+As filed with the Securities and Exchange Commission on February 9, 2001.
REGISTRATION NO. 333-43258
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
SMARTSERV ONLINE, INC.
(Name of Small Business Issuer in its Charter)
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
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
RICHARD D. KERSCHNER, ESQ.
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
SMARTSERV ONLINE, INC.
ONE STATION PLACE
STAMFORD, CT 06902
(203) 353-5950
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies of communications to:
MICHAEL J. SHEF, ESQ.
JENKENS & GILCHRIST 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
========================================== ========================== ============================== ===========================
TITLE OF EACH CLASS OF AMOUNT TO BE REGISTERED PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE
------------------------------------------ -------------------------- ------------------------------ ---------------------------
Common Stock, par value $.01 per share 668,715 (1) $23,300,705(2) $6,151
------------------------------------------ -------------------------- ------------------------------ ---------------------------
(1) Pursuant to Rule 416(b), there shall be deemed covered hereby all additional
securities resulting from antidilution adjustments.
(2) Estimated pursuant to Rule 457(c) under the Securities Act of 1933 solely
for the purpose of computing the amount of the registration fee. The fee for
the common stock was based on the average of the closing bid and asked price
of the common stock reported on the Nasdaq National Market on August 2,
2000.
(3) Does not include the following securities for which SmartServ paid a fee in
connection with the filing of a Registration Statement on Form SB-2 (File
No. 333-114) and for which this Registration Statement serves as
Post-Effective Amendment No. 1: (i) 155,192 shares of SmartServ's common
stock issuable upon exercise of warrants at $7.731 per share issued between
September 1995 and March 1996 to certain bridge lenders, and (ii) 892,461
shares of SmartServ's common stock issuable upon the exercise of warrants at
$7.731 per share issued in its March 1996 initial public offering.
Pursuant to Rule 429, this Registration Statement serves as Post-Effective
Amendment No. 1 to the Registrant's Registration Statement on Form SB-2
(File No. 333-114) relating to: (i) 155,192 shares of SmartServ's common
stock issuable upon exercise of warrants at $7.731 per share issued between
September 1995 and March 1996 to certain bridge lenders, and (ii) 892,461
shares of SmartServ's common stock issuable upon the exercise of warrants at
$7.731 per share issued in its March 1996 initial public offering.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
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.
1,716,368 SHARES OF COMMON STOCK
o The selling stockholders are offering to sell 823,907 shares
of common stock of which 448,146 shares are issuable upon
exercise of warrants.
This prospectus also covers (i) 892,461 shares of our common
stock issuable upon the exercise of warrants at $7.731 per
share which were issued in our March 1996 initial public
offering. The warrants expire in March 2002.
o We will not receive any proceeds from the offering of common
stock.
o Our common stock is traded and quoted on the Nasdaq National
Market (NMS) under the symbol "SSOL". On February 5, 2001, the
last reported bid price of our common stock was $10.313 and
the last reported asked price was $10.375.
THE SECURITIES OFFERED IN THIS PROSPECTUS INVOLVE A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY CONSIDER THE FACTORS DESCRIBED UNDER THE HEADING "RISK FACTORS"
BEGINNING ON PAGE 3.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------------------
The date of this prospectus is February __, 2001
-1-
TABLE OF CONTENTS
PROSPECTUS SUMMARY............................................................3
ABOUT OUR COMPANY.............................................................3
SUMMARY FINANCIAL DATA........................................................3
RISK FACTORS..................................................................4
SPECIAL INFORMATION REGARDING FORWARD LOOKING STATEMENTS......................7
USE OF PROCEEDS...............................................................7
MARKET PRICE OF OUR COMMON STOCK AND PUBLIC WARRANTS..........................7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION......................................................9
BUSINESS.....................................................................14
MANAGEMENT...................................................................19
PRINCIPAL STOCKHOLDERS.......................................................27
SELLING STOCKHOLDERS.........................................................28
PLAN OF DISTRIBUTION.........................................................30
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................31
DESCRIPTION OF CAPITAL STOCK.................................................32
DELAWARE BUSINESS COMBINATION PROVISIONS.....................................34
INDEMNIFICATION OF DIRECTORS AND OFFICERS....................................35
WHERE YOU CAN FIND MORE INFORMATION..........................................36
TRANSFER AGENT...............................................................36
LEGAL MATTERS................................................................36
EXPERTS......................................................................36
INDEX TO FINANCIAL STATEMENTS ..............................................F-1
-2-
PROSPECTUS SUMMARY
This summary highlights information included elsewhere in this
document. You should carefully review the more detailed information and
financial statements included in this document. The summary is not complete
and may not contain all of the information you may need to consider before
investing in our common stock. We urge you to carefully read this document,
including the "Risk Factors" section beginning on page 4 and the Financial
Statements and notes to those statements beginning on page F-1 of this
document.
ABOUT OUR COMPANY
Please note that throughout this prospectus, the words "we", "our" or
"us" refer to SmartServ Online, Inc. and not to the selling stockholders.
SmartServ Online, Inc. was organized in 1993. We are a
business-to-business Web and wireless application services provider
specializing in building and hosting content-rich and transaction-intensive
applications for both mobile wireless and fixed wireline users. We deliver
Internet-based content and trade order routing solutions, as well as
"Web-to-Wireless" applications designed to facilitate e-commerce. We have
developed online financial, transactional and media applications using a
unique "device-independent" delivery solution and have designed
applications that enable the receipt of information and the execution of
transactions on wireless telephones and personal digital assistants. Our
executive offices are located at One Station Place, Stamford, Connecticut
06902 and our telephone number is (203) 353-5950.
SUMMARY FINANCIAL DATA
This summary financial data is derived from our financial statements
for the fiscal years ended June 30, 2000, 1999 and 1998, and for the three
month periods ended September 30, 2000 and 1999, certain of which are
included elsewhere herein. You should read the following summary financial
data in conjunction with the financial statements and notes to those
statements.
Three Months Ended September 30 Years Ended June 30
--------------------------------- ------------------------------------------------
STATEMENT OF OPERATIONS 2000 1999 2000 1999 1998
---------------- --------------- ---------------- ------------- ----------------
Revenues $1,013,528 $808,292 $ 3,696,133 $ 1,443,781 $ 873,476
Income (Loss) from Operations 2,107,633** (326,684)** (31,910,386)* (3,750,471)* (4,488,307)*
Net Income (Loss) 2,459,061** (315,667)** (30,993,559)* (7,124,126)* (5,040,009)*
Basic earnings (Loss) per Share 0.47 (0.23) (11.42) (6.44) (7.65)
Diluted earnings (Loss) per 0.27 (0.23) (11.42) (6.44) (7.65)
Share
BALANCE SHEET September 30 June 30
-------------------------------- ------------------------------------------------
2000 1999 2000 1999 1998
---------------- --------------- ---------------- ------------- ----------------
Cash and Cash Equivalents $21,668,505 $1,103,443 $ 24,016,345 $ 2,165,551 $ 354,225
Working Capital (Deficiency) 19,783,186 (524,769) 21,887,491 (165,708) (1,074,238)
Total Assets 24,795,612 2,840,462 26,702,824 3,820,598 1,276,853
Total Liabilities and Deferred
Revenue 5,888,223 7,321,783 6,720,887 8,527,898 2,523,714
Shareholders' Equity
(Deficiency) 18,907,389 (4,481,321) 19,981,937 (4,707,300) (1,246,861)
* Included in such amount are noncash charges for stock-based compensation costs
of $30,271,024 for the year ended June 30, 2000, $1,312,324 for the year ended
June 30, 1999, and $660,576 for the year ended June 30, 1998.
** Included in such amount are noncash credits for stock based compensation of
$4,661,402 for the three months ended September 30, 2000 and noncash charges
for stock-based compensation of $272,951 for the three months ended September
30, 1999.
-3-
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 $30,993,559 for the year ended June 30,
2000, $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. However, included in the June 30, 2000 amount was
a noncash charge for stock-based compensation of $30,271,024. On September 30,
2000, we had an accumulated deficit of $50,480,503. 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 have negative cash flows
from operations. 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. 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. However, under our amended
agreement with DTN, SmartServ will be able to market those applications licensed
to DTN in both wireline and wireless platforms with strategic marketing partners
internationally effective December 2000, and within the United States and Canada
effective September 2001. Pursuant to this amendment, SmartServ will continue to
provide operational support through August 2001. Revenues earned from such
services will be $83,000 per month through August 2001. 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 would adversely affect our
results of operations.
OUR BUSINESS DEPENDS UPON STRATEGIC MARKETING PARTNERSHIPS WHICH MAY
NOT MATERIALIZE
We intend to sell our services primarily by entering into non-exclusive
agreements with strategic marketing partners who would brand our information and
transaction services with their own private label, promote the product offering
and then provide our information and e-commerce 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.
-4-
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, 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 the market for our services will depend in part upon our ability to create
and develop additional services and adjust existing services in accordance with
changing consumer preferences, all at competitive prices. Our failure to develop
new services and generate revenues could have a material adverse effect on our
financial condition and operating results.
WE COMPETE AGAINST LARGER, WELL KNOWN COMPANIES WITH GREATER RESOURCES
THAN WE HAVE
The market for Web and wireless based information and transactional
services is highly competitive and involves rapid innovation and technological
change, shifting consumer preferences and frequent new service introductions.
Most of our competitors and potential competitors have substantially greater
financial, marketing and technical resources than we have. Increased competition
in the market for our services could limit our ability to expand and materially
and adversely affect our results of operations.
The principal competitive factors in both the Internet-based and
wireless services industry include content, product features and quality, ease
of use, access to distribution channels, brand recognition, reliability and
price. We believe that potential new competitors, including large multimedia and
information system companies, are increasing their focus on transaction
processing. We face competition from numerous services delivered through
personal computers. Although in its infancy, the wireless arena too has its
competitors, such as Datalink Systems Corporation, I3 Mobile, Inc., Aether
Systems, Inc., Tantau Software, Inc., 724 Solutions, Inc. and w-Trade
Technologies, Inc. We expect competition to increase from existing competitors
and from new competitors, 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
-5-
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 Executive Vice President of Technology, in the
amount of $500,000. The loss of the services of either Mr. Cassetta or Mr. Rossi
would have a material adverse effect upon our business, financial condition and
results of operations.
PROVISIONS IN OUR CHARTER MAY MAKE IT MORE DIFFICULT FOR A PERSON TO
ACQUIRE US AT A PREMIUM TO OUR CURRENT MARKET VALUE
Our charter restricts the ability of our stockholders to call a
stockholders meeting and provides that our stockholders may not act by written
consent or change the number of directors and classes of our board of directors.
These provisions may have the effect of deterring or delaying certain
transactions involving an actual or potential change in control of SmartServ,
including transactions in which our stockholders might otherwise receive a
premium for their shares over then current market prices, and may limit the
ability of our stockholders to approve transactions that they may deem to be in
their best interests.
YOUR OWNERSHIP INTEREST, VOTING POWER AND THE MARKET PRICE OF OUR
COMMON STOCK MAY DECREASE BECAUSE WE HAVE ISSUED, AND MAY CONTINUE TO ISSUE, A
SUBSTANTIAL NUMBER OF SECURITIES CONVERTIBLE OR EXERCISABLE INTO OUR COMMON
STOCK
We have issued common stock, options and warrants to purchase our
common stock, and in the future we may issue additional shares of common stock,
options, warrants, preferred stock or other securities exercisable for or
convertible into our common stock. At January 31, 2001, there were $554,000 of
our prepaid warrants outstanding that were then convertible into 395,714 shares
of our common stock. Additionally, we have issued warrants to investors and
consultants and granted options to employees for the purchase of 4,338,134
shares of our common stock. Except for 1,241,000 shares subject to stock
options, substantially all of such shares have been registered for resale under
the Securities Act. Additional shares are available for sale under Rule 144 of
the Securities Act. Sales of these shares or the market's perception that these
sales could occur may cause the market price of our common stock to fall and may
make it more difficult for us to sell equity securities in the future at a time
and price that we deem appropriate or to use equity securities as consideration
for future acquisitions.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS
We have designed and developed our own information platform,
"SmartServ", based on Sun Microsystems, Inc. computers and Oracle Corp.'s
version 8.i 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
-6-
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.
WE ARE INVOLVED IN SEVERAL PENDING LEGAL PROCEEDINGS WHICH, IF RESOLVED
AGAINST US, COULD CAUSE DILUTION TO OUR STOCKHOLDERS AND HAVE A MATERIAL
NEGATIVE IMPACT ON OUR OPERATIONS
From time to time we have been, and expect to continue to be, a party
to legal proceedings and claims in the ordinary course of our business. Our
ongoing legal proceedings with Michael Fishman and Commonwealth Associates, L.P.
have been set forth in the Business section of this document under the heading
"Legal Proceedings". Commonwealth seeks 13,333 shares of our common stock or
damages of at least $1,770,000. While we expect to contest these matters
vigorously, litigation is inherently uncertain and an adverse judgment on any of
these claims could cause dilution to our stockholders as well as harm our
business. Even if not meritorious, any of these current and future matters could
require the expenditure of significant financial and managerial resources.
SPECIAL INFORMATION REGARDING FORWARD LOOKING STATEMENTS
Some of the statements in this prospectus or in the documents we
incorporate by reference are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve certain known and unknown risks, uncertainties and other
factors which may cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by these forward-looking statements. These factors include,
among others, the factors set forth above under "Risk Factors." The words
"believe," "expect," "anticipate," "intend" and "plan" and similar expressions
identify forward-looking statements. We caution you not to place undue reliance
on these forward-looking statements. We undertake no obligation to update or
revise any forward-looking statements or to publicly announce the result of any
revisions to any of the forward-looking statements in this document to reflect
future events or developments.
USE OF PROCEEDS
We will receive approximately $12,085,000 if all of the warrants for
the underlying shares of common stock being registered are exercised. We expect
to use these proceeds, if any, for general corporate purposes.
MARKET PRICE OF OUR COMMON STOCK AND PUBLIC WARRANTS
On May 16, 2000, SmartServ's $.01 par value common stock commenced
trading on the Nasdaq National Market as SSOL. On this date, our Redeemable
Common Stock Purchase Warrants, or public warrants, also commenced trading on
the Nasdaq National Market as SSOLW.
SmartServ's securities traded on the OTC Bulletin Board until May 15,
2000.
On October 15, 1998, our stockholders approved a one-for-six reverse
stock split which became effective on October 26, 1998.
-7-
The following table sets forth the high and low prices for the common
stock and public warrants during the periods indicated as reported by the Nasdaq
National Market and the OTC Bulletin Board, as applicable. Such amounts (and all
other share and price information contained in this document) have been adjusted
to reflect the reverse stock split.
COMMON STOCK WARRANTS
------------ --------
HIGH LOW HIGH LOW
---- --- ---- ---
Year Ending December 31, 2001
- -----------------------------
(First Quarter through February
6, 2001) $ 14.188 $ 6.000 $ 6.250 $ 2.000
Year Ending December 31, 2001
- -----------------------------
First Quarter $ 70.250 $26.875 $ 27.000 $ 9.687
Second Quarter 36.937 6.750 16.063 1.625
Year Ended June 30, 2000
- ------------------------
First Quarter $ 1.531 $ .719 $ .156 $ .063
Second Quarter 24.625 .719 6.500 .070
Third Quarter 186.000 17.625 64.000 5.000
Fourth Quarter 129.000 25.000 47.031 10.500
Year Ended June 30, 1999
- ------------------------
First Quarter $ 4.313 $ 1.875 $ 2.250 $ .375
Second Quarter 4.125 1.031 .531 .063
Third Quarter 4.875 1.500 .625 .063
Fourth Quarter 2.500 1.500 .250 .100
As of January 31, 2001, we had 5,997,690 shares of common stock
outstanding held by 96 shareholders of record. We estimate that our common stock
is held by approximately 6,000 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.
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
PLAN OF OPERATION
SmartServ is a business-to-business Web and wireless application
services provider specializing in building and hosting content-rich and
transaction-intensive applications for both mobile wireless and fixed wireline
users. We deliver Internet-based content and trade order routing solutions, as
well as "Web-to-Wireless" applications designed to facilitate e-commerce. We
have developed online financial, transactional and media applications using a
unique "device-independent" delivery solution and have designed applications
that enable the receipt of information and the execution of transactions on
wireless handsets, computers and personal digital assistants.
SmartServ's plan of operation includes programs for the sale of its
information and transactional application services through strategic marketing
partners utilizing a "business-to-business" strategy. Such a strategy provides
access to a large number of potential subscribers and allows SmartServ to
maximize its market reach at minimal operating costs. The flexibility of
SmartServ's application software and communications architecture enables the
customization of each information package offered to each strategic marketing
partner, and in turn to their end users.
As an early entrant in the dynamic market for the distribution of
financial information and transaction services via wireless telephones and
personal digital assistants, or PDAs, SmartServ is developing strategic
marketing relationships with wireless equipment manufacturers, carriers and
other value-added service providers and potential corporate partners. SmartServ
continuously seeks to increase product performance and widen its distribution by
building and maintaining this network of strategic marketing partners. Combining
SmartServ's application development and data platform with the core competencies
of its strategic marketing partners, SmartServ is offering a packaged turnkey
solution for extending content and transactions to the wireless environment.
Management believes the wireless area has tremendous potential for distribution
of SmartServ's information products and as a source of revenues from "fee based"
transactions such as routing stock order entries; however, we have yet to derive
any revenues from such efforts.
Management believes that most of SmartServ's revenues will continue to
be derived from consumers who purchase its services through strategic marketing
partners. SmartServ anticipates that strategic marketing partners will brand its
information and transaction services with their own private label and promote
and distribute SmartServ's packaged offering to their clients. SmartServ has the
ability to customize the information package to be offered to each strategic
marketing partner, by device.
Management anticipates that staffing requirements associated with the
implementation of its plan of operation will result in the addition of a minimum
of forty-five people during the period ending December 31, 2001. Such personnel
will be added to assist primarily with the programming requirements of strategic
marketing partners' product offerings, for customer support and sales and
marketing.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2000 VERSUS QUARTER ENDED SEPTEMBER 30, 1999
During the quarters ended September 30, 2000 and 1999, SmartServ's
revenues were $1,013,528 and $808,292, respectively. Substantially all of such
revenues were obtained from SmartServ's licensing agreement with DTN. During the
quarters ended September 30, 2000 and 1999, we recognized $598,200 and $414,200,
respectively, from the amortization of deferred revenues associated with this
agreement.
-9-
During the quarter ended September 30, 2000, SmartServ incurred costs
of services of $1,010,710. Such costs consisted primarily of systems consultants
($598,000), information and communication costs ($122,700), personnel costs
($236,200) and computer hardware lease, depreciation and maintenance costs
($53,400). During the quarter ended September 30, 1999, SmartServ incurred costs
of services of $232,866. Such costs consisted primarily of information and
communication costs ($48,400), personnel costs ($55,800) and computer hardware
lease, depreciation and maintenance costs ($84,600). Product development costs
were $417,776 and $46,845 for the quarters ended September 30, 2000 and 1999,
respectively. During the quarter ended September 30, 2000, such costs consisted
primarily of the amortization of capitalized software development costs related
to certain product enhancements in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed" ("Statement 86") ($227,200) and personnel
costs ($182,900). During the quarter ended September 30, 1999, such costs
consisted primarily of the amortization of capitalized software development
costs related to certain product enhancements. During the quarters ended
September 30, 2000 and 1999, SmartServ capitalized $160,300 and $244,200,
respectively, of development costs in accordance with Statement 86.
During the quarter ended September 30, 2000, SmartServ incurred
selling, general and administrative expenses of $2,138,811 versus $582,314 for
the quarter ended September 30, 1999. During the quarter ended September 30,
2000, such costs were incurred primarily for personnel costs ($1,208,300),
marketing and advertising costs ($79,200), professional fees ($578,700), and
facilities ($54,900). Selling, general and administrative expenses for the
quarter ended September 30, 1999 were incurred primarily for personnel costs
($202,700), marketing and advertising costs ($76,400), professional fees
($177,500), facilities ($50,000) and telecommunications costs ($17,000).
During the quarter ended September 30, 2000, noncash credits for
stock-based compensation amounted to $4,661,402 compared to noncash charges of
$272,951 for the quarter ended September 30, 1999. In 2000, such noncash
adjustments were primarily related to personnel costs resulting from the
valuation of stock-based compensation in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25").
Certain options are subject to the variable plan requirements of APB No. 25, as
they were repriced, and therefore, compensation adjustments are recognized for
changes in the fair value of common stock during reporting dates. In 1999, such
noncash charges resulted primarily from the amortization of costs ascribed to
common stock purchase warrants previously issued to financial consultants.
Interest income for the quarters ended September 30, 2000 and 1999
amounted to $351,428 and $11,017, respectively. Such amounts were earned
primarily from SmartServ's investments in short-term commercial paper and cash
balances.
Basic earnings per share were $.47 for the three months ended September
30, 2000 versus a per share loss of $.23 for the three months ended September
30, 1999. The number of basic weighted average shares outstanding increased from
1,368,046 at September 30, 1999 to 5,296,859 at September 30, 2000. Diluted
earnings per share were $.27 for the three months ended September 30, 2000
versus a per share loss of $.23 for the three months ended september 30, 1999.
At September 30, 2000 there were 9,091,970 diluted shares outstanding versus
1,368,046 at September 30, 1999.
FISCAL YEAR ENDED JUNE 30, 2000 VERSUS FISCAL YEAR ENDED JUNE 30, 1999
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During the years ended June 30, 2000 and 1999 we recorded revenues of
$3,696,133 and $1,443,781, respectively. Substantially all of such revenues were
earned through our licensing agreement with Data Transmission Network
Corporation. During the years ended June 30, 2000 and 1999, we recognized
$1,656,600 and $1,112,100, respectively, from the amortization of deferred
revenues associated with this agreement.
During the year ended June 30, 2000, SmartServ incurred costs of
services of $954,048. Such costs consisted primarily of information and
communication costs ($182,000), personnel costs ($260,900), computer hardware
leases and maintenance ($356,000) and systems consultants ($104,400). During the
year ended June 30, 1999, SmartServ incurred costs of services of $992,741. Such
costs consisted primarily of information and communication costs ($267,600),
personnel costs ($288,400), computer hardware leases and maintenance ($339,400),
and systems consultants ($97,300). Product development costs were $383,042 for
the year ended June 30, 2000 versus $193,188 for the year ended June 30, 1999.
During the years ended June 30, 2000 and 1999, we capitalized $1,122,000 and
$765,000, respectively, of development costs in accordance with the Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed" ("Statement 86"). Product
development costs consisted primarily of the amortization of capitalized
software development costs.
During the year ended June 30, 2000, SmartServ incurred selling,
general and administrative expenses of $3,998,405 versus $2,695,999 for the year
ended June 30, 1999. During the year ended June 30, 2000, such costs were
incurred primarily for personnel costs ($1,899,200), facilities ($267,800),
marketing and advertising costs ($668,800), professional fees ($952,100), and
telecommunications costs ($87,700). During the year ended June 30, 1999, such
costs were incurred primarily for personnel costs ($1,131,400), facilities
($240,500), marketing and advertising costs ($263,100), professional fees
($856,000) and telecommunications costs ($69,500). As compared to 1999,
personnel costs increased by $767,800 in 2000, primarily from our efforts to
build our marketing and sales infrastructure, while marketing and advertising
costs increased $405,700 as a result of our efforts to increase awareness of our
company and its product line.
During the year ended June 30, 2000, noncash charges for stock-based
compensation amounted to $30,271,024 compared to $1,312,324 during the year
ended June 30, 1999. Such noncash charges in 2000 were primarily related to
personnel costs ($28,991,100) resulting from the valuation of stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"). Certain options are
subject to the variable plan requirements of APB No. 25, as they were repriced,
and therefore, compensation expense is recognized for changes in the fair value
of our common stock. During 1999, such costs were approximately $18,000. Noncash
charges for professional fees for the years ended June 30, 2000 and 1999 were
$1,279,900 and $1,294,000, respectively, resulting from the issuance of warrants
to purchase common stock to various financial, marketing and technical
consultants. The value of such common stock purchase warrants was recorded in
accordance with the Black-Scholes pricing methodology.
Interest income for the year ended June 30, 2000 amounted to $241,402
versus $4,767 for the year ended June 30, 1999. Such amounts were earned
primarily from SmartServ's investments in highly liquid commercial paper. The
increase in interest income resulted from the availability of funds from our
January and May 2000 equity placements. Interest costs for the years ended June
30, 2000 and 1999 were $2,275 and $167,839, respectively. In 1999, such costs
were incurred primarily in connection with the issuance of the 8% convertible
notes. Debt origination and other financing costs were $(677,700) and $3,210,583
for the years ended June 30, 2000 and 1999, respectively. During the year ended
June 30, 1999, we recorded a charge of approximately $986,000 for our obligation
to holders of our prepaid warrants pursuant to the default provisions thereof.
We reversed $717,700 of such charge during the year ended June 30, 2000 as a
result of the conversion of certain prepaid warrants into our common stock and
the relisting of our common stock on the Nasdaq National Market, thus curing the
event of default. In 1999, $2,593,800 of the interest and financing cost
represents noncash charges for the issuance of common stock as settlement of
certain default obligations and warrants to purchase common stock in connection
with our 8% convertible notes.
Loss per share was $11.42 per share for the year ended June 30, 2000
versus $6.44 per share for the year ended June 30, 1999. The net loss increased
by $23,869,433, and the number of SmartServ's weighted average shares of common
stock outstanding in 2000 increased by 1,607,328 shares.
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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 $992,741. Such costs consisted primarily of information and
communication costs ($267,600), personnel costs ($288,400), computer hardware
leases and maintenance ($339,400) and systems consultants ($97,300). During the
year ended June 30, 1998, 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 versus $923,082 for the year ended
June 30, 1998. The decrease in product development costs resulted from the
capitalization of software development costs related to certain product
enhancements in accordance with Statement 86. During the year ended June 30,
1999, SmartServ capitalized $765,000 of development costs in accordance with
Statement 86. No such costs were capitalized during the year ended June 30,
1998. During the year ended June 30, 1999, product development costs consisted
primarily of the amortization of capitalized software development costs. During
the year ended June 30, 1998, product development costs consisted primarily of
personnel costs ($541,400) and computer system consultants ($335,000).
During the year ended June 30, 1999, SmartServ incurred selling,
general and administrative expenses of $2,695,999 versus $2,561,364 for the year
ended June 30, 1998. During the year ended June 30, 1999, such costs were
incurred primarily for personnel costs ($1,131,400), facilities ($240,500),
marketing and advertising costs ($263,100), professional fees ($856,000), and
telecommunications costs ($69,500). During the year ended June 30, 1998, such
costs were incurred primarily for personnel costs ($1,349,000), facilities
($216,000), marketing and advertising costs ($240,400), professional fees
($390,800) and telecommunications costs ($73,100).
During the year ended June 30, 1999, noncash charges for stock-based
compensation amounted to $1,312,324 compared to $660,576 during the year ended
June 30, 1998. Such noncash charges resulted from the issuance of common stock
purchase warrants to various financial and marketing consultants. The value of
such common stock purchase warrants was recorded in accordance with the
Black-Scholes pricing methodology.
Interest income for the year ended June 30, 1999 amounted to $4,767
versus $40,788 for the year ended June 30, 1998. Such amounts were earned
primarily from 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.
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Loss per share was $6.44 per share for the year ended June 30, 1999
versus $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.
CAPITAL RESOURCES AND LIQUIDITY
In June 1999, SmartServ and DTN entered into a license agreement that
amended their original agreement. 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. Additionally, we received $324,000 in exchange
for an agreement to issue warrants to purchase 300,000 shares of our common
stock at an exercise price of $8.60 per share. In November 2000, we amended the
license agreement to provide that in consideration for a copy of the application
source code, DTN will return both the domestic and international marketing
rights of the software applications to SmartServ. As part of our strategy for
providing information and transaction capabilities with device independence,
SmartServ will be able to market these applications in both wireline and
wireless platforms in conjunction with strategic marketing partners worldwide.
Pursuant to this amendment, SmartServ will continue to perform maintenance and
enhancement services through December 2000, and provide operational support
through August 2001. Revenues earned by SmartServ for services to be rendered
pursuant to this amendment will be $83,000 per month through August 2001.
In November 1998, we completed a financing for $550,000. We sold five
and one-half (5.5) units, each consisting of a secured convertible 8% note in
the principal amount of $100,000 and warrants to purchase common stock. The
notes and the warrants were initially convertible and exercisable, respectively,
at $.60 per share of common stock. Such notes were repaid in June 1999.
In July 1999, we entered into an agreement with Arnhold & S.
Bleichroeder, Inc. to settle our obligation to Arnhold & S. Bleichroeder
pursuant to the default provisions of the prepaid warrants. In accordance with
that agreement, we paid Arnhold & S. Bleichroeder $325,000 to redeem the prepaid
warrants held by them and issued 180,000 shares of common stock in full
settlement of all obligations.
In January 2000, America First Associates Corp., acting as placement
agent for SmartServ, completed a private placement of 233,000 shares of common
stock at $15.00 per share. We also completed a private placement of an
additional 100,000 shares of common stock at $15.00 per share without the
services of a placement agent. The net proceeds of the two placements were used
for general working capital requirements.
In May 2000, Chase Securities Inc., acting as placement agent for
SmartServ, completed a private placement of 353,535 shares of common stock at
$49.50 a share. The net proceeds of the placement of $16,750,000 were used for
general working capital requirements.
In May 2000, we entered into a Business Alliance Agreement with Hewlett
Packard Company whereby the companies agreed to jointly market their products
and services, and to work on the build-out of SmartServ's domestic and
international infrastructure. In furtherance of these objectives Hewlett-Packard
will provide us with up to $20,000,000 in secured financing for the acquisition
of approved hardware, software and services, subject to SmartServ's continuing
compliance with certain financial covenants. The debt is evidenced by a note,
bearing an interest rate of 11%, with a three year maturity and may be converted
into our common stock at $33.56 per share.
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During the year ended June 30, 2000, we issued 1,855,509 shares of
common stock to investors upon the exercise of warrants to purchase such shares.
Proceeds from the exercise of these warrants were $3,650,200. Additionally, we
received $1,127,800 from the exercise of warrants to purchase 237,946 shares of
our common stock during the quarter ended September 30, 2000.
At September 30, 2000, we have 1,725,000 public warrants (SSOLW) and
300,000 warrants with terms identical to the public warrants outstanding. These
warrants are currently convertible into our common stock at the ratio of one
warrant per .5174 share of common stock at an exercise price of $7.73 per share.
These warrants are redeemable by SmartServ on not less than 30 days written
notice at the redemption price of $.10 per warrant, provided the average closing
bid quotation of the common stock as reported on the Nasdaq Stock Market has
been at least 187.5% of the current exercise price of the warrants for a period
of 20 consecutive trading days ending on the third day prior to the date on
which we give notice of redemption. Proceeds from the exercise of the warrants
by the holders thereof would provide us with approximately $8,000,000.
While we reported a loss from operations of $31,910,000 for the fiscal
year ended June 30, 2000, our net loss from operations exclusive of stock-based
compensation costs was $1,639,000. Cash used in operations was $1,529,000, while
cash used for investing activities was $1,541,000. Of the amount used for
investing activities, $1,100,000 represents funds used in the development of our
software applications. Similarly, while we reported net income from operations
of $2,107,600 for the quarter ended September 30, 2000, our net loss from
operations exclusive of stock-based compensation costs was $2,553,800. Cash used
in operations was $3,048,300, while cash used for investing activities was
$427,400.
We are currently involved in two lawsuits. Although we are vigorously
defending these actions, there can be no assurance that we will be successful.
The unfavorable outcome of either of these actions could have a material adverse
effect on our financial condition and cash flows. See Note 8 of the Notes to
Unaudited Financial Statements for the three months ended September 30, 2000 for
a more detailed discussion of these actions.
BUSINESS
THE COMPANY
SmartServ Online is a business-to-business Web and wireless application
services provider specializing in building and hosting content-rich and
transaction-intensive applications for both mobile wireless and fixed wireline
users. We deliver Internet-based content and securities trade order routing
solutions, as well as "Web-to-Wireless" or "W2W" applications designed to
facilitate mobile commerce, or "m-commerce". We have developed online financial,
transactional and media applications using a unique "device-independent"
delivery solution and have designed applications that enable the receipt of
information and the execution of transactions on wireless handsets, computers
and personal digital assistants.
SERVICES
Recognizing the trend toward mobility, we have developed an
infrastructure that integrates and delivers our Internet-based information and
that effectuates m-commerce transactions via wireless networks and devices. By
developing fully integrated solutions, we offer traditional and new-economy
companies the ability to leverage the Internet and provide m-commerce
capabilities for both wireline and emerging wireless networks. SmartServ's
solutions offer enterprises a platform that enables anytime, anywhere,
any-device access to Web content, industrial-strength transaction routing
systems and a suite of applications for financial and commerce transactions -
all in a secure and reliable hosted environment. Our development efforts allow
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our customers to gain W2W capabilities with significantly lower costs for
development and maintenance than if developed internally. We maintain the
systems while making sure the technology available to our customers remains
state-of-the-art.
We have invested in the development of a transaction engine and an
application software and communications architecture to provide a highly
scalable and reliable carrier-grade e-commerce solution. We believe our
application software and communications architecture that formats the
information in a manner that is most appropriate for the device on which it will
be displayed will be attractive in the marketplace. Product development efforts
are focused on providing new solutions for user-level personalization and
profiling, integrated payment capabilities and other enhancements to our current
information and transaction services. Additionally, we are developing new format
modifications for emerging devices, content and feature improvements and
customizations based on market requirements. We intend to continue to invest in
this area and believe our transaction engine, application software and
communications architecture represent an important competitive advantage.
MARKETING STRATEGY
SmartServ was an early entrant in the dynamic market of distribution of
financial information and transaction services via wireless telephones and
personal digital assistants. We have worked to develop strategic marketing
relationships with wireless equipment manufacturers, carriers, other value-added
service providers and potential corporate partners. We continuously seek to
increase product performance and widen our distribution by building and
maintaining this network of strategic marketing partners. Recently, we entered
into a Business Alliance Agreement with Hewlett-Packard Company, whereby the
companies agreed to jointly market their products and services and to work on
the build-out of SmartServ's global infrastructure. We expect Hewlett-Packard to
introduce SmartServ's wireless m-commerce solutions to their interested
enterprise customers. Our strategy of forming alliances with strategic marketing
partners enables us to maximize our market reach at minimal operating costs,
improve product and service performance and grow distribution channels to
end-users.
By combining our application development and platform with the core
competencies of our strategic marketing partners we are offering a packaged
turnkey solution for extending content and transactions to the wireless
environment. Our data and communication architecture adds user functionality and
utility to both wired and wireless technology while our application development
and strategic alliances provide us with a competitive advantage for providing
complete end-to-end solutions.
We expect that our sources of revenue will include the sale of our
solutions to our financial services, telecommunications and enterprise
customers, as well as the recurring content delivery and transaction fees
resulting from distribution of our services to their end-users. We expect that
our customers will private label our information and transaction services and
promote them to their end-users. Our m-commerce platform will enable our
customers to provide m-commerce solutions via both the Internet and wireless
networks.
Our goal is to be a leading provider of software applications and
hosting services that facilitate W2W transactions; to this end we will
concentrate our efforts in the following areas:
EXPANSION OF OUR CUSTOMER BASE
- ------------------------------
The expansion of our customer base is focused primarily on:
o FINANCIAL SERVICES SOLUTIONS
----------------------------
SmartServ seeks to expand its customer base among financial services
enterprises both institutional and retail, by leveraging its
Transaction Routing Engine and W2W Middleware with
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a suite of applications designed to meet the rigorous demands of the
financial community. SmartServ's ability to provide these transaction
management systems via the Internet makes us well-suited to provide
these services in a m-commerce environment. Our experience in providing
these systems better qualifies us to understand the unique needs of our
customers, whether they are broker/dealers, banks or custodial
clearinghouses. Customers have the ability to choose an entire suite of
transaction and information services or select only those services that
are relevant to their particular business needs.
o TELECOMMUNICATIONS SOLUTIONS
----------------------------
We provide a suite of solutions to help the wireless carriers, handset
manufacturers and Internet service providers rapidly expand the
delivery of products and services to their customers. Our platform
supports an array of features and transaction-enabling applications
designed to drive service usage and network revenues. These features
and applications include: authentication, security, customer
administration and management, mobile brokerage, multi-language
support, currency converter and mobile lottery.
o ENTERPRISE SOLUTIONS
--------------------
We have designed our enterprise commerce solution based upon our belief
that the timely and accurate delivery of information drives
transactions. Alerts notify the consumer of expiring inventories, price
changes or specials in order to prompt transactions. SmartServ's
Transaction Routing Engine and Middleware provide the ideal platform
for a host of commerce applications.
GEOGRAPHIC EXPANSION
- --------------------
We have established a sales and marketing presence in Zurich, Switzerland in an
effort to expand our services into Europe. The extensive and growing European
reliance on wireless services makes it a prime candidate for SmartServ's
information and e-commerce capabilities. Additionally, we believe that new
products and services developed for the European market will also be introduced
into the U.S. market.
APPLICATION DEVELOPMENT AND PLATFORM STABILITY
- ----------------------------------------------
We plan to continue to expand the development of our core technologies to
include voice recognition, localized financial and lifestyle information, and
payment features while continuing to provide a personalized and esthetically
appealing user interface. We will work to ensure that our platform is stable and
scalable and its information reporting capabilities meet the demands of our
customers.
EXPANSION OF HOSTING CAPABILITIES
- ---------------------------------
The complexity surrounding the provision of wireless services with regard to
such things as security, redundancy, scalability and reliability provides us
with the opportunity to assume the role of a Wireless Application Services
Provider, or "WASP". As a WASP, we can facilitate the rapid implementation and
deployment of a customer's wireless business plan. We will offer carrier-grade
operation centers and secure communication lines worldwide.
COMPETITION
The market for Web-based information and transactional services is
highly competitive and subject to rapid innovation and technological change,
shifting consumer preferences and frequent new service introductions. While our
application software and communications architecture makes the services "device
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independent", we face competition from numerous services delivered through
personal computers. Although in its infancy, the wireless arena too has its
competitors, such as DataLink Systems Corporation, I3 Mobile, Inc., Aether
Systems, Inc., Tantau Software, Inc., 724 Solutions, Inc. and w-Trade
Technologies, Inc. We expect competition to increase from existing competitors
and from new competitors, possibly including telecommunications companies. Most
of our competitors and potential competitors have substantially greater
financial, marketing and technical resources than we have. We believe that
potential new competitors, including large multimedia and information system
companies, are increasing their focus on transaction processing. Increased
competition in the market for our services could limit our ability to expand and
materially and adversely affect our results of operations.
The information content provided through our application software and
communication architecture is generally purchased through non-exclusive
distribution agreements. While we are not dependent on any one content provider,
existing and potential competitors may enter into agreements with these and
other such providers and thereby acquire the ability to deliver online
information and transactional services substantially similar to those provided
by us.
The principal competitive factors in both the online and wireless
industries include content, product features and quality, ease of use, access to
distribution channels, brand recognition, reliability and price. Our strategy of
establishing alliances with strategic marketing partners and our ability to
provide what we believe to be unique software applications and communications
architecture should enable us to compete effectively.
SOFTWARE
We have developed an application software and communications
architecture that we believe provides a highly scalable carrier-grade m-commerce
solution, offers easy to use and visually appealing services, and maximizes the
capabilities of various devices. Our user-friendly front-end application
software provides instant access to information and flexibility to the varying
needs of multiple users. Subscribers are empowered to create their own groupings
of information they routinely request and are able to navigate directly to the
information they seek with the software's easy to read menu systems and search
capabilities. Our transaction engine has been designed to facilitate various
forms of m-commerce and our application software employs common user interface
techniques, such as icons, pull-down menus, spreadsheet formats, tree structures
and the use of "key" words, to make our products intuitive to our users. Our
software employs a unique, object-oriented architecture that intelligently
identifies a wide range of wireless and wired devices and dynamically formats
the information to device-specific attributes.
Capitalized software development costs for the quarter ended September
30, 2000 were $160,269 and for the quarter ended September 30, 1999 were
$244,225. Additionally, during the fiscal years ended June 30, 2000 and 1999, we
capitalized software development costs amounting to $1,122,000 and $765,000,
respectively. No such costs were capitalized in the year ended June 30, 1998.
PROPRIETARY RIGHTS
We have designed and developed our own "device independent" information
and transaction platform, "SmartServ", based on Sun Microsystems, Inc. computers
and Oracle Corp.'s version 8.i relational database manager, to support a wide
array of wireless browsers and operating systems. The platform seamlessly
integrates real-time data and transaction capabilities, such as stock trade
order routing and m-commerce services, into a user-friendly services interface.
We rely upon a combination of contract provisions, trade secret laws, patent,
trademark and copyright laws to attempt to protect our proprietary
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rights. We license the use of our services under agreements that contain terms
and conditions prohibiting the unauthorized reproduction of our software and
services. Although we intend to protect our rights vigorously, there can be no
assurance that any of the foregoing measures will be successful.
We granted Data Transmission Network Corporation an exclusive perpetual
worldwide license to our Internet-based (1) real-time stock quote product, (2)
online trading vehicle for customers of small and medium sized brokerage
companies, (3) administrative reporting package for brokers of small and medium
sized brokerage companies and (4) order entry/routing system. In November 2000,
we amended the license agreement to provide that in consideration for a copy of
the application source code, Data Transmission Network will return both the
domestic and international marketing rights of the software applications to
SmartServ. As part of our strategy for providing information and transaction
capabilities with device independence, SmartServ will be able to market these
applications in both wireline and wireless platforms in conjunction with
strategic marketing partners worldwide. Pursuant to this amendment, SmartServ
will continue to perform maintenance and enhancement services through December
2000 and provide operational support through August 2001.
We believe that our software, services, trademark, service mark and
other proprietary rights do not infringe on the proprietary rights of third
parties. However, there can be no assurance that third parties will not assert
infringement claims against us with respect to current features, content or
services or that any such assertion may not require us to enter into royalty
arrangements or result in litigation.
GOVERNMENT REGULATION
We are not currently subject to direct regulation other than federal
and state regulation generally applicable to businesses. However, changes in the
regulatory environment relating to the telecommunications and media industry
could have an effect on our business, including regulatory changes which
directly or indirectly affect telecommunication costs or increase the likelihood
or scope of competition from regional telephone companies. Additionally,
legislative proposals from international, federal and state governmental bodies
in the areas of content regulation, intellectual property and privacy rights, as
well as federal and state tax issues could impose additional regulations and
obligations upon all online service providers. We cannot predict the likelihood
that any such legislation will pass, or the financial impact, if any, the
resulting regulation or taxation may have.
Moreover, the applicability to application service providers of
existing laws governing issues such as intellectual property ownership, libel
and personal privacy is uncertain. The use of the Internet for illegal
activities and the dissemination of pornography have increased public focus and
could lead to increased pressure on legislatures to impose regulations on
application service providers such as ourselves. The law relating to the
liability of online service companies for information carried on or disseminated
through their systems is currently unsettled. If an action were to be initiated
against us, the costs incurred as a result of such action could have a material
adverse effect on our business.
EMPLOYEES
We employ fifty-seven people, all 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 forty-five people
during the period ending December 2001. Such personnel will be added to assist
primarily with the programming requirements of strategic marketing partners'
product offerings, for customer support and sales and marketing. None of our
employees are covered by a collective bargaining agreement, and we believe that
our relationship with our employees is satisfactory.
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DESCRIPTION OF PROPERTY
We occupy approximately 10,300 square feet in a leased facility located
in Stamford, Connecticut. The lease expires in October 2010.
LEGAL PROCEEDINGS
On or about June 4, 1999, Michael Fishman, our former Vice President of
Sales, commenced an action against us, Sebastian E. Cassetta, Steven Francesco,
(our former President) and four others in the Connecticut Superior Court for the
Judicial District of Stamford/Norwalk at Stamford alleging breach of contract,
breach of duty of good faith and fair dealing, fraudulent misrepresentation,
negligent misrepresentation, intentional misrepresentation and failure to pay
wages. The defendants have answered the complaint and filed counterclaims for
fraudulent inducement and breach of contract. Plaintiff has responded to the
counter-claim, and discovery is proceeding. Although we are vigorously defending
this action, there can be no assurance that we will be successful.
On or about February 29, 2000, Commonwealth Associates, L.P. filed a
complaint against us in the Supreme Court of the State of New York, County of
New York. The complaint alleges that on or about August 19, 1999 Commonwealth
and SmartServ entered into an engagement letter pursuant to which Commonwealth
was to provide financial advisory and investment banking services to SmartServ
in connection with a possible combination between SmartServ and Data Link
Systems Corporation. The engagement letter provided for a nonrefundable fee of
$15,000 payable in cash or common stock at SmartServ's option. The complaint
alleges that SmartServ elected to pay the fee in stock and seeks 13,333 shares
of common stock or at least $1,770,000 together with interest and costs. In our
answer to the complaint, we denied the material allegations of the complaint,
including the allegation that we elected to pay in stock. Discovery has
commenced. Although we are vigorously defending this action, there can be no
assurance that we will be successful.
While we intend to vigorously defend these actions, the unfavorable
outcome of either such action could have a material adverse effect on our
financial condition, results of operations and cash flows.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to the
executive officers and directors of SmartServ Online, Inc.
NAME AGE POSITION
- ---- --- --------
Sebastian E. Cassetta 51 Chief Executive Officer, Chairman of the Board and
Class III Director
Mario F. Rossi (1) 61 Executive Vice President, Operations, Chief
Technology Officer and Class II Director
Thomas W. Haller, CPA 46 Senior Vice President, Treasurer and Chief Financial and
Accounting Officer
Richard D. Kerschner 34 Senior Vice President, General Counsel and
Corporate Secretary
John Montgomery 38 Senior Vice President, Corporate Development
Robert Pearl 32 Senior Vice President, Business Development
Hendrik Hoets 47 Senior Vice President of Sales and Marketing
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Claudio Guazzoni (2) 36 Class I Director
Charles R. Klotz 58 Class II Director
Stephen Lawler (1) 36 Class III Director
L. Scott Perry (3) 51 Class I Director
Robert Steele (2) (3) (4) 60 Class II Director
Catherine Cassel Talmadge (2) (3) 47 Class I Director
Charles R. Wood (4) 58 Class III Director
- ---------------------------------
(1) Member of the Technology Advisory Committee
(2) Member of the Finance Committee
(3) Member of the Audit Committee
(4) Member of the Compensation Committee
SEBASTIAN E. CASSETTA has been Chief Executive Officer, Chairman of the
Board and a director of SmartServ since its inception and had been its Treasurer
and Secretary from its inception until March 1996 and October 2000,
respectively. From June 1987 to August 1992, Mr. Cassetta was the President of
Burns and Roe Securacom Inc., an engineering and large-scale systems integration
firm. He is also a former Director, Managing Director and Vice President of
Brinks Inc. At Brinks, he expanded international operations in over 15 countries
and became the youngest person to be appointed Vice President in Brinks' 140
year history. Appointed by President Reagan and Department of Commerce Secretary
Malcolm Baldridge, he served on both the U.S. Export Council and The Industry
Sector Advisory Committee (ISAC) regarding GATT negotiations. He is a former
member of the Board of Directors of The Young Presidents' Organization and the
former Chairman of the New York Chapter.
MARIO F. ROSSI was Vice President of Operations of SmartServ from
December 1994 to February 1998, and Senior Vice President, Operations and Chief
Technology Officer until October 2000 when he was promoted to Executive Vice
President. In February 1998, Mr. Rossi was appointed a director of SmartServ.
Mr. Rossi has business and operational management experience in the computer,
telecommunications and security fields. He has an extensive background in
product development, operations and technical marketing. From 1989 to 1994, Mr.
Rossi was Vice President of Operations for MVS Inc., a fiber optic company
specializing in wireless technology, and a General Manager at Pirelli from 1986
to 1988. From 1971 to 1986, he was Director of Development of Philips Medical
Systems, in the U.S. as well as the Netherlands.
THOMAS W. HALLER, CPA has been SmartServ's Treasurer since he joined
SmartServ in March 1996. He served as Vice President from March 1996 until
October 2000, when he was promoted to Senior Vice President. Additionally, Mr.
Haller has been the Chief Financial Officer since January 2001 and also held
such position from March 1996 until June 2000. He has also been SmartServ's
Chief Accounting Officer since June 2000. From December 1992 to March 1996, Mr.
Haller was a Senior Manager at Kaufman Greenhut Forman, LLP, a public accounting
firm in New York City, where he was responsible for technical advisory services
and the firm's quality assurance program. Prior thereto, he was a Senior Manager
with Ernst & Young LLP, an international public accounting and consulting firm,
where he had responsibility for client services and new business development in
the firm's financial services practice.
RICHARD D. KERSCHNER joined SmartServ as Vice President and General
Counsel in April 2000. In September 2000, Mr. Kerschner was elected Secretary of
SmartServ and in October 2000 he was promoted to Senior Vice President. Prior
thereto, Mr. Kerschner was Managing Counsel at Omnipoint Communications, a
leading wireless service provider, where he supervised a staff of attorneys and
paralegals in Omnipoint's legal and regulatory affairs department. Mr. Kerschner
joined Omnipoint in 1997 and worked on all aspects of its legal and regulatory
issues, and had primary in-house responsibility for Omnipoint's corporate
finance, mergers and acquisitions, joint ventures and strategic alliances, tax
and general
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commercial litigation. Mr. Kerschner was in private practice with the law firm
of McCann & McCann from 1994 to 1997.
JOHN MONTGOMERY joined SmartServ in April 2000 as Vice President of
Financial Services with over 15 years of global and domestic securities
experience. In January 2001, he became Senior Vice President-Corporate
Development. From October 2000 to January 2001, he was Senior Vice President of
Sales and Business Development. From January 1999 to January 2000, Mr.
Montgomery was a director of, and from April 1997 to January 1999 a Vice
President of, SG Cowen Securities. Managing over 22 sales professionals, he
provided account coverage to broker-dealers, money managers, mutual funds,
insurance companies and commercial banks. Mr. Montgomery holds several NASD
registrations, including General Securities Sales Supervisor. He has experience
with equities, fixed-income, options and interest rate derivatives. Mr.
Montgomery spent 5 years in institutional sales at UBS Securities, over 3 years
in portfolio strategies for PaineWebber and 3 years with Merrill Lynch Capital
Markets.
ROBERT PEARL joined SmartServ in September 1998 with over 7 years of
wireless industry experience. He is responsible for developing SmartServ's
wireless strategy and consummating relationships with key business and
technology strategic alliances. In March 2000, Mr. Pearl was promoted to Vice
President and in October 2000 to Senior Vice President. Mr. Pearl is a
co-founder and former co-chairman of the WAP Forum's Developer Expert Group.
Prior to joining SmartServ, Mr. Pearl was Project Manager for Wireless
Information Services at Omnipoint from 1996 to 1998 and Marketing Liaison at
AT&T Wireless (formerly McCaw Cellular Communications) from 1993 to 1996.
HENDRIK HOETS has been Senior Vice President of Sales and Marketing
since January 29, 2001. From 1987 to January 2001, Mr. Hoets had served in
various positions with Motorola, Inc., most recently as Worldwide Director of
Business Development of its Network Management Group.
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. Mr. Guazzoni is a director of Planet Zanett, Inc.
CHARLES R. KLOTZ became a director of SmartServ on May 15, 2000. Since
1985, Mr. Klotz has been a director of a number of private and public companies
associated with David R. Barclay and Frederick H. Barclay. He was President and
Chief Executive Officer of Gulf Resources & Chemical Corporation from 1985-1988
and he was Chairman and Chief Executive Officer of Gotaas Larsen Shipping
Corporation from 1988-1997. Prior thereto, he was with Bank of Boston where he
held a number of positions 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 was Vice President,
Advanced Platform Services of AT&T Corp. From January 1989 to December 1995, Mr.
Perry held various positions with AT&T including Vice President -- Business
Multimedia Services, Vice President (East) -- Business Communications Services
and Vice President -- Marketing, Strategy and Technical Support for AT&T Data
Systems Group. Mr. Perry serves on the Board of Directors of Junior Achievement
of New York, is a member of the Cornell University Engineering College Advisory
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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 is a director of Capital Returns, Inc., an internet incubator for
companies developing financial related products and internet enabling
technologies utilized by online investors and financial service firms, and is
Chairman and Chief Executive Officer of Terra Investors, Inc., a private,
closely held investment company. 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 currently consists of nine directors divided
into three classes: Class I Directors, Class II Directors and Class III
Directors. 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. The Class III Directors will serve
until the Annual Meeting of SmartServ's stockholders to be held in 2001, except
for Mr. Lawler whose term will expire on December 27, 2000, 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, except for Mr. Klotz whose term
will expire on May 14, 2001. The Directors elected at the 2001, 2002, and 2003
annual meetings will serve normal terms of three years. Officers are appointed
annually and serve at the discretion of the Board for one year. Under a Stock
Purchase Agreement dated May 15, 2000, TecCapital, Ltd. has the right to
designate one member of SmartServ's Board of Directors. Messrs. Cassetta and
Rossi agreed to vote all shares of SmartServ held by them, representing
approximately 18.14% of the outstanding stock of SmartServ, to elect the
director designated by TecCapital, Ltd. In the event of a default under
SmartServ's prepaid warrants, SmartServ will, at the request of Zanett Capital,
Inc., appoint such number of designees of Zanett Capital, Inc. to its Board of
Directors so that the designees of Zanett Capital, Inc. will constitute a
majority of the members of the Board of Directors of SmartServ. Further, Mr.
Cassetta and Steven Francesco (former president of SmartServ) have agreed to
vote their shares of common stock, representing approximately 14.71% of the
outstanding stock of SmartServ, in favor of such designees of Zanett Capital,
Inc., at each Annual Meeting of Stockholders of SmartServ at which directors are
elected.
BOARD COMMITTEES
The Compensation Committee, currently composed of Messrs. Wood and
Steele, has authority over officer compensation and administers our employee
stock option plans.
-22-
The Audit Committee, currently composed of Messrs. Steele and Perry and
Ms. Talmadge, serves as the Board's liaison with our auditors.
The Finance Committee, currently composed of Mr. Guazzoni, Mr. Steele
and Ms. Talmadge, reviews expenditures of SmartServ.
The Technology Advisory Committee, currently composed of Messrs. Lawler
and Rossi, is responsible for identifying new technologies and markets therefor.
COMPENSATION OF DIRECTORS
Each director who is not an officer or employee of SmartServ is
reimbursed for his or her out-of-pocket expenses incurred in connection with
attendance at meetings or other company business. Each non-employee director
receives a $1,500 fee for each meeting he or she attends. Additionally, each
committee member may receive up to $1,000 per meeting attended.
The Compensation Committee has the discretionary authority to grant
options to non-employee directors. Pursuant to such authority, on October 13,
1999, it granted options to purchase 10,000 shares of common stock at an
exercise price of $.9375 to each non-employee director. Additionally, on May 30,
2000, the Board of Directors granted options to purchase 10,000 shares of common
stock at an exercise price of $49.50 to each non-employee director, and on
November 3, 2000, granted options to purchase 5,000 shares of common stock at an
exercise price of $19.00 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 2000 for services in all capacities to
SmartServ during the last three fiscal years.
SUMMARY COMPENSATION TABLE
--------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------------------- ---------------------------
RESTRICTED SECURITIES
NAME AND PRINCIPAL FISCAL OTHER ANNUAL STOCK UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION (1) AWARDS (2) OPTIONS COMPENSATION
- --------------------------- ------- ----------- ------------- ------------------ -------------- ------------ -------------
Sebastian E. Cassetta 2000 $ 216,200 $ 241,300 $ 9,750 $ -- 23,000 $27,100(10)
Chief Executive 1999 155,000 116,414(3) 9,750 185,471(4) 92,000(6) 24,416(10)
Officer 1998 125,000 -- 9,750 -- 37,500(7) -- (11)
Mario F. Rossi 2000 162,000 104,100 6,000 -- 22,000 -- (11)
Senior Vice 1999 122,500 43,749(3) 6,000 61,824(5) 67,500(8) -- (11)
President of Operations 1998 92,400 -- 6,000 -- 20,834(7) -- (11)
Thomas W. Haller 2000 112,250 21,300 6,000 -- 79,000 -- (11)
Treasurer 1999 89,400 2,600 6,000 -- 32,000(9) -- (11)
1998 77,700 -- 6,000 -- 15,000(7) -- (11)
(1) Amounts shown consist of a non-accountable expense allowance.
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(2) The Named Executive Officers did not receive any LTIP Payouts in 2000,
1999 or 1998.
(3) Based on the closing price of $0.75 on June 30, 1999, the date on which
the bonus was earned. If such amount were calculated at $16.50, the
closing price on December 28, 1999, the day immediately preceding the
date of grant, the value of the common stock issued in satisfaction of
the bonus obligation would be $2,442,000 and $891,000 for Messrs.
Cassetta and Rossi, respectively.
(4) On December 29, 1998, the Board of Directors approved the sale to Mr.
Cassetta of 618,239 shares of restricted stock representing 9% of the
fully diluted shares of common stock of SmartServ at that date.
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. 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. At June 30, 2000, based upon the closing bid
price ($70.5625) of SmartServ's common stock, the value of Mr.
Cassetta's shares was $43,624,500. 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.
(5) On December 29, 1998, the Board of Directors approved the sale to Mr.
Rossi of 206,080 shares of restricted stock representing 3% of the
fully diluted shares of common stock of SmartServ at that date.
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. 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. At June 30, 2000, based upon the closing bid price
($70.5625) of SmartServ's common stock, the value of Mr. Rossi's shares
was $14,541,500. 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.
(6) Includes options for the purchase of 37,500 shares which were canceled
when repriced options to purchase a like number of shares were granted
in lieu thereof.
(7) Such options were canceled when repriced options were granted in lieu
thereof in fiscal 1999.
(8) Includes options for the purchase of 25,250 shares which were canceled
when repriced options to purchase a like number of shares were granted
in lieu thereof.
(9) Includes options for the purchase of 15,000 shares which were canceled
when repriced options to purchase a like number of shares were granted
in lieu thereof.
(10) Amounts represent premiums paid by SmartServ for life and disability
insurance for the benefit of Mr. Cassetta.
(11) The aggregate amount of personal benefits not included in the Summary
Compensation Table does not exceed the lesser of either $50,000 or 10%
of the total annual salary and bonus paid to the Named Executive
Officers.
-24-
STOCK OPTIONS
The following table sets forth information with respect to stock
options granted to the Named Executive Officers during fiscal year 2000:
OPTION GRANTS IN FISCAL 2000
(INDIVIDUAL GRANTS) (1)
-----------------------
NUMBER OF % OF TOTAL OPTIONS
SECURITIES UNDERLYING GRANTED TO EMPLOYEES IN EXERCISE EXPIRATION
NAME OPTIONS GRANTED FISCAL 2000 PRICE DATE
- -------------------------- ----------------------- -------------------------- ------------------ ---------------------
Sebastian E. Cassetta 15,000 $ .9375 10/12/09
8,000 2.11% 49.5000 5/29/10
Mario F. Rossi 15,000 $ .9375 10/12/09
7,000 2.02% 49.5000 5/29/10
Thomas W. Haller 72,000 $ .9375 10/12/09
7,000 7.24% 49.5000 5/29/10
(1) No stock appreciation rights ("SARs") were granted to the Named Executive
Officers during fiscal 2000.
The following table sets forth information as to the number of unexercised
shares of common stock underlying stock options and the value of unexercised
in-the-money stock options at fiscal year end:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUE (1)(2)
-----------------------------------
NUMBER OF
UNEXERCISED VALUE OF
SECURITIES UNEXERCISED IN-
UNDERLYING THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
YEAR END YEAR END
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
- ------------------------------ -------------------- ----------------- ------------------ --------------------------
Sebastian E. Cassetta -- -- 27,250/50,250 $1,884,800/$3,097,700
Mario F. Rossi -- -- 21,125/43,125 $1,460,500/$2,652,300
Thomas W. Haller -- -- 16,000/95,000 $1,105,500/$6,266,000
(1) No SARs were exercised by the Named Executive Officers during fiscal 2000
or held by them at fiscal year end.
(2) Value is based on the closing bid price of SmartServ's common stock as
reported by the NASDAQ National Market on June 30, 2000 ($70.5625) less the
exercise price of the option.
-25-
EMPLOYMENT AGREEMENTS
SmartServ and Mr. Cassetta have entered into an employment agreement
("Cassetta Agreement"), effective January 1, 1999 and expiring on December 31,
2001, providing for (1) base compensation of $185,000 per annum, (2) additional
compensation of up to 100% of base compensation and (3) the sale to him of
618,239 shares of restricted stock representing 9% of the fully diluted shares
of common stock of SmartServ. Mr. Cassetta's additional compensation will be
equal to 10% of his base compensation for each 10% increase in sales during the
first year of the Cassetta Agreement, subject to a maximum of 100% of base
compensation. In each subsequent year of the Cassetta Agreement, Mr. Cassetta
will receive additional compensation equal to 5% of his base compensation for
each 5% increase in sales, subject again to a maximum of 100% of base
compensation. The purchase price ($2.20 per share) of the restricted stock was
equal to 110% of the fair market value of SmartServ's common stock for the 30
days preceding the date of the stock purchase agreement ("Cassetta Stock
Purchase Agreement") contemplated by the Cassetta Agreement. On October 13,
1999, the Board of Directors agreed to reprice the shares granted to Mr.
Cassetta to $.75 per share, the fair market value of the shares at that date.
$6,182.39 of the purchase price has been paid in cash and the balance by a 5
year, non-recourse promissory note, secured by the stock, at an interest rate of
6.75%, which is 1% below the prime rate on the date of the Cassetta Stock
Purchase Agreement. The Cassetta Stock Purchase Agreement provides SmartServ
with certain repurchase options and provides Mr. Cassetta with a put option in
the event of the termination of his employment. In the event that Mr. Cassetta's
employment is terminated without cause, Mr. Cassetta will receive a lump sum
severance payment equal to his full base salary for the remaining term of the
Cassetta Agreement, discounted to the present value using an 8% discount rate
and continuing benefit coverage for the lesser of 12 months or the remaining
term of the Cassetta Agreement. On December 28, 1999, the Board of Directors of
SmartServ 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
SmartServ issued 148,000 shares of common stock to Mr. Cassetta.
SmartServ and Mr. Rossi have entered into an employment agreement
("Rossi Agreement"), effective January 1, 1999 and expiring on December 31,
2001, providing for (1) base compensation of $135,000 per annum, (2) additional
compensation of up to 50% of base compensation and (3) the sale to him of
206,080 shares of restricted stock representing 3% of the fully diluted shares
of common stock of SmartServ. Mr. Rossi's additional compensation will be equal
to 5% of his base compensation for each 10% increase in sales during the first
year of the Rossi Agreement, subject to a maximum of 50% of base compensation.
In each subsequent year of the Rossi Agreement, Mr. Rossi will receive
additional compensation equal to 2.5% of base compensation for each 5% increase
in sales, subject again to a maximum of 50% of base compensation. The purchase
price ($2.20 per share) of the restricted stock was equal to 110% of the fair
market value for the 30 days preceding the date of the stock purchase agreement
("Rossi Stock Purchase Agreement") contemplated by the Rossi Agreement. On
October 13, 1999, the Board of Directors agreed to reprice the shares granted to
Mr. Rossi to $.75 per share, the fair market value of the shares at that date.
$2,060.80 of the purchase price has been paid in cash and the balance by a 5
year, non-recourse promissory note, secured by the stock, at an interest rate of
6.75%, which is 1% below the prime rate on the date of the Rossi Stock Purchase
Agreement. The Rossi Stock Purchase Agreement provides SmartServ with certain
repurchase options and provides Mr. Rossi with a put option in the event of the
termination of his employment. In the event that Mr. Rossi's employment is
terminated without cause, Mr. Rossi will receive a lump sum severance payment
equal to his full base salary for the remaining term of the Rossi Agreement,
discounted to the present value using an 8% discount rate and continuing benefit
coverage for the lesser of 12 months or the remaining term of the Rossi
Agreement. On December 28, 1999, the Board of Directors of SmartServ 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 SmartServ issued 54,000
shares of common stock to Mr. Rossi.
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PRINCIPAL STOCKHOLDERS
The following table sets forth, as of January 31, 2001, certain
information with respect to the beneficial ownership of the Common Stock by (i)
each person known by SmartServ to beneficially own more than 5% of the
outstanding shares, (ii) each director of SmartServ, (iii) each Named Executive
Officer (as defined below) and (iv) 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.
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP (2) OUTSTANDING SHARES (3)
------------------------------------------ -------------------------------- --------------------------
Sebastian E. Cassetta 940,992(4) 15.40%
c/o SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902
Steven Rosner 420,533 7.01%
1220 Mirabeau Lane
Gladwyn, Pennsylvania 19035
Mario F. Rossi 329,330(5) 5.43%
c/o SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902
TecCapital, Ltd. 303,030 5.05%
Cedar House
41 Cedar Avenue
Hamilton, HM 12, Bermuda
Data Transmission Network Corporation 179,900 3.00%
Claudio Guazzoni 108,699(6) 1.78%
Thomas W. Haller 86,316(7) 1.42%
L. Scott Perry 40,833(8) *
Catherine Cassel Talmadge 40,816(8) *
Stephen Lawler 35,000(9) *
Charles R. Wood 29,000(10) *
Robert H. Steele 25,000(11) *
Charles R. Klotz 15,000(12) *
All executive officers and directors as
a group (14 persons) 1,827,482(13) 27.51%
--------------------
* Less than 1%
(1) Under the rules of the Securities and Exchange Commission (the "SEC"),
addresses are only given for holders of 5% or more of the outstanding
Common Stock of SmartServ.
(2) Under the rules of the SEC, a person is deemed to be the beneficial
owner of a security if such person has or shares the power to vote or
direct the voting of such security or the power to dispose or direct
the disposition of such security. A person is also deemed to be a
beneficial owner of any securities if that person has the right to
acquire beneficial ownership within 60 days of the date
-27-
hereof. Except as otherwise indicated the named entities or individuals
have sole voting and investment power with respect to the shares of
Common Stock beneficially owned.
(3) Represents the number of shares of common stock beneficially owned as
of January 31, 2001 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 112,000 shares of common stock subject to currently
exercisable options. Also includes 2,051 shares held in trust for the
benefit of Mr. Cassetta's wife.
(5) Includes 68,500 shares of common stock subject to currently exercisable
options.
(6) Includes 39,166 shares of common stock subject to currently exercisable
options. Also includes 69,533 shares of common stock subject to
currently exercisable warrants.
(7) Includes 84,650 shares of common stock subject to currently exercisable
options and 1,000 shares of common stock subject to currently
exercisable warrants.
(8) Includes 40,000 shares of common stock subject to currently exercisable
options.
(9) Represents 35,000 shares of common stock subject to currently
exercisable options.
(10) Includes 15,000 shares of common stock subject to currently exercisable
options.
(11) Represent 25,000 shares of common stock subject to currently
exercisable options.
(12) Represents 15,000 shares of common stock subject to currently
exercisable options. Does not include 303,030 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 646,377 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 14.71% of the outstanding
stock of SmartServ, in favor of the designees of Zanett Capital, Inc., at each
Annual Meeting of Stockholders of SmartServ at which directors are elected.
SELLING STOCKHOLDERS
The shares being offered for resale by the selling stockholders consist
of the shares of common stock issued in our May 2000 private placement, shares
of common stock held by certain financial consultants, shares of common stock
issuable upon exercise of stock purchase warrants held by (a) several investors
who
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have held such warrants since prior to our initial public offering and (b)
several financial, marketing and technical consultants. Other than consulting
arrangements with Bruno Guazzoni, Andrew Seybold Group, LLC, InterBank Funding
Corp., Ehrenkrantz King Nussbaum, Inc., Michael Kramer, Lindquist Global
Advisors, LLC, Steven Rosner and Brauning Associates (of which Michael P. Silva
and Todd M. Peterson are principals and transferees), investment advisory
relationships with The Zanett Securities Corporation (of which Claudio Guazzoni,
a director of SmartServ, is a principal) and that Charles R. Klotz is a director
of SmartServ and designee of TecCapital, Ltd., none of the selling stockholders
has, and, within the past three years, none has had, any position, office or
other material relationship with us or any of our predecessors or affiliates.
The following table sets forth the name of the selling stockholders,
the number of shares of common stock beneficially owned by the selling
stockholders as of January 31, 2001 and the number of shares of common stock
being offered by the selling stockholders. The shares being offered hereby are
being registered to permit public secondary trading, and the selling
stockholders may offer all or part of the shares for resale from time to time.
However, the selling stockholders are under no obligation to sell all or any
portion of such shares nor are the selling stockholders obligated to sell any
shares immediately under this prospectus. All information with respect to share
ownership has been furnished by the selling stockholders. Because the selling
stockholders may sell all or part of their shares, no estimates can be given as
to the number of shares of common stock that will be held by the selling
stockholders upon termination of any offering made hereby.
Shares of Common Stock Shares of Common Beneficial Ownership
Beneficially Stock to be After Offering If All
Selling Stockholders Owned Sold Shares Are Sold
-------------------- ----- ---- ---------------
TecCapital, Ltd. 303,030 303,030 --
The Abernathy Group 20,202 20,202 --
Hare & Co. 30,303 30,303 --
John E. Herzog 4,167 4,167 --
Andrew DaPonte 3,750 3,750 --
Emanuel E. Geduld 2,083 2,083 --
Anchung Sammy Chung and Fong-Chi Alison
Taso 1,250 1,250 --
Alexandra Building Corp. 833 833 --
Andrew Seybold Group, LLC 10,000 10,000 --
InterBank Funding Corp. 4,309 4,309 --
Ira Abbott 2,586 2,586 --
CLFS Equities . 2,586 2,586 --
Depositary Trust Company 150,020 150,020 --
Ehrenkrantz King Nussbaum, Inc. 16,667 16,667 --
Michael Kramer 16,000 16,000 --
Lindquist Global Advisors, LLC 0 50,000 (1) --
-29-
Steven Rosner 420,533 8,000 412,533
Bruno Guazzoni 116,866 116,866 --
Zanett Lombardier, Ltd. 9,227 9,227 --
Samuel L. Milbank 4,406 4,406 --
David M. McCarthy 8,811 8,811 --
Claudio Guazzoni 8,811 8,811 --
Michael P. Silva 40,000 40,000 --
Todd M. Peterson 10,000 10,000 --
--------- -------- -------
Total 1,186,440 823,907 412,533
========= ======= =======
- -----------------------------
(1) Represents 50,000 shares underlying warrants to purchase such shares
that are not included in shares of common stock beneficially owned
because the warrants are not currently exercisable nor will be within
the next 60 days.
We agreed with Zanett Lombardier, Ltd. and Bruno Guazzoni to register
the underlying shares of common stock pursuant to the antidilution provisions of
warrants issued to them. They agreed that they will not exercise their warrants
to the extent that they would beneficially own more than 4.99% of our common
stock. They can waive this restriction on 61 days notice.
PLAN OF DISTRIBUTION
The shares may be sold or distributed from time to time by the selling
stockholders or by pledgees, donees or transferees of, or successors in interest
to, the selling stockholders, directly to one or more purchasers (including
pledgees) or through brokers, dealers or underwriters who may act solely as
agents or may acquire shares as principals, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices, at negotiated
prices or at fixed prices, which may be changed. The distribution of the shares
may be effected in one or more of the following methods:
o ordinary brokers transactions, which may include long or short sales,
o transactions involving cross or block trades or otherwise on the OTC
Bulletin Board,
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,
-30-
o in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected through
agents,
o through transactions in options, swaps or other derivatives (whether
exchange listed or otherwise), or
o any combination of the foregoing, or by any other legally available
means.
In addition, the selling stockholders may enter into hedging
transactions with broker-dealers who may engage in short sales of shares in the
course of hedging the positions they assume with the selling stockholders. The
selling stockholders may also enter into option or other transactions with
broker-dealers that require the delivery by such broker-dealers of the shares,
which shares may be resold thereafter pursuant to this prospectus.
Brokers, dealers, underwriters or agents participating in the
distribution of the shares may receive compensation in the form of discounts,
concessions or commissions from the selling stockholders and/or the purchasers
of shares for whom such broker-dealers may act as agent or to whom they may sell
as principal or both (which compensation as to a particular broker-dealer may be
in excess of customary commissions). The selling stockholders and any
broker-dealers acting in connection with the sale of the shares hereunder may be
deemed to be underwriters within the meaning of Section 2(11) of the Securities
Act of 1933, and any commissions received by them and any profit realized by
them on the resale of shares as principals may be deemed underwriting
compensation under the Securities Act of 1933. Neither SmartServ nor the selling
stockholders can presently estimate the amount of such compensation. SmartServ
knows of no existing arrangements between the selling stockholders and any other
stockholder, broker, dealer, underwriter or agent relating to the sale or
distribution of the shares.
SmartServ will not receive any proceeds from the sale of the shares
pursuant to this prospectus. SmartServ has agreed to bear the expenses of the
registration of the shares, including legal and accounting fees, and such
expenses are estimated to be approximately $42,000.
SmartServ has informed the selling stockholders that while they are
engaged in a distribution of the shares included in this prospectus they are
required to comply with certain anti-manipulative rules contained in Regulation
M under the Securities Exchange Act of 1934. With certain exceptions, Regulation
M precludes the selling stockholders, any affiliated purchasers, and any
broker-dealer or other person who participates in such distribution from bidding
for or purchasing, or attempting to induce any person to bid for or purchase any
security which is the subject of the distribution until the entire distribution
is complete. Regulation M also prohibits any bids or purchases made in order to
stabilize the price of a security in connection with the distribution of that
security. All of the foregoing may affect the marketability of the shares
offered by this prospectus.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 24, 1999, SmartServ and DTN entered into an agreement that
amended the Software License and Service Agreement dated April 23, 1998. In
consideration of the receipt of $5.175 million, SmartServ granted DTN an
exclusive perpetual worldwide license to SmartServ's Internet-based (1)
real-time stock quote product, (2) online trading vehicle for customers of small
and medium sized brokerage companies, (3) administrative reporting package for
brokers of small and medium sized brokerage companies 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 agreed to operate these
products and provide maintenance and enhancement services in exchange for a
percentage of the revenues earned by DTN therefrom. Charles R. Wood, a
-31-
director of SmartServ, was until February 28, 2000, Senior Vice President of DTN
and President of its Financial Services Division.
In November 2000, we amended the license agreement to provide that in
consideration for a copy of the application source code, DTN will return both
the domestic and international marketing rights of the software applications to
SmartServ. As part of our strategy for providing information and transaction
capabilities with device independence, SmartServ will be able to market these
applications in both wireline and wireless platforms in conjunction with
strategic marketing partners worldwide. Pursuant to this amendment, SmartServ
will continue to perform maintenance and enhancement services through December
2000, and provide operational support through August 2001.
SmartServ believes that the terms of the transactions described above
were no less favorable to SmartServ than would have been obtained from a
non-affiliated third party for similar transactions at the time of entering into
such transactions. In accordance with SmartServ's policy, such transactions were
approved by a majority of the independent disinterested directors of SmartServ.
DESCRIPTION OF CAPITAL STOCK
The following is a summary description of our capital stock and certain
provisions of our Amended and Restated Certificate of Incorporation and By-Laws,
copies of which have been incorporated by reference as exhibits to the
registration statement of which this prospectus forms a part. The following
discussion is qualified in its entirety by reference to such exhibits. We have
also included a summary description of only those warrants held by selling
stockholders and we have not described any of our other outstanding warrants.
GENERAL
Our authorized capital stock consists of 40,000,000 shares of common
stock, par value $.01 per share, and 1,000,000 shares of preferred stock, par
value $.01 per share. As of January 31, 2001, we had 5,997,690 shares of common
stock issued and outstanding. No shares of preferred stock are issued and
outstanding. We have reserved 4,773,848 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
-32-
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
Between September 1995 and March 1996, we issued to certain bridge
lenders warrants to purchase 155,192 shares of common stock at an exercise price
of $7.731 per share, subject to adjustment in certain events. Unless exercised,
the warrants will automatically expire on March 20, 2002.
On March 21, 1996, in our initial public offering we issued 1,725,000
Redeemable Common Stock Purchase Warrants pursuant to a warrant agreement, or
the Warrant Agreement, between us, Rickel & Associates, Inc., Continental Stock
Transfer & Trust Company, as warrant agent, and others. Pursuant to the terms of
the Warrant Agreement, such warrants are currently convertible into 892,461
shares of common stock. Upon surrender of 1.933 warrants and $7.731, the
registered holder would be entitled to receive one share of common stock. Such
conversion formula remains subject to adjustment in certain events. Unless
exercised, the warrants will automatically expire on March 20, 2002. The
warrants are subject to redemption by SmartServ at a redemption price of $.10
per warrant at any time, upon not less than 30 days prior written notice to the
holders of the warrants, provided the average closing bid quotation of the
common stock has been at least 187.5% of the then current exercise price of the
warrants, for a period of 20 consecutive trading days ending on the third day
prior to the date on which we give notice of redemption. The warrants will be
exercisable until the close of business on the day immediately preceding the
date fixed for redemption. The Warrant Agreement may be amended by us and the
warrant agent together, and, in certain instances, with the written consent of
the holders of at least a majority of the warrants.
Prior to our initial public offering, we issued to Alexandra Building
Corp., John E. Herzog, Andrew DaPonte, Emanuel E. Geduld, Anchung Sammy Chung
and Fong-Chi Alison Tsao, for nominal consideration, warrants to purchase an
aggregate of 12,083 shares of common stock at an exercise price of $24.00 per
share during the period ending March 21, 2001.
On January 1, 1999, we issued to Andrew Seybold Group, LLC a warrant to
purchase 10,000 shares of common stock at an exercise price of $2.50 per share.
These warrants were issued as partial consideration for marketing consulting
services provided to SmartServ and expire on December 31, 2001.
On November 19, 1999, we issued to Michael Kramer a warrant to purchase
16,000 shares of common stock at an exercise price of $17.75. These warrants
were issued as partial consideration for technical consulting services provided
to SmartServ and expire on November 18, 2002.
On December 31, 1999, we issued to Brauning Associates warrants to
purchase an aggregate of 50,000 shares of common stock at an exercise price of
$3.00 per share. Thereafter, these warrants were transferred by Brauning
Associates to Michael Silva and Todd Peterson, principals of Brauning
Associates. These warrants were issued as partial consideration for marketing
consulting services provided to SmartServ and expire on December 31, 2002.
On January 4, 2000, we issued to Steven Rosner, a warrant to purchase
8,000 shares of common stock at an exercise price of $18.375. This warrant was
issued as partial consideration for financial consulting services to be provided
to SmartServ and expires on July 2, 2003.
-33-
On January 7, 2000, we issued 16,667 shares of common stock to
Ehrenkrantz King Nussbaum, Inc. upon exercise of warrants.
On March 15, 2000, we issued 4,309 shares of common stock to InterBank
Funding Corp. upon exercise of warrants.
On April 5, 2000, we issued 1,250 shares of common stock to Anchung
Sammy Chung and Fong-Chi Alison Tsao upon exercise of warrants.
On May 1, 2000, we issued to Lindquist Global Advisors, LLC, a warrant
to purchase 50,000 shares of common stock at an exercise price of $49.50. This
warrant was issued as partial consideration for financial consulting services to
be provided to SmartServ and will expire on April 30, 2003.
The warrants may be exercised in whole or in part, subject to the
limitations provided in the warrants. Any warrant holders who do not exercise
their warrants prior to the conclusion of the exercise period will forfeit the
right to purchase the shares of common stock underlying the warrants and any
outstanding warrants will become void and be of no further force or effect.
Holders of the warrants have no voting, preemptive, liquidation or
other rights of a stockholder, and no dividends will be declared on the
warrants.
We have agreed to pay all registration expenses incurred in connection
with the registration of the common stock issuable upon exercise of the
warrants.
DELAWARE BUSINESS COMBINATION PROVISIONS
We are governed by the provisions of Section 203 of the Delaware
General Corporation Law ("DGCL"). In general, this statute prohibits a publicly
held Delaware corporation from engaging, under certain circumstances, in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder unless:
o prior to the date at which the stockholder became an interested
stockholder, the Board of Directors approved either the business
combination or the transaction in which the person became an interested
stockholder;
o the stockholder acquired more than 85% of the outstanding voting stock of
the corporation (excluding shares held by directors who are officers and
shares held in certain employee stock plans) upon consummation of the
transaction in which the stockholder became an interested stockholder; or
o the business combination is approved by the Board of Directors and by at
least 66-2/3% of the outstanding voting stock of the corporation (excluding
shares held by the interested stockholder) at a meeting of stockholders
(and not by written consent) held on or after the date such stockholder
became an interested stockholder.
An "interested stockholder" is a person who, together with affiliates
and associates, owns (or at any time within the prior three years did own) 15%
or more of the corporation's voting stock. Section 203 defines a "business
combination" to include, without limitation, mergers, consolidations, stock
sales and asset-based transactions and other transactions resulting in a
financial benefit to the interested stockholder.
-34-
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 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.
-35-
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
web site 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, 2000,
1999, and for each of the three years in the period ended June 30, 2000,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
on the authority of such firm as experts in accounting and auditing.
-36-
INDEX TO FINANCIAL STATEMENTS
UNAUDITED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2000
Page
Balance Sheets as of June 30, 2000 and September 30, 2000
(unaudited)..........................................................................F-2
Statements of Operations for the three months ended
September 30, 2000 and 1999 (unaudited)..............................................F-4
Statement of Changes in Stockholders' Equity for the
three months ended September 30, 2000 (unaudited)....................................F-5
Statements of Cash Flows for the three months ended
September 30, 2000 and 1999 (unaudited)..............................................F-6
Notes to Unaudited Financial Statements..............................................F-7
FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDING JUNE 30, 2000, JUNE 30, 1999
AND JUNE 30, 1998
Report of Independent Auditors......................................................F-12
Balance Sheets as of June 30, 2000 and 1999.........................................F-13
Statements of Operations for the years ended June 30, 2000,
1999 and 1998.......................................................................F-15
Statement of Changes in Stockholders' Equity (Deficiency)
for the years ended June 30, 1998, 1999 and 2000....................................F-16
Statements of Cash Flows for the years ended June 30, 2000,
1999 and 1998.......................................................................F-19
Notes to Financial Statements.......................................................F-20
F-1
SMARTSERV ONLINE, INC.
BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
2000 2000
-------------------- -------------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 21,668,505 $ 24,016,345
Accounts receivable 129,006 236,498
Prepaid expenses 330,548 213,956
-------------------- -------------------
Total current assets 22,128,059 24,466,799
-------------------- -------------------
Property and equipment, net 858,859 687,439
Other assets
Capitalized software development costs,
net of accumulated amortization of $639,397 at
September 30, 2000 and $412,236 at June 30, 2000 1,408,320 1,475,212
Security deposits 200,374 73,374
Deferred financing costs 200,000 --
-------------------- -------------------
1,808,694 1,548,586
-------------------- -------------------
Total Assets $ 24,795,612 $ 26,702,824
==================== ===================
F-2
SMARTSERV ONLINE, INC.
BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
2000 2000
-------------------- -------------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,359,970 $ 1,482,019
Accrued liabilities 984,903 1,097,289
-------------------- -------------------
Total current liabilities 2,344,873 2,579,308
-------------------- -------------------
Deferred revenues 3,543,350 4,141,579
COMMITMENTS AND CONTINGENCIES - NOTE 8
STOCKHOLDERS' EQUITY
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 - 5,814,840 shares at September 30,
2000 and 5,576,894 shares at June 30, 2000 58,148 55,768
Additional paid-in capital 72,035,614 75,842,858
Notes receivable from officers (666,841) (666,841)
Unearned compensation (2,039,029) (2,310,284)
Accumulated deficit (50,480,503) (52,939,564)
-------------------- -------------------
Total stockholders' equity 18,907,389 19,981,937
-------------------- -------------------
Total Liabilities and Stockholders' Equity $ 24,795,612 $ 26,702,824
==================== ===================
See accompanying notes.
F-3
SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS
ENDED SEPTEMBER 30
------------------------------------------
2000 1999
------------------- -------------------
Revenues $ 1,013,528 $ 808,292
------------------- -------------------
Costs and expenses:
Costs of services (1,010,710) (232,866)
Product development expenses (417,776) (46,845)
Selling, general and administrative
expenses (2,138,811) (582,314)
Stock-based compensation 4,661,402 (272,951)
------------------- -------------------
Total costs and expenses 1,094,105 (1,134,976)
------------------- -------------------
Income (loss) from operations 2,107,633 (326,684)
Interest income 351,428 11,017
------------------- -------------------
Net income (loss) $ 2,459,061 $ (315,667)
=================== ===================
Basic earnings (loss) per share $ 0.47 $ (0.23)
=================== ===================
Diluted earnings (loss) per share $ 0.27 $ (0.23)
=================== ===================
Weighted average shares outstanding - basic 5,296,859 1,368,046
=================== ===================
Weighted average shares outstanding - diluted 9,091,970 1,368,046
=================== ===================
See accompanying notes.
F-4
SMARTSERV ONLINE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
NOTES
COMMON STOCK RECEIVABLE ADDITIONAL
PAR FROM PAID-IN UNEARNED ACCUMULATED
SHARES VALUE OFFICERS CAPITAL COMPENSATION DEFICIT
----------- ----------- ------------- ---------------- -------------- ----------------
Balances at June 30, 2000 5,576,894 $ 55,768 $(666,841) $ 75,842,858 $(2,310,284) $(52,939,564)
Amortization of unearned
compensation 331,255
Issuance of warrants to
purchase 50,000 shares of
common stock for consulting
services 60,000 (60,000)
Issuance of common stock
upon exercise of warrants
to purchase common stock 237,946 2,380 1,125,413
Change in market value of
employee stock options (4,992,657)
Net income for the period 2,459,061
----------- ----------- ------------- ---------------- -------------- ----------------
Balances at September 30, 2000 5,814,840 $ 58,148 $(666,841) $72,035,614 $(2,039,029) $(50,480,503)
=========== =========== ============= ================ ============== ================
See accompanying notes.
F-5
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS
ENDED SEPTEMBER 30
-----------------------------------------
2000 1999
------------------- ------------------
OPERATING ACTIVITIES
Net income (loss) $ 2,459,061 $ (315,667)
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Depreciation and amortization 322,844 96,266
Noncash compensation (4,661,402) 272,951
Amortization of deferred revenues (598,229) (414,156)
Changes in operating assets and liabilities
Accounts receivable 107,492 79,427
Prepaid expenses (116,592) 9,485
Accounts payable and accrued liabilities (434,435) (500,554)
Security deposit (127,000) 1,460
------------------- ------------------
Net cash used for operating activities (3,048,261) (770,788)
------------------- ------------------
INVESTING ACTIVITIES
Purchase of equipment (267,103) (24,385)
Capitalization of software development costs (160,269) (244,225)
------------------- ------------------
Net cash used for investing activities (427,372) (268,610)
------------------- ------------------
FINANCING ACTIVITIES
Repayment of capital lease obligation -- (22,710)
Issuance of common stock 1,127,793 --
------------------- ------------------
Net cash provided by (used for) financing activities 1,127,793 (22,710)
------------------- ------------------
Decrease in cash and cash equivalents (2,347,840) (1,062,108)
Cash and cash equivalents - beginning of period 24,016,345 2,165,551
------------------- ------------------
Cash and cash equivalents - end of period $ 21,668,505 $ 1,103,443
=================== ==================
See accompanying notes.
F-6
SMARTSERV ONLINE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. NATURE OF BUSINESS
SmartServ Online, Inc. commenced operations on August 20, 1993. We deliver
Internet-based and wireless content, as well as "Web-to-Wireless" applications,
such as securities trade order routing, that enable e-commerce by providing
transactional and information services to our alliance partners or Strategic
Marketing Partners. We have developed online financial, transactional and media
applications using a unique "device independent" delivery solution and make
these services available to wireless handsets and personal digital assistants,
personal computers and the Internet through our application software and
communications architecture. Our services facilitate stock trading and other
e-commerce transactions, as well as the dissemination of real-time stock quotes,
business and financial news, sports information, private-labeled electronic
mail, national weather reports and other business and entertainment information
in a user-friendly manner.
Our plan of operation focuses on the business-to-business strategy of marketing
our services in partnership with those companies that have an economic incentive
to provide our information and transaction services to their customers.
Management believes that SmartServ's primary source of revenues will be derived
from consumers who purchase the services through these Strategic Marketing
Partners. Through the use of this strategy, the consumer is a customer of both
SmartServ and its Strategic Marketing Partner. We also believe that the sale of
our information and transaction services through the cooperative efforts of
Strategic Marketing Partners with more recognizable brand names than our own is
important to our success.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
- ---------------------
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information, the instructions of Form 10-QSB and Rule 310 of
Regulation 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, 2000 has been derived from the audited financial statements at that
date, but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. The
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-KSB for the year ended June 30, 2000. In the opinion of the
Company, all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation have been made. Results of operations for the three months
ended September 30, 2000 are not necessarily indicative of those expected for
the period ending December 31, 2000.
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.
F-7
REVENUE RECOGNITION
- -------------------
Revenues are recognized as services are provided. Deferred revenues, resulting
from customer prepayments, are recognized as services are provided throughout
the term of the agreement. Deferred revenues resulting from our agreement with
Data Transmission Network Corporation ("DTN") have been amortized over the
anticipated future revenue stream, a period of 42 months, commencing June 1,
1999. We have amended our agreement with DTN such that, effective September 1,
2000, Smartserv will perform maintenance and enhancement services through
December 2000 and provide operational support through August 2001. Therefore,
commencing September 1, 2000, deferred revenues are being amortized to income
over the period through August 2001.
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 SmartServ and its
Strategic Marketing Partners, as well as other projects, we have capitalized
costs related to certain product enhancements and application development in
accordance with Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed",
effective July 1, 1998.
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.
STOCK BASED COMPENSATION
- ------------------------
We maintain several stock option plans for employees and non-employee directors
that provide for the granting of stock options for a fixed number of shares with
an exercise price equal to the fair value of the shares at the date of grant. We
account for these stock compensation plans in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"). Accordingly, compensation expense is recognized to the extent
that the fair value of the stock exceeds the exercise price of the option at the
measurement date. Certain options, which have been repriced, are subject to the
variable plan requirements of APB No. 25, that requires us to record
compensation expense for changes in the fair value of our common stock.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in the financial statements. We do not believe that the adoption of SAB 101 will
have a material affect on our financial results.
RECLASSIFICATIONS
- -----------------
Certain amounts in the 1999 presentation have been reclassified to conform to
the 2000 presentation.
F-8
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
SEPTEMBER 30, JUNE 30,
2000 2000
------------------- -----------------
Data processing equipment $ 1,257,387 $ 1,109,828
Data processing equipment purchased under a capital lease 246,211 246,211
Office furniture and equipment 138,984 81,140
Display equipment 71,335 9,635
Leasehold improvements 36,678 36,678
------------------- -----------------
1,750,595 1,483,492
Accumulated depreciation, including $168,244 at September
30, 2000 and $155,933 at June 30, 2000 for equipment
purchased under a capital lease (891,736) (796,053)
------------------- -----------------
$ 858,859 $ 687,439
=================== =================
4. NOTE PAYABLE
On September 28, 2000, we entered into a $20,000,000 line of credit facility
with Hewlett-Packard Company. The agreement provides for the financing of the
acquisition of approved hardware, software and services, subject to our
continuing compliance with certain financial covenants. The facility is
evidenced by a note that bears interest at 11% per annum and is secured by
SmartServ's tangible assets. The note matures in three years from issuance and
may be converted into common stock at $33.56 per share.
5. EQUITY TRANSACTIONS
During the period ended September 30, 2000, we issued 237,946 shares of common
stock to certain investors at prices ranging from $2.63 to $14.64 per share upon
exercise of warrants to purchase such shares. Net proceeds from the exercise of
these warrants were $1,127,793.
During the period ended September 30, 2000, we issued warrants to purchase
50,000 shares of our common stock to a financial consultant as partial
consideration for services to be rendered to SmartServ. The warrants have an
exercise price of $49.50 per share and expire in April 2003.
6. STOCK-BASED COMPENSATION
In connection with the grant of certain stock options, warrants and other
compensation arrangements, we have recorded adjustments, both credits and
charges, to earnings that are noncash in nature. Certain of these grants are
subject to the variable plan requirements of APB No. 25 that require us to
adjust compensation expense for changes in the fair value of our common stock.
The following table shows the amount of stock-based compensation that would have
been recorded in the categories of the statement of operations had stock-based
compensation not been separately stated therein:
F-9
THREE MONTHS ENDED SEPTEMBER 30
----------------------------------------
2000 1999
------------------ ------------------
Costs of revenues $ (1,112,161) $ --
Selling, general and administrative expenses (3,549,241) 272,951
------------------ ------------------
$ (4,661,402) $ 272,951
================== ==================
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
THREE MONTHS ENDED SEPTEMBER 30
----------------------------------------
2000 1999
------------------ ------------------
Numerator:
Net income (loss) $ 2,459,061 $ (315,667)
================== ==================
Denominator:
Weighted average shares - basic 5,296,859 1,368,046
================== ==================
Weighted average shares - diluted 9,091,970 1,368,046
================== ==================
Basic earnings (loss) per common share $ 0.47 $ (0.23)
================== ==================
Diluted earnings (loss) per common share $ 0.27 $ (0.23)
================== ==================
At September 30, 2000, $612,000 of our Prepaid Warrants were outstanding. At
that date, the Prepaid Warrants were convertible into 437,142 shares of common
stock. Additionally, there were warrants to purchase 2,572,815 shares of our
common stock outstanding. Such warrants have exercise prices ranging from $0.60
to $72.00 per share and expire from March 2001 through January 2005. Based on
the closing sale price ($35.75) of our common stock at September 30, 2000, there
were, exclusive of the Prepaid Warrants, currently exercisable in-the-money
warrants outstanding for the purchase of 2,522,000 shares of common stock.
Additionally, we have established several employee stock option plans and
granted options thereunder to our employees, directors, and consultants. These
options are intended to qualify as incentive stock options within the meaning of
Section 422 of the Internal Revenue Code, as amended, or as nonqualified stock
options. The options are partially exercisable after one year from date of grant
and no options may be granted after May 29, 2010. At September 30, 2000, there
were options outstanding for the purchase of 1,322,781 shares of our common
stock.
8. COMMITMENTS AND CONTINGENCIES
On or about June 4, 1999, Michael Fishman, our former Vice President of Sales,
commenced an action against us, Sebastian E. Cassetta (our Chairman of the Board
and Chief Executive Officer), Steven Francesco (our former President) and four
others in the Connecticut Superior Court for the Judicial District of
Stamford/Norwalk at Stamford alleging breach of contract, breach of duty of good
faith and fair dealing, fraudulent misrepresentation, negligent
misrepresentation, intentional misrepresentation and failure to pay wages. The
defendants have answered the complaint and filed counterclaims for fraudulent
F-10
inducement and breach of contract. Plaintiff has responded to the counterclaim,
and in compliance with direction from the court, has filed an amended complaint.
Although we are vigorously defending this action, there can be no assurance that
we will be successful.
On or about February 29, 2000, Commonwealth Associates, L.P. filed a complaint
against us in the Supreme Court of the State of New York, County of New York.
The complaint alleges that on or about August 19, 1999, Commonwealth and
SmartServ entered into an engagement letter pursuant to which Commonwealth was
to provide financial advisory and investment banking services to SmartServ in
connection with a possible combination between SmartServ and Data Link Systems
Corporation. The engagement letter provided for a nonrefundable fee of $15,000
payable in cash or common stock at SmartServ's option. The complaint alleges
that SmartServ elected to pay the fee in stock and seeks 13,333 shares of common
stock or at least $1,770,000 together with interest and costs. In our answer to
the complaint, we have denied the material allegations of the complaint,
including the allegation that we elected to pay in stock. Discovery has
commenced. Although we are vigorously defending this action, there can be no
assurance that we will be successful.
While we intend to vigorously defend these actions, the unfavorable outcome of
either such action could have a material adverse effect on our financial
condition, results of operations and cash flows.
9. SUBSEQUENT EVENTS
Subsequent to September 30, 2000, we issued 27,305 shares of common stock to
employees upon the exercise of options to purchase such shares. Proceeds from
the exercise of these options were $28,385.
On November 3, 2000, the Board of Directors increased the number of shares
available for issuance under the 2000 Employee Stock Option Plan by 600,000 to a
maximum of 1,525,000. Additionally, the Board authorized the issuance of options
to purchase 638,750 shares to employees and to non-employee directors at $19.00
per share, the fair value of the common stock at that date.
F-11
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
SmartServ Online, Inc.
We have audited the accompanying balance sheets of SmartServ Online, Inc. as of
June 30, 2000 and 1999, and the related statements of operations, stockholders'
equity (deficiency), and cash flows for each of the three years in the period
ended June 30, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SmartServ Online, Inc. at June
30, 2000 and 1999, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 2000, in conformity with
accounting principles generally accepted in the United States.
/S/ ERNST & YOUNG LLP
Stamford, Connecticut
August 15, 2000, except
for footnote 13 as to
which the date is
September 28, 2000
F-12
SMARTSERV ONLINE, INC.
BALANCE SHEETS
JUNE 30
-----------------------------------------
2000 1999
------------------- -- ------------------
ASSETS
Current assets
Cash and cash equivalents $ 24,016,345 $ 2,165,551
Accounts receivable 236,498 348,278
Prepaid expenses 213,956 50,150
------------------- ------------------
Total current assets 24,466,799 2,563,979
------------------- ------------------
Property and equipment, net 687,439 498,448
Other assets
Capitalized software development costs,
net of accumulated amortization of $412,236 at
June 30, 2000 and $82,108 at June 30, 1999 1,475,212 683,337
Security deposit 73,374 74,834
------------------- ------------------
1,548,586 758,171
------------------- ------------------
Total Assets $ 26,702,824 $ 3,820,598
=================== ==================
See accompanying notes.
F-13
SMARTSERV ONLINE, INC.
BALANCE SHEETS
JUNE 30
-----------------------------------------
2000 1999
------------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable $ 1,482,019 $ 780,543
Accrued liabilities 1,097,289 637,779
Accrued liabilities to warrant holders -- 1,311,365
------------------- ------------------
Total current liabilities 2,579,308 2,729,687
------------------- ------------------
Deferred revenues 4,141,579 5,798,211
COMMITMENTS AND CONTINGENCIES - NOTE 10
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred stock - $0.01 par value
Authorized - 1,000,000 shares
Issued and outstanding - None
Common Stock - $0.01 par value
Authorized - 40,000,000 shares
Issued and outstanding - 5,576,894 at June 30, 2000
and 1,199,787 shares at June 30, 1999 55,768 11,998
Common stock subscribed -- 1,812,554
Additional paid-in capital 75,842,858 20,679,611
Notes receivable from officers (666,841) (1,812,554)
Unearned compensation (2,310,284) (3,452,904)
Accumulated deficit (52,939,564) (21,946,005)
------------------- ------------------
Total stockholders' equity (deficiency) 19,981,937 (4,707,300)
------------------- ------------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 26,702,824 $ 3,820,598
=================== ==================
See accompanying notes.
F-14
SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30
-----------------------------------------------------------------
2000 1999 1998
------------------- ------------------- ---------------------
Revenues $ 3,696,133 $ 1,443,781 $ 873,476
------------------- ------------------- ---------------------
Costs and expenses
Cost of services (954,048) (992,741) (1,216,761)
Product development expenses (383,042) (193,188) (923,082)
Selling, general and administrative
expenses (3,998,405) (2,695,999) (2,561,364)
Stock-based compensation (30,271,024) (1,312,324) (660,576)
------------------- ------------------- ---------------------
Total costs and expenses (35,606,519) (5,194,252) (5,361,783)
------------------- ------------------- ---------------------
Loss from operations (31,910,386) (3,750,471) (4,488,307)
------------------- ------------------- ---------------------
Other income (expense):
Interest income 241,402 4,767 40,788
Interest expense (2,275) (167,839) (57,485)
Debt origination and other financing costs 677,700 (3,210,583) (535,005)
------------------- ------------------- ---------------------
916,827 (3,373,655) (551,702)
------------------- ------------------- ---------------------
Net loss $ (30,993,559) $ (7,124,126) $ (5,040,009)
=================== =================== =====================
Basic and diluted loss per share $ (11.42) $ (6.44) $ (7.65)
=================== =================== =====================
Weighted average shares outstanding 2,712,931 1,105,603 659,034
=================== =================== =====================
See accompanying notes.
F-15
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
NOTES
COMMON STOCK COMMON RECEIVABLE ADDITIONAL
PAR STOCK FROM PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED OFFICERS CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
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)
----------------------------------------------------------------------------------------------
See accompanying notes.
F-16
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
NOTES
COMMON STOCK COMMON RECEIVABLE ADDITIONAL
PAR STOCK FROM PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED OFFICERS CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
Balances at June 30, 1998 836,227 $ 8,362 $ -- $ -- $ 18,184,580 $ (4,617,924) $ (14,821,879)
Conversion of 276.67 Prepaid
Common Stock Purchase
Warrants into Common Stock 178,560 1,786 -- -- (1,786) -- --
Issuance of Common Stock to
Prepaid Warrant holders
for amending certain
terms of the Prepaid
Warrants 60,000 600 -- -- 146,713 -- --
Issuance of Common Stock
Purchase Warrants in
connection with
prepayments made by a
marketing partner -- -- -- -- 6,300 -- --
Issuance of Common Stock
Purchase Warrants in
connection with the
issuance of 8%
convertible notes -- -- -- -- 1,573,000 -- --
Beneficial conversion
feature of 8% convertible
notes -- -- -- -- 550,000 -- --
Issuance of Common Stock and
warrants to purchase
Common Stock in partial
settlement of litigation 125,000 1,250 -- -- 144,500 -- --
Amortization of unearned
compensation -- -- -- -- -- 1,165,020 --
Common Stock subscriptions
and notes receivable in
connection with officers'
employment agreements -- -- 1,812,554 (1,812,554) -- -- --
Issuance of Common Stock
Purchase Warrants as
compensation for services -- -- -- -- 59,000 -- --
Redemption of Prepaid Common
Stock Purchase Warrants -- -- -- -- (325,000) -- --
Issuance of Common Stock
Purchase Warrants in
connection with a
licensing agreement -- -- -- -- 324,000 -- --
See accompanying notes.
F-17
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
NOTES
COMMON STOCK COMMON RECEIVABLE ADDITIONAL
PAR STOCK FROM PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED OFFICERS CAPITAL COMPENSATION DEFICIT
----------------------- ------------- ------------- ------------- -------------- --------------
Change in market value of
employee stock options -- -- -- -- 18,304 -- --
Net loss for the year -- -- -- -- -- -- (7,124,126)
----------- ----------- ------------- ------------- ------------- -------------- --------------
Balance at June 30, 1999 1,199,787 11,998 1,812,554 (1,812,554) 20,679,611 (3,452,904) (21,946,005)
Issuance of Common Stock in
settlement of obligations
to a Prepaid Warrant
holder 180,000 1,800 -- -- 266,895 -- --
Issuance of Common Stock
upon exercise of employee
stock options 47,808 478 -- -- 80,290 -- --
Issuance of warrants to
purchase 334,000 shares
of Common Stock for
various consulting
services -- -- -- -- 137,300 (77,400) --
Conversion of 1,357 Prepaid
Common Stock Purchase
Warrants into Common Stock 810,785 8,107 -- -- (8,107) -- --
Issuance of Common Stock in
connection with Officers'
Restricted Stock Purchase
and Employment Agreements 1,103,137 11,031 (1,812,554) 1,145,713 3,997,821 -- --
Issuance of Common Stock
upon exercise of warrants
to purchase Common Stock 1,548,842 15,489 -- -- 3,465,006 -- --
Amortization of unearned
compensation -- -- -- -- -- 1,220,020 --
Issuance of Common Stock and
warrants to purchase 18,640
shares of Common Stock in
connection with private
placements, net of direct
costs of $1,073,900 686,535 6,865 -- -- 21,414,438 -- --
Change in market value of
employee stock options and
stock subscriptions -- -- -- -- 25,809,604 -- --
Net loss for the year -- -- -- -- -- -- (30,993,559)
----------- ----------- ------------- ------------- ------------- -------------- --------------
Balance at June 30, 2000 5,576,894 $ 55,768 $ -- $(666,841) $75,842,858 $(2,310,284) $(52,939,564)
=========== =========== ============= ============= ============= ============== ==============
See accompanying notes.
F-18
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30
-------------------------------------------------------
2000 1999 1998
------------------ --------------- ----------------
OPERATING ACTIVITIES
Net loss $ (30,993,559) $ (7,124,126) $ (5,040,009)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization 560,472 278,646 193,601
Provision for losses on and write-off of receivables -- -- (1,300)
Noncash interest costs -- 12,524 52,837
Noncash debt origination and other financing costs (717,670) 2,593,808 475,527
Noncash compensation costs 28,991,104 18,304 --
Noncash consulting services 1,279,920 1,349,020 660,576
Amortization of unearned revenues (1,656,632) (1,112,138) (251,058)
Settlement of litigation -- -- 145,750
Changes in operating assets and liabilities
Accounts receivable 111,780 (237,227) 40,031
Prepaid expenses (163,806) (44,547) (25,878)
Accounts payable and accrued liabilities 1,151,075 781,264 344,441
Salaries payable (93,443) 36,135 (9,093)
Unearned revenues -- 6,121,776 1,002,193
Security deposit 1,460 (4,397) 10,781
------------------ --------------- ----------------
Net cash provided by (used for) operating activities (1,529,299) 2,669,042 (2,401,601)
------------------ --------------- ----------------
INVESTING ACTIVITIES
Capitalization of software development costs (1,122,003) (765,445) --
Purchase of equipment (419,335) (84,449) (60,424)
------------------ --------------- ----------------
Net cash used for investing activities (1,541,338) (849,894) (60,424)
------------------ --------------- ----------------
FINANCING ACTIVITIES
Proceeds from the issuance of warrants 24,746 324,000 2,643,941
Proceeds from the issuance of common stock 26,031,723 -- --
Repayment of officers' loans 9,012 -- --
Proceeds from the issuance of short-term notes -- 478,500 196,500
Repayment of short-term notes -- (691,794) --
Repayment of capital lease obligation (70,147) (83,528) (92,536)
Proceeds of advances from DTN -- 2,058,300 --
Repayment of advances from DTN -- (2,058,300) --
Costs of issuing securities (1,073,903) (35,000) (25,000)
------------------ --------------- ----------------
Net cash provided by (used for) financing activities 24,921,431 (7,822) 2,722,905
------------------ --------------- ----------------
Increase in cash and cash equivalents 21,850,794 1,811,326 260,880
Cash and cash equivalents - beginning of year 2,165,551 354,225 93,345
----------------- --------------- ----------------
Cash and cash equivalents - end of year $ 24,016,345 $ 2,165,551 $ 354,225
================= =============== ================
See accompanying notes.
F-19
SMARTSERV ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
SmartServ Online, Inc. commenced operations on August 20, 1993. We deliver
Internet-based and wireless content, as well as "Web-to-Wireless" applications,
such as securities trade order routing, that enable e-commerce by providing
transactional and information services to our alliance partners or Strategic
Marketing Partners. We have developed online financial, transactional and media
applications using a unique "device independent" delivery solution and make
these services available to wireless handsets and personal digital assistants,
personal computers and the Internet through our application software and
communications architecture. Our services facilitate stock trading and other
e-commerce transactions, as well as the dissemination of real-time stock quotes,
business and financial news, sports information, private-labeled electronic
mail, national weather reports and other business and entertainment information
in a user-friendly manner.
Our plan of operation focuses on the business-to-business strategy of marketing
our services in partnership with those companies that have an economic incentive
to provide our information and transaction services to their customers.
Management believes that SmartServ's primary source of revenues will be derived
from consumers who purchase the services through these Strategic Marketing
Partners. Through the use of this strategy, the consumer is a customer of both
SmartServ and its Strategic Marketing Partner. We also believe that the sale of
our information and transaction services through the cooperative efforts of
Strategic Marketing Partners with more recognizable brand names than our own is
important to our success.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
- ---------------------
The financial statements are prepared in conformity with accounting principles
generally accepted in the United States.
Our stockholders approved a one-for-six reverse stock split at a Special Meeting
on October 15, 1998. Such reverse stock split became effective on October 26,
1998. All applicable financial statement amounts and related disclosures have
been restated to give effect to this transaction.
USE OF ESTIMATES
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-20
REVENUE RECOGNITION
- -------------------
Revenues are recognized as services are provided. Deferred revenues, resulting
from customer prepayments, are recognized as services are provided throughout
the term of the agreement. Deferred revenues resulting from our agreement with
Data Transmission Network Corporation are being amortized over the anticipated
future revenue stream, a period of 42 months, commencing June 1, 1999.
BASIC AND DILUTED EARNINGS PER SHARE
- ------------------------------------
The weighted average shares outstanding are determined as the mean average of
the shares outstanding and assumed to be outstanding during the period.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
- --------------------------------------
In connection with certain contracts entered into between SmartServ and its
Strategic Marketing Partners, as well as other projects, we have capitalized
costs related to certain product enhancements and application development in
accordance with Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed",
effective July 1, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------
The carrying amounts of our financial instruments approximate fair value.
SUPPLEMENTAL CASH FLOW DATA
- ---------------------------
We consider all highly liquid investments with a maturity date of three months
or less when purchased to be cash equivalents.
Interest, debt origination and other financing costs paid during the years ended
June 30, 2000, 1999 and 1998 were $2,275, $101,974 and $32,536, respectively.
CONCENTRATION OF CREDIT RISK
- ----------------------------
Financial instruments that potentially subject SmartServ to concentrations of
credit risk consist primarily of its commercial paper investments and accounts
receivable. While our commercial paper investments are short-term and highly
liquid, it is management's policy to invest in only those companies with a AAA
credit rating. There is no single geographic concentration of sales or related
accounts receivable in the United States. At June 30, 2000, accounts receivable
consist principally of amounts due from Data Transmission Network ($168,300),
and a telecommunications company ($24,100). We perform periodic credit
evaluations of our customers and, if applicable, provide for credit losses in
the financial statements.
PROPERTY AND EQUIPMENT
- ----------------------
Property and equipment are stated at cost. Equipment purchased under a capital
lease has been recorded at the present value of the future minimum lease
payments at the date of acquisition. Depreciation is computed using the
straight-line method over estimated useful lives of three to ten years.
ADVERTISING COSTS
- -----------------
Advertising costs are expensed as incurred and were approximately $91,700,
$20,500 and $97,100 in 2000, 1999 and 1998, respectively.
STOCK BASED COMPENSATION
- ------------------------
We maintain several stock option plans for employees and non-employee directors
that provide for the granting of stock options for a fixed number of shares with
an exercise price equal to the fair value of
F-21
the shares at the date of grant. We account for these stock compensation plans
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25"). Accordingly, compensation expense is
recognized to the extent that the fair value of the stock exceeds the exercise
price of the option at the measurement date. Certain options, which have been
repriced, are subject to the variable plan requirements of APB No. 25, that
requires us to record compensation expense for changes in the fair value of our
common stock.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in the financial statements. We do not believe that the adoption of SAB 101 will
have a material affect on our financial results.
RECLASSIFICATIONS
- -----------------
Certain amounts in the 1999 and 1998 presentations have been reclassified to
conform to the 2000 presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
JUNE 30
------------------------------------------
2000 1999
------------------- -----------------
Data processing equipment $ 1,109,828 $ 700,210
Data processing equipment purchased under a capital lease 246,211 246,211
Office furniture and equipment 81,140 71,423
Display equipment 9,635 9,635
Leasehold improvements 36,678 36,678
------------------- -----------------
1,483,492 1,064,157
Accumulated depreciation, including $155,933 and
$106,691 for equipment purchased under a capital lease (796,053) (565,709)
------------------- -----------------
$ 687,439 $ 498,448
=================== =================
4. NOTES PAYABLE
Commencing November 1998, we sold five and one-half (5.5) units, each consisting
of a secured 8% convertible note in the principal amount of $100,000 and
warrants to purchase our common stock. The convertible notes were repaid in June
1999. In addition to customary fees and expenses, Spencer Trask Securities, Inc.
("Spencer Trask"), the placement agent, received for nominal consideration,
warrants to purchase ten percent (10%) of the shares of SmartServ common stock
issuable on conversion of the notes and exercise of the warrants at $.72 per
share. The issuance to the noteholders of warrants to purchase 916,667 shares of
common stock, as well as those issued to Spencer Trask for the purchase of
183,333 shares of common stock have been valued in accordance with the
Black-Scholes pricing methodology and recorded as debt origination and other
financing costs. Also in connection with the 8% convertible notes,
F-22
we have recorded a non-cash charge for debt origination and other financing
costs of $550,000 representing the perceived cost of the beneficial conversion
feature of the notes. Emerging Issues Task Force Issue 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" ("Issue 98-5") defines the beneficial conversion
feature as the non-detachable conversion feature that is "in-the-money" at the
date of issuance. Issue 98-5 requires the recognition of the intrinsic value of
the conversion feature as the difference between the conversion price and the
fair value of the common stock into which the notes are convertible. Such amount
is limited to the proceeds of the financing ($550,000) and has been recorded in
debt origination and other financing costs as of the date of issuance.
In December 1998, we executed an agreement with a service provider whereby
certain of our obligations, amounting to $141,794, were converted into a 12%
note payable. In June 1999, the outstanding balance of $66,794 was repaid.
5. EQUITY TRANSACTIONS
In September 1997, The Zanett Securities Corporation ("Zanett"), acting as our
placement agent, completed the private placement ("Placement") of $4 million of
our Prepaid Common Stock Purchase Warrants ("Prepaid Warrants"). The sale of
these Prepaid Warrants was exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. At June
30, 2000, Prepaid Warrants with a face value of $612,000 were outstanding and
are currently convertible into 437,142 shares of our common stock. As
compensation for its services, Zanett received a placement fee and an
unaccountable expense allowance of 10% ($400,000) and 3% ($120,000),
respectively, of the gross proceeds of the Placement. Additionally, we issued
warrants to purchase 155,627 shares of common stock to Zanett that are subject
to antidilution provisions and are exercisable at $4.34 per share of common
stock. These warrants expire on September 30, 2002.
Also in conjunction with the Placement, we entered into an agreement with a
financial consultant who is an affiliate of Zanett Lombardier, Ltd, an investor
in the Prepaid Warrants. During the five-year term of the agreement such
consultant will provide us with advisory services relating to financial and
strategic ventures and alliances, investment banking and general financial
advisory services, and advice and assistance with our market development
activities. As compensation for these services, we issued warrants to purchase
922,236 shares of common stock to this consultant that are subject to
antidilution provisions and are exercisable at $4.34 per share of common stock.
We have valued these warrants in accordance with Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation", and the
Black-Scholes pricing methodology at $5,145,500 and recorded this amount in
stockholders' equity as unearned compensation. Unearned compensation is being
amortized to income over the five-year term of the agreement. These warrants
expire on September 30, 2002. We have recorded consulting expense of $1,165,000,
$1,165,000 and $527,600 for the years ended June 30, 2000, 1999 and 1998,
respectively.
During the year ended June 30, 1998, holders of 1,429.33 of our Prepaid Warrants
converted such warrants into 220,395 shares of common stock at exercise prices
ranging from $3.54 to $8.40 per share.
In August 1998, we issued 32,953 shares of common stock to Zanett Lombardier,
Ltd. and 17,047 shares of common stock to Bruno Guazzoni in consideration of
their agreement to certain restrictions on the exercise of Prepaid Warrants and
the resale of the shares of common stock issuable on exercise thereof. Such
shares have been recorded at the fair value of our common stock at that date as
other financing costs.
F-23
In September 1998, we issued warrants to purchase 3,000 shares of common stock
to Data Transmission Network Corporation for prepayment of certain guaranteed
payments in accordance with the Software License and Service Agreement between
the parties dated April 23, 1998. Such warrants were exercisable at $3.00 per
share of common stock and have been recorded in accordance with the
Black-Scholes pricing methodology as other financing costs. In June 1999, in
consideration of the receipt of $324,000, we agreed to issue Data Transmission
Network warrants for the purchase of 300,000 shares of our common stock at $8.60
per share. The warrants have been recorded in accordance with the Black-Scholes
pricing methodology and will expire on November 17, 2000. In June 2000, we
issued 203,000 shares of common stock upon the partial exercise of the warrants.
Proceeds from the exercise of the warrants were $1,729,000.
In November 1998, we issued 125,000 shares of common stock and warrants to
purchase 16,667 shares of common stock, exercisable at $5.00 per share until
November 11, 2001, to Mr. Steven Francesco, a former SmartServ officer, as
partial consideration for the settlement of his claims against us and certain of
our officers and directors. The value of these shares has been recorded in
selling, general and administrative expenses based upon the fair value of our
common stock at that date while the warrants have been recorded in accordance
with the Black-Scholes pricing methodology. In February 2000, we issued 16,667
shares of our common stock to Mr. Francesco upon exercise of the warrants. The
proceeds from such exercise amounted to $83,335.
In December 1998, our Board of Directors approved the terms of employment
contracts for Sebastian E. Cassetta, Chairman and Chief Executive Officer, and
Mario F. Rossi, Senior Vice President of Technology. Accordingly, SmartServ and
Mr. Cassetta have entered into an employment agreement, effective January 1,
1999 and expiring on December 31, 2001, providing for, among other things, the
sale to him of 618,239 shares of restricted stock. SmartServ received cash in
the amount of $6,182 and a 5 year, non-recourse promissory note in the amount of
$457,497. The note is secured by the stock and bears an interest rate of 6.75%.
The stock purchase agreement provides SmartServ with certain repurchase options
and provides Mr. Cassetta with a put option in the event of the termination of
his employment.
SmartServ and Mr. Rossi have also entered into an employment agreement,
effective January 1, 1999 and expiring on December 31, 2001, providing for,
among other things, the sale to him of 206,080 shares of restricted stock.
SmartServ received cash in the amount of $2,061 and a 5 year, non-recourse
promissory note in the amount of $152,499. The note is secured by the stock and
bears an interest rate of 6.75%. The stock purchase agreement provides SmartServ
with certain repurchase options and provides Mr. Rossi with a put option in the
event of the termination of his employment.
In October 1999, our Board of Directors authorized the repricing of the
restricted shares granted to Messrs. Cassetta and Rossi to $.75 per share, the
fair value of the shares at that date. Through December 31, 1999, the restricted
stock awards were variable plan awards pursuant to APB No. 25 and accordingly,
SmartServ was required to recognize compensation expense for the changes in the
market value of its common stock. In conjunction therewith, we have recorded a
charge to compensation expense of $15,636,300, as well as a corresponding
increase to additional paid-in capital. We have amended our restricted stock
purchase agreements with Messrs. Cassetta and Rossi to provide for certain
recourse against them in the event of their default on their obligations to us.
Accordingly, the restricted stock awards are no longer variable plan awards
pursuant to APB No. 25.
In January 1999, we issued 10,000 shares of common stock to Arnhold & S.
Bleichroeder, Inc., an investor in our Prepaid Warrants, in consideration of an
agreement to waive certain events of default
F-24
under such Prepaid Warrants. In July 1999, we paid $325,000 to redeem the
Prepaid Warrants held by Arnhold & S. Bleichroeder and issued 180,000 shares of
common stock in full settlement of all obligations to Arnhold & S. Bleichroeder.
These shares have been recorded at the fair value of SmartServ's common stock on
the date of issuance as other financing costs.
In January 1999, we agreed to cancel warrants to purchase 20,833 shares of
common stock exercisable at $15.75 and $19.50 per share to a financial advisor
to SmartServ, and to grant such advisor warrants to purchase 40,833 shares of
common stock at $.60 per share for his efforts at arranging our relationship
with Spencer Trask Securities. These warrants have been recorded in accordance
with the Black-Scholes pricing methodology as selling, general and
administrative expenses. In March 2000, we issued 40,833 shares of common stock
upon exercise of the warrants. Proceeds from the exercise of the warrants were
$24,500.
During the year ended June 30, 1999, holders of 276.67 of our Prepaid Warrants
converted such warrants into 178,560 shares of common stock at exercise prices
ranging from $.75 to $2.38 per share.
The delisting of our common stock from the Nasdaq Small Cap Market in May 1998
caused us to default on certain terms and conditions of the Prepaid Warrants.
Such default obligated SmartServ to pay financial penalties, as well as to
redeem the outstanding Prepaid Warrants at a 43% premium. We had been unable to
obtain appropriate waivers from holders of $1,994,000 of such Prepaid Warrants.
Accordingly, we recorded a charge to debt origination and other financing costs
in the amount of $986,365, representing the potential penalties due such
holders. During the year ended June 30, 2000, we reversed such unpaid penalties
upon the conversion by the holders of the Prepaid Warrants into SmartServ common
stock.
In October 1999, SmartServ entered into a restricted stock agreement with Robert
Pearl, Vice President International Development, providing for the sale to Mr.
Pearl of 76,818 shares of common stock at a purchase price of $.75 per share.
SmartServ received cash in the amount of $768 and a 5 year, non-recourse
promissory note in the amount of $56,845. The note is secured by the stock and
bears an interest rate of 7.50%. The stock purchase agreement provides SmartServ
with certain repurchase options and provides Mr. Pearl with a put option in the
event of the termination of his employment.
In October 1999, we entered into a consulting agreement with a financial
advisor. As consideration for such services, we granted this advisor warrants to
purchase 100,000 shares of common stock at an exercise price of $2.625 per share
and warrants to purchase 100,000 shares of common stock at $3.625 per share. In
consideration of $125,000 and the issuance of warrants to purchase 8,000 shares
of common stock at $18.375 per share, we extended this agreement for the
two-year period commencing October 24, 2000. The warrants expire on October 24,
2004. We have recorded a noncash charge of $62,400 for the value of the warrants
to unearned compensation that is being amortized to income over the term of the
agreement. In July 2000, we issued 200,000 shares of our common stock to this
advisor upon exercise of warrants to purchase such shares. Proceeds from the
exercise were $625,000.
In December 1999, we issued 202,000 shares of common stock to Messrs. Cassetta
and Rossi in satisfaction of our bonus obligations to them, pursuant to their
employment contracts. We have recorded a charge to compensation expense of
$3,181,500 for the change in fair value of our common stock between the due date
of the obligation and the grant date of the common stock.
During the year ended June 30, 2000, we issued warrants to purchase 126,000
shares of our common stock to various marketing and technical consultants as
partial compensation for services rendered and to be rendered to SmartServ. The
warrants have exercise prices of between $2.50 and $49.50 and expire
F-25
through April 30, 2003. During the year we recorded charges to earnings of
$74,000 in connection with these warrants.
In January 2000, we completed an offering of 333,000 shares of our common stock
to accredited investors. Gross proceeds from the offering amounted to $4,995,000
or $15.00 per share of common stock. In connection with this transaction, we
paid $25,000 and issued warrants to purchase 18,640 shares of common stock at
$15.00 per share through January 18, 2005 to American First Associates Corp. as
compensation for services as placement agent for the offering.
During the year ended June 30, 2000, we issued 1,288,342 shares of common stock
to certain other investors at prices ranging from $.60 to $24.00 per share upon
exercise of warrants to purchase such shares. Proceeds from the exercise of
these warrants were $1,630,764.
During the year ended June 30, 2000, holders of 1,357 of our Prepaid Warrants
converted such warrants into 810,785 shares of common stock at exercise prices
ranging from $1.40 to $8.40 per share.
In May 2000, we completed an offering of 353,535 shares of our common stock to
accredited investors. Gross proceeds from the offering amounted to $17,500,000
or $49.50 per share of common stock. Chase Securities, Inc., acting as placement
agent for the offering, received a commission of $700,000 and reimbursement for
$17,700 of expenses.
At June 30, 2000, we have 1,725,000 public warrants (SSOLW) and 300,000 warrants
with terms identical to the public warrants outstanding. These warrants are
currently convertible into our common stock at the ratio of one warrant per
.5174 share of common stock at an exercise price of $7.73 per share. These
warrants are redeemable by SmartServ on not less than 30 days written notice at
the redemption price of $.10 per warrant, provided the average closing bid
quotation of the common stock as reported on the Nasdaq Stock Market has been at
least 187.5% of the current exercise price of the warrants for a period of 20
consecutive trading days ending on the third day prior to the date on which we
give notice of redemption.
6. STOCK-BASED COMPENSATION
In connection with the grant of certain stock options, warrants and other
compensation arrangements, we have recorded charges to earnings that are noncash
in nature. Certain of these grants are subject to the variable plan requirements
of APB No. 25 that require us to record compensation expense for changes in the
fair value of our common stock.
The following table shows the amount of stock-based compensation that would have
been recorded in the categories of the statement of operations had stock-based
compensation not been separately stated therein:
YEAR ENDED JUNE 30
-------------------- ----------------------------------------
2000 1999 1998
-------------------- ------------------- ------------------
Costs of revenues $2,749,997 $ 1,724 $ --
Selling, general and administrative expenses 27,521,027 1,310,600 660,576
-------------------- ------------------- ------------------
$ 30,271,024 $ 1,312,324 $ 660,576
==================== =================== ==================
F-26
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share:
YEAR ENDED JUNE 30
----------------------------------------------------------------
2000 1999 1998
------------------ -------------------- --------------------
Numerator:
Net loss $ (30,993,559) $ (7,124,126) $ (5,040,009)
================== ==================== ====================
Denominator:
Weighted average shares 2,712,931 1,105,603 659,034
================== ==================== ====================
Basic and diluted loss per common share
$ (11.42) $ (6.44) $ (7.65)
================== ==================== ====================
At June 30, 2000, $612,000 of our Prepaid Warrants were outstanding. At that
date, the Prepaid Warrants were convertible into 437,142 shares of common stock.
Additionally, there were warrants to purchase 2,808,000 shares of our common
stock outstanding. Such warrants have exercise prices ranging from $0.60 to
$72.00 per share and expire from March 2001 through January 2005. Based on the
closing sale price ($70.56) of our common stock at June 30, 2000, there were,
exclusive of the Prepaid Warrants, currently exercisable in-the-money warrants
outstanding for the purchase of 2,807,000 shares of common stock. Additionally,
we have established several employee stock option plans and granted options
thereunder to our employees, directors, and consultants. These options are
intended to qualify as incentive stock options within the meaning of Section 422
of the Internal Revenue Code, as amended, or as nonqualified stock options. The
options are partially exercisable after one year from date of grant and no
options may be granted after May 29, 2010. At June 30, 2000, there are options
outstanding for the purchase of 1,322,781 shares of our common stock. Neither
the warrants nor the options have been included in the computation of diluted
loss per share because their inclusion would be antidilutive.
8. INCOME TAXES
At June 30, 2000 and 1999, SmartServ has deferred tax assets as follows:
2000 1999
---- ----
Capitalized Start-up Costs $ 371,000 $ 741,600
Net Operating Loss Carryforwards 19,182,000 6,578,000
------------ -------------
$ 19,553,000 $ 7,319,600
============== ============
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," we have established a valuation allowance to
fully reserve the future income tax benefit of these deferred tax assets due to
uncertainty about their future realization. The valuation allowance increased to
$19,553,000 at June 30, 2000 from $7,319,600 at June 30, 1999 and $5,238,500 at
June 30, 1998.
F-27
At June 30, 2000, we have net operating loss carryforwards for Federal income
tax purposes of approximately $40,600,000 which expire in the years 2009 through
2015. As a result of the public issuance of stock by SmartServ on March 21,
1996, and the resultant change in ownership pursuant to Internal Revenue Code
Section 382, the utilization of net operating losses incurred to this date may
be limited.
9. LEASES
SmartServ leases office space for its Stamford, Connecticut headquarters under a
noncancelable lease. The lease includes escalation clauses for items such as
real estate taxes, building operation and maintenance expenses, and electricity
usage.
On May 1, 1997, we entered into a 3 year noncancelable capital lease for certain
computer equipment used to provide information services. We also lease certain
other computer equipment under operating leases which expire through July 2000.
Rent expense amounted to approximately $267,800, $290,600, and $278,000 for the
years ended June 30, 2000, 1999, and 1998, respectively.
Minimum future rental payments at June 30, 2000 are as follows:
OPERATING LEASES
----------------------------------------
YEAR ENDING JUNE 30 PREMISES EQUIPMENT
- ------------------- ------------------- -----------------
2001 $ 345,100 $ 1,600
2002 374,300 --
2003 437,900 --
2004 480,700
2005 491,100
Thereafter 2,800,000
------------------- -----------------
$ 4,929,100 $ 1,600
=================== =================
10. COMMITMENTS AND CONTINGENCIES
On or about June 4, 1999, Michael Fishman, our former Vice President of Sales,
commenced an action against us, Sebastian E. Cassetta (our Chairman of the Board
and Chief Executive Officer), Steven Francesco (our former President) and four
others in the Connecticut Superior Court for the Judicial District of
Stamford/Norwalk at Stamford alleging breach of contract, breach of duty of good
faith and fair dealing, fraudulent misrepresentation, negligent
misrepresentation, intentional misrepresentation and failure to pay wages. The
defendants have answered the complaint and filed counterclaims for fraudulent
inducement and breach of contract. Plaintiff has responded to the counterclaim,
and discovery is proceeding. Although we are vigorously defending this action,
there can be no assurance that we will be successful.
F-28
On or about February 29, 2000, Commonwealth Associates, L.P. filed a complaint
against us in the Supreme Court of the State of New York, County of New York.
The complaint alleges that on or about August 19, 1999 Commonwealth and
SmartServ entered into an engagement letter pursuant to which Commonwealth was
to provide financial advisory and investment banking services to SmartServ in
connection with a possible combination between SmartServ and Data Link Systems
Corporation. The engagement letter provided for a nonrefundable fee of $15,000
payable in cash or common stock at SmartServ's option. The complaint alleges
that SmartServ elected to pay the fee in stock and seeks 13,333 shares of common
stock or at least $1,770,000 together with interest and costs. In our answer to
the complaint, we have denied the material allegations of the complaint,
including the allegation that we elected to pay in stock. Discovery has
commenced. Although we are vigorously defending this action, there can be no
assurance that we will be successful.
While we intend to vigorously defend these actions, the unfavorable outcome of
either such action could have a material adverse effect on our financial
condition, results of operations and cash flows.
11. SIGNIFICANT RELATIONSHIPS
In April 1998, we entered into an agreement with Data Transmission Network
Corporation whereby Data Transmission Network purchased the exclusive right to
market three of our Internet products: SmartServ Pro, a real time stock quote
product; TradeNet, an online trading vehicle for the customers of small and
medium sized brokerage companies, and BrokerNet, an administrative reporting
package for brokers of small and medium sized brokerage companies. In June 1999,
SmartServ and Data Transmission Network amended the agreement such that in
consideration of the receipt of $5.175 million, we granted Data Transmission
Network an exclusive perpetual worldwide license to our Internet-based (i)
SmartServ Pro, (ii) TradeNet, (iii) BrokerNet, and (iv) an order entry/routing
system. Additionally, we received $324,000 in exchange for an agreement to issue
warrants to purchase 300,000 shares of our common stock at an exercise price of
$8.60 per share. We have agreed to continue to operate these products and
provide maintenance and enhancement services in exchange for a percentage of the
revenues earned by Data Transmission Network therefrom. The cost of our
commitment to provide such maintenance and enhancement services is limited to a
maximum of 20% of the revenues earned by SmartServ. None of our wireless
products were included in this transaction.
During the years ended June 30, 2000 and 1999, our relationship with Data
Transmission Network accounted for 96.9% and 94.8%, respectively, of our
revenues while during the year ended June 30, 1998, three Strategic Marketing
Partner relationships accounted for 10.2%, 10.0% and 24.1%, respectively, of the
our revenues.
12. EMPLOYEE STOCK OPTION PLAN
In April 1996, our Board of Directors approved the establishment of an Employee
Stock Option Plan authorizing stock option grants to our directors, key
employees, and consultants. The options are intended to qualify as incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, or as nonqualified stock options. The Plan provides for the
issuance of up to 250,000 of such options at not less than the fair value of the
stock on the date of grant. The options are partially exercisable after one year
from date of grant and expire on the tenth anniversary of the date of grant.
In September 1997, our Board of Directors granted new stock options to employees
and non-employee
F-29
directors conditional upon cancellation of all of their existing stock options.
Such options were exercisable at $12.00. In October 1998, our Board of Directors
voted to cancel the outstanding employee and non-employee director options and
reissue options covering a like number of shares to employees and non-employee
directors at an exercise price not less than the fair value at that date. The
exercise price of the options issued to employees and non-employee directors was
$1.29 per share. Such options expire on October 7, 2008. In accordance with APB
No. 25, we have recorded the changes in the fair value of the shares underlying
177,201 of such options to reflect the compensatory nature of their issuance. In
November 1998, our Board of Directors granted employees options to purchase
58,700 shares of common stock at $1.625 per share. Such options expire on
November 19, 2008.
In December 1998, our Board of Directors approved a plan to compensate
non-employee directors for their service to SmartServ. Accordingly, each
non-employee director will receive options to purchase 10,000 shares of our
common stock at the commencement of each fiscal year. Effective January 1, 1999,
we issued options to such persons to purchase 50,000 shares of common stock
exercisable at $2.35 per share through December 31, 2003.
In October 1999, our Board of Directors authorized the establishment of our 1999
Employee Stock Option Plan ("1999 Plan"). The 1999 Plan provides for the
issuance of options to employees and directors for the purchase of a maximum of
400,000 shares of our common stock. The Board of Directors authorized the
issuance of 400,000 of such options to both employees and non-employee directors
at the fair value of the common stock on that date. The 1999 Plan provides for
the issuance of such options at not less than the fair value of the common stock
on the date of grant.
In May 2000, our Board of Directors authorized the establishment of our 2000
Employee Stock Option Plan ("2000 Plan"). The 2000 Plan provides for the
issuance of options to employees and directors for the purchase of a maximum of
925,000 shares of our common stock. The 2000 Plan provides for the issuance of
such options at not less than the fair value of the common stock on the date of
grant. The Board of Directors authorized the issuance of 657,000 of such options
to employees and non-employee directors at an exercise price in excess of the
fair value on the date of grant.
F-30
Information concerning stock options for the Company is as follows:
AVERAGE
EXERCISE
OPTIONS PRICE
-------------------- -----------------------
Balance at July 1, 1997 56,392 $ 31.26
Granted 206,391 12.00
Exercised -- --
Cancelled (85,216) 25.50
-------------------- -----------------------
Balance at June 30, 1998 177,567 12.00
Granted 463,858 1.92
Exercised -- --
Cancelled (355,524) 7.26
-------------------- -----------------------
Balance at June 30, 1999 285,901 1.54
Granted 1,091,000 31.10
Exercised (47,810) 1.69
Cancelled (6,310) 1.40
-------------------- -----------------------
Balance at June 30, 2000 1,322,781 $ 25.92
==================== =======================
The following table summarizes information about employee stock options
outstanding as of June 30, 2000.
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
- --------------------------- ----------------- --------------- --------------- ---------------- ------------------
$ .94 to $ 2.34 631,781 $ 1.15 8.7 148,541 $ 1.47
17.00 20,000 17.00 4.5 20,000 17.00
49.50 671,000 49.50 9.9 70,000 49.50
----------------- ----------------
1,322,781 238,541
================= ================
SUPPLEMENTAL AND PRO FORMA DISCLOSURE
Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" ("Statement 123") requires companies to recognize compensation
expense based on the respective fair values of the options at the date of grant.
Companies that choose not to adopt the new rules will continue to apply the
existing accounting rules contained in APB No. 25, but are required to disclose
the pro forma effects on net income and earnings per share, as if the fair value
based method of accounting had been applied.
F-31
The pro forma information regarding net loss and loss per share required by
Statement 123 has been determined as if SmartServ had accounted for its employee
stock option plan under the fair value methods described in Statement 123. The
fair value of options granted under our employee stock option plans was
estimated at the date of grant using the Black-Scholes option pricing model. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected dividend yield, the expected life
of the options, the expected stock price volatility, and the risk-free interest
rate.
Pertinent assumptions with regard to the determination of fair value of the
options and their impact on earnings per share are as follows:
2000 1999 1998
------------------- --------------- ------------------
Weighted average dividend yield for options
granted 0.0% 0.0% 0.0%
Weighted average expected life in years 5.0 5.0 5.0
Weighted average volatility 159.1% 147.0% 143.9%
Risk-free interest rate 5.41% 5.75% 6.0%
Weighted average grant date fair value of
options $25.07 $1.92 $10.92
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.
SmartServ's pro forma information is as follows:
YEAR ENDED JUNE 30
---------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------- -- ------------------------------ -- -----------------------------
REPORTED PROFORMA REPORTED PROFORMA REPORTED PROFORMA
---------------- --------------- --------------- -------------- -------------- --------------
Net Loss $30,993,559 $32,115,231 $7,124,126 $7,308,036 $5,040,009 $5,654,512
================ =============== =============== ============== ============== ==============
Loss per Share $11.42 $11.84 $6.44 $6.61 $7.65 $8.58
================ =============== =============== ============== ============== ==============
13. SUBSEQUENT EVENTS
Subsequent to June 30, 2000, we issued 242,615 shares of common stock to certain
investors at prices ranging from $2.63 to $14.64 per share upon exercise of
warrants to purchase such shares. Proceeds from the exercise of these warrants
were $1,137,264.
F-32
On September 28, 2000, we entered into a $20,000,000 line of credit facility
with Hewlett-Packard Company. The agreement provides for the financing of the
acquisition of approved hardware, software and services, subject to our
continuing compliance with certain financial covenants. The facility is
evidenced by a note that bears interest at 11% per annum and is secured by
SmartServ's tangible assets. The note matures in three years from issuance and
may be converted into common stock at $33.56 per share.
F-33
- --------------------------------------------------------------------------------
[LOGO]
SMARTSERV ONLINE, INC.
1,716,368
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.
_____________, 2001
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.
Section 145 of the General Corporation Law of Delaware ("DGCL")
provides that directors, officers, employees or agents of Delaware corporations
are entitled, under certain circumstances, to be indemnified against expenses
(including attorneys' fees) and other liabilities actually and reasonably
incurred by them in connection with any suit brought against them in their
capacity as a director, officer, employee or agent, if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, if they had no reasonable cause to believe their conduct was
unlawful. Section 145 also provides that directors, officers, employees and
agents may also be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by them in connection with a derivative suit
bought against them in their capacity as a director, if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification may be made without
court approval if such person was adjudged liable to the corporation.
Article Tenth of the registrant's Certificate of Incorporation provides
that the registrant shall indemnify any and all persons whom it shall have power
to indemnify to the fullest extent permitted by the DGCL. Article VI of the
registrant's by-laws provides that the registrant shall indemnify authorized
representatives of the registrant to the fullest extent permitted by the DGCL.
The registrant's by-laws also permit the registrant to purchase insurance on
behalf of any such person against any liability asserted against such person and
incurred by such person in any capacity, or out of such person's status as such,
whether or not the registrant would have the power to indemnify such person
against such liability under the foregoing provision of the by-laws.
The registrant maintains a directors and officers liability insurance
policy with National Union Fire Insurance Company of Pittsburgh, PA. The policy
insures the directors and officers of the registrant against loss arising from
certain claims made against such directors or officers by reason of certain
wrongful acts.
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection
with the issuance and distribution of the securities being registered hereby.
All such expenses will be borne by the registrant; none shall be borne by any
selling stockholders.
Securities and Exchange
Commission registration fee $ 6,151
Legal fees and expenses $ 20,000
Accounting fees and expenses $ 15,000
Miscellaneous $ 849
---------
Total $ 42,000
Item 26. RECENT SALES OF UNREGISTERED SECURITIES.
Between January 13, 1998 and January 31, 2001 an aggregate of 3,121
prepaid common stock purchase warrants ("Prepaid Warrants") were converted into
an aggregate of 1,251,169 shares of common
II-1
stock of SmartServ. No sales commissions were paid in connection with such
conversions. The shares were issued in reliance upon the exemption from
registration provided by Section 3 (a) (9) of the Securities Act.
In January 1998, SmartServ issued warrants to purchase 16,666 shares of
common stock to Ehrenkrantz King and Nussbaum, Inc., in connection with an
investment advisory contract. The warrants had an exercise price of $3.75 per
share. No sales commissions were paid in connection with such transactions. The
warrants were issued in reliance upon the exemption from registration provided
by Section 4 (2) of the Securities Act. In December 1999, we issued 16,666
shares of common stock upon exercise of the warrants. Proceeds from the exercise
of the warrants were $62,497.
In March 1998, we issued warrants to purchase 20,833 shares of common
stock to Steven Rosner, a financial advisor to SmartServ, at exercise prices of
$15.75 and $19.50. In January 1999, we agreed to cancel these warrants and to
grant Mr. Rosner warrants to purchase 40,833 shares of common stock at $.60 per
share for his efforts in arranging our relationship with Spencer Trask
Securities, Inc. These warrants expire on March 4, 2003 and January 19, 2004 and
were issued in reliance upon the exemption from registration provided by Section
4 (2) of the Securities Act. In March 2000, we issued 40,833 shares of common
stock upon exercise of the warrants. Proceeds from the exercise of the warrants
were $24,500.
In April 1998, stockholders approved the issuance of warrants to
purchase 792,201 shares of common stock to Bruno Guazzoni at an exercise price
of $4.34 per share. No sales commissions were paid in connection with such
transaction. The warrants were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
In August 1998, SmartServ issued 32,953 shares of common stock to
Zanett Lombardier, Ltd. ("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.
In September 1998, SmartServ issued warrants to purchase 3,000 shares
of common stock to Data Transmission Network Corporation ("DTN") for prepayment
of certain guaranteed payments in accordance with the Software License and
Service Agreement between the parties dated April 23, 1998. Such warrants are
exercisable at $3.00 per share of common stock. These warrants were issued in
reliance upon the exemption from registration provided by Section 4 (2) of the
Securities Act. No sales commissions were paid in connection with such
transaction. In June 2000, we issued 3,000 shares of common stock upon exercise
of the warrants. Proceeds from the exercise of the warrants were $9,000.
In November 1998, SmartServ 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
SmartServ, as partial consideration for the settlement of his claims against
SmartServ 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. In February 2000, we issued 16,667 shares of common stock upon
exercise of the warrants. Proceeds from the exercise of the warrants were
$83,335.
In November and December 1998, SmartServ 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. Spencer Trask Securities, Inc. ("Spencer Trask"), the
II-2
placement agent, received a commission of $50,000 and an unaccountable expense
allowance of $15,000 in connection with such transaction. Additionally,
SmartServ issued warrants to purchase 166,667 shares of common stock to Spencer
Trask exercisable at $.72 per share. These promissory notes and warrants were
issued in reliance upon the exemption from registration provided by Section 4
(2) of the Securities Act. During the year ended June 30, 2000, we issued
998,509 shares of common stock upon exercise of these warrants. Proceeds from
exercise of these warrants were $560,000.
In January 1999, SmartServ issued 10,000 shares of common stock to
Arnhold & S. Bleichroeder, Inc. ("ASB"), an investor in SmartServ'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.
In January 1999, SmartServ issued a convertible promissory note in the
amount of $50,000 and warrants to purchase 83,333 shares of common stock to
Bruno Guazzoni, an investor in SmartServ'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 in connection with this transaction. The
promissory note and the warrants were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act. In May 2000, we
issued 16,667 shares of common stock to Spencer Trask upon exercise of the
warrants. Proceeds from exercise of the warrants were $12,000.
In July 1999, SmartServ issued 180,000 shares of common stock to ASB to
settle SmartServ'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.
In October 1999, SmartServ entered into a consulting agreement with
Steven Rosner, a financial consultant to SmartServ. As consideration for such
services, we granted Mr. Rosner 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 $3.625 per share. In consideration of $125,000 and the
issuance of warrants to purchase 8,000 shares of common stock at $18.375 per
share, SmartServ extended this agreement for the two-year period commencing
October 24, 2000. The warrants expire on October 24, 2004. In July 2000, we
issued 200,000 shares of common stock to Mr. Rosner upon exercise of warrants to
purchase such shares. Proceeds from the exercise of the warrants were $625,000.
No sales commissions were paid in connection with such transactions. The
warrants and the shares were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.
In November 1999, ZLL exercised on a cashless basis warrants to
purchase 50,083 shares of common stock in exchange for 25,042 shares of common
stock. No sales commissions were paid in connection with such transactions. The
shares were issued in reliance upon the exemption from registration provided by
Section 3 (a) (9) of the Securities Act.
In November 1999, SmartServ issued to Michael Kramer, a warrant to
purchase 16,000 shares of common stock at an exercise price of $17.75 per share.
This warrant was issued as partial consideration for technical systems
consulting services to be provided to SmartServ and expires on November 18,
2002. No sales commissions were paid in connection with such transaction. This
warrant was issued in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act.
II-3
In December 1999, the Board of Directors of SmartServ 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 SmartServ 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.
In December 1999, SmartServ issued to Brauning Associates warrants to
purchase an aggregate of 50,000 shares of common stock at an exercise price of
$3.00 per share. Thereafter, these warrants were transferred by Brauning
Associates to Michael Silva and Todd Peterson, principals of Brauning
Associates. These warrants were issued as partial consideration for marketing
consulting services provided to SmartServ and expire on December 31, 2002. No
sales commissions were paid in connection with such transaction. These warrants
were issued in reliance upon the exemption from registration provided by Section
4(2) of the Securities Act.
In December 1999, SmartServ issued a warrant to purchase an aggregate
of 10,000 shares of common stock at an exercise price of $2.50 per share to the
Andrew Seybold Group LLC. This warrant was issued as partial consideration for
marketing consulting services provided to SmartServ and expires on December 31,
2002. No sales commissions were paid in connection with such transaction. These
warrants were issued in reliance upon the exemption from registration provided
by Section 4(2) of the Securities Act.
In January 2000, SmartServ issued 618,239 shares of common stock to
Sebastian E. Cassetta pursuant to a Stock Purchase Agreement between SmartServ
and Mr. Cassetta. SmartServ received cash in the amount of $6,182 and a note in
the amount of $457,497. The note bears interest at a rate of 6.75% and is
secured by the common stock. No sales commissions were paid in connection with
such transactions. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
In January 2000, SmartServ issued 206,080 shares of common stock to
Mario Rossi pursuant to a Stock Purchase Agreement between SmartServ and Mr.
Rossi. SmartServ received cash in the amount of $2,061 and a note in the amount
of $152,499. The note bears interest at 6.75% and is secured by the common
stock. No sales commissions were paid in connection with such transaction. The
shares were issued in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act.
In January 2000, SmartServ issued to Steven Rosner, a warrant to
purchase 8,000 shares of common stock at an exercise price of $18.375 per share.
This warrant was issued as partial consideration for financial consulting
services to be provided to SmartServ and expires on July 2, 2003. No sales
commissions were paid in connection with such transaction. The warrant was
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act.
In January 2000, SmartServ 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 of common stock at an
exercise price of $15.00 per share which expire on January 17, 2005. These
shares and warrants were issued in reliance upon the exemption from registration
provided by Section 4 (2) of the Securities Act. Proceeds from the issuance of
these shares were $3,495,000.
II-4
In January 2000, SmartServ issued 100,000 shares of common stock to 14
additional investors. No sales commissions were paid in connection with such
transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act. Proceeds from the
issuance of these shares were $1,500,000.
In January 2000, SmartServ issued to DTN a warrant to purchase 300,000
shares of SmartServ's common stock at $8.60 per share in exchange for $324,000.
The warrant was to expire on November 17, 2000. No sales commissions were paid
in connection with such transaction. In June and November 2000, we issued
200,000 and 100,000 shares, respectively, of common stock upon exercise of the
warrant. Proceeds from the exercise of the warrant were $2,580,000. The warrant
and the shares were issued in reliance upon the exemption from registration
provided by Section 4 (2) of the Securities Act.
In May 2000, SmartServ issued to Lindquist Global Advisors, LLC, a
warrant to purchase 50,000 shares of common stock at an exercise price of $49.50
per share. This warrant was issued as partial consideration for financial
consulting services to be provided to SmartServ and expires on April 30, 2003.
No sales commissions were paid in connection with such transaction. The warrant
was issued in reliance upon the exemption from registration provided by Section
4(2) of the Securities Act.
In May 2000, SmartServ issued 353,535 shares of common stock to 3
accredited investors. Gross proceeds from this transaction amounted to
$17,500,000. Chase Securities Inc., the placement agent, received a commission
of $700,000 and reimbursement of direct expenses of $17,500 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 May and June 2000, SmartServ issued an aggregate of 95,000 shares of
our common stock to Wireless Acquisition Partners, LLC, at prices ranging from
$4.70 to $7.69 per share upon the cashless exercise of warrants to purchase such
shares. The shares were issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act.
In August 2000, we issued 7,615 shares of our common stock to Wireless
Acquisition Partners, LLC, at prices ranging from $4.70 to $7.69 per share upon
the cashless exercise of warrants to purchase such shares. No sales commission
was paid in connection with such transaction. The shares were issued in reliance
upon the exemption from registration provided by Section 4(2) of the Securities
Act.
In September 2000, we issued 35,000 shares of our common stock to
Wireless Acquisition Partners, LLC upon exercise of warrants to purchase such
shares. Proceeds from the exercise of these warrants were $512,264. No sales
commission was 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.
Item 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
-------------------------------------------
(a) Exhibits:
The following exhibits are filed as part of this registration
statement:
EXHIBIT DESCRIPTION
------- -----------
3.1 Amended and Restated Certificate of Incorporation of
SmartServ***
3.2 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation
II-5
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 SmartServ, as amended***
4.1 Specimen Certificate of SmartServ's Common Stock***
4.2 Form of Warrant Agent Agreement***
4.3 Form of Redeemable Warrant***
4.4 Form of Warrant Agreement used by SmartServ for the warrants
issued to Alexandra Building Corp., John E. Herzog, Emanuel E.
Geduld, Andrew DaPonte, Anchung Sammy Chung and Fong-Chi
Allison Tsao+
4.5 Form of Warrant Agreement used by SmartServ for the warrants
issued to Steven Rosner, Andrew Seybold Group, LLC, Michael
Kramer, Lindquist Global Advisors, LLC and Brauning
Associates+
4.6 Stock Purchase Agreement dated May 12, 2000 between SmartServ
and TecCapital, Ltd., The Abernathy Group and Conseco Equity
Fund+
4.7 Note Purchase Agreement, dated September 28, 2000, between
SmartServ and Hewlett Packard Company*
4.8 Registration Rights Agreement, dated September 28, 2000,
between SmartServ and Hewlett Packard Company*
4.9 Convertible Secured U.S. $20,000,000 Promissory Note, dated
September 28, 2000, between SmartServ and Hewlett Packard
Company*
5.1 Opinion of Parker Chapin LLP+
10.1 Information Distribution License Agreement dated as of July
18, 1994 between SmartServ 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 SmartServ 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 SmartServ 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 SmartServ
and Nasdaq***
10.5 Lease Agreement dated as of March 4, 1994, between SmartServ
and One Station Place, L.P. regarding SmartServ's Stamford,
Connecticut offices***
10.6 Lease Modification and Extension Agreement, dated February 6,
1996, between SmartServ and One Station Place, L.P. regarding
SmartServ's Stamford, Connecticut offices****
10.7 Second Lease Modification and Extension Agreement, dated June
29, 2000, between SmartServ and One Station Place, L.P.
regarding SmartServ's Stamford, Connecticut offices*
10.8 1996 Stock Option Plan*****
10.9 1999 Stock Option Plan+
10.10 2000 Stock Option Plan*
10.11 Asset Purchase and Software License and Service Agreements
between SmartServ Online, Inc. and Data Transmission Network
Corporation, dated April 23, 1998******
10.12 Amendment to the Software and License Agreement between
SmartServ Online, Inc. and Data Transmission Network
Corporation, dated June 24, 1999. Portions of this exhibit
(indicated by asterisks) have been omitted pursuant to an
order by the Securities and Exchange Commission dated December
2, 1999, granting confidential treatment under the Securities
Exchange Act of 1934 and the omitted portions have been filed
separately with the Securities and Exchange Commission **
II-6
10.13 Letter agreement dated August 26, 1999, amending the Amendment
to the Software and License Agreement between SmartServ
Online, Inc. and Data Transmission Network Corporation, dated
June 24, 1999. Portions of this exhibit (indicated by
asterisks) have been omitted pursuant to an order by the
Securities and Exchange Commission dated December 2, 1999,
granting confidential treatment under the Securities Exchange
Act of 1934 and the omitted portions have been filed
separately with the Securities and Exchange Commission **
10.14 Amendment to the License Agreement with Data Transmission
Network Corporation effective September 1, 2000+
10.15 Amended and Restated Employment Agreement between SmartServ
Online, Inc. and Sebastian E. Cassetta, dated January 1,
1999**
10.16 Restricted Stock Purchase Agreement between SmartServ Online,
Inc. and Sebastian E. Cassetta, dated December 29, 1998**
10.17 Employment Agreement between SmartServ Online, Inc. and Mario
F. Rossi, dated January 1, 1999**
10.18 Restricted Stock Purchase Agreement between SmartServ Online,
Inc. and Mario F. Rossi, dated December 29, 1998**
10.19 Amended Restricted Stock Purchase Agreement between SmartServ
Online, Inc. and Sebastian E. Cassetta, dated December 31,
1999+
10.20 Amended Promissory Note between SmartServ Online, Inc. and
Sebastian E. Cassetta, dated January 4, 2000+
10.21 Amended Security Agreement between SmartServ Online, Inc. and
Sebastian E. Cassetta, dated January 4, 2000+
10.22 Amended Restricted Stock Purchase Agreement between SmartServ
Online, Inc. and Mario F. Rossi, dated December 31, 1999+
10.23 Amended Promissory Note between SmartServ Online, Inc. and
Mario F. Rossi, dated January 4, 2000+
10.24 Amended Security Agreement between SmartServ Online, Inc. and
Mario F. Rossi, dated January 4, 2000+
10.25 Employment Agreement between SmartServ Online, Inc. and Alan
G. Bozian, dated May 29, 2000+
10.26 Restricted Stock Purchase Agreement between SmartServ Online
Inc. and Robert W. Pearl, dated October 13, 1999*
10.27 Promissory Note between SmartServ Online, Inc. and Robert W.
Pearl, dated January 31, 2000*
10.28 Security Agreement between SmartServ Online, Inc. and Robert
W. Pearl, dated January 31, 2000*
23.1 Consent of Ernst & Young LLP++
23.2 Consent of Parker Chapin LLP (Included in Exhibit 5.1)
27 Financial Data Schedule*
- ------------
+ Filed with the original Form SB-2 filing or Amendment No. 1
thereto
++ Filed herewith
* Filed as an exhibit to SmartServ's Annual Report on Form
10-KSB for the fiscal year ended June 30, 2000
** Filed as an exhibit to SmartServ's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1999
*** Filed as an exhibit to SmartServ's registration statement on
Form SB-2 (Registration No. 333-114)
II-7
**** Filed as an exhibit to SmartServ's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1996
***** Filed as an exhibit to SmartServ's Proxy Statement dated
October 10, 1996
****** Filed as an exhibit to SmartServ's Quarterly Report on Form
10-QSB for the period ended March 31, 1998
Item 28. UNDERTAKINGS.
-------------
(A) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement to:
(i) Include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental
change in the information set forth in the
registration statement; and
(iii) Include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering therein, and
the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(B) Undertaking Required by Regulation S-B, Item 512(e).
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or controlling persons
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
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.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment no. 2 to its registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Stamford, State of Connecticut, on the 9th day of February, 2001.
SmartServ Online, Inc.
By: /S/ SEBASTIAN E. CASSETTA
--------------------------
Sebastian E. Cassetta
Chairman of the Board, Chief
Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this
amendment no. 2 to the registration statement has been signed by the following
persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ SEBASTIAN E. CASSETTA* Chairman of the Board, February 9, 2001
- --------------------------------------- Chief Executive Officer,
Sebastian E. Cassetta and Director
/S/ THOMAS W. HALLER Senior Vice President and February 9, 2001
- --------------------------------------- Treasurer (Chief Financial
Thomas W. Haller and Accounting Officer)
/S/ MARIO F. ROSSI* Executive Vice President, February 9, 2001
- --------------------------------------- Chief Technology Officer
Mario F. Rossi and Director
Director February __, 2001
- ---------------------------------------
Claudio Guazzoni
/S/ CHARLES R. KLOTZ* Director February 9, 2001
- ---------------------------------------
Charles R. Klotz
Director February __, 2001
- ---------------------------------------
Stephen Lawler
/S/ L. SCOTT PERRY* Director February 9, 2001
- ---------------------------------------
L. Scott Perry
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/S/ ROBERT H. STEELE* Director February 9, 2001
- ---------------------------------------
Robert H. Steele
/S/ CATHERINE CASSEL TALMADGE* Director February 9, 2001
- ----------------------------------
Catherine Cassel Talmadge
/S/ CHARLES R. WOOD* Director February 9, 2001
- ---------------------------------------
Charles R. Wood
*By: /S/ THOMAS W. HALLER
-----------------------------------
Thomas W. Haller as attorney-in-fact.
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