 1999. Mr. Lawler's experience includes
all aspects of engineering including software development, program management,
quality assurance and documentation. Additionally, he has directed product
marketing teams, program management teams and engineering teams. From 1992 to
April 1999, he worked for MapInfo Corporation where he was a member of the
Executive Team, the Managing Director of Product Marketing and Product
Management and the Managing Director of Software Development and Product
Development.
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
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<PAGE>
December 1995, Mr. Perry held various positions with AT&T including Vice
President -- Business Multimedia Services, Vice President (East) -- Business
Communications Services and Vice President -- Marketing, Strategy and Technical
Support for AT&T Data Systems Group. Mr. Perry serves on the Board of Directors
of Junior Achievement of New York, is a member of the Cornell University
Engineering College Advisory Council and serves on the Board of INEA, a private
financial planning software company based in Toronto, Canada.
ROBERT STEELE was appointed a director of SmartServ on February 23,
1998. Since February 1998, Mr. Steele has been Vice Chairman of the John Ryan
Company, an international bank support and marketing company. From 1992 to
February 1998, Mr. Steele was a Senior Vice President of the John Ryan Company.
Mr. Steele is the former President of Dollar Dry Dock Bank and a member of the
Board of Directors of Moore Medical Corp., Scan Optics, Inc. Accent Color
Sciences, Inc., NLC Insurance Companies, Inc. and the New York Mercantile
Exchange.
CATHERINE CASSEL TALMADGE has been a director of SmartServ since March
1996. Since May 1999, Ms. Talmadge has been Senior Vice President of Business
Development for High Speed Access Corporation. From September 1984 to May 1999,
she held various positions with Time Warner Cable, a division of Time Warner
Entertainment Company, L.P., including Vice President, Cable Programming;
Director, Programming Development; Director, Operations; Director, Financial
Analyses; and Manager, Budget Department.
CHARLES R. WOOD was appointed a director of SmartServ in September
1998. Mr. Wood was Senior Vice President of DTN and President of its Financial
Services Division, from 1989 and 1986, respectively, until February 28, 2000.
BOARD OF DIRECTORS
The Board of Directors consists of nine directors divided into three
classes: Class I Directors, Class II Directors and Class III Directors. The
Class I and Class III Directors will serve until the 1999 annual meeting and the
Class II Directors will serve until the 2000 annual meeting or, in each case,
until their respective successors are duly elected and qualified or until their
earlier resignation or removal. Upon such annual meetings of stockholders, the
Class III Directors will serve until the annual meeting of SmartServ's
stockholders to be held in 2001, the Class I Directors will serve until the
annual meeting of SmartServ's stockholders to be held in 2002 and the Class II
Directors will serve until the annual meeting of SmartServ's stockholders to be
held in 2003. Directors of each Class are elected for a full term of three years
(or any lesser period representing the balance of the previous term of such
Class) and until their respective successors are duly elected and qualified or
until their earlier resignation or removal. Officers are appointed annually and
serve at the discretion of the Board for one year. As a result of a Stock
Purchase Agreement dated May 15, 2000, TecCapital Ltd. has the right to
designate one member of SmartServ's Board of Directors. Messrs. Cassetta and
Rossi agreed to vote all shares of SmartServ held by them, so as to elect the
director designated by TecCapital. Mr. Cassetta serves as Chief Executive
Officer, Chairman of the Board, and Secretary of SmartServ pursuant to an
employment agreement. Mr. Rossi serves as Vice President and Chief Technology
Officer pursuant to an employment agreement.
BOARD COMMITTEES
The Compensation Committee, currently composed of Messrs. Wood and
Steele, has authority over officer compensation and administers our Amended and
Restated Stock Option Plan.
The Audit Committee, currently composed of Messrs. Steele and Perry and
Ms. Talmadge, serves as the Board's liaison with our auditors.
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<PAGE>
The Finance Committee, currently composed of Mr. Guazzoni, Mr. Steele
and Ms. Talmadge, reviews expenditures of SmartServ.
The Technology Advisory Committee, currently composed of Messrs. Lawler
and Rossi, is responsible for identifying new technologies and markets therefor.
COMPENSATION OF DIRECTORS
Each director who is not an officer or employee of SmartServ is
reimbursed for his or her out-of-pocket expenses incurred in connection with
attendance at meetings or other company business. Commencing December 29, 1998,
each non-employee director receives a $1,000 fee for each meeting he or she
attends during the year.
Between November 4, 1996 and April 24, 1998, each person who was not a
salaried employee of SmartServ was granted, on the date he or she became a
director, an option to purchase 5,000 shares of common stock and immediately
following each annual meeting of stockholders at which directors were elected,
each such person elected to serve as a director at that annual meeting or who
remained a director following that annual meeting was granted an option to
purchase 5,000 shares of common stock. Subsequent to April 24, 1998, the
Compensation Committee has had the discretionary authority to grant options to
non-employee directors. Pursuant to such authority, on December 28, 1998 and
October 13, 1999 it granted options to purchase 10,000 shares of common stock at
a price of $2.35 and $.9375, respectively, to each non-employee director. The
exercise price of each share of common stock under any option granted to a
director was equal to the fair market value of a share of common stock on the
date the option was granted.
EXECUTIVE COMPENSATION
The following table sets forth information concerning annual and
long-term compensation, paid or accrued, for the Chief Executive Officer and for
each other executive officer (the "Named Executive Officers") of SmartServ whose
compensation exceeded $100,000 in fiscal 1999 for services in all capacities to
SmartServ during the last three fiscal years.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------------------- ------------------------------
RESTRICTED SECURITIES
NAME AND PRINCIPAL FISCAL OTHER ANNUAL STOCK AWARDS UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION (1) (2) OPTIONS COMPENSATION
- -------------------------- -------- ------------- ---------- ------------------ --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sebastian E. Cassetta 1999 $ 155,000 $ 5,414 $ 9,750 $ 185,471(3) 92,000 (5) $24,416(8)
Chief Executive 1998 125,000 -- 9,750 -- 37,500 (6) -- (9)
Officer 1997 125,000 -- 9,750 -- 16,666 (6) -- (9)
Mario F. Rossi 1999 122,500 3,249 6,000 61,824(4) 67,500 (7) -- (9)
Vice President 1998 92,400 -- 6,000 -- 20,834 (6) -- (9)
of Operations 1997 75,000 -- 6,000 -- 4,416 (6) -- (9)
</TABLE>
(1) Amounts shown consist of a non-accountable expense allowance.
(2) The Named Executive Officers did not receive any LTIP Payouts in 1999, 1998
or 1997.
(3) On December 29, 1998, the Board of Directors approved the sale to Mr.
Cassetta of 618,239 shares of restricted stock representing 9% of the fully
diluted shares of common stock of SmartServ.
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<PAGE>
Compensation has been determined as the number of shares awarded to Mr.
Cassetta times the closing price of SmartServ's common stock on December
29, 1998 ($2.50) less the consideration to be paid by Mr. Cassetta. At June
30, 1999, based upon the closing bid price ($1.50) of SmartServ's common
stock, the value of Mr. Cassetta's shares was $0. On October 13, 1999, the
Board of Directors agreed to reprice the shares granted to Mr. Cassetta to
$.75 per share, the fair value of the shares at that date. Through
December 31, 1999, the purchase of this restricted stock was recorded as a
variable award pursuant to Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". In accordance therewith,
SmartServ's results of operations for the six months ended December 31,
1999 includes a noncash compensation charge of $11,727,000 for the change
in the fair value of its common stock at December 31, 1999.
(4) On December 29, 1998, the Board of Directors approved the sale to Mr. Rossi
of 206,080 shares of restricted stock representing 3% of the fully diluted
shares of common stock of SmartServ. Compensation has been determined as
the number of shares awarded to Mr. Rossi times the closing price of
SmartServ's common stock on December 29, 1998 ($2.50) less the
consideration to be paid by Mr. Rossi. At June 30, 1999, based upon the
closing bid price ($1.50) of SmartServ's common stock, the value of Mr.
Rossi's shares was $0. On October 13, 1999, the Board of Directors agreed
to reprice the shares granted to Mr. Rossi to $.75 per share, the fair
value of the shares at that date. Through December 31, 1999, the purchase
of this restricted stock was recorded as a variable award pursuant to
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". In accordance therewith, SmartServ's results of operations for
the six months ended December 31, 1999 includes a noncash compensation
charge of $3,909,000 for the change in the fair value of its common stock
at December 31, 1999.
(5) Includes options for the purchase of 37,500 shares which were cancelled
when repriced options to purchase a like number of shares were granted in
lieu thereof.
(6) Such options were cancelled when repriced options were granted in lieu
thereof in fiscal 1999.
(7) Includes options for the purchase of 25,250 shares which were cancelled
when repriced options to purchase a like number of shares were granted in
lieu thereof.
(8) Amounts represent premiums paid by SmartServ for life and disability
insurance for the benefit of Mr. Cassetta.
(9) The aggregate amount of personal benefits not included in the Summary
Compensation Table does not exceed the lesser of either $50,000 or 10% of
the total annual salary and bonus paid to the Named Executive Officers.
STOCK OPTIONS
The following table sets forth information with respect to stock
options granted to the Named Executive Officers during fiscal year 1999:
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL 1999
(INDIVIDUAL GRANTS) (1)
-----------------------
NUMBER OF % OF TOTAL OPTIONS
SECURITIES UNDERLYING GRANTED TO EMPLOYEES IN EXERCISE EXPIRATION
NAME OPTIONS GRANTED FISCAL 1999 PRICE DATE
- -------------------------- ----------------------- ------------------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
Sebastian E. Cassetta 17,000 3.66% $ 1.625 11/19/08
37,500 8.08 1.290 10/07/08
37,500 (2) 8.08 2.530 8/06/08
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
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:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUE (1)(2)
-----------------------------------
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
SECURITIES UNDERLYING OPTIONS AT
OPTIONS AT FISCAL FISCAL YEAR END
SHARES ACQUIRED VALUE YEAR END EXERCISABLE/
ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE UNEXERCISABLE
- ------------------------------ -------------------- ----------------- -------------------------- ---------------------
<S> <C> <C>
Sebastian E. Cassetta -- -- 0/54,499 $0/$7,874
Mario F. Rossi -- -- 0/42,249 $0/$5,302
</TABLE>
(1) No SARs were granted to, or exercised by, the Named Executive Officers
during fiscal 1999.
(2) Value is based on the closing bid price of SmartServ's common stock as
reported by the OTC Bulletin Board on June 30, 1999 ($1.50) less the
exercise price of the option.
EMPLOYMENT AGREEMENTS
SmartServ and Mr. Cassetta have entered into an employment agreement
("Cassetta Agreement"), effective January 1, 1999 and expiring on December 31,
2001, providing for (1) base compensation of $185,000 per annum, (2) additional
compensation of up to 100% of base compensation, (3) continuation of existing
life and disability insurance policies, (4) all benefits available to other
employees and (5) the sale to him of 618,239 shares of restricted stock
representing 9% of the fully diluted shares of common stock of SmartServ. Mr.
Cassetta's additional compensation will be equal to 10% of his base compensation
for each 10% increase in sales during the first year of the Cassetta Agreement,
subject to a maximum of 100% of base compensation. In each subsequent year of
the Cassetta Agreement, Mr. Cassetta will receive additional compensation equal
to 5% of his base compensation for each 5% increase in sales, subject again to a
maximum of 100% of base compensation. The purchase price ($2.20 per share) of
the restricted stock was equal to 110% of the fair market value of SmartServ's
common stock for the 30 days preceding the date of the stock purchase agreement
("Cassetta Stock Purchase Agreement") contemplated by the Cassetta Agreement. On
October 13, 1999, the Board of Directors agreed to reprice the shares granted to
Mr. Cassetta to $.75 per share, the fair market value of the shares at that
date. $6,182.39 of the purchase price
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<PAGE>
has been paid in cash and the balance by a 5 year, non-recourse promissory note,
secured by the stock, at an interest rate of 6.75%, which is 1% below the prime
rate on the date of the Cassetta Stock Purchase Agreement. The Cassetta Stock
Purchase Agreement provides SmartServ with certain repurchase options and
provides Mr. Cassetta with a put option in the event of the termination of his
employment. In the event that Mr. Cassetta's employment is terminated without
cause, Mr. Cassetta will receive a lump sum severance payment equal to his full
base salary for the remaining term of the Cassetta Agreement, discounted to the
present value using an 8% discount rate and continuing benefit coverage for the
lesser of 12 months or the remaining term of the Cassetta Agreement. On December
28, 1999, the Board of Directors of the Company approved the payment to Mr.
Cassetta in stock of the bonus payable to him for 1999 under his employment
agreement. Pursuant thereto, in March 2000 the Company issued 148,000 shares of
common stock to Mr. Cassetta.
SmartServ and Mr. Rossi have entered into an employment agreement
("Rossi Agreement"), effective January 1, 1999 and expiring on December 31,
2001, providing for (1) base compensation of $135,000 per annum, (2) additional
compensation of up to 50% of base compensation, (3) continuation of existing
life and disability insurance policies, (4) all benefits available to other
employees and (5) the sale to him of 206,080 shares of restricted stock
representing 3% of the fully diluted shares of common stock of SmartServ. Mr.
Rossi's additional compensation will be equal to 5% of his base compensation for
each 10% increase in sales during the first year of the Rossi Agreement, subject
to a maximum of 50% of base compensation. In each subsequent year of the Rossi
Agreement, Mr. Rossi will receive additional compensation equal to 2.5% of base
compensation for each 5% increase in sales, subject again to a maximum of 50% of
base compensation. The purchase price ($2.20 per share) of the restricted stock
was equal to 110% of the fair market value for the 30 days preceding the date of
the stock purchase agreement ("Rossi Stock Purchase Agreement") contemplated by
the Rossi Agreement. On October 13, 1999, the Board of Directors agreed to
reprice the shares granted to Mr. Rossi to $.75 per share, the fair market value
of the shares at that date. $2,060.80 of the purchase price has been paid in
cash and the balance by a 5 year, non-recourse promissory note, secured by the
stock, at an interest rate of 6.75%, which is 1% below the prime rate on the
date of the Rossi Stock Purchase Agreement. The Rossi Stock Purchase Agreement
provides SmartServ with certain repurchase options and provides Mr. Rossi with a
put option in the event of the termination of his employment. In the event that
Mr. Rossi's employment is terminated without cause, Mr. Rossi will receive a
lump sum severance payment equal to his full base salary for the remaining term
of the Rossi Agreement, discounted to the present value using an 8% discount
rate and continuing benefit coverage for the lesser of 12 months or the
remaining term of the Rossi Agreement. On December 28, 1999, the Board of
Directors of the Company approved the payment to Mr. Rossi in stock of the bonus
payable to him for 1999 under his employment agreement. Pursuant thereto, in
March 2000 the Company issued 54,000 shares of common stock to Mr. Rossi.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of May 17, 2000, certain information
with respect to the beneficial ownership of the common stock by (1) each person
known by SmartServ to beneficially own more than 5% of the outstanding shares,
(2) each director of SmartServ, (3) each Named Executive Officer and (4) all
executive officers and directors of SmartServ as a group. Except as otherwise
indicated, each person listed below has sole voting and investment power with
respect to the shares of common stock set forth opposite such person's name.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP (2) OUTSTANDING SHARES (3)
-------------------- ------------------------ ----------------------
<S> <C> <C>
Sebastian E. Cassetta 856,241 (4) 16.15%
c/o SmartServ Online, Inc.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Metro Center, One Station Place
Stamford, CT 06902
TecCapital Ltd. 303,031 5.75%
c/o Berwick Management, Inc.
150 Federal Street, 19th Floor
Boston, MA 02110
Data Transmission Network Corporation 303,000 (5) 5.44%
9110 West Dodge Road
Omaha, Nebraska 68114
Steven Rosner 283,000 (6) 5.16%
1220 Mirabeau Lane
Gladwyn, Pennsylvania 19035
Mario F. Rossi 281,954 (7) 5.33%
c/o SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902
Kevin Kimberlin Partners, L.P. 277,500 5.26%
c/o Spencer Trask Securities, Inc.
535 Madison Avenue
New York, New York 10022
Claudio Guazzoni 88,004 (8) 1.64%
Charles R. Wood 28,874 *
L. Scott Perry 25,833 (9) *
Catherine Cassel Talmadge 25,416 (9) *
Stephen Lawler 20,000 (10) *
Robert H. Steele 14,166 (11) *
Charles R. Klotz 0 (12) *
All executive officers and directors
as a group (10 persons) 1,358,154 (13) 24.66%
- -----------
</TABLE>
* Less than 1% of the outstanding common stock
(1) Under the rules of the Securities and Exchange Commission (SEC),
addresses are only given for holders of 5% or more of the outstanding
common stock of SmartServ.
(2) Under the rules of the SEC, a person is deemed to be the beneficial owner
of a security if such person has or shares the power to vote or direct
the voting of such security or the power to dispose or direct the
disposition of such security. A person is also deemed to be a beneficial
owner of any
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<PAGE>
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
May 17, 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 303,000 shares of common stock subject to currently
exercisable warrants.
(6) Includes 208,000 shares of common stock subject to currently exercisable
warrants.
(7) Includes 21,124 shares of common stock subject to currently exercisable
options.
(8) Includes 24,166 shares of common stock subject to currently exercisable
options. Also includes 63,838 shares of common stock subject to currently
exercisable warrants.
(9) Includes 25,000 shares of common stock subject to currently exercisable
options.
(10) Represents 20,000 shares of common stock subject to currently exercisable
options.
(11) Includes 10,000 shares of common stock subject to currently exercisable
options.
(12) Does not include 303,031 shares beneficially owned by TecCapital Ltd. of
which Mr. Klotz is a director. Mr. Klotz disclaims beneficial ownership
of these shares.
(13) Includes 2,051 shares held in trust for the benefit of Mr. Cassetta's
wife and 233,377 shares of common stock subject to currently exercisable
options and warrants issued to all executive officers and directors.
CHANGES IN CONTROL
SmartServ and each of Messrs. Cassetta and Francesco have entered into
an agreement with Zanett Capital, Inc. dated September 29, 1997, as subsequently
amended, which provides, among other things, that for a period of 5 years, upon
an event of default under the prepaid warrants, SmartServ will, at the request
of Zanett Capital, Inc., appoint such number of designees of Zanett Capital,
Inc. to its Board of Directors so that the designees of Zanett Capital, Inc.,
will constitute a majority of the members of the Board of Directors of
SmartServ. Further, Messrs. Cassetta and Francesco have agreed to vote their
shares of common stock, representing approximately 17.30% of the outstanding
stock of SmartServ at May 17, 2000, in favor of the designees of Zanett
Capital, Inc., at each Annual Meeting of Stockholders of SmartServ at which
directors are elected.
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<PAGE>
SELLING STOCKHOLDERS
The shares being offered for resale by the selling stockholders consist
of the shares of common stock held by the selling stockholders listed below as
of May 17, 2000, which were acquired by them in private placements consummated
on January 18, 2000 and shares of common stock underlying stock purchase
warrants (a) received by America First Associates Corp as agent in one of such
private placements, (b) held by Wireless Acquisition Partners, LLC as transferee
of stock purchase warrants which were issued to Rickel & Associates, Inc. for
its services as underwriter in our initial public offering and (c) held by Data
Transmission Network Corp. The shares being offered hereby are being registered
to permit public secondary trading, and the selling stockholders may offer all
or part of the shares for resale from time to time. However, the selling
stockholders are under no obligation to sell all or any portion of such shares
nor are the selling stockholders obligated to sell any shares immediately under
this prospectus. All information with respect to share ownership has been
furnished by the selling stockholders. Because the selling stockholders may sell
all or part of their shares, no estimates can be given as to the number of
shares of common stock that will be held by the selling stockholders upon
termination of any offering made hereby. Other than a consulting arrangement
with Steven Rosner, an investment advisory relationship with America First
Associates Corp., and a contractual license arrangement with Data Transmission
Network Inc. (one of whose former officers, Charles R. Wood, is one of our
directors) none of the selling stockholders has, and, within the past three
years, none has had, any position, office or other material relationship with us
or any of our predecessors or affiliates.
<TABLE>
<CAPTION>
Shares of Common Stock Shares of Common Beneficial Ownership After
Beneficially Stock to be Offering If All Shares Are
Selling Stockholders Owned Sold Sold
-------------------- ------------ ------------ ---------------
<S> <C> <C> <C>>
Cassandra Appleman 2,000 2,000 0
BC Capital LLC 4,000 4,000 0
Howard & Shari Borenstein 4,000 4,000 0
Edward A. Borrelli 1,500 1,500 0
John D. Byram 20,000 20,000 0
Carlisle Capital LLC 5,000 5,000 0
Bernard Cohen 2,333 2,333 0
Jeff Conry 2,000 2,000 0
Marc Cornstein 5,000 5,000 0
Data Transmission Network Corp. 303,000 303,000 0
DDL Corp. 31,333 31,333 0
Hilary Edson, SSB as IRA Custodian 15,000 15,000 0
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>>
Richard Faieta 2,000 2,000 0
Faucetta Family Partnership 7,500 7,500 0
Mark Fisher 4,000 4,000 0
Bruce M. Ginsburg 10,000 10,000 0
Daniel A. Gooze 4,000 4,000 0
DLJSC as IRA Custodian 20,000 20,000 0
FBO Walter S. Grossman
Stephen P. Harrington 55,833 21,666 34,167
Hathaway Partners Investment LP 5,000 5,000 0
Sam Katzman 8,500 7,500 1,000
Kevin McCaffrey 50,000 25,000 25,000
Marvin Mermelstein 2,335 2,335 0
James Metzger, SSB as IRA Custodian 5,000 5,000 0
Alan B. Miller Living Trust 4,000 4,000 0
John A. Moore 2,900 2,900 0
John W. Moore 2,300 2,300 0
E. James Mulcahy 3,000 3,000 0
Ronald and Carolyn Nilsen 1,500 1,500 0
Paul Packer 2,000 2,000 0
Richard Pizitz 3,500 3,500 0
Frank Lyon Polk III 10,000 10,000 0
Lara June Purchase 2,000 2,000 0
Susan Ribman 2,000 2,000 0
Gerald Rimer 2,300 2,300 0
Steven B. Rosner 283,000 8,333 274,667
Robert H. Savage 5,000 5,000 0
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>>
Wayne Wilkey 5,000 5,000 0
Glen D. Witt 3,000 3,000 0
John H. Willmoth 5,000 5,000 0
ZeroDotNet, Inc. 65,000 65,000 0
Joseph A. Genzardi 7,000 7,000 0
Joseph R. Ricupero 7,000 7,000 0
America First Associates Corp. 4,640 4,640 0
Wireless Acquisition Partners, LLC 169,856 169,856 0
------- ------- ---
Total 1,159,330 824,496 334,834
- ----- ========= ======= =======
</TABLE>
We agreed to file a registration statement, of which this prospectus is
a part, within 90 days after the closing of the two private placements on
January 18, 2000 and to use our best efforts to cause such registration
statement to be declared effective by the SEC as soon as practical thereafter.
In the event that 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, the holders of the shares will be
entitled to receive an additional number of shares equal to 10% of the shares
purchased in the private placement.
We also agreed to file a registration statement, of which this
prospectus is a part, within 10 business days after the signing of a settlement
agreement with Wireless Acquisition Partners, LLC on May 12, 2000 and to use our
best efforts to cause such registration statement to be declared effective by
the SEC as soon as practical thereafter. In the event that the registration
statement is not declared effective on or before June 26, 2000, Wireless
Acquisition Partners, LLC will receive an additional 200 warrants per day until
the registration statement becomes effective.
PLAN OF DISTRIBUTION
The shares may be sold or distributed from time to time by the selling
stockholders or by pledgees, donees or transferees of, or successors in interest
to, the selling stockholders, directly to one or more purchasers (including
pledgees) or through brokers, dealers or underwriters who may act solely as
agents or may acquire shares as principals, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices, at negotiated
prices or at fixed prices, which may be changed. The distribution of the shares
may be effected in one or more of the following methods:
o ordinary brokers transactions, which may include long or short sales,
o transactions involving cross or block trades or otherwise on the OTC
Bulletin Board,
o purchases by brokers, dealers or underwriters as principal and resale by
such purchasers for their own accounts pursuant to this prospectus,
o "at the market" to or through market makers or into an existing market
for the common stock,
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o in other ways not involving market makers or established trading markets,
including direct sales to purchasers or sales effected through agents,
o through transactions in options, swaps or other derivatives (whether
exchange listed or otherwise), or
o any combination of the foregoing, or by any other legally available
means.
In addition, the selling stockholders may enter into hedging
transactions with broker-dealers who may engage in short sales of shares in the
course of hedging the positions they assume with the selling stockholders. The
selling stockholders may also enter into option or other transactions with
broker-dealers that require the delivery by such broker-dealers of the shares,
which shares may be resold thereafter pursuant to this prospectus.
Brokers, dealers, underwriters or agents participating in the
distribution of the shares may receive compensation in the form of discounts,
concessions or commissions from the selling stockholders and/or the purchasers
of shares for whom such broker-dealers may act as agent or to whom they may sell
as principal, or both (which compensation as to a particular broker-dealer may
be in excess of customary commissions). The selling stockholders and any
broker-dealers acting in connection with the sale of the shares hereunder may be
deemed to be underwriters within the meaning of Section 2(11) of the Securities
Act of 1933, and any commissions received by them and any profit realized by
them on the resale of shares as principals may be deemed underwriting
compensation under the Securities Act of 1933. Neither SmartServ nor the selling
stockholders can presently estimate the amount of such compensation. SmartServ
knows of no existing arrangements between the selling stockholders and any other
stockholder, broker, dealer, underwriter or agent relating to the sale or
distribution of the shares.
SmartServ will not receive any proceeds from the sale of the shares
pursuant to this prospectus. SmartServ has agreed to bear the expenses of the
registration of the shares, including legal and accounting fees, and such
expenses are estimated to be approximately $67,500.
SmartServ has informed the selling stockholders that certain
anti-manipulative rules contained in Regulation M under the Securities Exchange
Act of 1934 may apply to their sales in the market and has furnished the selling
stockholders with a copy of such rules and has informed them of the need for
delivery of copies of this prospectus.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 24, 1999, SmartServ and DTN entered into an agreement that
amended the Software License and Service Agreement dated April 23, 1998. In
consideration of the receipt of $5.175 million, SmartServ granted DTN an
exclusive perpetual worldwide license to SmartServ's Internet-based (1)
real-time stock quote product, (2) online trading vehicle for customers of small
and medium sized brokerage companies, (3) administrative reporting package for
brokers of small and medium sized brokerage companies and (4) order
entry/routing system. Additionally, SmartServ received $324,000 in exchange for
an agreement to issue warrants to purchase 300,000 shares of SmartServ's common
stock at an exercise price of $8.60 per share. SmartServ has agreed to continue
to operate these products and provide maintenance and enhancement services in
exchange for a percentage of the revenues earned by DTN therefrom. The cost of
SmartServ's commitment to provide such maintenance and enhancement services is
limited to a maximum of 20% of the revenues earned by SmartServ. Charles R.
Wood, a director of SmartServ, was until February 28, 2000, Senior Vice
President of DTN and President of its Financial Services Division.
SmartServ believes that the terms of the transactions described above
were no less favorable to SmartServ than would have been obtained from a
non-affiliated third party for similar transactions at the
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<PAGE>
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 America First
Associates Corp., Wireless Acquisition Partners, LLC as transferee of Rickel &
Associates, Inc. and DTN and we have not described any of our other outstanding
warrants.
GENERAL
Our authorized capital stock consists of 40,000,000 shares of common
stock, par value $.01 per share, and 1,000,000 shares of preferred stock, par
value $.01 per share. As of May 17, 2000, we had 5,271,811 shares of common
stock issued and outstanding. No shares of preferred stock are issued and
outstanding. We have reserved 4,373,412 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
On January 18, 2000, America First Associates Corp., acting as our
placement agent, completed a private placement of 233,000 shares of common stock
at $15.00 a share. In connection with this private placement, we issued warrants
to purchase 18,640 shares to America First Associates Corp. at an exercise price
of $15.00 per share. The warrants expire January 18, 2005. The exercise price
and number of shares
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<PAGE>
into which such warrants are exercisable are subject to adjustment under certain
circumstances including a stock split of, or stock dividend on, or a
reclassification of the common stock. We agreed to file a registration statement
with the Securities and Exchange Commission to register the shares within 90
days after the closing of the offering and to use our best efforts to have such
registration statement declared effective. We have also granted certain
piggyback rights to America First Associates Corp.
On March 21, 1996 we agreed to sell to Rickel & Associates, Inc. for
its services as underwriter in our initial public offering, warrrants, or
Underwriter's Warrants, to purchase 84,551 shares of common stock and 85,305
warrants. The Underwriter's Warrants are exercisable at $14.6361 per share of
common stock and $0.99 per warrant. The warrants contained in the Underwriter's
Warrants are exercisable at $15.1221 per share. The warrants will expire on
March 20, 2001. We have granted certain demand and "piggyback" registration
rights to holders of the Underwriter's Warrants. We agreed to file a
registration statement, of which this prospectus is a part, within 10 business
days after the signing of a settlement agreement with Wireless Acquisition
Partners, LLC, as transferee of the Underwriter's Warrants, on May 12, 2000 and
to use our best efforts to cause such registration statement to be declared
effective by the SEC as soon as practical thereafter.
On September 8, 1998, we 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. On
January 20, 2000 we issued to DTN a warrant for the purchase of 300,000 shares
of our common stock at $8.60 per share in exchange for $324,000. The warrant
will expire on November 17, 2000. We have granted certain demand and piggyback
registration rights to DTN.
The warrants may be exercised in whole or in part, subject to the
limitations provided in the warrants. Any warrant holders who do not exercise
their warrants prior to the conclusion of the exercise period will forfeit the
right to purchase the shares of common stock underlying the warrants and any
outstanding warrants will become void and be of no further force or effect.
Holders of the warrants have no voting, preemptive, liquidation or
other rights of a stockholder, and no dividends will be declared on the
warrants.
We have agreed to pay all registration expenses incurred in connection
with the registration of the common stock issuable upon exercise of the
warrants.
DELAWARE BUSINESS COMBINATION PROVISIONS
We are governed by the provisions of Section 203 of the Delaware
General Corporation Law ("DGCL"). In general, this statute prohibits a publicly
held Delaware corporation from engaging, under certain circumstances, in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder unless:
o prior to the date at which the stockholder became an interested
stockholder, the Board of Directors approved either the business
combination or the transaction in which the person became an interested
stockholder;
o the stockholder acquired more than 85% of the outstanding voting stock of
the corporation (excluding shares held by directors who are officers and
shares held in certain employee stock plans) upon consummation of the
transaction in which the stockholder became an interested stockholder; or
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<PAGE>
o the business combination is approved by the Board of Directors and by at
least 66-2/3% of the outstanding voting stock of the corporation (excluding
shares held by the interested stockholder) at a meeting of stockholders
(and not by written consent) held on or after the date such stockholder
became an interested stockholder.
An "interested stockholder" is a person who, together with affiliates
and associates, owns (or at any time within the prior three years did own) 15%
or more of the corporation's voting stock. Section 203 defines a "business
combination" to include, without limitation, mergers, consolidations, stock
sales and asset-based transactions and other transactions resulting in a
financial benefit to the interested stockholder.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102(b)(7) of the DGCL enables a corporation in its original
certificate of incorporation or an amendment thereto to eliminate or limit the
personal liability of a director to a corporation or its stockholders for
violations of the director's fiduciary duty, except:
o for any breach of a director's duty of loyalty to the corporation or its
stockholders,
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
o pursuant to Section 174 of the DGCL (providing for liability of directors
for unlawful payment of dividends or unlawful stock purchases or
redemptions), or
o for any transaction from which a director derived an improper personal
benefit.
The Amended and Restated Certificate of Incorporation of SmartServ provides in
effect for the elimination of the liability of directors to the extent permitted
by the DGCL.
Section 145 of the DGCL provides, in summary, that directors and
officers of Delaware corporations are entitled, under certain circumstances, to
be indemnified against all expenses and liabilities (including attorney's fees)
incurred by them as a result of suits brought against them in their capacity as
a director or officer, if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, if they had
no reasonable cause to believe their conduct was unlawful; provided, that no
indemnification may be made against expenses in respect of any claim, issue or
matter as to which they shall have been adjudged to be liable to the
corporation, unless and only to the extent that the court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, they
are fairly and reasonably entitled to indemnity for such expenses which the
court shall deem proper. Any such indemnification may be made by the corporation
only as authorized in each specific case upon a determination by the
stockholders or disinterested directors that indemnification is proper because
the indemnitee has met the applicable standard of conduct. SmartServ's By-Laws
entitle officers and directors of SmartServ to indemnification to the fullest
extent permitted by the DGCL.
SmartServ has agreed to indemnify each of its directors and certain
officers against certain liabilities, including liabilities under the Securities
Act of 1933. In addition, SmartServ maintains an insurance policy with respect
to potential liabilities of its directors and officers, including potential
liabilities under the Securities Act of 1933.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
SmartServ pursuant to the provisions described above, or
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<PAGE>
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.
TRANSFER AGENT
The Transfer Agent and Registrar for the common stock is Continental
Stock Transfer & Trust Company, Two Broadway, New York, New York 10004. Its
telephone number is (212) 509-4000.
LEGAL MATTERS
The validity of the shares of common stock offered in this prospectus
has been passed upon for us by Parker Chapin LLP, The Chrysler Building, 405
Lexington Avenue, New York, New York 10174. Its telephone number is (212)
704-6000.
EXPERTS
The financial statements of SmartServ Online, Inc. at June 30, 1999 and
1998, and for each of the three years in the period ended June 30, 1999,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
(which contains an explanatory paragraph describing conditions that raise
substantial doubt about the Company's ability to continue as a going concern as
described in Note 1 to the financial statements) appearing elsewhere
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<PAGE>
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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[LOGO]
SMARTSERV ONLINE, INC.
824,496
Shares
of
Common Stock
PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THAT WE
HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS IS NOT AN OFFER TO SELL COMMON
STOCK AND IS NOT SOLICITING AN OFFER TO BUY COMMON STOCK IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
May 22, 2000
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