<PAGE>
+As filed with the Securities and Exchange Commission on May 19, 2000.
REGISTRATION NO. 333-34940
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO.1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
SMARTSERV ONLINE, INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 7375 13-3750708
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
ONE STATION PLACE
STAMFORD, CT 06902
(203) 353-5950
</TABLE>
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
SEBASTIAN E. CASSETTA
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
SMARTSERV ONLINE, INC.
ONE STATION PLACE
STAMFORD, CT 06902
(203) 353-5950
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies of communications to:
MICHAEL J. SHEF, ESQ.
PARKER CHAPIN LLP
THE CHRYSLER BUILDING
405 LEXINGTON AVENUE
NEW YORK, NEW YORK 10174
TELEPHONE NO.: (212) 704-6000
FACSIMILE NO.: (212) 704-6288
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
========================================== ========================== ============================== ==============================
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) AGGREGATE OFFERING PRICE REGISTRATION FEE
------------------------------------------ -------------------------- ------------------------------ ------------------------------
<S> <C> <C> <C>
Common Stock, par value $.01 per share 351,640 $ 22,351,118(2) $5,901
- ------------------------------------------ -------------------------- ------------------------------ ------------------------------
Common Stock, par value $.01 per share 472,856 $ 33,262,464 (3) $8,781
------------------------------------------ -------------------------- ------------------------------ ------------------------------
</TABLE>
(1) All of the shares of common stock being registered hereby are being
offered by selling stockholders who acquired such shares in private
transactions. No other shares of the registrant's common stock are
being registered in this offering.
(2) Estimated pursuant to Rule 457(c) under the Securities Act of 1933
solely for the purpose of computing the amount of the registration fee.
The fee for the common stock, which was paid with the initial filing of
this Registration Statement, was based on the average of the closing
bid and asked price of the common stock reported on the
Over-the-Counter (OTC) Bulletin Board on April 11, 2000.
(3) Estimated pursuant to Rule 457(c) under the Securities Act of 1933
solely for the purpose of computing the amount of the registration fee.
The fee for the common stock was based on the average of the closing
bid and asked price of the common stock reported on the Nasdaq National
Market (NMS) on May 17, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
PROSPECTUS
SMARTSERV ONLINE, INC.
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 __, 2000
- 1-
<PAGE>
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>
- 2-
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information included elsewhere in this
document. You should carefully review the more detailed information and
financial statements included in this document. The summary is not complete
and may not contain all of the information you may need to consider before
investing in our common stock. We urge you to carefully read this document,
including the "Risk Factors" section beginning on page 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.
- 3-
<PAGE>
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.
-4-
<PAGE>
RISK FACTORS
An investment in our common stock is highly speculative and involves a
high degree of risk. Therefore, you should consider all of the risk factors
discussed below, as well as the other information contained in this document.
You should not invest in our common stock unless you can afford to lose your
entire investment and you are not dependent on the funds you are investing.
WE HAVE A HISTORY OF LOSSES AND IF WE DO NOT ACHIEVE PROFITABILITY WE
MAY NOT BE ABLE TO CONTINUE OUR BUSINESS
We have incurred net losses of $7,124,126 for the year ended June 30,
1999, $5,040,009 for the year ended June 30, 1998, $4,434,482 for the year ended
June 30, 1997 and $2,966,287 for the year ended June 30, 1996. Additionally, we
have incurred a net loss of $21,096,231 for the six month period ended December
31, 1999. However, included in the December 31, 1999 operating results were
noncash charges for stock-based compensation of $21,635,019. At December 31,
1999, we had an accumulated deficit of $43,042,236 and a deficiency of net
assets of $3,826,746. 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.
-5-
<PAGE>
OUR BUSINESS DEPENDS UPON STRATEGIC MARKETING PARTNERSHIPS WHICH MAY
NOT MATERIALIZE
We intend to sell our services primarily by entering into non-exclusive
agreements with strategic marketing partners who would brand our "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
-6-
<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
-7-
<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
-8-
<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.
-9-
<PAGE>
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.
-19-
<PAGE>
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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<PAGE>
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 __, 2000
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.
Section 145 of the General Corporation Law of Delaware ("DGCL")
provides that directors, officers, employees or agents of Delaware corporations
are entitled, under certain circumstances, to be indemnified against expenses
(including attorneys' fees) and other liabilities actually and reasonably
incurred by them in connection with any suit brought against them in their
capacity as a director, officer, employee or agent, if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, if they had no reasonable cause to believe their conduct was
unlawful. Section 145 also provides that directors, officers, employees and
agents may also be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by them in connection with a derivative suit
bought against them in their capacity as a director, if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification may be made without
court approval if such person was adjudged liable to the corporation.
Article Tenth of the registrant's Certificate of Incorporation provides
that the registrant shall indemnify any and all persons whom it shall have power
to indemnify to the fullest extent permitted by the DGCL. Article VI of the
registrant's by-laws provides that the registrant shall indemnify authorized
representatives of the registrant to the fullest extent permitted by the DGCL.
The registrant's by-laws also permit the registrant to purchase insurance on
behalf of any such person against any liability asserted against such person and
incurred by such person in any capacity, or out of such person's status as such,
whether or not the registrant would have the power to indemnify such person
against such liability under the foregoing provision of the by-laws.
The registrant maintains a directors and officers liability insurance
policy with National Union Fire Insurance Company of Pittsburgh, PA. The policy
insures the directors and officers of the registrant against loss arising from
certain claims made against such directors or officers by reason of certain
wrongful acts.
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with the
issuance and distribution of the securities being registered hereby. All such
expenses will be borne by the registrant; none shall be borne by any selling
stockholders.
Securities and Exchange
Commission registration fee $14,682
Legal fees and expenses (1) $25,000
Accounting fees and expenses (1) $25,000
Miscellaneous (1) $ 2,818
Total $67,500
- -------------------------------
(1) Estimated.
II-1
<PAGE>
Item 26. RECENT SALES OF UNREGISTERED SECURITIES.
On May 29, 1997, the Company issued a $550,000 promissory note and
warrants to purchase 45,302 shares of common stock to Zanett Lombardier, Ltd.
("ZLL") for $550,000. On each of July 21, 1997 and September 16, 1997, the
Company issued an additional $111,111 promissory note and warrants to purchase
an additional 9,151 shares of common stock to ZLL for $111,111. The warrants are
subject to antidilution provisions and have exercise prices of $4.97 and $6.07
per share. Zanett Securities Corporation ("Zanett") received fees of $78,576 for
its services in connection with such transactions. Additionally, Zanett received
warrants to purchase 15,899 shares of common stock. Such warrants are subject to
antidilution provisions and have exercise prices of $4.97 and $6.07. The
promissory notes and warrants were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On September 16, 1997, the Company issued warrants to purchase 50,083
shares of common stock to ZLL as a default penalty under the ZLL notes. The
warrants have an exercise price of 50% of the closing price of the Company's
common stock on the exercise date. On November 16, 1999, ZLL exercised on a
cashless basis all of such warrants in exchange for 25,042 shares of common
stock. No sales commissions were paid in connection with such transactions. The
warrants were issued in reliance upon the exemption from registration provided
by Section 4 (2) of the Securities Act. The shares were issued in reliance upon
the exemption from registration provided by Section 3 (a) (9) of the Securities
Act.
On September 29, 1997, the Company issued 4,000 prepaid common stock
purchase warrants ("Prepaid Warrants") to 12 investors for $4,000,000. Included
in such amount was $772,222 of the promissory notes issued to ZLL and $63,837 of
accrued interest thereon which were cancelled in connection with this
transaction. The Prepaid Warrants are convertible into a number of shares of
common stock of the Company that is equal to $1,000 divided by the applicable
exercise price. The exercise price is 70% of the average closing bid price of
the common stock for the 10 trading days ending on the day prior to exercise of
such warrants, reduced by 1% for each 60 day period the Prepaid Warrants remain
unexercised, but in no event above $8.40 per share. Zanett received a commission
of $400,000, an unaccountable expense allowance of $120,000, and warrants to
purchase 135,906 shares, subject to antidilution provisions, of common stock at
$4.97 per share in connection with such transaction. The Prepaid Warrants, and
the warrants issued to Zanett, were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On September 29, 1997, the Company issued 113,250 warrants to Bruno
Guazzoni and, subject to stockholder approval, agreed to issue to him warrants
to purchase an additional 692,120 shares of common stock. These additional
warrants were approved by the stockholders and issued in April 1998. The
warrants are subject to antidilution provisions and have an exercise price of
$4.97 per share. No sales commissions were paid in connection with such
transaction. The warrants were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
Between January 13, 1998 and March 21, 2000 an aggregate of 3,388
Prepaid Warrants were converted into an aggregate of 1,209,738 shares of common
stock of the Company. No sales commissions were paid in connection with such
conversions. The shares were issued in reliance upon the exemption from
registration provided by Section 3 (a) (9) of the Securities Act.
On January 2, 1998 and March 3, 1998, the Company issued warrants to
purchase 16,666 and 20,833 shares of common stock, respectively, in connection
with consulting contracts. The warrants have exercise prices of $3.75 and $15.75
to $19.50, respectively. No sales commissions were paid in
II-2
<PAGE>
connection with such transactions. The warrants were issued in reliance upon the
exemption from registration provided by Section 4 (2) of the Securities Act.
On August 31, 1998, the Company issued 32,953 shares of common stock to
ZLL and 17,047 shares of common stock to Bruno Guazzoni in consideration for
their agreeing to certain restrictions on the exercise of the Prepaid Warrants
and the resale of the shares of common stock issuable on exercise thereof. No
sales commissions were paid in connection with such transaction. The shares were
issued in reliance upon the exemption from registration provided by Section 4
(2) of the Securities Act.
On September 8, 1998, the Company issued warrants to purchase 3,000
shares of common stock to DTN for prepayment of certain guaranteed payments in
accordance with the Software License and Service Agreement between the parties
dated April 23, 1998. Such warrants are exercisable at $3.00 per share of common
stock. These warrants were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act. No sales
commissions were paid in connection with such transaction.
On November 17, 1998, the Company issued 125,000 shares of common stock
and warrants to purchase 16,667 shares of common stock, exercisable at $5.00 per
share until November 11, 2001, to Steven Francesco, a former officer of the
Company, as partial consideration for the settlement of his claims against the
Company and certain of its officers and directors. The shares and warrants were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act. No sales commissions were paid in connection with such
transaction.
Between November 20, 1998 and December 3, 1998, the Company issued
convertible promissory notes in the amount of $500,000 and warrants to purchase
833,333 shares of common stock to 6 investors for $500,000. Such warrants are
exercisable at $.60 per share and expire on November 19, 2003. Spencer Trask
Securities, Inc. ("Spencer Trask"), the placement agent, received a commission
of $50,000 and an unaccountable expense allowance of $15,000 in connection with
such transaction. Additionally, the Company issued warrants to purchase 166,667
shares of common stock to Spencer Trask exercisable at $.72 per share through
November 29, 2003. These promissory notes and warrants were issued in reliance
upon the exemption from registration provided by Section 4 (2) of the Securities
Act.
On January 14, 1999, the Company issued 10,000 shares of common stock
to Arnhold & S. Bleichroeder, Inc. ("ASB"), an investor in the Company's Prepaid
Warrants, in consideration of an agreement to waive certain events of default
under such Prepaid Warrants. No sales commissions were paid in connection with
such transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On January 20, 1999, the Company agreed to cancel warrants to purchase
20,833 shares of common stock exercisable at $15.75 and $19.50 per share to Mr.
Steven Rosner, a financial advisor to the Company, and to grant Mr. Rosner
warrants to purchase 40,833 shares of common stock at $.60 per share for his
efforts in arranging the Company's relationship with Spencer Trask. These
warrants expire on March 4, 2003 and January 19, 2004 and were issued in
reliance upon the exemption from registration provided by Section 4 (2) of the
Securities Act.
On January 28, 1999, the Company issued a convertible promissory note
in the amount of $50,000 and warrants to purchase 83,333 shares of common stock
to Mr. Bruno Guazzoni, an investor in the Company's Prepaid Warrants, for
$50,000. Such warrants are exercisable at $.60 per share and expire on November
19, 2003. Spencer Trask, the placement agent, received a commission of $5,000,
an unaccountable expense allowance of $1,500 and warrants to purchase 16,667
shares of common stock at $.72 per share through January 26, 2004 in connection
with this transaction. The promissory note and the
II-3
<PAGE>
warrants were issued in reliance upon the exemption from registration provided
by Section 4 (2) of the Securities Act.
On July 6, 1999, the Company issued 180,000 shares of common stock to
ASB to settle the Company's obligation to ASB pursuant to the default provisions
of the Prepaid Warrants. No sales commissions were paid in connection with such
transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On December 28, 1999, the Board of Directors of the Company approved
the payment to Sebastian E. Cassetta and Mario F. Rossi in stock of the bonus
payable to them for 1999 under their employment agreements. Pursuant thereto, in
March 2000 the Company issued 148,000 shares of common stock to Mr. Cassetta and
54,000 shares to Mr. Rossi. No sales commissions were paid in connection with
such transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On January 4, 2000, the Company issued 618,239 and 206,080 shares of
common stock to Sebastian E. Cassetta and Mario F. Rossi, respectively, pursuant
to Stock Purchase Agreements dated December 29, 1998 between the Company and
each of them. No sales commissions were paid in connection with such
transactions. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On January 18, 2000, the Company issued 233,000 shares of common stock
to 24 investors. America First Associates Corp., the placement agent, received a
commission of 8% of the aggregate purchase price of the shares purchased in the
offering, an unaccountable expense allowance of $25,000 in connection with such
transaction and warrants to purchase 18,640 shares. These shares and warrants
were issued in reliance upon the exemption from registration provided by Section
4 (2) of the Securities Act.
On January 18, 2000, the Company issued an additional 100,000 shares of
common stock to 14 investors. No sales commissions were paid in connection with
such transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On January 20, 2000, the Company issued to DTN a warrant for the
purchase of 300,000 shares of the Company's common stock at $8.60 per share in
exchange for $324,000. The warrant will expire on November 17, 2000. No sales
commissions were paid in connection with such transaction. The warrant was
issued in reliance upon the exemption from registration provided by Section 4
(2) of the Securities Act.
On May 15, 2000, the Company issued 353,535 shares of common stock to 3
investors. Chase Securities Inc., the placement agent, received a commission of
4% of the aggregate purchase price of the shares purchased in the offering and
an unaccountable expense allowance of $50,000 in connection with such
transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
Item 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
-------------------------------------------
(a) Exhibits:
The following exhibits are filed as part of this registration
statement:
EXHIBIT DESCRIPTION
------- -----------
II-4
<PAGE>
3.1 Amended and Restated Certificate of Incorporation of the
Company***
3.2 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation filed on June 1, 1998 *
3.3 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation filed on October 16, 1998*
3.4 By-laws of the Company, as amended***
4.1 Specimen Certificate of the Company's Common Stock***
4.2 Placement Agent Agreement dated as of January 11, 2000 between
the Company and America First Associates Corp.*******
4.3 Form of Underwriter's Warrant***
4.4 Warrant Agreement between the Company and Data Transmission
Network Corporation+
5.1 Opinion of Parker Chapin LLP+
10.1 Information Distribution License Agreement dated as of July
18, 1994 between the Company and S&P ComStock, Inc.***
10.2 New York Stock Exchange, Inc. Agreement for Receipt and Use of
Market Data dated as of August 11, 1994 between the Company
and the New York Stock Exchange, Inc.***
10.3 The Nasdaq Stock Market, Inc. Vendor Agreement for Level 1
Service and Last Sale Service dated as of September 12, 1994
between the Company and The Nasdaq Stock Exchange, Inc.
("Nasdaq")***
10.4 Amendment to Vendor Agreement for Level 1 Service and Last
Sale Service dated as of October 11, 1994 between the Company
and Nasdaq***
10.5 Lease Agreement dated as of March 4, 1994, between the Company
and One Station Place, L.P. regarding the Company's Stamford,
Connecticut offices***
10.6 Lease Modification and Extension Agreement, dated February 6,
1996, between the Company and One Station Place, L.P.
regarding the Company's Stamford, Connecticut offices****
10.7 Form of 1996 Stock Option Plan*****
10.8 Asset Purchase and Software License and Service Agreements
between SmartServ Online, Inc. and Data Transmission Network
Corporation, dated April 23, 1998******
10.9 Amendment to the Software and License Agreement between
SmartServ Online, Inc. and Data Transmission Network
Corporation, dated June 24, 1999. Portions of this exhibit
(indicated by asterisks) have been omitted pursuant to an
order by the Securities and Exchange Commission dated December
2, 1999, granting confidential treatment under the Securities
Exchange Act of 1934 and the omitted portions have been filed
separately with the Securities and Exchange Commission *
10.10 Letter agreement dated August 26, 1999, amending the Amendment
to the Software and License Agreement between SmartServ
Online, Inc. and Data Transmission Network Corporation, dated
June 24, 1999. Portions of this exhibit (indicated by
asterisks) have been omitted pursuant to an order by the
Securities and Exchange Commission dated December 2, 1999,
granting confidential treatment under the Securities Exchange
Act of 1934 and the omitted portions have been filed
separately with the Securities and Exchange Commission *
10.11 Amended and Restated Employment Agreement between SmartServ
Online, Inc. and Sebastian E. Cassetta, dated January 1, 1999*
10.12 Restricted Stock Purchase Agreement between SmartServ Online,
Inc. and Sebastian E. Cassetta, dated December 29, 1998*
10.13 Employment Agreement between SmartServ Online, Inc. and Mario
F. Rossi, dated January 1, 1999*
II-5
<PAGE>
10.14 Restricted Stock Purchase Agreement between SmartServ Online,
Inc. and Mario F. Rossi, dated December 29, 1998*
23.1 Consent of Ernst & Young LLP+
23.2 Consent of Parker Chapin LLP (Included in Exhibit 5.1)
24.1 Power of Attorney of certain directors and officers of
SmartServ (Included as part of the signature page beginning on
page II-7 of the initial filing)
- ------------
+ Filed herewith
* Filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1999
** Filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1997
*** Filed as an exhibit to the Company's registration statement on
Form SB-2 (Registration No. 333-114)
**** Filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1996
***** Filed as an exhibit to the Company's Proxy Statement dated
October 10, 1996
****** Filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for the period ended March 31, 1998
******* Filed with the initial filing of this Registration Statement
Item 28. UNDERTAKINGS.
-------------
(A) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement to:
(i) Include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental
change in the information set forth in the
registration statement; and
(iii) Include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering therein, and
the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(B) Undertaking Required by Regulation S-B, Item 512(e).
II-6
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or controlling persons
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel that the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(C) Undertaking Required by Regulation S-B, Item 512(f)
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at the time
shall be deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Stamford, State of
Connecticut, on the 19th day of May, 2000.
SmartServ Online, Inc.
By: /s/ Sebastian E. Cassetta
------------------------------
Sebastian E. Cassetta
Chairman of the Board, Chief Executive
Officer and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
amendment statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Sebastian E. Cassetta* Chairman of the Board, May 19, 2000
- --------------------------------------- Chief Executive Officer,
Sebastian E. Cassetta Secretary and Director
/s/ Mario F. Rossi* Vice President and May 19, 2000
- --------------------------------------- Director
Mario F. Rossi
/s/ Thomas W. Haller Vice President, Treasurer May 19, 2000
- --------------------------------------- (Chief Financial Officer and Chief
Thomas W. Haller Accounting Officer)
Director May __, 2000
- ---------------------------------------
Claudio Guazzoni
Director May __, 2000
- ---------------------------------------
Charles R. Klotz
/s/ Stephen Lawler* Director May 19, 2000
- ---------------------------------------
Stephen Lawler
/s/ Robert H. Steele* Director May 19, 2000
- ---------------------------------------
Robert H. Steele
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ L. Scott Perry* Director May 19, 2000
- ---------------------------------------
L. Scott Perry
/s/ Catherine Cassel Talmadge* Director May 19, 2000
- ---------------------------------------
Catherine Cassel Talmadge
/s/ Charles R. Wood* Director May 19, 2000
- ---------------------------------------
Charles R. Wood
*By:/s/ Thomas W. Haller
- -----------------------------------------
Thomas W. Haller as attorney-in-fact
</TABLE>
II-9
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
UNAUDITED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS AND SIX
MONTHS ENDED DECEMBER 31, 1999
<S> <C>
Balance Sheets as of June 30, 1999 and December 31, 1999 (unaudited) F-2
Statements of Operations for the three month and the six month periods
ended December 31, 1999 and 1998 (unaudited) F-4
Statement of Changes in Stockholders' Deficiency
for the six months ended December 31, 1999 (unaudited) F-5
Statements of Cash Flows for the three month and the six month periods
ended December 31, 1999 and 1998 (unaudited) F-6
Notes to Unaudited Financial Statements F-7
FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDING JUNE 30, 1999 AND JUNE 30,
1998 AND JUNE 30, 1997
Report of Independent Auditors F-13
Balance Sheets as of June 30, 1999 and 1998 F-14
Statements of Operations for the years
ended June 30, 1999, 1998 and 1997 F-16
Statement of Stockholders' Equity (Deficiency)
for the years ended June 30, 1997, 1998 and 1999 F-17
Statements of Cash Flows for the years
ended June 30, 1999, 1998 and 1997 F-21
Notes to Financial Statements F-22
</TABLE>
F-1
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
-------------------- -------------------
(UNAUDITED)
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 371,581 $ 2,165,551
Accounts receivable 386,007 348,278
Prepaid expenses 51,777 50,150
-------------------- -------------------
Total current assets 809,365 2,563,979
-------------------- -------------------
Property and equipment, net 461,198 498,448
Other assets
Capitalized software development costs,
net of accumulated amortization of $202,834 at
December 31, 1999 and $82,108 at June 30, 1999 1,115,906 683,337
Security deposits 73,374 74,834
-------------------- -------------------
1,189,280 758,171
-------------------- -------------------
Total Assets $ 2,459,843 $ 3,820,598
==================== ===================
</TABLE>
F-2
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
-------------------- -------------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
<S> <C> <C>
Accounts payable $ 886,196 $ 780,543
Accrued liabilities 358,359 474,189
Accrued liabilities to warrant holders -- 1,311,365
Salaries payable 48,193 93,443
Capital lease obligation 23,942 70,147
Deferred revenues - current portion 1,656,632 1,656,632
------------------- -------------------
Total current liabilities 2,973,322 4,386,319
------------------- -------------------
Deferred revenues - long-term portion 3,313,267 4,141,579
COMMITMENTS AND CONTINGENCIES - NOTE 7
STOCKHOLDERS' DEFICIENCY
Preferred stock - $0.01 par value
Authorized - 1,000,000 shares
Issued and outstanding - None
Common stock - $.01 par value
Authorized - 40,000,000 shares
Issued and outstanding - 1,199,787 shares at June 30, 1999
and 1,460,215 shares at December 31, 1999 14,601 11,998
Common stock subscribed 675,853 1,812,554
Notes receivable from officers (675,853) (1,812,554)
Additional paid-in capital 42,121,283 20,679,611
Unearned compensation (2,920,394) (3,452,904)
Accumulated deficit (43,042,236) (21,946,005)
-------------------- -------------------
Total stockholders' deficiency (3,826,746) (4,707,300)
-------------------- -------------------
Total Liabilities and Stockholders' Deficiency $ 2,459,843 $ 3,820,598
==================== ===================
</TABLE>
See accompanying notes.
F-3
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED DECEMBER 31 ENDED DECEMBER 31
--------------------------------------- -------------------------------------
1999 1998 1999 1998
------------------- ----------------- ----------------- -----------------
Revenues $ 912,621 $ 344,024 $ 1,720,913 $ 693,729
------------------- ----------------- ----------------- -----------------
Costs and expenses:
<S> <C> <C> <C> <C>
Costs of revenues 207,779 182,437 445,412 389,521
Product development expenses 87,377 24,170 134,222 51,216
Selling, general and administrative
expenses 725,427 666,693 1,302,974 1,167,130
Stock-based compensation 21,362,068 335,004 21,635,019 665,425
------------------- ----------------- ----------------- -----------------
Total costs and expenses 22,382,651 1,208,304 23,517,627 2,273,292
------------------- ----------------- ----------------- -----------------
Loss from operations (21,470,030) (864,280) (21,796,714) (1,579,563)
------------------- ----------------- ----------------- -----------------
Other income (expense):
Interest income 2,016 706 13,033 2,908
Interest expense and other
financing costs (30,250) (669,701) (30,250) (810,797)
Prepaid warrant costs 717,700 -- 717,700 --
------------------- ----------------- ----------------- -----------------
689,466 (668,995) 700,483 (807,889)
------------------- ----------------- ----------------- -----------------
Net loss $ (20,780,564) $ (1,533,275) $ (21,096,231) $ (2,387,452)
=================== ================= ================= =================
Basic and diluted earnings per
common share $ (14.75) $ (1.41) $ (15.19) $ (2.36)
=================== ================= ================= =================
Weighted average shares outstanding 1,409,046 1,089,881 1,388,546 1,010,487
=================== ================= ================= =================
</TABLE>
See accompanying notes.
F-4
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
SIX MONTHS ENDED DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK COMMON RECEIVABLE ADDITIONAL
PAR STOCK FROM PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED OFFICERS CAPITAL COMPENSATION DEFICIT
---------- ----------- ------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1999 1,199,787 $11,998 $1,812,554 $(1,812,554) $20,679,611 $(3,452,904) $(21,946,005)
Issuance of Common Stock in
connection with the
settlement of obligations
to a Prepaid Warrant holder 180,000 1,800 -- -- 266,895 -- --
Issuance of Common Stock upon
exercise of employee stock
options 8,195 81 -- -- 10,494 -- --
Issuance of warrants to
purchase 200,000 shares of
Common Stock in connection
with investment advisory -- -- -- -- 60,000 (60,000) --
services
Conversion of 87.8 Prepaid
Common Stock Purchase
Warrants into Common Stock 30,525 305 -- -- (305) -- --
Revaluation of subscriptions
for 824,319 shares of
Common Stock and notes
receivable in connection
with officers' employment -- -- (1,194,315) 1,194,315 -- -- --
contracts
Subscriptions for 76,818
shares of Common Stock and
notes receivable in
connection with restricted
stock purchase agreement -- -- 57,614 (57,614) -- -- --
Issuance of Common Stock upon
exercise of warrants to
purchase Common Stock 41,708 417 -- -- 62,079 -- --
Amortization of unearned
compensation over the term
of consulting agreements -- -- -- -- -- 592,510 --
Change in market value of
employee stock options -- -- -- -- 2,224,709 -- --
Authorization of the issuance
of 202,000 shares of Common
Stock in connection with
officers' employment -- -- -- -- 3,181,500 -- --
contracts
Change in market value of
Common Stock subscriptions -- -- -- -- 15,636,300 -- --
Net loss for the period -- -- -- -- -- -- (21,096,231)
---------- ----------- ------------- ------------- ------------- -------------- --------------
Balances at December 31, 1999 1,460,215 $14,601 $ 675,853 $(675,853) $42,121,283 $(2,920,394) $(43,042,236)
========== =========== ============= ============= ============= ============== ==============
</TABLE>
See accompanying notes.
F-5
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED DECEMBER 31 ENDED DECEMBER 31
------------------------------------- --------------------------------------
1999 1998 1999 1998
------------------ ---------------- ------------------ -----------------
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net loss $ (20,780,564) $ (1,533,275) $ (21,096,231) $ (2,387,452)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization 125,080 69,198 221,346 116,901
Noncash interest expense and other
financing costs -- 666,070 -- 794,245
Noncash compensation costs 21,060,813 -- 21,042,509 --
Noncash consulting costs 301,255 335,004 592,510 665,425
Amortization of unearned revenues (414,156) (15,534) (828,312) (31,068)
Changes in operating assets and liabilities
Accounts receivable (117,156) 816 (37,729) 34,811
Prepaid expenses (11,112) 11,009 (1,627) (72,627)
Accounts payable and accrued liabilities (576,689) 377,988 (1,052,847) 539,050
Accrued interest payable -- 3,776 -- 3,776
Salaries payable (20,854) (34,915) (45,250) (34,910)
Unearned revenues -- 13,051 -- 213,051
Security deposit -- -- 1,460 --
----------------- ---------------- ------------------ -----------------
Net cash used for operating activities (433,383) (106,812) (1,204,171) (158,798)
----------------- ---------------- ------------------ -----------------
INVESTING ACTIVITIES
Purchase of equipment (38,985) (11,057) (63,370) (22,695)
Capitalization of software development costs (309,070) (262,810) (553,295) (495,815)
----------------- ---------------- ------------------ -----------------
Net cash used for investing activities (348,055) (273,867) (616,665) (518,510)
----------------- ---------------- ------------------ -----------------
FINANCING ACTIVITIES
Repayment of capital lease obligation (23,495) (20,516) (46,205) (40,353)
Proceeds from the issuance of notes -- 435,000 -- 435,000
Proceeds from the issuance of common stock 73,071 -- 73,071 --
Deferred financing costs -- (35,000) -- (35,000)
----------------- ---------------- ------------------ -----------------
Net cash provided by financing activities 49,576 379,484 26,866 359,647
----------------- ---------------- ------------------ -----------------
Decrease in cash (731,862) (1,195) (1,793,970) (317,661)
Cash - beginning of period 1,103,443 37,759 2,165,551 354,225
----------------- ---------------- ------------------ -----------------
Cash - end of period $ 371,581 $ 36,564 $ 371,581 $ 36,564
================= ================ ================== =================
</TABLE>
See accompanying notes.
F-6
<PAGE>
SMARTSERV ONLINE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION
SmartServ Online, Inc. (the "Company") commenced operations on August 20, 1993.
The Company offers a range of services designed to facilitate e-commerce by
providing transactional and information services to its alliance partners
("Strategic Marketing Partners"). The Company has developed online financial,
transactional and media applications using a unique "device independent"
delivery solution and makes these services available through its application
software and communication architecture to wireless telephones and personal
digital assistants, personal computers and the Internet. The Company's services
include stock trading, real-time stock quotes, business and financial news,
sports information, private-labeled electronic mail, national weather reports
and other business and entertainment information.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
- ---------------------
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information,
the instructions of Form 10-QSB and Rule 310 of Regulation SB and, therefore, do
not include all information and notes necessary for a presentation of results of
operations, financial position and cash flows in conformity with generally
accepted accounting principles. The balance sheet at June 30, 1999 has been
derived from the audited financial statements at that date, but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial statements should be
read in conjunction with the Company's audited financial statements for the year
ended June 30, 1999 included herein. In the opinion of the Company, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation have been made. Results of operations for the six months ended
December 31, 1999 are not necessarily indicative of those expected for the year
ending June 30, 2000.
The Company has completed development of its core applications software and
communications architecture; however, it has yet to generate revenues in an
amount sufficient to support its operations. The Company has incurred recurring
operating losses and its operations have not produced a positive cash flow.
Additionally, there is no assurance that the Company will generate future
revenues or cash flow from operations. The Company's financial statements for
the period ended December 31, 1999 have been prepared on a going concern basis
which contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business. The Company incurred net
losses of $7,124,126, $5,040,009 and $4,434,482 for the years ended June 30,
1999, 1998 and 1997, respectively, and as of December 31, 1999 had an
accumulated deficit of $43,042,236 and a deficiency of net assets of $3,826,746.
The Company is also a defendant in several legal proceedings (see Note 7) which
could have a material adverse effect on the Company's financial position, cash
flow, and results of operations. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of these uncertainties.
F-7
<PAGE>
The Company's stockholders approved a one-for-six reverse stock split at a
Special Meeting on October 15, 1998. Such reverse stock split became effective
on October 26, 1998. All applicable financial statement amounts and related
disclosures have been restated to give effect to this transaction.
USE OF ESTIMATES
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
REVENUE RECOGNITION
- -------------------
Revenues are recognized as services are provided. Deferred revenues, resulting
from customer prepayments, are recognized as services are provided throughout
the term of the agreement. Deferred revenues resulting from the Company's
agreements with Data Transmission Network Corporation ("DTN") are being
amortized over the term of the anticipated future revenue stream, a period of 42
months.
BASIC AND DILUTED EARNINGS PER SHARE
- ------------------------------------
The weighted average shares outstanding are determined as the mean average of
the shares outstanding and assumed to be outstanding during the period.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
- --------------------------------------
In connection with certain contracts entered into between the Company and its
Strategic Marketing Partners, the Company has capitalized software development
costs related to certain product enhancements in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed", effective July 1, 1998.
STOCK BASED COMPENSATION
- ------------------------
The Company maintains stock option plans for employees and non-employee
directors that provide for the granting of stock options for a fixed number of
shares with an exercise price equal to the fair value of the shares at the date
of grant. The Company accounts for these stock compensation plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). Certain options are subject to the variable plan
requirements of APB No. 25 which requires the Company to record compensation
expense for changes in the fair value of the Company's Common Stock.
SUPPLEMENTAL CASH FLOW DATA
- ---------------------------
Interest, debt origination and other financing costs paid during the six months
ended December 31, 1999 and 1998 were $-0- and $20,762, respectively.
F-8
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
-------------------- -----------------
<S> <C> <C>
Data processing equipment $ 763,580 $ 700,210
Data processing equipment purchased under a capital lease 246,211 246,211
Office furniture and equipment 71,423 71,423
Display equipment 9,635 9,635
Leasehold improvements 36,678 36,678
-------------------- -----------------
1,127,527 1,064,157
Accumulated depreciation, including $131,312 and $106,691 at
December 31, 1999 and June 30, 1999, respectively, for
equipment purchased under a capital lease (666,329) (565,709)
-------------------- -----------------
$ 461,198 $ 498,448
==================== =================
</TABLE>
4. EQUITY TRANSACTIONS
On July 1, 1999, the Company entered into an agreement with a holder of $325,000
of the Company's Prepaid Common Stock Purchase Warrants ("Prepaid Warrants"), to
settle the Company's obligation to such holder pursuant to the default
provisions of the Prepaid Warrants. Accordingly, the Company paid $325,000 to
redeem the Prepaid Warrants and issued 180,000 shares of Common Stock in full
settlement of all obligations to the holder. Settlement costs of $268,695 were
recorded during the year ended June 30, 1999.
During the period July 1, 1999 through December 31, 1999, holders of $87,803 of
the Company's Prepaid Warrants converted such warrants into 30,525 shares of
Common Stock at an exercise price of $2.88 per share.
On October 13, 1999, the Board of Directors authorized the establishment of the
Company's 1999 Employee Stock Option Plan ("1999 Plan"). The 1999 Plan provides
for the issuance of options to employees and directors for the purchase of a
maximum of 400,000 shares of Common Stock of the Company at not less than the
fair value of the Common Stock on the date of grant. Additionally, the Board of
Directors authorized the repricing of the restricted shares granted to Messrs.
Cassetta and Rossi to $.75 per share, the fair value of the shares at that date.
The restricted stock awards are variable plan awards pursuant to APB No. 25 and
accordingly, the Company is required to recognize compensation expense for the
changes in the market value of its Common Stock. In conjunction therewith, the
Company has recorded a charge to compensation expense of $15,636,300 for the
three and six month periods ended December 31, 1999, as well as a corresponding
increase to additional paid-in capital.
Also on October 13, 1999, the Board of Directors authorized the Company to enter
into a restricted stock agreement with Robert Pearl, Director of Business
Development, pursuant to which Mr. Pearl will be awarded 1% of the fully diluted
shares of Common Stock of the Company as of that date at the purchase price of
$.75 per share.
In October 1999, the Company entered into a consulting agreement with a
financial advisor to the Company. As consideration for such services, the
Company granted such advisor warrants to purchase 100,000 shares of Common Stock
at an exercise price of $2.625 per share and warrants to purchase 100,000 shares
of Common Stock at $3.65 per share. The warrants expire on October 24, 2004. The
Company recorded a noncash charge of $60,000 to unearned compensation which is
being amortized to income over the one year term of the agreement.
F-9
<PAGE>
In November 1999, the Company issued 25,042 shares of Common Stock to Zanett
Lombardier, Ltd pursuant to the cashless exercise provisions of warrants to
purchase 50,084 shares of Common Stock.
In December 1999, the Board of Directors authorized the issuance of 148,000
shares of Common Stock to Mr. Sebastian Cassetta in satisfaction of its bonus
obligation to Mr. Cassetta pursuant to his employment contract. The Company has
recorded a charge to compensation expense of $2,331,000 for the change in the
fair value of the Company's Common Stock between the due date of the obligation
and the grant date of the Common Stock.
In December 1999, the Board of Directors authorized the issuance of 54,000
shares of Common Stock to Mr. Mario Rossi in satisfaction of its bonus
obligation to Mr. Rossi pursuant to his employment contract. The Company has
recorded a charge to compensation expense of $850,500 for the change in the fair
value of the Company's Common Stock between the due date of the obligation and
the grant date of the Common Stock.
In December 1999, the Company issued 16,666 shares of Common Stock to
Ehrenkrantz King Nussbaum, Inc., financial advisors to the Company, upon the
exercise of warrants to purchase such Common Stock. The exercise price of the
warrants was $3.75 per share.
During the fiscal year ended June 30, 1999, the Company recorded a charge of
$717,700 as the potential cost of its default pursuant the terms of the Prepaid
Warrants. At December 31, 1999, the Company received waivers from such default
and reversed such previously recorded costs.
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31 SIX MONTHS ENDED DECEMBER 31
--------------------------------------- --------------------------------------
1999 1998 1999 1998
------------------ ----------------- ------------------ ------------------
Numerator:
<S> <C> <C> <C> <C>
Net loss $ (20,780,564) $ (1,533,275) $ (21,096,231) $ (2,387,452)
================== ================= ================== ==================
Denominator:
Weighted average shares 1,409,046 1,089,881 1,388,546 1,010,487
================== ================= ================== ==================
Basic and diluted earnings per
common share $ (14.75) $ (1.41) $ (15.19) $ (2.36)
================== ================= ================== ==================
</TABLE>
At December 31, 1999, $1,881,197 of the Company's prepaid common stock purchase
warrants ("Prepaid Warrants") were outstanding. At that date, the Prepaid
Warrants were convertible into 1,217,403 shares of Common Stock. Additionally,
there were 3,911,000 common stock purchase warrants outstanding. Such warrants
have exercise prices ranging from $.60 to $72.00 per share and expire from March
2001 through January 2004. Based on the closing price ($19.72) of the Company's
Common Stock at December 31, 1999, there were, exclusive of the Prepaid
Warrants, currently exercisable in-the-money warrants outstanding for the
purchase of 3,898,000 shares of Common Stock. Additionally, the Company has
established employee stock option plans and authorized restricted stock awards
to employees, directors and consultants to the Company. These options are
intended to qualify as incentive stock options within the meaning of Section 422
of the Internal Revenue Code, as amended, or as nonqualified stock options. The
options are partially exercisable after one year from date of grant and no
options may be granted after April 15, 2006. At December 31, 1999, options and
restricted stock awards have been authorized for the purchase of 1,593,000
shares of the Company's Common Stock. None of the warrants, options or
restricted stock awards have been included in the computation of diluted loss
per share because their inclusion would be antidilutive.
F-10
<PAGE>
6. STOCK-BASED COMPENSATION
In connection with the grant of certain stock options, warrants and other
compensation arrangements, the Company has recorded charges to earnings that are
noncash in nature. These grants are subject to the variable plan requirements of
APB No. 25 that requires the Company to record compensation expense for changes
in the fair value of the Company's Common Stock.
The following table shows the amount of stock-based compensation that would have
been recorded in the categories of the statement of operations had stock-based
compensation not been separately stated therein:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED DECEMBER 31 ENDED DECEMBER 31
--------------------------------------- -------------------------------------
1999 1998 1999 1998
------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Costs of revenues $ 602,468 $ -- $ 597,701 $ --
Product development expenses -- -- -- --
Selling, general and administrative
expenses 20,759,600 335,004 21,037,318 665,425
------------------- ----------------- ----------------- -----------------
$ 21,362,068 $ 335,004 $ 21,635,019 $ 665,425
=================== ================= ================= =================
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
By letter dated April 10, 1998, Michael Fishman, then Vice President of Sales
for the Company, resigned his position. On or about April 24, 1998, Mr. Fishman
filed a complaint against the Company, Sebastian E. Cassetta and four other
defendants in the United States District Court for the District of Connecticut.
The complaint asserted claims under Sections 10(b) and 18 of the Securities
Exchange Act of 1934, as well as several state law claims, including breach of
contract, fraud and misrepresentation. Mr. Fishman alleged that the Company (1)
failed to pay him the benefits and compensation to which he was entitled and (2)
made material misrepresentations in its filings with the Securities and Exchange
Commission. On December 11, 1998, the Court granted the Company's motion to
dismiss Mr. Fishman's action without prejudice to the plaintiff to seek leave to
file an amended complaint within 30 days. On May 12, 1999, the Court denied the
plaintiff's subsequent motion for leave to file a substituted complaint on the
basis that the federal securities law claim, the only federal claim alleged by
the plaintiff, was still deficient. Accordingly, the federal securities claim
was dismissed with prejudice. On or about June 4, 1999, Mr. Fishman commenced an
action against the same defendants and added as a seventh defendant, the
Company's former President, Steven Francesco, in the Connecticut Superior Court
for the Judicial District of Stamford/Norwalk at Stamford alleging breach of
contract, breach of duty of good faith and fair dealing, fraudulent
misrepresentation, negligent misrepresentation, intentional misrepresentation
and failure to pay wages. The defendants have answered the complaint and filed
counterclaims for fraudulent inducement and breach of contract. Plaintiff has
responded to the counterclaims and discovery is proceeding. Although the Company
is vigorously defending this action, there can be no assurance that it will be
successful.
On or about May 11, 1998, Ronald G. Weiner filed a complaint against the Company
and Mr. Francesco in the Supreme Court of the State of New York, County of New
York. The complaint alleges, among other things, that in May 1993, by letter
from Mr. Francesco, Mr. Weiner was offered a 10% equity stake in Smart Phone
Services, Inc. ("SPS"), a Subchapter S company of which Mr. Francesco allegedly
was the President and sole shareholder, in exchange for his active involvement
in, among other things, raising capital and managing the financial aspects of
SPS. The complaint alleges that, in November 1993, Mr. Francesco sent a letter
to Mr. Weiner in which he (i) represented that SPS had failed to attract a
single investor and (ii) withdrew his offer to Mr. Weiner of a 10% equity
position in SPS. The complaint further alleges that, in conversations with Mr.
Weiner beginning in
F-11
<PAGE>
November 1993, Mr. Francesco represented that he was ceasing all efforts to
capitalize SPS. The complaint alleges, among other things, that Mr. Francesco
and SPS breached their agreement with Mr. Weiner by withdrawing their offer to
him of a 10% equity stake in SPS, and that, at the time Mr. Francesco
represented that he was ceasing efforts to capitalize SPS, he had actually
formed the Company and was actively seeking investors for it. The complaint
further alleges that the Company is a successor entity to SPS and that,
therefore, the Company is liable for SPS' and Mr. Francesco's alleged conduct in
derogation of their alleged agreement with Mr. Weiner. The complaint seeks,
among other things, (i) a declaratory judgment declaring Mr. Weiner a 10% equity
shareholder of the Company, (ii) a constructive trust in Mr. Weiner's favor for
10% of the Company's equity shares and (iii) restitution against Mr. Francesco
and the Company for unjust enrichment. On his unjust enrichment claim, Mr.
Weiner seeks unspecified damages that he alleges to be at least $250,000. In its
answer to the complaint, the Company has denied the material allegations of the
complaint and asserted affirmative defenses. No discovery in this action has yet
been taken. Although the Company is vigorously defending this action, there can
be no assurance that it will be successful.
8. SUBSEQUENT EVENTS
On January 18, 2000, the Company completed an offering ("Offering") of 333,000
shares of Common Stock to accredited investors. Gross proceeds from the Offering
amounted to $4,995,000 or $15.00 per share of Common Stock. The Company has
agreed to file a registration statement with the Securities and Exchange
Commission ("SEC") within 90 days to register the shares and use its best
efforts to have such registration declared effective. Should the Company fail to
file a registration statement with the SEC within 90 days, the holders will be
entitled to receive an additional number of shares equal to 10% of the shares
purchased in the Offering. The sale of these shares and warrants was exempt from
the registration requirements of the Securities Act of 1933, as amended,
pursuant to Section 4(2) thereof.
In January 2000, the Company issued 618,239 shares of Common Stock to Sebastian
Cassetta in connection with a restricted stock purchase agreement between the
Company and Mr. Cassetta. The Company received cash in the amount of $6,182 and
a note in the amount of $457,497. The note bears interest at 6.75% and is
secured by the Common Stock. No sales commissions were paid in connection with
such transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
In January 2000, the Company issued 206,080 shares of Common Stock to Mario
Rossi in connection with a restricted stock purchase agreement between the
Company and Mr. Rossi. The Company received cash in the amount of $2,061 and a
note in the amount of $152,499. The note bears interest at 6.75% and is secured
by the Common Stock. No sales commissions were paid in connection with such
transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
In January 2000, the Company issued 306,667 shares to certain participants of
the Company's November 1998 interim financing upon the exercise of warrants to
purchase such shares. Proceeds from the exercise of such warrants were $184,000.
These shares were issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act.
In January and February 2000, $739,000 of Prepaid Warrants were converted into
an aggregate of 527,855 shares of Common Stock of the Company. No sales
commissions were paid in connection with such conversions. The shares were
issued in reliance upon the exemption from registration provided by Section
3(a)(9) of the Securities Act.
F-12
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
SmartServ Online, Inc.
We have audited the accompanying balance sheets of SmartServ Online, Inc. as of
June 30, 1999 and 1998, and the related statements of operations, stockholders'
equity (deficiency), and cash flows for each of the three years in the period
ended June 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SmartServ Online, Inc. at June
30, 1999 and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 1999, in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that SmartServ
Online, Inc. will continue as a going concern. As more fully described in Note
1, the Company has incurred recurring operating losses and has a working capital
deficiency. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/S/ ERNST & YOUNG LLP
Stamford, Connecticut
October 13, 1999
F-13
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30
-----------------------------------------
1999 1998
--------------------- -------------------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 2,165,551 $ 354,225
Accounts receivable 348,278 111,051
Prepaid expenses 50,150 130,603
--------------------- -------------------
Total current assets 2,563,979 595,879
--------------------- -------------------
Property and equipment, net 498,448 610,537
Other assets
Capitalized software development costs,
net of accumulated amortization of $82,108 683,337 --
Security deposit 74,834 70,437
--------------------- -------------------
758,171 70,437
--------------------- -------------------
Total Assets $ 3,820,598 $ 1,276,853
===================== ===================
</TABLE>
F-14
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30
-----------------------------------------
1999 1998
-------------------- --------------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
<S> <C> <C>
Accounts payable $ 780,543 $ 800,545
Accrued liabilities 474,189 736,137
Accrued liabilities to warrant holders 1,311,365 --
Salaries payable 93,443 57,308
Capital lease obligation - current portion 70,147 76,127
Deferred revenues - current portion 1,656,632 776,049
-------------------- --------------------
Total current liabilities 4,386,319 2,446,166
-------------------- --------------------
Capital lease obligation - long-term portion -- 77,548
Deferred revenues - long-term portion 4,141,579 --
COMMITMENTS AND CONTINGENCIES - NOTE 9
STOCKHOLDERS' DEFICIENCY
Preferred stock - $0.01 par value
Authorized - 1,000,000 shares
Issued and outstanding - None
Common Stock - $0.01 par value
Authorized - 40,000,000 shares
Issued and outstanding - 1,199,787 shares at June 30, 1999
and 836,227 shares at June 30, 1998 11,998 8,362
Common stock subscribed 1,812,554 --
Notes receivable from officers (1,812,554) --
Additional paid-in capital 20,679,611 18,184,580
Unearned compensation (3,452,904) (4,617,924)
Accumulated deficit (21,946,005) (14,821,879)
-------------------- --------------------
Total stockholders' deficiency (4,707,300) (1,246,861)
-------------------- --------------------
Total Liabilities and Stockholders' Deficiency $ 3,820,598 $ 1,276,853
==================== ====================
</TABLE>
See accompanying notes.
F-15
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-----------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------
Revenues $ 1,443,781 $ 873,476 $ 688,610
-----------------------------------------------------------
Costs and expenses
<S> <C> <C> <C>
Cost of services (994,465) (1,216,761) (1,133,884)
Product development expenses (193,188) (923,082) (1,150,224)
Selling, general and administrative
expenses (4,006,599) (3,221,940) (2,861,845)
-----------------------------------------------------------
Total costs and expenses (5,194,252) (5,361,783) (5,145,953)
-----------------------------------------------------------
Loss from operations (3,750,471) (4,488,307) (4,457,343)
-----------------------------------------------------------
Other income (expense):
Interest income 4,767 40,788 74,507
Interest expense (167,839) (57,485) (20,194)
Debt origination and other financing costs (3,210,583) (535,005) (31,452)
-----------------------------------------------------------
(3,373,655) (551,702) 22,861
-----------------------------------------------------------
Net loss $ (7,124,126) $ (5,040,009) $ (4,434,482)
===========================================================
Basic and diluted loss per share $ (6.44) $ (7.65) $ (7.20)
===========================================================
Weighted average shares outstanding 1,105,603 659,034 615,833
===========================================================
</TABLE>
See accompanying notes.
F-16
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
COMMON STOCK NOTES ADDITIONAL
PAR COMMON STOCK RECEIVABLE PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED FROM OFFICERS CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1996 615,832 $ 6,158 $ -- $ -- $8,789,091 $ -- $(5,347,388)
Change in market value of
employee stock options -- -- -- -- 188,293 -- --
Issuance of Common Stock
Purchase Warrants in
connection with
investment advisory
services -- -- -- -- 75,000 -- --
Issuance of Common Stock
Purchase Warrants in
connection with
short-term line of credit -- -- -- -- 25,000 -- --
Net loss for the year -- -- -- -- -- -- (4,434,482)
----------------------------------------------------------------------------------------------
Balances at June 30, 1997 615,832 $ 6,158 $ -- $ -- $9,077,384 $ -- $ (9,781,870)
----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-17
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK COMMON RECEIVABLE ADDITIONAL
PAR STOCK FROM PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED OFFICERS CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1997 615,832 $ 6,158 $ -- $ -- $ 9,077,384 $ -- $ (9,781,870)
Issuance of 4,000 Prepaid
Common Stock Purchase
Warrants; net of direct
costs of $545,000 -- -- -- -- 3,455,000 -- --
Conversion of 1,429.33
Prepaid Common Stock
Purchase Warrants into
Common Stock 220,395 2,204 -- -- (2,204) -- --
Issuance of Common Stock
Purchase Warrants to a
financial consultant in
connection with the
issuance of 4,000 Prepaid
Common Stock Purchase
Warrants -- -- -- -- 5,145,500 (5,145,500) --
Issuance of Common Stock
Purchase Warrants in
connection with the --
issuance of notes -- -- -- -- 388,900 --
Issuance of Common Stock
Purchase Warrants in
connection with investment
advisory contracts -- -- -- -- 120,000 -- --
Amortization of unearned
compensation -- -- -- -- -- 527,576 --
Net loss for the year -- -- -- -- -- -- (5,040,009)
----------------------------------------------------------------------------------------------
Balances at June 30, 1998 836,227 $ 8,362 $ -- $ -- $ 18,184,580 $ (4,617,924) $ (14,821,879)
----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-18
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK COMMON RECEIVABLE ADDITIONAL
PAR STOCK FROM PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED OFFICER CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1998 836,227 $ 8,362 $ -- $ -- $ 18,184,580 $ (4,617,924) $ (14,821,879)
Conversion of 276.67 Prepaid
Common Stock Purchase
Warrants into Common Stock 178,560 1,786 -- -- (1,786) -- --
Issuance of Common Stock to
Prepaid Warrant holders
as consideration for
amending certain terms
and conditions of the
Prepaid Warrants 60,000 600 -- -- 146,713 -- --
Issuance of Common Stock
Purchase Warrants in
connection with
prepayments made by a
marketing partner -- -- -- -- 6,300 -- --
Issuance of Common Stock
Purchase Warrants in
connection with the
issuance of 8%
convertible notes -- -- -- -- 1,573,000 -- --
Beneficial conversion
feature of 8% convertible
notes -- -- -- -- 550,000 -- --
Issuance of Common Stock and
warrants to purchase
Common Stock in partial
settlement of litigation 125,000 1,250 -- -- 144,500 -- --
Amortization of unearned
compensation over the
term of the consulting
agreement -- -- -- -- -- 1,165,020 --
Common Stock subscriptions
and notes receivable in
connection with officers'
employment agreements -- -- 1,812,554 (1,812,554) -- -- --
Issuance of Common Stock
Purchase Warrants to a
financial consultant as
compensation for services -- -- -- -- 59,000 -- --
Redemption of Prepaid Common
Stock Purchase Warrants -- -- -- -- (325,000) -- --
</TABLE>
See accompanying notes.
F-19
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
<TABLE>
<CAPTION>
COMMON STOCK NOTES ADDITIONAL
PAR COMMON STOCK RECEIVABLE PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED FROM OFFICERS CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Authorization of the
issuance of Common Stock
Purchase Warrants in
connection with a
licensing agreement -- -- -- -- 324,000 -- --
Change in market value of
employee stock options -- -- -- -- 18,304 -- --
Net loss for the year -- -- -- -- -- -- (7,124,126)
----------- ----------- ------------- ------------- ------------- -------------- --------------
Balance at June 30, 1999 1,199,787 $11,998 $1,812,554 $(1,812,554) $20,679,611 $(3,452,904) $(21,946,005)
=========== =========== ============= ============= ============= ============== ==============
</TABLE>
See accompanying notes.
F-20
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-----------------------------------------------------
1999 1998 1997
-----------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $ (7,124,126) $ (5,040,009) $ (4,434,482)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization 278,646 193,601 149,182
Provision for losses on and write-off of receivables -- (1,300) 29,248
Noncash interest costs 12,524 52,837 --
Noncash debt origination and other financing costs 2,593,808 475,527 30,449
Noncash compensation costs 18,304 -- 188,293
Noncash consulting services 1,349,020 660,576 75,000
Amortization of unearned revenues (1,112,138) (251,058) --
Settlement of litigation -- 145,750 --
Changes in operating assets and liabilities
Accounts receivable (237,227) 40,031 (121,040)
Prepaid expenses (44,547) (25,878) (22,415)
Accounts payable and accrued liabilities 781,264 349,764 558,317
Accrued interest -- (5,323) 16,323
Payroll taxes payable 1,696 (16,089) 5,482
Salaries payable 34,439 6,996 1,364
Unearned revenues 6,121,776 1,002,193 24,914
Security deposit (4,397) 10,781 --
-----------------------------------------------------
Net cash provided by (used for) operating activities 2,669,042 (2,401,601) (3,499,365)
-----------------------------------------------------
INVESTING ACTIVITIES
Capitalization of software development costs (765,445) -- --
Purchase of equipment (84,449) (60,424) (351,786)
-----------------------------------------------------
Net cash used for investing activities (849,894) (60,424) (351,786)
-----------------------------------------------------
FINANCING ACTIVITIES
Proceeds from the issuance of warrants 324,000 2,643,941 --
Proceeds from the issuance of short-term notes 478,500 196,500 493,646
Repayment of short-term notes (691,794) -- --
Repayment of capital lease obligation (83,528) (92,536) --
Proceeds of advances from DTN 2,058,300 -- --
Repayment of advances from DTN (2,058,300) -- --
Costs of issuing securities (35,000) (25,000) (10,000)
-----------------------------------------------------
Net cash provided by (used for) financing activities (7,822) 2,722,905 483,646
-----------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,811,326 260,880 (3,367,505)
Cash and cash equivalents - beginning of year 354,225 93,345 3,460,850
-----------------------------------------------------
Cash and cash equivalents - end of year $ 2,165,551 $ 354,225 $ 93,345
=====================================================
</TABLE>
See accompanying notes.
F-21
<PAGE>
SMARTSERV ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND LIQUIDITY
SmartServ Online, Inc. (the "Company") commenced operations on August 20, 1993.
The Company offers a range of services designed to facilitate e-commerce by
providing transactional and information services to its alliance partners
("Strategic Marketing Partners"). The Company has developed online financial,
transactional and media applications using a unique "device independent"
delivery solution and makes these services available through its application
software and communication architecture to wireless telephones and personal
digital assistants, personal computers and the Internet. The Company's services
include stock trading, real-time stock quotes, business and financial news,
sports information, private-labeled electronic mail, national weather reports
and other business and entertainment information.
The Company's financial statements for the year ended June 30, 1999 have been
prepared on a going concern basis which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business. The Company incurred net losses of $7,124,126, $5,040,009, and
$4,434,482 for the years ended June 30, 1999, 1998, and 1997, respectively, and
as of June 30, 1999 had an accumulated deficit of $21,946,005 and a deficiency
of net assets of $4,707,300. The Company is also a defendant in several legal
proceedings (see Note 9) which could have a material adverse effect on the
Company's financial position, cash flow, and results of operations. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of these uncertainties.
The Company's business plan focuses on the strategy of marketing its services in
partnership with those companies that have an economic incentive to provide the
Company's information and transaction services to their customers. Management
believes that the Company's primary source of revenues will be derived from
consumers who purchase the services through its Strategic Marketing Partners.
Through the use of this strategy, the consumer is a customer of both SmartServ
and its Strategic Marketing Partner. The Company also believes that the sale of
its information and transaction services through the cooperative efforts of
partners with more recognizable brand names than its own is important to its
success.
On September 30, 1997, the Company completed a private placement ("Placement")
of $4 million of Prepaid Common Stock Purchase Warrants ("Prepaid Warrants") as
more fully disclosed in Note 5. An integral part of this Placement was the
conversion of notes payable and accrued interest thereon, aggregating $836,059,
into Prepaid Warrants. The net proceeds of $2,643,941 provided the Company with
working capital to continue its marketing efforts.
Effective May 1, 1998, the Company entered into an agreement with Data
Transmission Network Corporation ("DTN") whereby DTN purchased the exclusive
right to market three of the Company's Internet products: SmartServ Pro, a real
time stock quote product; TradeNet, an online trading vehicle for the customers
of small and medium sized brokerage companies, and BrokerNet, an administrative
reporting package for brokers of small and medium sized brokerage companies. The
consummation of this agreement has removed the Company from the retail market
and allows the Company to focus on business-to-business marketing. The Company
received $850,000 upon execution of the agreement and
F-22
<PAGE>
received minimum monthly payments of $100,000 through April 1999. On June 24,
1999, the Company and DTN entered into an agreement that amended the Software
License and Service Agreement dated April 23, 1998. In consideration of the
receipt of $5.175 million, the Company granted DTN an exclusive perpetual
worldwide license to the Company's Internet-based (i) SmartServ Pro, (ii)
TradeNet, (iii) BrokerNet, and (iv) order entry/routing system. Additionally,
the Company received $324,000 in exchange for an agreement to issue warrants to
purchase 300,000 shares of the Company's Common Stock at an exercise price of
$8.60 per share. The Company has agreed to continue to operate these products
and provide maintenance and enhancement services in exchange for a percentage of
the revenues earned by DTN therefrom. The cost of the Company's commitment to
provide such maintenance and enhancement services is limited to a maximum of 20%
of the revenues earned by the Company. None of the Company's wireless products
were included in this transaction.
The market for online information and transactional services is highly
competitive and subject to rapid innovation and technological change, shifting
consumer preferences and frequent new service introductions. The Company
believes that potential new competitors, including large multimedia and
information systems companies, are increasing their focus on transaction
processing. Increased competition in the market for the Company's services could
materially and adversely affect the Company's results of operations through
price reductions and loss of potential market share. The Company's ability to
compete in the future depends on its ability to maintain the technological and
performance advantages of its current distribution platform and to introduce new
applications that achieve market acceptance.
Notwithstanding the execution of the DTN agreements and the continual
discussions with potential Strategic Marketing Partners about future
relationships, the Company's ability to generate fee revenue and working capital
may not be sufficient to meet management's objectives as presently structured.
Management recognizes that the Company must generate additional revenues or
consider additional modifications to its sales and marketing program or
institute cost reductions to allow it to continue to operate with available cash
resources. There is no assurance that the Company will generate future revenues
or cash flow from operations or that the Company's products and services will
continue to be accepted in the marketplace by the ultimate consumers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
- ---------------------
The financial statements are prepared in conformity with generally accepted
accounting principles.
The Company's stockholders approved a one-for-six reverse stock split at a
Special Meeting on October 15, 1998. Such reverse stock split became effective
on October 26, 1998. All applicable financial statement amounts and related
disclosures have been restated to give effect to this transaction.
USE OF ESTIMATES
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
REVENUE RECOGNITION
- -------------------
Revenues are recognized as services are provided. Deferred revenues, resulting
from customer prepayments, are recognized as services are provided throughout
the term of the agreement. Deferred revenues resulting from the Company's
agreements with DTN are being amortized over the anticipated future revenue
stream, a period of 42 months.
F-23
<PAGE>
BASIC AND DILUTED EARNINGS PER SHARE
- ------------------------------------
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("Statement 128"). Statement
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented and, where necessary, restated
to conform to the Statement 128 requirements. The weighted average shares
outstanding are determined as the mean average of the shares outstanding and
assumed to be outstanding during the period.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
- --------------------------------------
In connection with certain contracts entered into between the Company and its
Strategic Marketing Partners, the Company has capitalized software development
costs related to certain product enhancements in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed", effective July 1, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------
The carrying amounts of the Company's financial instruments approximate fair
value.
SUPPLEMENTAL CASH FLOW DATA
- ---------------------------
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Interest, debt origination and other financing costs paid during the years ended
June 30, 1999, 1998, and 1997 were $101,974, $32,536, and $9,194, respectively.
CONCENTRATION OF CREDIT RISK
- ----------------------------
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of accounts receivable. There is no single
geographic concentration of sales or related accounts receivable in the United
States. At June 30, 1999, accounts receivable consist principally of amounts due
from DTN ($268,000), and a telecommunications company ($78,100). The Company
performs periodic credit evaluations of its customers and, if applicable,
provides for credit losses in the financial statements.
PROPERTY AND EQUIPMENT
- ----------------------
Property and equipment are stated at cost. Equipment purchased under a capital
lease has been recorded at the present value of the future minimum lease
payments at the date of acquisition. Depreciation is computed using the
straight-line method over estimated useful lives of three to ten years.
ADVERTISING COSTS
- -----------------
Advertising costs are expensed as incurred and were approximately $20,500,
$97,100, and $540,000 in 1999, 1998 and 1997, respectively.
STOCK BASED COMPENSATION
- ------------------------
The Company maintains a stock option plan for employees and non-employee
directors that provides for the granting of stock options for a fixed number of
shares with an exercise price equal to the fair value of the shares at the date
of grant. The Company accounts for this stock compensation plan in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). Accordingly, compensation expense is recognized to
the extent that the fair value of the stock exceeds the exercise price of the
option at the measurement date. In 1997, the Company adopted the
F-24
<PAGE>
disclosure provisions of Statement of Financial Accounting Standards No. 123
"Accounting for Stock-based Compensation".
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, as amended by SOP 98-4, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). The
adoption of SOP 98-1 is not expected to have a material effect on the Company's
operations. SOP 98-1 is required to be adopted by the Company no later than July
1, 1999.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30
------------------------------------------
1999 1998
------------------- -----------------
<S> <C> <C>
Data processing equipment $ 700,210 $ 616,587
Data processing equipment purchased under a capital lease 246,211 246,211
Office furniture and equipment 71,423 70,597
Display equipment 9,635 9,635
Leasehold improvements 36,678 36,678
------------------- -----------------
1,064,157 979,708
Accumulated depreciation, including $106,691 and
$57,449 for equipment purchased under a capital lease (565,709) (369,171)
------------------- -----------------
$ 498,448 $ 610,537
=================== =================
</TABLE>
During the year ended June 30, 1997, the Company leased computer equipment with
a capitalized cost of $246,211. The recording of such costs and the related
capitalized lease obligation are non-cash transactions for the purposes of the
Statement of Cash Flows.
4. NOTES PAYABLE
On May 29, 1997, the Company entered into a line of credit facility with a
financial institution for a maximum borrowing thereunder of $550,000. Borrowings
under this facility were to be repaid on August 27, 1997 along with interest at
the rate of 24% per annum. On July 21, 1997 and September 16, 1997, the facility
was amended to provide for additional borrowings of up to $222,222. On September
30, 1997, notes payable of $772,222 and accrued interest thereon of $63,837 were
converted into the Company's Prepaid Warrants as more fully described in Note 5.
In conjunction with the origination of the line of credit facility, the Company
issued 56,627 common stock purchase warrants to the financial institution.
Similarly, the Company issued 11,438 warrants for each of the July and September
amendments. As a result of the Company's default on the note in August, the
Company was required to issue 50,083 "default" warrants to such institution. At
June 30, 1999, these warrants were exercisable at prices ranging from $.75 to
$6.07. These warrants are subject to certain antidilution provisions and expire
in September 2002. Pursuant to Statement of Financial Accounting Standard No.
123, "Accounting for Stock Based Compensation", the Company valued these
warrants in accordance with the Black-Scholes pricing methodology at the time of
issuance and recorded such valuation in the statement of operations as debt
origination and other financing costs. The Company recorded debt origination and
other financing costs associated with these warrants of $463,567 for the year
ended June 30, 1998.
F-25
<PAGE>
Commencing November 20, 1998, the Company sold five and one-half (5.5) units,
each consisting of a secured 8% convertible note in the principal amount of
$100,000 and warrants to purchase Common Stock of the Company. The warrants are
exercisable at $.60 per share of Common Stock. The convertible notes were repaid
in June 1999. The Company has agreed to register the shares of Common Stock
issuable upon exercise of the warrants. In addition to customary fees and
expenses, Spencer Trask Securities, Inc. ("Spencer Trask"), the placement agent,
received for nominal consideration, warrants to purchase ten percent (10%) of
the shares of Common Stock of the Company issuable on conversion of the notes
and exercise of the warrants at $.72 per share. The issuance to the noteholders
of warrants to purchase 916,667 shares of Common Stock, as well as those issued
to Spencer Trask for the purchase of 183,333 shares of Common Stock have been
valued in accordance with the Black-Scholes pricing methodology and recorded as
debt origination and other financing costs. Also in connection with the 8%
convertible notes, the Company has recorded a non-cash charge to debt
origination and other financing costs of $550,000 representing the perceived
cost of the beneficial conversion feature of the notes. Emerging Issues Task
Force Issue 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios" ("Issue 98-5")
defines the beneficial conversion feature as the non-detachable conversion
feature that is "in-the-money" at the date of issuance. Issue 98-5 requires the
recognition of the intrinsic value of the conversion feature as the difference
between the conversion price and the fair value of the common stock into which
the notes are convertible. Such amount is limited to the proceeds of the
financing ($550,000) and has been recorded in debt origination and other
financing costs as of the date of issuance.
On December 30, 1998, the Company executed an agreement with a service provider
whereby certain obligations of the Company, amounting to $141,794, were
converted into a 12% note payable. On June 28, 1999, the outstanding balance of
$66,794 was repaid.
5. EQUITY TRANSACTIONS
During the year ended June 30, 1997, the Company authorized the issuance of
warrants for the purchase of 33,333 shares of Common Stock in connection with
certain investment advisory agreements. Such warrants are exercisable at prices
ranging from $12.00 to $24.00 per share through May 2002.
On September 30, 1997, The Zanett Securities Corporation ("Zanett"), acting as
placement agent for the Company, completed the private placement ("Placement")
of $4 million of the Company's Prepaid Common Stock Purchase Warrants ("Prepaid
Warrants"). The sale of the Prepaid Warrants was exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2)
thereof. Each Prepaid Warrant entitles the holder to purchase that number of
shares of Common Stock that is equal to $1,000 divided by the applicable
exercise price. Such exercise price is determined initially as 70% of the
average closing bid price of the Common Stock for the 10 trading days ending on
the day prior to exercise of the Prepaid Warrants. Additionally, the exercise
discount shall be increased by 1% for each subsequent 60 day period that the
Prepaid Warrants remain unexercised. The exercise price, however, shall never
exceed $8.40. The Prepaid Warrants became exercisable on December 29, 1997 and
expire on September 30, 2000.
As compensation for its services, Zanett received a placement fee and an
unaccountable expense allowance of 10% ($400,000) and 3% ($120,000),
respectively, of the gross proceeds of the Placement. Additionally, the Company
issued 135,906 Common Stock Purchase Warrants to Zanett that are subject to
antidilution provisions and are exercisable at $4.97 per share of Common Stock.
These warrants expire on September 30, 2002.
Also in conjunction with the Placement, the Company entered into an agreement
with Bruno Guazzoni, a financial consultant who is an affiliate of Zanett
Lombardier, Ltd., an investor in the Prepaid Warrants.
F-26
<PAGE>
During the five-year term of the agreement such consultant will provide the
Company with advisory services relating to financial and strategic ventures and
alliances, investment banking and general financial advisory services, and
advice and assistance with the Company's market development activities. As
compensation for these services, the Company authorized the issuance of 805,370
Common Stock Purchase Warrants ("Consulting Warrants") to this consultant that
are subject to antidilution provisions and are exercisable at $4.97 per share of
Common Stock. The Company has valued these Consulting Warrants in accordance
with Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation", and the Black-Scholes pricing methodology at
$5,145,500 and recorded this amount in stockholders' equity as unearned
compensation. Unearned compensation is being amortized to income over the
five-year term of the agreement. These warrants expire on September 30, 2002.
The Company has recorded consulting expense of $1,165,020 and $527,576 for the
years ended June 30, 1999 and 1998, respectively.
During the year ended June 30, 1999, holders of 276.67 of the Company's Prepaid
Warrants converted such warrants into 178,560 shares of Common Stock at exercise
prices ranging from $.75 to $2.38 per share.
On August 31, 1998, the Company issued 32,953 shares of Common Stock to Zanett
Lombardier, Ltd. and 17,047 shares of Common Stock to Bruno Guazzoni in
consideration of their agreement to certain restrictions on the exercise of
Prepaid Warrants and the resale of the shares of Common Stock issuable on
exercise thereof. Such shares have been recorded at the fair value of the
Company's Common Stock at that date as other financing costs.
On September 8, 1998, the Company issued warrants to purchase 3,000 shares of
Common Stock to DTN for prepayment of certain guaranteed payments in accordance
with the Software License and Service Agreement between the parties dated April
23, 1998. Such warrants are exercisable at $3.00 per share of Common Stock and
have been recorded in accordance with the Black-Scholes pricing methodology as
other financing costs.
On November 17, 1998, the Company issued 125,000 shares of Common Stock and
warrants to purchase 16,667 shares of Common Stock, exercisable at $5.00 per
share until November 11, 2001, to Steven Francesco, a former officer of the
Company, as partial consideration for the settlement of his claims against the
Company and certain of its officers and directors. The value of these shares has
been recorded in selling, general and administrative expenses based upon the
fair value of the Company's Common Stock at that date while the warrants have
been recorded in accordance with the Black-Scholes pricing methodology.
On December 29, 1998, the Board of Directors approved the terms of employment
contracts for Sebastian E. Cassetta, Chairman and Chief Executive Officer, and
Mario F. Rossi, Vice President of Technology. The employment agreement with Mr.
Cassetta ("Cassetta Agreement"), is effective January 1, 1999, expires on
December 31, 2001, and provides for, among other things, the sale to him of
618,239 shares of restricted stock representing 9% of the fully diluted shares
of Common Stock of the Company. The purchase price ($2.20 per share) of the
restricted stock is equal to 110% of fair market value of the Company's Common
Stock for the 30 days preceding the date of the stock purchase agreement
("Cassetta Stock Purchase Agreement") contemplated by the Cassetta Agreement.
The purchase price has been paid with a 5 year, non-recourse promissory note,
secured by the stock, at an interest rate of 6.75%, which is 1% below the prime
rate on the date of the Cassetta Stock Purchase Agreement. The Cassetta Stock
Purchase Agreement provides the Company with certain repurchase options and
provides Mr. Cassetta with a put option in the event of the termination of his
employment. In accordance with APB No. 25, the Company will record the changes
in the fair value of such shares in recognition of the compensatory nature of
their issuance. On October 13, 1999, the Board of Directors agreed to reprice
the shares granted
F-27
<PAGE>
to Mr. Cassetta to $.75 per share, the fair value of the shares at that date.
The Company and Mr. Rossi have also entered into an employment agreement ("Rossi
Agreement"), effective January 1, 1999 and expiring on December 31, 2001,
providing for, among other things, the sale to him of 206,080 shares of
restricted stock representing 3% of the fully diluted shares of Common Stock of
the Company. The purchase price ($2.20 per share) of the restricted stock is
equal to 110% of fair market value for the 30 days preceding the date of the
stock purchase agreement ("Rossi Stock Purchase Agreement") contemplated by the
Rossi Agreement. The purchase price has been paid with a 5 year, non-recourse
promissory note, secured by the stock, at an interest rate of 6.75%, which is 1%
below the prime rate on the date of the Rossi Stock Purchase Agreement. The
Rossi Stock Purchase Agreement provides the Company with certain repurchase
options and provides Mr. Rossi with a put option in the event of the termination
of his employment. In accordance with APB No. 25, the Company will record the
changes in the fair value of such shares in recognition of the compensatory
nature of their issuance. On October 13, 1999, the Board of Directors agreed to
reprice the shares granted to Mr. Rossi to $.75 per share, the fair value of the
shares at that date.
On January 14, 1999, the Company issued 10,000 shares of Common Stock to Arnhold
& S. Bleichroeder, Inc. ("ASB"), an investor in the Company's Prepaid Warrants,
in consideration of an agreement to waive certain events of default under such
Prepaid Warrants. These shares have been recorded at the fair value of the
Company's Common Stock at that date as other financing costs.
On January 20, 1999, the Company agreed to cancel warrants to purchase 20,833
shares of Common Stock exercisable at $15.75 and $19.50 per share to Steven
Rosner, a financial advisor to the Company, and to grant Mr. Rosner warrants to
purchase 40,833 shares of Common Stock at $.60 per share for his efforts at
arranging the Company's relationship with Spencer Trask. Such warrants will
expire on January 20, 2004. These warrants have been recorded in accordance with
the Black-Scholes pricing methodology as selling, general and administrative
expenses.
On June 24, 1999, in consideration of the receipt of $324,000, the Company
agreed to issue DTN warrants for the purchase of 300,000 shares of the Company's
Common Stock at $8.60 per share. The warrants will expire on the earlier of
April 30, 2003, or the date one year after the market price of a share of Common
Stock reaches $8.60. These warrants have been recorded in accordance with the
Black-Scholes pricing methodology.
The delisting of the Company's Common Stock from the Nasdaq Small Cap Market
caused the Company to default on certain terms and conditions of the Prepaid
Warrants. Such default obligates the Company to pay financial penalties, as well
as to redeem the outstanding Prepaid Warrants at a 43% premium. The Company has
been unable to obtain appropriate waivers from holders of $1,994,000 of such
Prepaid Warrants. Accordingly, the Company has recorded a charge to debt
origination and other financing costs in the amount of $986,365, representing
the potential penalties due such holders.
F-28
<PAGE>
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------------------------------------------------
1999 1998 1997
------------------ -------------------- --------------------
Numerator:
<S> <C> <C> <C>
Net loss $ (7,124,126) $ (5,040,009) $ (4,434,482)
================== ==================== ====================
Denominator:
Weighted average shares 1,105,603 659,034 615,833
================== ==================== ====================
Basic and diluted loss per common
share $ (6.44) $ (7.65) $ (7.20)
================== ==================== ====================
</TABLE>
At June 30, 1999 there were, exclusive of the Prepaid Warrants (Note 5),
3,195,000 Common Stock Purchase Warrants outstanding. Such warrants have
exercise prices ranging from $.60 to $72.00 per share and expire from March 2001
through January 2004. Based on the closing bid price ($1.50) of the Company's
Common Stock at June 30, 1999, there were, exclusive of the Prepaid Warrants,
currently exercisable in-the-money warrants outstanding for the purchase of
507,700 shares of Common Stock. Additionally, the Company has established an
employee stock option plan for the benefit of directors, employees, and
consultants to the Company. These options are intended to qualify as incentive
stock options within the meaning of Section 422 of the Internal Revenue Code, as
amended, or as nonqualified stock options. The options are partially exercisable
after one year from date of grant and no options may be granted after April 15,
2006. At June 30, 1999, there are options outstanding for the purchase of
285,901 shares of the Company's Common Stock. None of the warrants or options
have been included in the computation of diluted loss per share because their
inclusion would be antidilutive. (See Note 11 for a discussion of the Company's
stock option plans.)
7. INCOME TAXES
At June 30, 1999 and 1998, the Company has deferred tax assets as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Capitalized Start-up Costs $ 741,600 $ 1,112,500
Net Operating Loss Carryforwards 6,578,000 4,126,000
------------- ------------
$ 7,319,600 $ 5,238,500
============= ============
</TABLE>
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," the Company has established a valuation allowance
to fully reserve the future income tax benefit of these deferred tax assets due
to uncertainty about their future realization. The valuation allowance increased
to $7,319,600 at June 30, 1999 from $5,238,500 at June 30, 1998 and $3,540,000
at June 30, 1997.
At June 30, 1999, the Company has net operating loss carryforwards for Federal
income tax purposes of approximately $8,930,000 which expire in the years 2009
through 2013. As a result of the public issuance of stock by the Company on
March 21, 1996, and the resultant change in ownership pursuant to
F-29
<PAGE>
Internal Revenue Code Section 382, the utilization of net operating losses
incurred prior to this date may be limited.
8. LEASES
The Company leases office space for its Stamford, Connecticut headquarters under
a noncancelable lease. The lease includes escalation clauses for items such as
real estate taxes, building operation and maintenance expenses, and electricity
usage.
On May 1, 1997, the Company entered into a 3 year noncancelable capital lease
for certain computer equipment used to provide information services. The Company
also leases certain other computer equipment under operating leases which expire
through July 2000.
Rent expense amounted to approximately $290,600, $278,000, and $207,000 for the
years ended June 30, 1999, 1998, and 1997, respectively.
Minimum future rental payments at June 30, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
------------------------------------ CAPITAL
YEAR ENDING JUNE 30 PREMISES EQUIPMENT LEASE
- ------------------ ----------------- --------------- ------------------
<S> <C> <C> <C>
2000 $ 179,700 $ 41,000 $ 75,341
2001 186,000 1,600 --
2002 192,300 -- --
2003 67,000 -- --
----------------- --------------- ------------------
$ 625,000 $ 42,600 75,341
================= ===============
Less amounts
representing interest
and executory costs 5,194
------------------
$ 70,147
==================
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
By letter dated April 10, 1998, Michael Fishman, then Vice President of Sales
for the Company, resigned his position. On or about April 24, 1998, Mr. Fishman
filed a complaint against the Company, Sebastian E. Cassetta and four other
defendants in the United States District Court for the District of Connecticut.
The complaint asserted claims under Sections 10(b) and 18 of the Securities
Exchange Act of 1934, as well as several state law claims, including breach of
contract, fraud and misrepresentation. Mr. Fishman alleged that the Company (1)
failed to pay him the benefits and compensation to which he was entitled and (2)
made material misrepresentations in its filings with the Securities and Exchange
Commission. On December 11, 1998, the Court granted the Company's motion to
dismiss Mr. Fishman's action without prejudice to the plaintiff to seek leave to
file an amended complaint within 30 days. On May 12, 1999, the Court denied the
plaintiff's subsequent motion for leave to file a substituted complaint on the
basis that the federal securities law claim, the only federal claim alleged by
the plaintiff, was still deficient. Accordingly, the federal securities claim
was dismissed with prejudice. On or about June 4, 1999, Mr. Fishman commenced an
action against the same defendants and added as a seventh defendant, the
Company's former President, Mr. Steven Francesco, in the Connecticut Superior
Court for the Judicial
F-30
<PAGE>
District of Stamford/Norwalk at Stamford alleging breach of contract, breach of
duty of good faith and fair dealing, fraudulent misrepresentation, negligent
misrepresentation, intentional misrepresentation and failure to pay wages. The
defendants have answered the complaint and filed counterclaims for fraudulent
inducement and breach of contract. Plaintiff's response to counterclaims was due
October 14, 1999 and has yet to be received. Although the Company is vigorously
defending this action, there can be no assurance that it will be successful.
By memorandum dated April 10, 1998, Jonathan Paschkes, then Vice President of
Marketing for the Company, resigned his position. On or about November 17, 1998,
Mr. Paschkes filed a complaint against the Company and Sebastian E. Cassetta in
the United States District Court, District of Connecticut. In the complaint, Mr.
Paschkes alleges (i) fraudulent inducement to him to accept his position with
the Company; (ii) breach of various terms of the Company's employment contract
with him; and (iii) failure by the Company to pay him wages and bonuses and
issue options to him pursuant to the terms of his employment contract. On or
about February 18, 1999, Mr. Paschkes filed an amended complaint. The Company
answered the amended complaint and asserted counterclaims against Mr. Paschkes
for fraudulent inducement, breach of contract, conversion and statutory theft.
On October 5, 1999, an agreement in principle was reached between the Company
and Mr. Paschkes in full settlement of these claims. The Company anticipates
executing a settlement agreement with Mr. Paschkes and filing a Stipulation of
Dismissal with prejudice before October 31, 1999. The Company has recorded a
charge for the settlement of such claims in the results of operations for the
year ended June 30, 1999.
On or about May 11, 1998, Ronald G. Weiner filed a complaint against the Company
and Mr. Francesco in the Supreme Court of the State of New York, County of New
York. The complaint alleges, among other things, that in May 1993, by letter
from Mr. Francesco, Mr. Weiner was offered a 10% equity stake in Smart Phone
Services, Inc. ("SPS"), a Subchapter S company of which Mr. Francesco allegedly
was the President and sole shareholder, in exchange for his active involvement
in, among other things, raising capital and managing the financial aspects of
SPS. The complaint alleges that, in November 1993, Mr. Francesco sent a letter
to Mr. Weiner in which he (i) represented that SPS had failed to attract a
single investor and (ii) withdrew his offer to Mr. Weiner of a 10% equity
position in SPS. The complaint further alleges that, in conversations with Mr.
Weiner beginning in November 1993, Mr. Francesco represented that he was ceasing
all efforts to capitalize SPS. The complaint alleges, among other things, that
Mr. Francesco and SPS breached their agreement with Mr. Weiner by withdrawing
their offer to him of a 10% equity stake in SPS, and that, at the time Mr.
Francesco represented that he was ceasing efforts to capitalize SPS, he had
actually formed the Company and was actively seeking investors for it. The
complaint further alleges that the Company is a successor entity to SPS and
that, therefore, the Company is liable for SPS' and Mr. Francesco's alleged
conduct in derogation of their alleged agreement with Mr. Weiner. The complaint
seeks, among other things, (i) a declaratory judgment declaring Mr. Weiner a 10%
equity shareholder of the Company, (ii) a constructive trust in Mr. Weiner's
favor for 10% for the Company's equity shares and (iii) restitution against Mr.
Francesco and the Company for unjust enrichment. On his unjust enrichment claim,
Mr. Weiner seeks unspecified damages that he alleges to be at least $250,000. In
its answer to the complaint, the Company has denied the material allegations of
the complaint, asserted affirmative defenses and also asserted cross-claims
against Mr. Francesco seeking indemnification from, or contribution towards, any
judgment that Mr. Weiner may obtain against the Company. In accordance with an
agreement dated November 11, 1998, the Company has filed a motion to discontinue
the cross-claims that it asserted against Mr. Francesco. No discovery in this
action has yet been taken. Although the Company is vigorously defending this
action there can be no assurance that it will be successful.
10. SIGNIFICANT RELATIONSHIPS
During the year ended June 30, 1999, the Company's relationship with DTN
accounted for 94.8% of its
F-31
<PAGE>
revenues. During the year ended June 30, 1998, three Strategic Marketing Partner
relationships accounted for 10.2%, 10.0% and 24.1%, respectively, of the
Company's revenues while during the year ended June 30, 1997, one Strategic
Marketing Partner relationship accounted for approximately 46.4% of the
Company's revenues.
11. EMPLOYEE STOCK OPTION PLAN
In April 1996, the Board of Directors approved the establishment of an Employee
Stock Option Plan authorizing stock option grants to directors, key employees,
and consultants of the Company. The options are intended to qualify as incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, or as nonqualified stock options. The Plan provides for the
issuance of up to 250,000 of such options at not less than the fair value of the
stock on the date of grant. The options are partially exercisable after one year
from date of grant and expire on the tenth anniversary of the date of grant.
On September 24, 1997, the Compensation Committee granted new stock options to
employees and non-employee directors conditional upon cancellation of all of
their existing stock options. Such options were exercisable at $12.00. On
October 8, 1998, the Board of Directors voted to cancel the outstanding employee
and non-employee director options and reissue options covering a like number of
shares to employees and non-employee directors at an exercise price not less
than the fair value at that date. The exercise price of the options issued to
employees and non-employee directors on October 8, 1998 was $1.29 per share.
Such options expire on October 7, 2008. In accordance with APB No. 25, the
Company has recorded the changes in the fair value of the shares underlying
177,201 of such options to reflect the compensatory nature of their issuance. On
November 20, 1998, the Board of Directors granted employees options to purchase
58,700 shares of Common Stock at $1.625 per share. Such options expire on
November 19, 2008.
On December 29, 1998, the Board approved a plan to compensate non-employee
directors for their service to the Company by granting to them options to
purchase 10,000 shares of the Company's Common Stock at the commencement of each
calendar year. Effective January 1, 1999, the Company issued options to such
persons to purchase 50,000 shares of Common Stock exercisable at $2.35 per share
through December 31, 2003.
On October 13, 1999, the Board of Directors authorized the establishment of the
Company's 1999 Employee Stock Option Plan ("1999 Plan"). The 1999 Plan provides
for the issuance of options to employees and directors for the purchase of a
maximum of 400,000 shares of Common Stock of the Company at not less than the
fair value of the Common Stock on the date of grant. The Board authorized the
issuance of 300,000 of such options to employees at the fair value of the Common
Stock on that date.
F-32
<PAGE>
Information concerning stock options for the Company is as follows:
<TABLE>
<CAPTION>
AVERAGE
EXERCISE
OPTIONS PRICE
-------------------- -----------------------
<S> <C> <C>
Balance at July 1, 1996 51,925 $ 38.82
Granted 70,829 31.38
Exercised -- --
Cancelled 66,362 37.32
-------------------- -----------------------
Balance at June 30, 1997 56,392 31.26
Granted 206,391 12.00
Exercised -- --
Cancelled 85,216 25.50
-------------------- -----------------------
Balance at June 30, 1998 177,567 12.00
Granted 463,858 1.92
Exercised -- --
Cancelled 355,524 7.26
-------------------- -----------------------
Balance at June 30, 1999 285,901 $ 1.54
==================== =======================
</TABLE>
The following table summarizes information about the Company's stock options
outstanding as of June 30, 1999.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -----------------------------------
AVERAGE
AVERAGE REMAINING AVERAGE
RANGE OF NUMBER OF EXERCISE CONTRACTUAL NUMBER OF EXERCISE
EXERCISE PRICES OPTIONS PRICE LIFE (YEARS) OPTIONS PRICE
- --------------------------- ----------------- --------------- --------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
$1.29 - $2.35 285,901 $ 1.54 8.25 81,164 $ 1.96
=========================== ================= =============== =============== ================ ==================
</TABLE>
SUPPLEMENTAL AND PRO FORMA DISCLOSURE
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation." This Statement requires companies to recognize compensation
expense based on the respective fair values of the options at the date of grant.
Companies that choose not to adopt the new rules will continue to apply the
existing accounting rules contained in APB No. 25, but are required to disclose
the pro forma effects on net income and earnings per share, as if the fair value
based method of accounting had been applied.
The pro forma information regarding net loss and loss per share required by
Statement 123 has been determined as if the Company had accounted for its
employee stock option plan under the fair value methods described in that
Statement. The fair value of options granted under the Company's employee stock
option plan was estimated at the date of grant using the Black-Scholes option
pricing model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require
F-33
<PAGE>
the input of highly subjective assumptions including the expected dividend
yield, the expected life of the options, the expected stock price volatility,
and the risk-free interest rate.
Pertinent assumptions with regard to the determination of fair value of the
options and their impact on earnings per share are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- --------------- ------------------
<S> <C> <C> <C>
Weighted average dividend yield for options
granted 0.0% 0.0% 0.0%
Weighted average expected life in years 5.0 5.0 5.0
Weighted average volatility 147.0% 143.9% 70.8%
Risk-free interest rate 5.75% 6.0% 6.5%
Weighted average grant date fair value of
options $1.92 $10.92 $19.80
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. As such, the pro forma
net loss and loss per share are not indicative of future years.
The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------------------------
REPORTED PROFORMA REPORTED PROFORMA REPORTED PROFORMA
--------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net Loss $7,124,126 $7,308,036 $5,040,009 $5,654,512 $4,434,482 $5,209,947
=============== ============== ============== ============== ============== ==============
Loss per Share $6.44 $6.61 $7.65 $8.58 $7.20 $8.46
=============== ============== ============== ============== ============== ==============
</TABLE>
12. SUBSEQUENT EVENTS
On July 1, 1999, the Company entered into an agreement with ASB, a holder of
$325,000 of the Company's Prepaid Warrants, to settle the Company's obligation
to ASB pursuant to the default provisions of the Prepaid Warrants. Pursuant to
such agreement, the Company paid ASB $325,000 to redeem the Prepaid Warrants and
issued 180,000 shares of Common Stock in full settlement of all obligations to
ASB. The Company has agreed to file a registration statement with the Securities
and Exchange Commission covering such shares. Settlement costs of $268,695 have
been recorded as debt origination and other financing costs during the year
ended June 30, 1999.
On October 13, 1999, the Board of Directors agreed to enter into a restricted
stock purchase agreement with Mr. Robert Pearl, Director of Business
Development. Accordingly, Mr. Pearl has been granted 1% of the fully diluted
shares of Common Stock of the Company as of that date at the purchase price of
$.75 per share.
F-34
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SMARTSERV ONLINE, INC.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE NO.
------- ----------- --------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the
Company
3.2 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation filed on June 1, 1998
3.3 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation filed on October 16, 1998
3.4 By-laws of the Company, as amended
4.1 Specimen Certificate of the Company's Common Stock
4.2 Placement Agent Agreement dated as of January 11, 2000 between
the Company and America First Associates Corp.
4.3 Form of Underwriter's Warrant
4.4 Warrant Agreement between the Company and Data Transmission
Network Corporation
5.1 Opinion of Parker Chapin LLP
10.1 Information Distribution License Agreement dated as of July
18, 1994 between the Company and S&P ComStock, Inc.
10.2 New York Stock Exchange, Inc. Agreement for Receipt and Use of
Market Data dated as of August 11, 1994 between the Company
and the New York Stock Exchange, Inc.
10.3 The Nasdaq Stock Market, Inc. Vendor Agreement for Level 1
Service and Last Sale Service dated as of September 12, 1994
between the Company and The Nasdaq Stock Exchange, Inc.
("Nasdaq")
10.4 Amendment to Vendor Agreement for Level 1 Service and Last
Sale Service dated as of October 11, 1994 between the Company
and Nasdaq
10.5 Lease Agreement dated as of March 4, 1994, between the Company
and One Station Place, L.P. regarding the Company's Stamford,
Connecticut offices
10.6 Lease Modification and Extension Agreement, dated February 6,
1996, between the Company and One Station Place, L.P.
regarding the Company's Stamford, Connecticut offices
10.7 Form of 1996 Stock Option Plan
10.8 Asset Purchase and Software License and Service Agreements
between
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SmartServ Online, Inc. and Data Transmission Network Corporation,
dated April 23, 1998
10.9 Amendment to the Software and License Agreement between
SmartServ Online, Inc. and Data Transmission Network
Corporation, dated June 24, 1999. Portions of this exhibit
(indicated by asterisks) have been omitted pursuant to an
order by the Securities and Exchange Commission dated December
2, 1999, granting confidential treatment under the Securities
Exchange Act of 1934 and the omitted portions have been filed
separately with the Securities and Exchange Commission.
10.10 Letter agreement dated August 26, 1999, amending the Amendment
to the Software and License Agreement between SmartServ
Online, Inc. and Data Transmission Network Corporation, dated
June 24, 1999. Portions of this exhibit (indicated by
asterisks) have been omitted pursuant to an order by the
Securities and Exchange Commission dated December 2, 1999,
granting confidential treatment under the Securities Exchange
Act of 1934 and the omitted portions have been filed
separately with the Securities and Exchange Commission.
10.11 Amended and Restated Employment Agreement between SmartServ
Online, Inc. and Sebastian E. Cassetta, dated January 1, 1999
10.12 Restricted Stock Purchase Agreement between SmartServ Online,
Inc. and Sebastian E. Cassetta, dated December 29, 1998
10.13 Employment Agreement between SmartServ Online, Inc. and Mario
F. Rossi, dated January 1, 1999
10.14 Restricted Stock Purchase Agreement between SmartServ Online,
Inc. and Mario F. Rossi, dated December 29, 1998
23.1 Consent of Ernst & Young LLP
23.2 Consent of Parker Chapin LLP (Included in
Exhibit 5.1)
24.1 Power of Attorney of certain directors and officers of
SmartServ (Included as part of the signature page beginning on
page II-7 of the initial filing)
</TABLE>
================================================================================
Exhibit 4.6
SMARTSERV ONLINE, INC.
COMMON STOCK PURCHASE WARRANT
EXPIRING APRIL 30, 2003
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Exercise of Warrant ............................................................................... 1
1.1. Manner of Exercise ....................................................................... 1
1.2. When Exercise Deemed Effected ............................................................ 2
1.3. Delivery of Stock Certificates, Etc. ..................................................... 2
1.4. Company to Reaffirm Obligations .......................................................... 3
2. Adjustments ....................................................................................... 3
2.1. Number of Shares; Warrant Price .......................................................... 3
2.2. Adjustment of Warrant Price .............................................................. 3
2.2.1. Issuance of Additional Shares of Common Stock.................................... 3
2.2.2. Extraordinary Dividends and Distributions ....................................... 4
2.3. Treatment of Options and Convertible Securities .......................................... 4
2.4. Treatment of Stock Dividends, Stock Splits, Etc. ......................................... 6
2.5. Computation of Consideration ............................................................. 7
2.6. Adjustments for Combinations. Etc. ....................................................... 8
2.7. Dilution in Case of Other Securities ..................................................... 8
2.8. Minimum Adjustment of Warrant Price ...................................................... 9
3. Consolidation, Merger, Sale of Assets, Reorganization, Etc. ....................................... 9
3.1. General Provisions........................................................................ 9
3.2. Assumption of Obligations ................................................................ 10
4. Other Dilutive Events ............................................................................. 10
5. No Dilution or Impairment ......................................................................... 10
6. Accountants' Report as to Adjustments.............................................................. 11
7. Notices of Corporate Action ....................................................................... 11
8. Restrictions on Transfer .......................................................................... 12
8.1. Restrictive Legends....................................................................... 12
8.2. Notice of Proposed Transfer; Opinions of Counsel ......................................... 12
8.3. Termination of Restrictions............................................................... 13
9. Registration Under Securities Act, Etc. ........................................................... 13
9.1 Registration on Request .................................................................. 13
9.2 Incidental Registration .................................................................. 15
</TABLE>
i
<TABLE>
<CAPTION>
Page
----
<S> <C>
9.3. Registration Procedures .................................................................. 17
9.4. Underwritten Offerings ................................................................... 19
9.5. Preparation; Reasonable Investigation .................................................... 20
9.6. Indemnification .......................................................................... 20
9.7. Registration Rights to Others ............................................................ 22
9.8. Rule 144 ................................................................................. 22
10. Availability of Information ....................................................................... 23
11. Reservation of Stock. Etc. ........................................................................ 23
12. Listing on Securities Exchange .................................................................... 23
13. Ownership, Transfer and Substitution of Warrants .................................................. 23
13.1. Ownership of Warrants .................................................................... 23
13.2. Transfer and Exchange of Warrants ........................................................ 23
13.3. Replacement of Warrants .................................................................. 24
14. Definitions ....................................................................................... 24
15. Remedies .......................................................................................... 29
16. No Rights or Liabilities as Stockholder ........................................................... 29
17. Notices .......................................................................................... 29
18. Expiration ........................................................................................ 29
19. Miscellaneous ..................................................................................... 29
</TABLE>
ii
<PAGE>
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED
EXCEPT IN COMPLIANCE WITH SUCH ACT AND APPLICABLE STATE SECURITIES LAWS. THIS
WARRANT AND SUCH SHARES ARE ALSO SUBJECT TO CERTAIN RESTRICTIONS ON
TRANSFERABILITY SET FORTH IN THIS WARRANT.
Common Stock Purchase Warrant
Expiring April 30, 2003
Stamford, Connecticut
______________, 1999
SMARTSERV ONLINE, INC., a Delaware corporation (the "Company"), for
value received, hereby certifies that Data Transmission Network Corporation, or
registered assigns, is entitled to purchase from the Company 300,000 duly
authorized, validly issued, fully paid and nonassessable shares of Common Stock,
par value $.01 per share, of the Company (the "Common Stock") at the purchase
price per share of $8.60, at any time or from time to time prior to 3 P.M., New
York City time, on the earlier of (i) April 30, 2003 or (ii) the date one year
after the Current Market Price of the Common Stock (determined without
consideration of clause (z) of the definition of Market Price) reaches $8.60 per
share, all subject to the terms, conditions and adjustments set forth below in
this Warrant.
This Warrant is issued pursuant to that certain Agreement dated May 1,
1999, between the Company and Data Transmission Network Corporation (the "DTN
Agreement"). Certain capitalized terms used in this Warrant are defined in
Section 14. If a capitalized term used in this Warrant is not defined in Section
14, or elsewhere in this Warrant, such term shall have the meaning given such
term in the DTN Agreement.
1. Exercise of Warrant.
1.1. Manner of Exercise.
(a) This Warrant may be exercised by the holder hereof, in whole or in
part, during normal business hours on any Business Day prior to the expiration
of this Warrant by surrender of this Warrant, with the form of subscription at
the end hereof (or a facsimile thereof) duly executed by such holder, to the
Company at its principal office (or, if such exercise shall be in connection
with an underwritten Public Offering of shares of Common Stock (or Other
Securities) subject to this Warrant, at the location at which the Company shall
have agreed to
<PAGE>
deliver the shares of Common Stock (or Other Securities) subject to such
offering), accompanied by payment, in cash or by certified or official bank
check payable to the order of the Company, in the amount obtained by multiplying
(a) the number of shares of Common Stock (without giving effect to any
adjustment therein) designated in such form of subscription by (b) the Warrant
Price, and such holder shall thereupon be entitled to receive the number of duly
authorized, validly issued, fully paid and nonassessable shares of Common Stock
(or Other Securities) determined as provided in Sections 2 through 4.
(b) Holder may elect in writing delivered to the Company as provided
above to receive, without payment of additional consideration, shares of Common
Stock equal to the value of this Warrant or any portion hereof by the surrender
of this Warrant or such portion to the Company at its principal office.
Thereupon, the Company shall issue to such holder such number of fully paid and
nonassessable shares of Common Stock as is computed using the following formula:
X = Y (A-B)
--------
A
where X = the number of shares to be issued to such holder pursuant to
this subsection 1.1(b).
Y= the number of shares covered by this Warrant in
respect of which the net issue election is made
pursuant to this subsection 1.1(b).
A= the Market Price of one share of Common Stock as at
the time the net issue election is made pursuant to
this subsection 1.1(b).
B= the Warrant Price in effect under this Warrant at
the time the net issue election is made pursuant to
this subsection 1.1(b).
1.2. When Exercise Deemed Effected. Each exercise of this
Warrant shall be deemed to have been effected immediately prior to the close of
business on the Business Day on which this Warrant shall have been surrendered
to the Company as provided in Section 1.1, and at such time the person or
persons in whose name or names any certificate or certificates for shares of
Common Stock (or Other Securities) shall be issuable upon such exercise as
provided in Section 1.3 shall be deemed to have become the holder or holders of
record thereof.
1.3. Delivery of Stock Certificates, Etc. As soon as
practicable after the exercise of this Warrant, in whole or in part, and in any
event within ten (10) Business Days thereafter (unless such exercise shall be in
connection with an underwritten Public Offering of shares of Common Stock (or
Other Securities) subject to this Warrant, in which event concurrently with such
exercise), the Company at its expense (including the payment by it of any taxes
(other than transfer taxes) payable by the Company) will cause to be issued in
the name of and delivered to the holder hereof or, subject to Section 8, as such
holder (upon payment by such holder of any applicable transfer taxes) may
direct,
2
<PAGE>
(a) a certificate or certificates for the number of duly
authorized, validly issued, fully paid and nonassessable shares of
Common Stock (or Other Securities) to which such holder shall be
entitled upon such exercise plus, in lieu of any fractional share to
which such holder would otherwise be entitled, cash in an amount equal
to the same fraction of the Market Price per share of such Common Stock
(or Other Securities) on the Business Day next preceding the date of
such exercise, and
(b) in case such exercise is in part only, a new Warrant of
like tenor, calling in the aggregate on the face thereof for the number
of shares of Common Stock equal (without giving effect to any
adjustment therein) to the number of such shares called for on the face
of this Warrant minus the number of such shares designated by the
holder upon such exercise as provided in Section 1.1.
1.4. Company to Reaffirm Obligations. The Company will, at the
time of or at any time after each exercise of this Warrant, upon the request of
the holder hereof or of any shares of Common Stock (or Other Securities) issued
upon such exercise, acknowledge in writing its continuing obligation to afford
to such holder all rights (including, without limitation, any right of
registration of any shares of Common Stock (or Other Securities) issuable upon
exercise of this Warrant pursuant to Section 9) to which such holder shall
continue to be entitled after such exercise in accordance with the terms of this
Warrant, provided that if any such holder shall fail to make any such request,
the failure shall not affect the continuing obligation of the Company to afford
such rights to such holder.
2. Adjustments.
2.1. Number of Shares; Warrant Price. The number of shares of
Common Stock which the holder of this Warrant shall be entitled to receive upon
each exercise hereof shall be determined by multiplying the number of shares of
Common Stock which would otherwise (but for the provisions of this Section 2) be
issuable upon such exercise, as designated by the holder hereof pursuant to
Section 1.1, by a fraction of which (a) the numerator is $8.60 and (ii) the
denominator is the Warrant Price in effect on the date of such exercise. The
"Warrant Price" shall initially be $8.60 per share, and shall be adjusted and
readjusted from time to time as provided in this Section 2 and, as so adjusted
or readjusted, shall remain in effect until a further adjustment or readjustment
thereof is required by this Section 2.
2.2. Adjustment of Warrant Price.
2.2.1. Issuance of Additional Shares of Common Stock. In
case the Company, at any time or from time to time after April 30, 1999 (the
"Initial Date"), shall issue or sell Additional Shares of Common Stock
(including Additional Shares of Common Stock deemed to be issued pursuant to
Section 2.3 or 2.4) without consideration or for a consideration per share less
than the Base Price in effect, in each case, on the date of and immediately
prior to such issue or sale, then, and in each such case, subject to Section
2.8, such Warrant Price shall be reduced, concurrently with such issue or sale,
to a price (calculated to the nearest .001 of a cent) determined by multiplying
such Warrant Price by a fraction,
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(a) the numerator of which shall be (i) the number of shares
of Common Stock outstanding immediately prior to such issue or sale
plus (ii) the number of shares of Common Stock which the aggregate
consideration received by the Company for the total number of such
Additional Shares of Common Stock so issued or sold would purchase at
the Base Price, and
(b) the denominator of which shall be the number of shares of
Common Stock outstanding immediately after such issue or sale,
provided that, for the purposes of this Section 2.2.1 (x) immediately after any
Additional Shares of Common Stock are deemed to have been issued pursuant to
Section 2.3 or 2.4, such Additional Shares shall be deemed to be outstanding,
and (y) treasury shares shall not be deemed to be outstanding.
2.2.2. Extraordinary Dividends and Distributions. In case
the Company at any time or from time to time after the Initial Date shall
declare, order, pay or make a dividend or other distribution (including, without
limitation, any distribution of other or additional stock or other securities or
property or options by way of dividend or spin-off, reclassification,
recapitalization or similar corporate rearrangement) on any Common Stock, other
than (a) a dividend payable in Additional Shares of Common Stock or in Options
for Common Stock or (b) a dividend payable in cash, then, and in each such case,
subject to Section 2.8, the Warrant Price in effect immediately prior to the
close of business on the record date fixed for the determination of holders of
any class of securities entitled to receive such dividend or distribution shall
be reduced, effective as of the close of business on such record date, to a
price (calculated to the nearest .001 of a cent) determined by multiplying such
Warrant Price by a fraction,
(x) the numerator of which shall be the Current Market Price
in effect on such record date or, if the Common Stock trades on an
ex-dividend basis, on the date prior to the commencement of ex-dividend
trading, less the value of such dividend or distribution (as determined
in good faith by the Board of Directors of the Company) applicable to
one share of Common Stock, and
(y) the denominator of which shall be such Current Market
Price.
2.3. Treatment of Options and Convertible Securities. In case
the Company at any time or from time to time after the Initial Date shall issue,
sell, grant or assume, or shall fix a record date for the determination of
holders of any class of securities entitled to receive, any Options or
Convertible Securities, then, and in each such case, the maximum number of
Additional Shares of Common Stock (as set forth in the instrument relating
thereto, without regard to any provisions contained therein for a subsequent
adjustment of such number) issuable upon the exercise of such Options or, in the
case of Convertible Securities and Options therefor, the conversion or exchange
of such Convertible Securities, shall be deemed to be issued for purposes of
Section 2.2 as of the time of such issue, sale, grant or assumption or, in case
such a record date shall have been fixed, as of the close of business on such
record date (or, if the Common Stock trades on an ex-dividend basis, on the date
prior to the commencement of ex-dividend trading), provided that such Additional
Shares of Common Stock shall not be deemed to have been issued unless the
consideration per share (determined pursuant to Section 2.5) of such shares
would be less than the Base Price in effect, in each case, on the date of and
immediately prior to such issue, sale, grant or assumption or immediately prior
to the close of business on such record date (or, if
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the Common Stock trades on an ex-dividend basis, on the date prior to the
commencement of ex-dividend trading), as the case may be, and provided, further,
that in any such case in which Additional Shares of Common Stock are deemed to
be issued,
(a) no further adjustment of the Warrant Price shall be made
upon the subsequent issue or sale of Additional Shares of Common Stock
or Convertible Securities upon the exercise of such Options or the
conversion or exchange of such Convertible Securities;
(b) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase in the
consideration payable to the Company, or decrease in the number of
Additional Shares of Common Stock issuable, upon the exercise,
conversion or exchange thereof (by change of rate or otherwise), the
Warrant Price computed upon the original issue, sale, grant or
assumption thereof (or upon the occurrence of the record date, or date
prior to the commencement of ex-dividend trading, as the case may be,
with respect thereto), and any subsequent adjustments based thereon,
shall, upon any such increase or decrease becoming effective, be
recomputed to reflect such increase or decrease insofar as it affects
such Options, or the rights of conversion or exchange under such
Convertible Securities, which are outstanding at such time;
(c) upon the expiration of any such Options or of the rights
of conversion or exchange under any such Convertible Securities which
shall not have been exercised (or upon purchase by the Company and
cancellation or retirement of any such Options which shall not have
been exercised or of any such Convertible Securities the rights of
conversion or exchange under which shall not have been exercised), the
Warrant Price computed upon the original issue, sale, grant or
assumption thereof (or upon the occurrence of the record date, or date
prior to the commencement of ex-dividend trading, as the case may be,
with respect thereto), and any subsequent adjustments based thereon,
shall, upon such expiration (or such cancellation or retirement, as the
case may be), be recomputed as if:
(x) in the case of Options for Common Stock or of
Convertible Securities, the only Additional Shares of Common
Stock issued or sold were the Additional Shares of Common
Stock, if any, actually issued or sold upon the exercise of
such Options or the conversion or exchange of such Convertible
Securities and the consideration received therefor was (i) an
amount equal to (A) the consideration actually received by the
Company for the issue, sale, grant or assumption of all such
Options, whether or not exercised, plus (B) the
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consideration actually received by the Company upon such
exercise, minus (C) the consideration paid by the Company for
any purchase of such Options which were not exercised, or (ii)
an amount equal to (A) the consideration actually received by
the Company for the issue, sale, grant or assumption of all
such Convertible Securities which were actually converted or
exchanged, plus (B) the additional consideration, if any,
actually received by the Company upon such conversion or
exchange, minus (C) the consideration paid by the Company for
any purchase of such Convertible Securities the rights of
conversion or exchange under which were not exercised, and
(y) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually
issued or sold upon the exercise of such Options were issued
at the time of the issue, sale, grant or assumption of such
Options, and the consideration received by the Company for the
Additional Shares of Common Stock deemed to have then been
issued was an amount equal to (i) the consideration actually
received by the Company for the issue, sale, grant or
assumption of all such Options, whether or not exercised, plus
(ii) the consideration deemed to have been received by the
Company (pursuant to Section 2.4) upon the issue or sale of
the Convertible Securities with respect to which such Options
were actually exercised, minus (iii) the consideration paid by
the Company for any purchase of such Options which were not
exercised;
(d) no readjustment pursuant to subdivision (b) or (c) above
shall have the effect of increasing the Warrant Price by an amount in
excess of the amount of the adjustment thereof originally made in
respect of the issue, sale, grant or assumption of such Options or
Convertible Securities, except as a result of any intervening events
causing adjustments therein; and
(e) in the case of any such Options which expire by their
terms not more than 30 days after the date of issue, sale, grant or
assumption thereof, no adjustment of the Warrant Price shall be made
until the expiration or exercise of all such Options, whereupon such
adjustment shall be made in the manner provided in subdivision (c)
above.
In case at any time after the Initial Date the Company shall be
required to increase the number of Additional Shares of Common Stock subject to
any Option or into which any Convertible Securities (other than the Warrants)
are convertible or exchangeable pursuant to the operation of anti-dilution
provisions applicable thereto, such Additional Shares of Common Stock shall be
deemed to be issued for purposes of Section 2.2 as of the time of such increase.
2.4. Treatment of Stock Dividends, Stock Splits, Etc. In case
the Company at any time or from time to time after the Initial Date shall
declare or pay any dividend or other distribution on any class of stock of the
Company payable in Common Stock, or shall effect a subdivision of the
outstanding shares of Common Stock into a greater number of shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in Common
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Stock), then, and in each such case, Additional Shares of Common Stock shall be
deemed to have been issued (a) in the case of any such dividend, immediately
after the close of business on the record date for the determination of holders
of any class of securities entitled to receive such dividend, or (b) in the case
of any such subdivision, at the close of business on the day immediately prior
to the day upon which such corporate action becomes effective.
2.5. Computation of Consideration. For the purposes of this
Section 2:
(a) The consideration for the issue or sale of any Additional
Shares of Common Stock or for the issue, sale, grant or assumption of
any Options or Convertible Securities, irrespective of the accounting
treatment of such consideration, shall
(x) insofar as it consists of cash, be computed at
the amount of cash received by the Company, without deducting
any expenses paid or incurred by the Company or any
commissions or compensation paid or concessions or discounts
allowed to underwriters, dealers or others performing similar
services and any accrued interest or dividends in connection
with such issue or sale,
(y) insofar as it consists of consideration
(including securities) other than cash, be computed at the
fair value thereof at the time of such issue or sale, as
determined in good faith by the Board of Directors of the
Company, without deducting any expenses paid or incurred by
the Company for any commissions or compensation paid or
concessions or discounts allowed to underwriters, dealers or
others performing similar services and any accrued interest or
dividends in connection with such issue or sale, and
(z) in case Additional Shares of Common Stock are
issued or sold or Convertible Securities are issued, sold,
granted or assumed together with other stock or securities or
other assets of the Company for a consideration which covers
both, be the proportion of such consideration so received,
computed as provided in subdivisions (x) and (y) above,
allocable to such Additional Shares of Common Stock or
Convertible Securities, as the case may be, all as determined
in good faith by the Board of Directors of the Company.
(b) All Options issued, sold, granted or assumed together with
other stock or securities or other assets of the Company for a
consideration which covers both and which does not set forth an
allocation of such consideration in the documentation for such
transaction, all Additional Shares of Common Stock, Options or
Convertible Securities issued in payment of any dividend or other
distribution on any class of stock of the Company and all Additional
Shares of Common Stock issued to effect a subdivision of the
outstanding shares of Common Stock into a greater number of shares of
Common Stock (by reclassification or otherwise than by payment of a
dividend in Common Stock) shall be deemed to have been issued without
consideration.
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(c) Additional Shares of Common Stock deemed to have been
issued for consideration pursuant to Section 2.3, relating to Options
and Convertible Securities, shall be deemed to have been issued for a
consideration per share determined by dividing
(x) the total amount, if any, received and receivable
by the Company as consideration for the issue, sale, grant or
assumption of the Options or Convertible Securities in
question, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating
thereto, without regard to any provision contained therein for
a subsequent adjustment of such consideration) payable to the
Company upon the exercise in full of such Options or the
conversion or exchange of such Convertible Securities or, in
the case of Options for Convertible Securities, the exercise
of such Options for Convertible Securities and the conversion
or exchange of such Convertible Securities, in each case
computing such consideration as provided in the foregoing
subdivision (a), by
(y) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment
of such number) issuable upon the exercise of such Options or
the conversion or exchange of such Convertible Securities.
(d) Additional Shares of Common Stock issued or deemed to have
been issued pursuant to the operation of anti-dilution provisions
applicable to Convertible Securities (other than the Warrants), Options
or other securities of the Company (either as a result of the
adjustments provided for by the Warrants or otherwise) shall be deemed
to have been issued without consideration.
2.6. Adjustments for Combinations, Etc. In case the
outstanding shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common Stock,
the Warrant Price in effect immediately prior to such combination or
consolidation shall, concurrently with the effectiveness of such combination or
consolidation, be proportionately increased.
2.7. Dilution in Case of Other Securities. In case any Other
Securities shall be issued or sold or shall become subject to issue or sale upon
the conversion or exchange of any Common Stock (or Other Securities) of the
Company (or any issuer of Other Securities or any other Person referred to in
Section 3) or to subscription, purchase or other acquisition pursuant to any
options issued or granted by the Company (or any such other issuer or Person)
for a consideration such as to dilute, on a basis consistent with the standards
established in the other provisions of this Section 2, the purchase rights
granted by this Warrant, then, and in each such case, the computations,
adjustments and readjustments provided for in this Section 2 with respect to the
Warrant Price shall be made as nearly as possible in the manner so provided and
applied to determine the amount of Other Securities from time to time receivable
upon the exercise of this Warrant, so as to protect the holder of this Warrant
against the effect of such dilution.
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2.8. Minimum Adjustment of Warrant Price. If the amount of any
adjustment of the Warrant Price required pursuant to this Section 2 would be
less than one-tenth of one percent of the Warrant Price in effect at the time
such adjustment is otherwise so required to be made, such amount shall be
carried forward and adjustment with respect thereto made at the time of and
together with any subsequent adjustment which, together with such amount and any
other amount or amounts so carried forward, shall aggregate at least one-tenth
of one percent of such Warrant Price; provided that, upon the exercise of this
Warrant, all adjustments carried forward and not theretofore made up to and
including the date of such exercise shall be made to the nearest one
one-hundredth of a cent.
3. Consolidation, Merger, Sale of Assets, Reorganization. Etc.
3.1. General Provisions. In case the Company, after the
Initial Date, (a) shall consolidate with or merge into any other Person and
shall not be the continuing or surviving corporation of such consolidation or
merger, or (b) shall permit any other Person to consolidate with or merge into
the Company and the Company shall be the continuing or surviving Person but, in
connection with such consolidation or merger, Common Stock or Other Securities
shall be changed into or exchanged for cash, stock or other securities of any
other Person or any other property, or (c) shall transfer all or substantially
all of its properties and assets to any other Person, or (d) shall effect a
capital reorganization or reclassification of Common Stock or Other Securities
(other than a capital reorganization or reclassification resulting in the issue
of Additional Shares of Common Stock for which adjustment in the Warrant Price
is provided in Section 2.2.1 or 2.2.2), then, and in the case of each such
transaction, the Company shall give written notice thereof to the holder of this
Warrant not less than 30 days prior to the consummation thereof and proper
provision shall be made so that, upon the basis and the terms and in the manner
provided in this Section 3, the holder of this Warrant, upon the exercise hereof
at any time after the consummation of such transaction, shall be entitled to
receive, at the aggregate Warrant Price in effect at the time of such
consummation for all Common Stock (or other Securities) issuable upon such
exercise immediately prior to such consummation, in lieu of the Common Stock (or
Other Securities) issuable upon such exercise prior to such consummation, the
highest amount of cash, securities or other property to which such holder would
actually have been entitled as a shareholder upon such consummation if such
holder had exercised this Warrant immediately prior thereto, subject to
adjustments (subsequent to such consummation) as nearly equivalent as possible
to the adjustments provided for in Section 2 and this Section 3, provided that
if a purchase, tender or exchange offer shall have been made to and accepted by
the holders of Common Stock under circumstances in which, upon completion of
such purchase, tender or exchange offer, the maker thereof, together with
members of any group (within the meaning of Section 13(d)(3) of the Exchange
Act) of which such maker is a part, and together with any affiliate or associate
of such maker (within the meaning of Rule 12b-2 under the Exchange Act) and any
members of any such group of which any such affiliate or associate is a part,
own beneficially (within the meaning of Rule 13d-3 under the Exchange Act) more
than 50% of the outstanding shares of Common Stock, and if the holder of this
Warrant so designates in such notice given to the Company, the holder of this
Warrant shall be entitled to receive the highest amount of cash, securities or
other property to which such holder would actually have been entitled as a
shareholder if the holder of this Warrant had exercised this Warrant prior to
the
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expiration of such purchase, tender or exchange offer, accepted such offer and
all of the Common Stock held by such holder had been purchased pursuant to such
purchase, tender or exchange offer, subject to adjustments (from and after the
consummation of such purchase, tender or exchange offer) as nearly equivalent as
possible to the adjustments provided for in Section 2 and this Section 3.
3.2. Assumption of Obligations. Notwithstanding anything
contained in this Warrant or the DTN Agreement to the contrary, the Company will
not effect any of the transactions described in subdivisions (a), (b) or (d) of
Section 3.1 unless, prior to the consummation thereof, each Person (other than
the Company) which may be required to deliver any cash, stock or other
securities or other property upon the exercise of this Warrant as provided
herein shall assume, by written instrument delivered to, and reasonably
satisfactory to, the holder of this Warrant, (a) the obligations of the Company
under this Warrant (and if the Company shall survive the consummation of such
transaction, such assumption shall be in addition to, and shall not release the
Company from, any continuing obligations of the Company under this Warrant) and
(b) the obligation to deliver to such holder such cash, stock or other
securities or other property as, in accordance with the foregoing provisions of
this Section 3, such holder may be entitled to receive, and such Person shall
have similarly delivered to such holder an opinion of counsel for such Person,
which counsel shall be reasonably satisfactory to such holder, stating that this
Warrant shall thereafter continue in full force and effect and the terms hereof
(including, without limitation, all of the provisions of Section 2 and this
Section 3) shall be applicable to the cash, stock or other securities or other
property which such Person may be required to deliver upon any exercise of this
Warrant or the exercise of any rights pursuant hereto.
4. Other Dilutive Events. In case any event shall occur as to
which the provisions of Section 2 or Section 3 are not strictly applicable but
the failure to make any adjustment would not fairly protect the purchase rights
represented by this Warrant in accordance with the essential intent and
principles of such sections, then, in each such case, the Company shall appoint
a firm of independent public accountants of recognized national standing (which
may be the regular auditors of the Company), which shall give their opinion upon
the adjustment, if any, on a basis consistent with the essential intent and
principles established in Sections 2 and 3, necessary to preserve, without
dilution, the purchase rights represented by this Warrant. Upon receipt of such
opinion the Company will promptly mail a copy thereof to the holder of this
Warrant and shall make the adjustments described therein.
5. No Dilution or Impairment. The Company will not, by amendment
of its certificate of incorporation or through any consolidation, merger,
reorganization, transfer of assets, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Warrant, but will at all times in good faith assist
in the carrying out of all such terms and in the taking of all such action as
may be necessary or appropriate in order to protect the rights of the holder of
this Warrant against dilution or other impairment. Without limiting the
generality of the foregoing, the Company (a) will not permit the par value of
any shares of stock receivable upon the exercise of this Warrant to exceed the
amount payable therefor upon such exercise, (b) will take all such action as may
be necessary or appropriate in order that the Company may validly and legally
issue fully paid and
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nonassessable shares of stock upon the exercise of all outstanding warrants
issued by the Company (including this Warrant) from time to time, and (c) will
not take any action which results in any adjustment of the Warrant Price if the
total number of shares of Common Stock (or Other Securities) issuable after the
action upon the exercise of all outstanding warrants issued by the Company
(including this Warrant) would exceed the total number of shares of Common Stock
(or Other Securities) then authorized by the Company's certificate of
incorporation and available for the purpose of issue upon such exercise.
6. Accountants' Report as to Adjustments. In each case of any
adjustment or readjustment in the shares of Common Stock (or Other Securities)
issuable upon the exercise of this Warrant, the Company at its expense will
promptly compute such adjustment or readjustment in accordance with the terms of
this Warrant, and will prepare a certificate of the chief financial officer of
the Company setting forth such adjustment or readjustment and showing in
reasonable detail the method of calculation thereof and the facts upon which
such adjustment or readjustment is based, including without limitation a
statement of (a) the consideration received or to be received by the Company for
any Additional Shares of Common Stock issued or sold or deemed to have been
issued, (b) the number of shares of Common Stock outstanding or deemed to be
outstanding, and (c) the Warrant Price in effect immediately prior to such issue
or sale and as adjusted and readjusted (if required by Section 2) on account
thereof. The Company will forthwith mail a copy of each such certificate to each
holder of a Warrant and will, upon the written request at any time of the holder
of this Warrant, furnish to such holder a like certificate setting forth the
Warrant Price at the time in effect and showing in reasonable detail how it was
calculated. In addition, with respect to any fiscal year of the Company during
which any such adjustment or readjustment shall have been made, the Company will
cause the independent public accountants reporting upon the Company's financial
statements for such fiscal year to verify, concurrently with their annual audit
of the Company's financial statements, the computations made by the Company
during such fiscal year and to prepare and to deliver to the holder of this
Warrant a report setting forth substantially the information described above in
this Section 6 with respect to all such adjustments and readjustments. The
Company will also keep copies of all such certificates and reports at its
principal office and will cause the same to be available for inspection at such
office during normal business hours by the holder of this Warrant or any
prospective purchaser of this Warrant designated by the holder thereof.
7. Notices of Corporate Action. In the event of
(a) any taking by the Company of a record of the holders of
any class of securities for the purpose of determining the holders
thereof who are entitled to receive any dividend or other distribution,
or any right to subscribe for, purchase or otherwise acquire any shares
of stock of any class or any other securities or property, or to
receive any other right, or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the
Company or any consolidation or merger involving the Company and any
other Person or any transfer of all or substantially all the assets of
the Company to any other Person, or
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(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
the Company will mail to the holder of this Warrant a notice specifying (x) the
date or expected date on which any such record is to be taken for the purpose of
such dividend, distribution or right, and the amount and character of such
dividend, distribution or right, and (y) the date or expected date on which any
such reorganization, reclassification, recapitalization, consolidation, merger,
transfer, dissolution, liquidation or winding-up is to take place and the time,
if any such time is to be fixed, as of which the holders of record of Common
Stock (or Other Securities) shall be entitled to exchange their shares of Common
Stock (or Other Securities) for the securities or other property deliverable
upon such reorganization, reclassification, recapitalization, consolidation,
merger, transfer, dissolution, liquidation or winding-up. Such notice shall be
mailed at least 20 days prior to the date therein specified, in the case of any
date referred to in the foregoing subdivision (x), and at least 30 days prior to
the date therein specified, in the case of the date referred to in the foregoing
subdivision (y).
8. Restrictions on Transfer.
8.1. Restrictive Legends. Except as otherwise permitted by
this Section 8, each certificate for Common Stock (or Other Securities) issued
upon the exercise of this Warrant and each certificate issued upon the direct or
indirect Transfer of any such Common Stock (or Other Securities) shall be
stamped or otherwise imprinted with a legend in substantially the following
form:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933 and may not be transferred except in
compliance with such Act and applicable state securities laws. Such
shares are also subject to certain restrictions on transferability
imposed by a Common Stock Purchase Warrant expiring April 30, 2003, a
copy of which is on file at the offices of the Company."
8.2. Notice of Proposed Transfer; Opinions of Counsel. Prior
to any Transfer of any Restricted Securities which are not registered under an
effective registration statement under the Securities Act (other than a Transfer
pursuant to Rule 144 or any comparable rule under such Act), the holder thereof
will give written notice to the Company of such holder's intention to effect
such Transfer and to comply in all other respects with this Section 8.2. Each
such notice (a) shall describe the manner and circumstances of the proposed
Transfer in sufficient detail to enable counsel to render the opinions referred
to below, and (b) shall designate counsel for the holder giving such notice (who
may be internal counsel for such holder). The holder giving such notice will
submit a copy thereof to the counsel designated in such notice and the Company
will promptly submit a copy thereof to its counsel. The following provisions
shall then apply:
(x) If in the opinion of such counsel for the holder
the proposed Transfer may be effected without registration (a
copy of which opinion shall be
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delivered to the Company), and if such opinion is reasonably
satisfactory to the Company, such holder shall thereupon be
entitled to Transfer such Restricted Securities in accordance
with the terms of the notice delivered by such holder to the
Company. Each Warrant or certificate, if any, issued upon or
in connection with such Transfer shall bear the appropriate
restrictive legend set forth in Section 8.1 unless, in the
opinion of such counsel and the Company's counsel, such legend
is no longer required to ensure compliance with the Securities
Act.
(y) If the opinion of such counsel for the holder is
not to the effect that the proposed Transfer may legally be
effected without registration of such Restricted Securities
under the Securities Act, such holder shall not be entitled to
Transfer such Restricted Securities (other than in a Transfer
pursuant to Rule 144 or any comparable rule under the
Securities Act) until the conditions specified in subdivision
(x) above shall be satisfied or until registration of such
Restricted Securities under the Securities Act has become
effective.
Notwithstanding the foregoing provisions of this Section 8.2, the holder of any
Restricted Securities shall be permitted to Transfer any such Restricted
Securities pursuant to Rule 144A under the Securities Act, provided that each
transferee agrees in writing to be bound by all the restrictions on transfer of
such Restricted Securities contained in this Section 8.2.
8.3. Termination of Restrictions. The restrictions imposed by
this Section 8 upon the transferability of Restricted Securities shall cease and
terminate as to any particular Restricted Securities (a) when such securities
shall have been effectively registered under the Securities Act and disposed of
in accordance with the registration statement covering such Restricted
Securities, (b) when, in the opinions of both counsel for the holder thereof and
counsel for the Company, such restrictions are no longer required in order to
ensure compliance with the Securities Act, or (c) when such securities may be
immediately sold by the holder as determined under Rule 144 under the Securities
Act. Whenever such restrictions shall terminate as to any Restricted Securities,
as soon as practicable thereafter and in any event within ten Business Days, the
holder thereof shall be entitled to receive from the Company, without expense
(other than transfer taxes, if any), new securities of like tenor not bearing
the legend set forth in Section 8.1 hereof.
9. Registration under Securities Act, Etc.
9.1 Registration on Request.
(a) Request. At any time and from time to time after September 30,
1999, upon the written request of DTN, requesting that the Company effect the
registration under the Securities Act of all or part of the Registrable
Securities and specifying the intended method of disposition thereof, the
Company will use its best efforts to effect its registration under the
Securities Act, including by means of a shelf registration pursuant to Rule 415
under the Securities Act if so requested in such request (but in the case of a
shelf registration only if the Company is then eligible to use Form S-2 or S-3
(or any successor forms)), of the Registrable Securities which the
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Company has been so requested to register by DTN for disposition in accordance
with the intended method of disposition stated in such request, all to the
extent requisite to permit the disposition (in accordance with the intended
methods thereof as aforesaid) of the Registrable Securities so to be registered;
provided that the Company shall not be required to effect the registration
pursuant to this Section 9.1 of any Warrants (but shall be required to effect
the registration of Registrable Securities described in clauses (b) and (c) of
the definition of Registrable Securities), and provided, further, that DTN, by
written notice to the Company within 10 Business Days after its receipt of a
copy of a notice from the managing underwriter delivered pursuant to Section
9.1(g), may withdraw such request and, on receipt of such notice of the
withdrawal of such request from DTN, the Company may elect not to effect such
registration. Subject to subdivision (g), the Company may include in such
registration other securities for sale for its own account or for the account of
any other Person.
(b) Number of Registrations. The Company shall not be required to
effect more than one registration pursuant to this Section 9.1, provided that
such registration shall permit the disposition of at least 80% of the
Registrable Securities issuable to DTN upon exercise of all of the Warrants,
provided, further, that if one or more such registrations, in the aggregate,
shall not permit the disposition of at least 80% of such Registrable Securities,
the Company shall be required to effect one additional registration pursuant to
this Section 9.1 so that the aggregate number of such Registrable Securities
shall be at least 80%.
(c) Registration Statement Form. The Company may, if permitted by law,
effect any registration requested under this Section 9.1 by the filing of a
registration statement on Form S-3 (or any successor or similar short form
registration statement) unless, if such registration involves an underwritten
Public Offering of such Registrable Securities, the managing underwriter of such
Public Offering shall notify the Company in writing that, in the judgment of
such managing underwriter, the use of a more detailed form specified in such
notice is of material importance to the success of the Public Offering of such
Registrable Securities, in which case such registration shall be effected on the
form so specified.
(d) Expenses. The Company will pay all Registration Expenses in
connection with any registration and sale effected pursuant to this Section 9.1.
(e) Selection of Underwriters. If, in the discretion of DTN, any
offering pursuant to this Section 9.1 shall constitute an underwritten offering,
the underwriter or underwriters thereof shall be selected, after consultation
with the Company, by DTN and shall be acceptable to the Company.
(f) Effective Registration Statement. A registration requested pursuant
to this Section 9.1 will not be deemed to have been effected (x) unless it has
become effective, provided that a registration which does not become effective
after the Company has filed a registration statement with respect thereto solely
by reason of the refusal to proceed of DTN shall be deemed to have been effected
by the Company at the request of DTN, unless DTN shall have elected to pay all
Registration Expenses in connection with such registration, (y) if, after it has
become effective, such registration is interfered with by any stop order,
injunction or other order or requirement of
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the Commission or other governmental agency or court entered within one year of
the effectiveness of such registration if it is a shelf registration pursuant to
Rule 415 under the Securities Act or entered within 90 days of the effectiveness
of such registration if other than a shelf registration, or (z) if the
conditions to closing specified in the underwriting agreement entered into in
connection with such registration are not satisfied other than by reason of some
act or omission by DTN.
(g) Priority in Requested Registrations. If a requested registration
pursuant to this Section 9.1 involves an underwritten offering, and the managing
underwriter shall advise the Company in writing (with a copy to DTN) that, in
its opinion, the total number of securities requested to be included in such
registration exceeds the number which can be sold in such offering, the Company
will include in any such registration to the extent of the number which the
Company is so advised can be sold in such offering (x) first, Registrable
Securities requested to be included in such registration by DTN, (y) second, any
securities proposed by the Company to be sold for its own account, and (z)
third, Other Securities of the Company proposed to be included in such
registration, in accordance with the priorities, if any, then existing among the
Company and the holders of such other securities.
(h) Company Request for Delay. Except with respect to a registration
statement covering a shelf registration, the Company shall be entitled to
postpone for a reasonable period of time (but not exceeding 180 days) the filing
of any registration statement otherwise required to be prepared and filed by it
pursuant to this Section 9.1 if the Board of Directors of the Company
determines, in its reasonable judgment, that such registration and offering
would interfere with any financing, acquisition, corporate reorganization or
other material transaction involving the Company or any of its affiliates and
promptly gives DTN written notice of such determination, containing a general
statement of the reasons for such postponement and approximation of the
anticipated delay. If the Company shall so postpone the filing of a registration
statement, DTN shall have the right to withdraw the request for registration by
giving written notice to the Company within 30 days after receipt of the notice
of postponement and, in the event of such withdrawal, such request shall not be
counted for purposes of the requests for registration to which holders of
Registrable Securities are entitled pursuant to Section 9.1.
(i) Shelf Registration Statement. The Company shall be deemed to have
complied with a request for registration made by DTN pursuant to this Section
9.1 if, at the time of such request, there shall be an effective shelf
registration statement on file with the Commission pursuant to Rule 415 under
the Securities Act covering the Registrable Securities which such holders shall
have requested to be registered, if such registration statement complies with
the provisions of this Section 9.1 and of Section 9.3 and if the Company
otherwise fulfills the requirements of Section 9.1 and 9.3 in respect of such
registration.
9.2 Incidental Registration.
(a) Right to Include Registrable Securities. Notwithstanding any
limitation contained in Section 9.1, if the Company at any time on or prior to
April 30, 2005 proposes to register any of its securities under the Securities
Act (other than by a registration on Form S-4 or S-8 or any
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successor or similar forms), whether or not for sale for its own account, in a
manner which would permit registration of Registrable Securities for sale to the
public under the Securities Act, it will each such time give prompt written
notice to DTN of its intention to do so and of DTN's rights under this Section
9.2. Upon the written request of DTN made within 20 days after receipt of any
such notice (which request shall specify the Registrable Securities intended to
be disposed of by DTN and the intended method of disposition thereof), the
Company will use its best efforts to effect the registration under the
Securities Act of all Registrable Securities which the Company has been so
requested to register by DTN, to the extent requisite to permit the disposition
(in accordance with the intended methods thereof as aforesaid) of the
Registrable Securities so to be registered, by inclusion of such Registrable
Securities in the registration statement which covers the securities which the
Company proposes to register, provided that (x) the Company shall not be
required to effect the registration pursuant to this Section 9.2 of any Warrants
(but shall be required to effect the registration of Registrable Securities
described in clauses (b) and (c) of the definition of Registrable Securities)
and (y) if, at any time after giving written notice of its intention to register
any securities and prior to the effective date of the registration statement
filed in connection with such registration, the Company shall determine for any
reason not to register or to delay registration of such securities, the Company
may, at its election, give written notice of such determination to DTN and,
thereupon, (i) in the case of a determination not to register, shall be relieved
of its obligation to register any Registrable Securities in connection with such
registration (but not from its obligation to pay the Registration Expenses in
connection therewith), without prejudice, however, to the rights of DTN to
request that such registration be effected as a registration under Section 9.1,
and (ii) in the case of a determination to delay registering, shall be permitted
to delay registering any Registrable Securities for the same period as the delay
in registering such other securities. No registration effected under this
Section 9.2 shall relieve the Company of its obligation to effect any
registration statement upon request under Section 9.1. The Company will pay all
Registration Expenses in connection with each registration of Registrable
Securities requested pursuant to this Section 9.2.
(b) Priority in Incidental Registrations. If a registration pursuant to
this Section 9.2 involves an underwritten offering and the managing underwriter
advises the Company in writing that, in its opinion, the number of securities
requested to be included in such registration exceeds the number which can be
sold in such offering, the Company will include in such registration to the
extent of the number which the Company is so advised can be sold in such
offering securities determined as follows:
(x) if such registration as initially proposed by the Company
was solely a primary registration of its securities, (i) first, the
securities proposed by the Company to be sold for its own account, (ii)
second, any Registrable Securities requested to be included in such
registration, and (iii) third, any other securities of the Company
proposed to be included in such registration, in accordance with the
priorities, if any, then existing among the Company and the holders of
such other securities, and
(y) if such registration as initially proposed by the Company
was in whole or in part requested by holders of securities of the
Company, other than DTN, pursuant to demand registration rights, (i)
first, securities proposed by the Company to be sold for its
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own account, (ii) second, such securities held by the holders
initiating such registration, in accordance with the priorities, if
any, then existing among the Company and the holders of such
securities, (iii) third, any Registrable Securities requested to be
included in such registration, and (iv) fourth, any other securities of
the Company proposed to be included in such registration, in accordance
with the priorities, if any, then existing among the Company and the
holders of such other securities.
9.3. Registration Procedures. If and whenever the Company is
required to use its best efforts to effect the registration of any Registrable
Securities under the Securities Act as provided in Sections 9.1 and 9.2, the
Company will as expeditiously as possible:
(a) prepare and file with the Commission the requisite
registration statement (including such audited financial statements as
may be required by the Securities Act or the rules and regulations
promulgated thereunder) to effect such registration and use its best
efforts to cause such registration statement to become effective,
provided that before filing such registration statement or any
amendments thereto, the Company will furnish to the counsel selected by
DTN copies of all such documents proposed to be filed, which documents
will be subject to the review of such counsel;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to maintain the effectiveness
of such registration statement and to comply with the provisions of the
Securities Act with respect to the disposition of all securities
covered by such registration statement until the earlier of such time
as all of such securities have been disposed of in accordance with the
intended methods of disposition by the seller or sellers thereof set
forth in such registration statement and the expiration of 90 days
after such registration statement becomes effective, except with
respect to any such registration statement filed pursuant to Rule 415
(or any successor Rule) under the Securities Act, in which case such
period shall be one year;
(c) furnish to DTN such number of conformed copies of such
registration statement and of each such amendment and supplement
thereto (in each case including all exhibits), such number of copies of
the prospectus contained in such registration statement (including each
preliminary prospectus and any summary prospectus) and any other
prospectus filed under Rule 424 under the Securities Act, in conformity
with the requirements of the Securities Act, and such other documents,
as DTN may reasonably request;
(d) use its best efforts to register or qualify all
Registrable Securities and other securities covered by such
registration statement under such other securities or blue sky laws of
such jurisdictions as DTN shall reasonably request, to keep such
registration or qualification in effect for so long as such
registration statement remains in effect, and take any other action
which may be reasonably necessary or advisable to enable DTN to
consummate the disposition in such jurisdictions of the securities
owned by DTN, except that the Company shall not for any such purpose be
required to qualify generally to do
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business as a foreign corporation in any jurisdiction wherein it would
not but for the requirements of this subdivision (d) be obligated to be
so qualified or to consent to general service of process in any such
jurisdiction;
(e) if such registration includes an underwritten Public
Offering, furnish to DTN a signed counterpart, addressed to DTN (and
the underwriters), of
(x) an opinion of counsel for the Company, dated the
date of any closing under the underwriting agreement,
reasonably satisfactory in form and substance to DTN, and
(y) a "comfort" letter, dated the effective date of
such registration statement and the date of any closing under
the underwriting agreement, signed by the independent public
accountants who have certified the Company's financial
statements included in such registration statement,
covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) and, in
the case of the accountants' letter, with respect to events subsequent
to the date of such financial statements, as are customarily covered in
opinions of issuer's counsel and in accountants' letters delivered to
the underwriters in underwritten Public Offerings of securities and, in
the case of the accountants' letter, such other financial matters, as
the underwriters may reasonably request;
(f) immediately notify DTN (w) when the prospectus or any
prospectus supplement or post-effective amendment has been filed, and,
with respect to the registration statement or any post-effective
amendment, when the same has become effective, (x) of any request by
the Commission for amendments or supplements to the registration
statement or the prospectus or for additional information, (y) of the
issuance by the Commission of any stop order suspending the
effectiveness of the registration statement or the initiation of any
proceedings for that purpose and (z) of the receipt by the Company of
any notification with respect to the suspension of the qualification of
the Registrable Securities for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose;
(g) use its reasonable best efforts to obtain the withdrawal
of any order suspending the effectiveness of the registration statement
at the earliest possible time;
(h) immediately notify DTN, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act,
of the happening of any event as a result of which the prospectus
included in such registration statement, as then in effect, includes an
untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which
they were made, and at the request of DTN promptly prepare and furnish
to DTN a reasonable number of copies of a supplement to or an amendment
of such prospectus as may be necessary so that, as thereafter delivered
to the
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purchasers of such securities, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which
they were made; and
(i) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available
to its security holders, as soon as reasonably practicable, an earnings
statement covering the period of at least twelve months, but not more
than eighteen months, beginning with the first full calendar month
after the effective date of such registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the
Securities Act, and not file any amendment or supplement to such
registration statement or prospectus to which DTN shall have reasonably
objected on the grounds that such amendment or supplement does not
comply in all material respects with the requirements of the Securities
Act or of the rules or regulations thereunder, having been furnished
with a copy thereof at least three business days prior to the filing
thereof.
The Company may require DTN to furnish the Company such information regarding
DTN and the distribution of such securities as the Company may from time to time
reasonably request in writing.
9.4 Underwritten Offerings.
(a) Requested Underwritten Offerings. If requested by the underwriters
for any underwritten offering by holders of Registrable Securities pursuant to
the registration requested under Section 9.1, the Company will enter into an
underwriting agreement with such underwriters for such offering, such agreement
to be satisfactory in substance and form to DTN and the underwriters and to
contain such representations and warranties by the Company and such other terms
as are customarily contained in agreements of this type, including, without
limitation, indemnities to the effect and to the extent provided in Section 9.6.
DTN shall be a party to such underwriting agreement. DTN shall be required to
make such representations and warranties to and agreements with the Company or
the underwriters as are customarily contained in such agreements.
(b) Incidental Underwritten Offerings. If the Company at any time
proposes to register any of its securities under the Securities Act as
contemplated by Section 9.2 and such securities are to be distributed by or
through one or more underwriters, the Company will, subject to the provisions of
Section 9.2(b), if requested by DTN, request such underwriters to include the
Registrable Securities to be offered and sold by DTN among the securities to be
distributed by such underwriters. DTN shall be a party to the underwriting
agreement between the Company and such underwriters. DTN shall be required to
make such representations and warranties and agreements with the Company or the
underwriters as are customarily contained in such agreements.
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(c) Holdback Agreements. (x) DTN agrees, if so required by the managing
underwriter, not to effect any public sale or distribution of securities of the
Company of the same class as the securities included in such registration
statement, during the seven days prior to the date on which any underwritten
registration pursuant to Section 9.1 or 9.2 has become effective and the 90 days
thereafter, or such longer period as may be required by the managing
underwriter.
(y) The Company agrees not to effect any public sale or
distribution of its equity securities or securities convertible into or
exchangeable or exercisable for any of such securities during the seven days
prior to the date on which any underwritten registration pursuant to Section 9.1
or 9.2 has become effective and the 90 days thereafter (or such longer period as
may be required by the underwriter), except as part of such underwritten
registration and except pursuant to registrations on Form S-4 or S-8 or any
successor or similar forms thereto.
9.5 Preparation; Reasonable Investigation. In connection with
the preparation and filing of each registration statement under the Securities
Act, the Company will give DTN, the underwriter, if any, and counsel for the
underwriter, the opportunity to participate in the preparation of such
registration statement, each prospectus included therein or filed with the
Commission, and each amendment thereof or supplement thereto, and will give each
of them such access to its books and records and such opportunities to discuss
the business of the Company with its officers and the independent public
accountants who have certified its financial statements as shall be necessary,
in the opinion of DTN and such underwriter, to conduct a reasonable
investigation within the meaning of the Securities Act.
9.6 Indemnification. (a) The Company will, and hereby does,
indemnify, to the extent permitted by applicable law, DTN, its officers and
directors, and each Person, if any, who controls DTN within the meaning of
Section 15 of the Securities Act, against all losses, claims, damages,
liabilities (or proceedings in respect thereof) and expenses (under the
Securities Act or common law or otherwise), joint or several, caused by any
untrue statement or alleged untrue statement of a material fact contained in any
registration statement or prospectus (and as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) or any
preliminary prospectus or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities (or proceedings in respect thereof) or expenses are caused
by any untrue statement or alleged untrue statement contained in or by any
omission or alleged omission from information furnished in writing to the
Company by DTN expressly for use therein. If the offering pursuant to any
registration statement provided for under this Agreement is made through
underwriters, no action or failure to act on the part of such underwriters shall
affect the obligations of the Company to indemnify DTN or any other Person
pursuant to the preceding sentence. If the offering pursuant to any registration
statement provided for under this Agreement is made through underwriters, the
Company agrees to enter into an underwriting agreement in customary form with
such underwriters and the Company agrees to indemnify such underwriters, their
officers and directors, if any, and each Person, if any, who controls such
underwriters within the meaning of Section 15 of the Securities Act to the same
extent as hereinbefore provided with respect to the
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indemnification of DTN; provided that the Company shall not be required to
indemnify DTN or any such underwriter, or any officer or director of DTN or such
underwriter or any Person who controls DTN or such underwriter within the
meaning of Section 15 of the Securities Act, to the extent that the loss, claim,
damage, liability (or proceedings in respect thereof) or expense for which
indemnification is claimed results from DTN's or such underwriter's failure to
send or give a copy of the amended or supplemented final prospectus to the
Person asserting an untrue statement or alleged untrue statement or omission or
alleged omission at or prior to the written confirmation of the sale of
Registrable Securities to such Person if such statement or omission was
corrected in such amended or supplemented final prospectus prior to such written
confirmation and DTN or the underwriter, as the case may be, was given notice of
the availability of such amended or supplemented final prospectus.
(b) DTN will indemnify, to the extent permitted by applicable law, the
Company, its officers and directors and each Person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act, against any
losses, claims, damages, liabilities (or proceedings in respect thereof) and
expenses resulting from any untrue statement or alleged untrue statement of a
material fact or any omission or alleged omission of a material fact required to
be stated in the registration statement or prospectus or preliminary prospectus
or any amendment thereof or supplement thereto or necessary to make the
statements therein not misleading, but only to the extent that such untrue
statement is contained in or such omission is from information so furnished in
writing by DTN expressly for use therein, provided that DTN's obligations
hereunder shall be limited to an amount equal to the proceeds to DTN of the
Registrable Securities sold pursuant to such registration statement.
(c) Any Person entitled to indemnification under the provisions of this
Section 9.6 shall (x) give prompt notice to the indemnifying party of any claim
with respect to which it seeks indemnification (but the failure of any
indemnified party to give notice as provided herein shall not relieve the
indemnifying party of its obligations under the preceding subdivisions of this
Section 9.6, except to the extent that the indemnifying party is actually
prejudiced by such failure) and (y) unless a conflict of interest between such
indemnified and indemnifying parties exists in respect of such claim, permit
such indemnifying party to assume the defense of such claim, with counsel
reasonably satisfactory to the indemnified party; and if such defense is so
assumed, such indemnifying party shall not enter into any settlement without the
consent of the indemnified party if such settlement attributes liability to the
indemnified party and such indemnifying party shall not be subject to any
liability for any settlement made without its consent (which shall not be
unreasonably withheld); and any underwriting agreement entered into with respect
to any registration statement provided for under this Agreement shall so
provide. In the event an indemnifying party shall not be entitled, or elects
not, to assume the defense of a claim, such indemnifying party shall not be
obligated to pay the fees and expenses of more than one counsel or firm of
counsel for all parties indemnified by such indemnifying party in respect of
such claim, unless a conflict of interest exists between such indemnified party
and any other of such indemnified parties in respect to such claim. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of an indemnified
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party, its officers, directors or any Person, if any, who controls such party as
aforesaid, and shall survive the transfer of such securities by such holder.
(d) If the indemnification provided for in this Section 9.6 shall for
any reason be held by a court to be unavailable to an indemnified party under
Section 9.6(a) or (b) hereof in respect of any loss, claim, damage or liability,
or any action in respect thereof, then, in lieu of the amount paid or payable
under Section 9.6(a) or (b), the indemnified party and the indemnifying party
under Section 9.6(a) or (b) shall contribute to the aggregate losses, claims,
damages and liabilities (including legal or other expenses reasonably incurred
in connection with investigating the same), (x) in such proportion as is
appropriate to reflect the relative fault of the Company, DTN and the
underwriters, if any, which resulted in such loss, claim, damage or liability,
or action or proceeding in respect thereof, with respect to the statements or
omissions which resulted in such loss, claim, damage or liability, or action or
proceeding in respect thereof, as well as any other relevant equitable
considerations or (y) if the allocation provided by clause (x) above is not
permitted by applicable law, in such proportion as shall be appropriate to
reflect the relative benefits received by the Company, DTN and the underwriters,
if any, from the offering of the securities covered by such registration
statement, provided, that for purposes of clauses (x) or (y), the relative
benefits received by DTN shall be deemed not to exceed the amount of proceeds
received by DTN and DTN shall not be required to contribute any amount in excess
of the amount it could have been required to pay to an indemnified party if the
indemnity under subsection (a) of this Section 9.6 was available. No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation. In addition, no Person shall be
obligated to contribute hereunder any amounts in payment for any settlement of
any action or claim effected without such Person's consent, which consent shall
not be unreasonably withheld.
9.7 Registration Rights to Others. If the Company shall at any
time after the date of this Warrant provide to any holder of any securities of
the Company rights with respect to the registration of such securities under the
Securities Act, such rights shall not be in conflict with any of the rights
provided in this Section 9 to the holders of Registrable Securities; provided,
however, the foregoing shall not preclude the Company from granting registration
rights which are more favorable than those contained in this Warrant so long as
such rights do not preclude the Company from complying with the terms of this
Warrant.
9.8 Rule 144. If and when the Common Stock is either listed,
designated or authorized as provided in Section 9.3(j), the Company shall take
all actions reasonably necessary to enable DTN to sell such shares of Common
Stock issuable upon exercise of this Warrant without registration under the
Securities Act within the limitation of the provisions of Rule 144 under the
Securities Act, as such Rule may be amended from time to time, or any similar
rules or regulations hereafter adopted by the Commission, including, without
limitation, filing on a timely basis all reports required to be filed pursuant
to the Exchange Act. Notwithstanding the provisions of Sections 9.1 and 9.2, the
Company has no obligation to effect the registration of any Registrable
Securities as provided in such sections if DTN can then sell under Rule 144 all
the Registrable Securities which otherwise would be registered in accordance
with such sections,
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as applicable; provided such exception does not preclude DTN from exercising its
registration rights on a future occasion.
10. Availability of Information. The Company will cooperate with
each holder of any Restricted Securities in supplying such information as may be
necessary for such holder to complete and file any information reporting forms
presently or hereafter required by the Commission as a condition to the
availability of an exemption from the Securities Act for the sale of any
Restricted Securities. The Company will furnish to the holder of this Warrant,
promptly upon their becoming available, copies of all financial statements,
reports, notices and proxy statements sent or made available generally by the
Company to its stockholders, and copies of all regular and periodic reports and
all registration statements and prospectuses filed by the Company with any
securities exchange or with the Commission.
11. Reservation of Stock, Etc. The Company will at all times
reserve and keep available, solely for issuance and delivery upon exercise of
this Warrant, the number of shares of Common Stock (or Other Securities) from
time to time issuable upon exercise of this Warrant at the time outstanding. All
shares of Common Stock (or Other Securities) shall be duly authorized and, when
issued upon such exercise, shall be validly issued and, in the case of shares,
fully paid and nonassessable, with no liability on the part of the holders
thereof.
12. Listing on Securities Exchange. The Company will, at all
times after any Common Stock is so listed, designated or authorized as indicated
below, (a) list on each national securities exchange on which any Common Stock
may at any time be listed, subject to official notice of issuance upon exercise
of this Warrant, and will maintain such listing of, all shares of Common Stock
from time to time issuable upon exercise of this Warrant or (b) secure and
maintain designation of all shares of Common Stock from time to time issuable
upon exercise of this Warrant as a NASDAQ "national market system security"
within the meaning of Rule llAa2-1 of the Commission or, failing that, secure
NASDAQ authorization for such shares of Common Stock.
13. Ownership, Transfer and Substitution of Warrants.
13.1. Ownership of Warrants. The Company may treat the person
in whose name this Warrant is registered on the register kept at the principal
office of the Company as the owner and holder thereof for all purposes,
notwithstanding any notice to the contrary, except that, if and when any Warrant
is properly assigned in blank, the Company may (but shall not be obligated to)
treat the bearer thereof as the owner of such Warrant for all purposes,
notwithstanding any notice to the contrary. Subject to Section 8, a Warrant, if
properly assigned, may be exercised by a new holder without first having a new
Warrant issued.
13.2. Transfer and Exchange of Warrants. Upon the surrender of
any Warrant, properly endorsed, for registration of transfer or for exchange at
the principal office of the Company, the Company at its expense will (subject to
compliance with Section 8, if applicable) execute and deliver to or upon the
order of the holder thereof a new Warrant or Warrants of like tenor, in
denominations of at least 1,000 shares, in the name of such holder or as such
holder
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(upon payment by such holder of any applicable transfer taxes) may direct,
calling in the aggregate on the face or faces thereof for the number of shares
of Common Stock called for on the face or faces of the Warrant or Warrants so
surrendered.
13.3. Replacement of Warrants. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of any Warrant and, in the case of any such loss, theft or
destruction of any Warrant held by a Person other than the Purchaser or any
institutional investor, upon delivery of indemnity reasonably satisfactory to
the Company in form and amount or, in the case of any such mutilation, upon
surrender of such Warrant for cancellation at the principal office of the
Company, the Company at its expense will execute and deliver, in lieu thereof, a
new Warrant of like tenor.
14. Definitions. As used herein, unless the context otherwise
requires, the following terms have the following respective meanings:
Acquiring Person: the continuing or surviving corporation or
other entity of a consolidation or merger with the Company (if other than the
Company), the transferee of substantially all of the properties and assets of
the Company, the corporation or other entity consolidating with or merging into
the Company in a consolidation or merger in connection with which the Common
Stock is changed into or exchanged for stock or other securities of any other
Person or cash or any other property, or, in the case of a capital
reorganization or reclassification, the Company.
Acquisition Price: as applied to the Common Stock, with
respect to any transaction to which Section 3 applies, (a) the price per share
equal to the greater of the following, determined in each case as of the date
immediately preceding the date of consummation of such transaction: (x) the
Market Price of the Common Stock and (y) the highest amount of cash plus the
Fair Value of the highest amount of securities or other property which the
holder of this Warrant would have been entitled as a shareholder to receive upon
such consummation if such holder had exercised this Warrant immediately prior
thereto, or (b) if a purchase, tender or an exchange offer is made by the
Acquiring Person (or by any of its affiliates) to the holders of the Common
Stock and such offer is accepted by the holders of more than 50% of the
outstanding shares of Common Stock, the greater of (i) the price determined in
accordance with the foregoing subdivision (a), and (ii) the price per share
equal to the greater of the following, determined in each case as of the date
immediately preceding the acceptance of such offer by the holders of more than
50% of the outstanding shares of Common Stock: (A) the Market Price of the
Common Stock and (B) the highest amount of cash plus the Fair Value of the
highest amount of securities or other property which the holder of this Warrant
would be entitled as a shareholder to receive pursuant to such offer if such
holder had exercised this Warrant immediately prior to the expiration of such
offer and accepted the same.
Additional Shares of Common Stock: all shares (including
treasury shares) of Common Stock issued or sold (or, pursuant to Section 2.3 or
2.4, deemed to be issued) by the Company after the Initial Date hereof, whether
or not subsequently reacquired or retired by the Company, other than (a) shares
of Common Stock issued upon the exercise of any Warrants and
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(b) not more than _________ shares of Common Stock issued upon the exercise of
stock options granted to directors, officers and other employees of the Company
pursuant to the [name of Stock Option Plan], as amended, and (c) ____________
shares of Common Stock issuable upon the exercise of existing warrants and
existing options not issued pursuant to the [name of Stock Option Plan].
Base Price: on any date specified herein, the lesser of (a)
the Current Market Price or (b) the Warrant Price.
Business Day: any day other than a Saturday or a Sunday or a
day on which commercial banking institutions in the City of New York are
authorized by law to be closed, provided that, in determining the period within
which certificates or Warrants are to be issued and delivered pursuant to
Section 1.3 at a time when shares of Common Stock (or Other Securities) are
listed or admitted to trading on any national securities exchange or in the
over-the-counter market and in determining the Market Price of any securities
listed or admitted to trading on any national securities exchange or in the
over-the-counter market, "Business Day" shall mean any day when the principal
exchange in which securities are then listed or admitted to trading is open for
trading or, if such securities are traded in the over-the-counter market in the
United States, such system is open for trading, and provided, further, that any
reference to "days" (unless Business Days are specified) shall mean calendar
days.
Commission: the Securities and Exchange Commission or any
other Federal agency at the time administering the Securities Act or the
Exchange Act, whichever is the relevant statute for the particular purpose.
Common Stock: the Company's common stock, par value $.01 per
share, as constituted on the date hereof, any stock into which such common stock
shall have been changed or any stock resulting from any reclassification of such
common stock, and all other stock of any class or classes (however designated)
of the Company the holders of which have the right, without limitation as to
amount, either to all or to a share of the balance of current dividends and
liquidating dividends after the payment of dividends and distributions on any
shares entitled to preference.
Company: SmartServ Online, Inc., a Delaware corporation.
Convertible Securities: any evidences of indebtedness, shares
of stock (other than Common Stock) or other securities directly or indirectly
convertible into or exchangeable for Additional Shares of Common Stock.
Current Market Price: on any date specified herein, (a) with
respect to Common Stock or to Voting Common Stock (or equivalent equity
interests) of an Acquiring Person or its Parent, (x) the average daily Market
Price during the period of the most recent 20 consecutive Business Days ending
on such date, or (y) if shares of Common Stock or such Voting Common Stock (or
equivalent equity interests), as the case may be, are not then listed or
admitted to trading on any national securities exchange and if the closing bid
and asked prices thereof are not
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then quoted or published in the over-the-counter market, the Market Price on
such date; and (b) with respect to any other securities, the Market Price on
such date.
DTN: Data Transmission Network Corporation or any successor to
its business.
DTN Agreement: the meaning specified in the opening paragraphs
of this Warrant.
Exchange Act: the Securities Exchange Act of 1934, or any
similar Federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time of determination.
Fair Value: with respect to any securities or other property,
the fair value thereof as of a date which is within 15 days of the date as of
which the determination is to be made (a) determined by an agreement between the
Company and DTN or (b) if the Company and DTN fail to agree, determined jointly
by an independent investment banking firm retained by the Company and by an
independent investment banking firm retained by DTN, either of which firms may
be an independent investment banking firm regularly retained by the Company or
DTN or (c) if the Company or DTN shall fail so to retain an independent
investment banking firm within five Business Days of the retention of such firm
by DTN or the Company, as the case may be, determined solely by the firm so
retained or (d) if the firms so retained by the Company and by DTN shall be
unable to reach a joint determination within 15 Business Days of the retention
of the last firm so retained, determined by another independent investment
banking firm which is not a regular investment banking firm of the Company or
DTN chosen by the first two such firms. Each of the Company and DTN shall be
responsible for the fees and expenses of the investment banking firm retained by
them under the foregoing clause (b) and shall share equally the fees and
expenses of any investment banking firm retained under the foregoing clause (d).
Initial Date: the meaning specified in Section 2.2.
Market Price: on any date specified herein, (a) with respect
to Common Stock or to Voting Common Stock (or equivalent equity interests) of an
Acquiring Person or its Parent, the amount per share equal to (x) the last sale
price of shares of such security, regular way, on such date or, if no such sale
takes place on such date, the average of the closing bid and asked prices
thereof on such date, in each case as officially reported on the principal
national securities exchange on which the same are then listed or admitted to
trading, or (y) if no shares of such security are then listed or admitted to
trading on any national securities exchange but such security is designated as a
national market system security by the NASD, the last trading price of such
security on such date, or if such security is not so designated, the average of
the reported closing bid and asked prices thereof on such date as shown by the
NASDAQ system or, if no shares thereof are then quoted in such system, as
published by the National Quotation Bureau, Incorporated or any successor
organization, and in either case as reported by any member firm of the New York
Stock Exchange selected by the Company, or (z) if no shares of such security are
then listed or admitted to trading on any national exchange or designated as a
national market system security and if no closing bid and asked prices thereof
are then so quoted or published in
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the over-the-counter market, the higher of
(i) the book value thereof as determined by agreement between the Company and
the Requisite Holders, or if the Company and the Requisite Holders fail to
agree, by any firm of independent public accountants of recognized standing
selected by the Board of Directors of the Company, as of the last day of any
month ending within 60 days preceding the date as of which the determination is
to be made and (ii) the fair value thereof determined in good faith by the Board
of Directors of the Company thereof as of a date which is within 15 days of the
date as of which the determination is to be made; and (b) with respect to any
other securities, the fair value thereof determined in good faith by the Board
of Directors of the Company as of a date which is within 15 days of the date as
of which the determination is to be made.
NASD: the National Association of Securities Dealers.
NASDAO: the Automated Quotation System of the NASD.
Options: rights, options or warrants to subscribe for,
purchase or otherwise acquire either Additional Shares of Common Stock or
Convertible Securities.
Other Securities: any stock (other than Common Stock) and
other securities of the Company or any other Person (corporate or otherwise)
which DTN at any time shall be entitled to receive, or shall have received, upon
the exercise of the Warrants, in lieu of or in addition to Common Stock, or
which at any time shall be issuable or shall have been issued in exchange for or
in replacement of Common Stock or Other Securities pursuant to this Warrant or
otherwise.
Parent: as to any Acquiring Person, any corporation or other
Person which (a) controls the Acquiring Person directly or indirectly through
one or more intermediaries, (b) is required to include the Acquiring Person in
its consolidated financial statements under generally accepted accounting
principles and (c) is not itself included in the consolidated financial
statements of any other Person (other than its consolidated subsidiaries).
Person: an individual, a partnership, a limited liability
company, an association, a joint venture, a corporation, a business, a trust, an
unincorporated organization or a government or any department, agency or
subdivision thereof.
Public Offering: any offering of Common Stock to the public
pursuant to an effective registration statement under the Securities Act.
Registrable Securities: (a) this Warrant, (b) any shares of
Common Stock or Other Securities issued or issuable upon exercise of this
Warrant and (c) any securities issued or issuable with respect to any Common
Stock or Other Securities referred to in subdivision (b) by way of stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization or otherwise. As
to any particular Registrable Securities, once issued such securities shall
cease to be Registrable Securities when (x) a registration statement with
respect to the sale of such securities shall have become effective under the
Securities Act and such securities shall have been disposed of in accordance
with such
27
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registration statement, (y) they shall have been sold as permitted under Rule
144 (or any successor provision) under the Securities Act, or (z) they shall
have ceased to be outstanding.
Registration Expenses: all expenses incident to the Company's
performance of or compliance with Section 9, including, without limitation, all
registration, filing and NASD fees, all fees and expenses of complying with
securities or blue sky laws, all word processing, duplicating and printing
expenses, messenger and delivery expenses, the fees and disbursements of counsel
for the Company and of its independent public accountants, including the
expenses of any special audits or "cold comfort" letters required by the
underwriters with respect to such registration, premiums and other costs of
policies of insurance against liabilities arising out of the public offering of
the Registrable Securities being registered and any fees and disbursements of
underwriters customarily paid by issuers of securities, but excluding
underwriting discounts and commissions and transfer taxes, if any, and the fees
and disbursements of DTN's counsel and accountants.
Restricted Securities: (a) any Warrants bearing the applicable
legend set forth in Section 8.1, (b) any shares of Common Stock (or Other
Securities) which have been issued upon the exercise of Warrants and which are
evidenced by a certificate or certificates bearing the applicable legend set
forth in such Section 8.1, and (c) unless the context otherwise requires, any
shares of Common Stock (or Other Securities) which are at the time issuable upon
the exercise of Warrants and which, when so issued, will be evidenced by a
certificate or certificates bearing the applicable legend set forth in Section
8.1.
Securities Act: the Securities Act of 1933, or any similar
Federal statute, and the rules and regulations of the Commission thereunder, all
as the same shall be in effect at the time of determination.
Subsidiary: any corporation, association or other business
entity a majority (by number of votes) of the Voting Common Stock of which is at
the time owned by the Company or by one or more Subsidiaries or by the Company
and one or more Subsidiaries.
Transfer: unless the context otherwise requires, any sale,
assignment, pledge or other disposition of any security, or of any interest
therein, which could constitute a "sale" as that term is defined in Section 2(3)
of the Securities Act.
Voting Common Stock: with respect to any corporation,
association or other business entity, stock of any class or classes (or
equivalent interest) , if the holders of the stock of such class or classes (or
equivalent interests) are ordinarily, in the absence of contingencies, entitled
to vote for the election of a majority of the directors (or persons performing
similar functions) of such corporation, association or business entity, even if
the right so to vote has been suspended by the happening of such a contingency.
Warrant Price: the meaning specified in Section 2.1.
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Warrants: this Common Stock Purchase Warrant and any warrant
or warrants into which it has been changed including, without limitation, any
new or replacement warrants referred to in Sections 13.2 and 13.3.
15. Remedies. The Company stipulates that the remedies at law of
the holder of this Warrant in the event of any default or threatened default by
the Company in the performance of or compliance with any of the terms of this
Warrant are not and will not be adequate and that, to the fullest extent
permitted by law, such terms may be specifically enforced by a decree for the
specific performance of any agreement contained herein or by an injunction
against a violation of any of the terms hereof or otherwise.
16. No Rights or Liabilities as Stockholder. Nothing contained in
this Warrant shall be construed as conferring upon the holder hereof any voting
or other rights as a stockholder of the Company or as imposing any liabilities
on such holder to purchase any securities or as a stockholder of the Company,
whether such liabilities are asserted by the Company or by creditors or
stockholders of the Company or otherwise.
17. Notices. All notices and other communications under this
Warrant shall be in writing and shall be mailed by registered or certified mail,
return receipt requested, addressed (a) if to the holder of this Warrant or any
holder of any Common Stock (or Other Securities), at the registered address of
such holder as set forth in the register kept at the principal office of the
Company, or (b) if to the Company, to the attention of its Chief Financial
Officer at its principal office, provided that the exercise of any Warrant shall
be effected in the manner provided in Section 1.
18. Expiration. The right to exercise this Warrant shall expire
at 3 P.M., New York City time, on November 17, 2000. The registration rights
provided in Section 9 shall expire at 3 P.M., New York City time, November 17,
2002 with respect to any shares of Common Stock issued previously to such time
upon the exercise hereof.
19. Miscellaneous. This Warrant and any term hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought. The agreements of the Company contained in this
Warrant other than those applicable solely to the Warrants and the holders
thereof shall inure to the benefit of and be enforceable by any holder or
holders at the time of any Common Stock (or Other Securities) issued upon the
exercise of Warrants, whether so expressed or not. This Warrant shall be
construed and enforced in accordance with and governed by the laws of the State
of Delaware. The section headings in this Warrant are for purposes of
convenience only and shall not constitute a part hereof.
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SMARTSERV ONLINE, INC.
By: ________________________________
Its: ________________________________
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FORM OF SUBSCRIPTION
--------------------
(To be executed only upon exercise of Warrant)
To: _______________________
The undersigned registered holder of the within Warrant hereby
irrevocably exercises such Warrant for, and purchases thereunder, ____________
shares of Common Stock of SmartServ Online, Inc., a Delaware corporation, and
herewith makes payment of $____________ therefor, and requests that the
certificates for such shares be issued in the name of
____________________________, and delivered to __________________, whose address
is____________________________.
Dated: ___________________.
____________________________________________
(Signature must conform in all respects to
the name of holder as specified on the face
of this Warrant)
[insert address]
<PAGE>
FORM OF ASSIGNMENT
------------------
(To be executed only upon transfer of Warrant)
For value received, the undersigned registered holder of the within
Warrant hereby sells, assigns and transfers unto ____________________________
the right represented by such Warrant to purchase shares of Common Stock of
SmartServ Online, Inc., a Delaware corporation, to which such Warrant relates,
and appoints ______________________ Attorney to make such transfer on the books
of _________________ maintained for such purpose, with full power of
substitution in the premises.
Dated: _________________.
____________________________________________
(Signature must conform in all respects to
the name of holder as specified on the face
of this Warrant)
[insert address]
Signed in the presence of:
____________________________
EXHIBIT 5.1
May 19, 2000
SmartServ Online, Inc.
One Station Place
Stamford, CT 06902
Gentlemen:
We have acted as counsel for SmartServ Online, Inc., a Delaware
corporation (the "Company"), in connection with its Registration Statement No.
333-34940 on Form SB-2 (the "Registration Statement") filed with the Securities
and Exchange Commission relating to the registration of 824,496 shares of Common
Stock, par value $ .01 per share (the "Shares"), of which 333,000 shares are
outstanding and 491,496 shares are issuable upon exercise of warrants issued by
the Company (the "Warrants").
In connection with the foregoing, we have examined, among other things,
the Registration Statement, the Warrants and originals or copies, satisfactory
to us, of all such corporate records and of all such other agreements,
certificates and documents as we have deemed relevant and necessary as a basis
for the opinion hereinafter expressed. In such examination, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals and the conformity with the original documents of documents
submitted to us as copies. As to any facts material to such opinion, we have, to
the extent that relevant facts were not independently established by us, relied
on certificates of public officials and certificates, oaths and declarations of
officers or other representatives of the Company.
Based upon and subject to the foregoing, we are of the opinion that the
333,000 outstanding Shares being registered pursuant to the Registration
Statement are validly issued, fully paid and non-assessable and the 491,496
Shares issuable upon exercise of the Warrants will be, when issued pursuant to
the terms and provisions of the respective Warrants, validly issued, fully paid
and non-assessable.
We hereby consent to the filing of a copy of this opinion as an exhibit
to the Registration Statement.
Very truly yours,
/s/ Parker Chapin LLP
Parker Chapin LLP
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated October 13, 1999 in Amendment No. 1 to the Registration
Statement (Form SB-2 No. 333-34940) and related Prospectus of SmartServ Online,
Inc. for the registration of 824,496 shares of its common stock.
Stamford, CT /s/ ERNST & YOUNG LLP
May 17, 2000
