+As filed with the Securities and Exchange Commission on June 13, 2001.
REGISTRATION NO. 333-43258
=======================================================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3 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 (4)
------------------------------------------ -------------------------- ------------------------------ -----------------------------
Common Stock, par value $.01 per share 664,406 (1) $23,300,705(2) $6,151
------------------------------------------ -------------------------- ------------------------------ -----------------------------
Common Stock, par value $.01 per share 176,818 (1) $1,588,709.70(3) $397.18
------------------------------------------ -------------------------- ------------------------------ -----------------------------
(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 and was paid in
connection with the original filing of this Registration Statement on Form SB-2 (File No. 333-43258).
(3) Estimated pursuant to Rule 457(c) under the Securities Act of 1933 solely for the purpose of computing the
amount of the registration fee. The fee for the common stock was based on the average of the closing bid and
asked price of the common stock reported on the Nasdaq National Market on June 7, 2001.
(4) 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.
1,888,877 SHARES OF COMMON STOCK
o The selling stockholders are offering to sell 996,416 shares
of common stock of which 448,146 shares are issuable upon
exercise of warrants.
This prospectus also covers 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 June 7, 2001, the
last reported bid price of our common stock was $8.92 and the
last reported asked price was $9.05.
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 June __, 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.........................................................................................................17
MANAGEMENT.......................................................................................................23
PRINCIPAL STOCKHOLDERS...........................................................................................31
SELLING STOCKHOLDERS.............................................................................................33
PLAN OF DISTRIBUTION.............................................................................................35
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................37
DESCRIPTION OF CAPITAL STOCK.....................................................................................38
DELAWARE BUSINESS COMBINATION PROVISIONS.........................................................................40
INDEMNIFICATION OF DIRECTORS AND OFFICERS........................................................................40
WHERE YOU CAN FIND MORE INFORMATION..............................................................................41
TRANSFER AGENT...................................................................................................42
LEGAL MATTERS....................................................................................................42
EXPERTS..........................................................................................................42
INDEX TO EXHIBITS..............................................................................................II-5
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 and transactional 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 three months ended March 31, 2001 and March 31, 2000, the
transition period ended December 31, 2000 and for the fiscal years ended
June 30, 2000, 1999 and 1998, certain of which are included elsewhere
herein. You should read the following summary financial data in conjunction
with the financial statements and notes to those statements.
Three Months Ended March 31 Six Months Ended
(unaudited) December 31 Years Ended June 30
-------------------------------- -------------- -----------------------------------------------
Statement of Operations 2001 2000 2000 2000 1999 1998
-------------- --------------- -------------- ------------- --------------- --------------
Revenues $ 1,224,971 $ 989,943 $ 2,232,476 $ 3,696,133 $ 1,443,781 $ 873,476
Income (Loss) from Operations (3,946,914)* (14,022,545)* 2,369,035** (31,910,386)*** (3,750,471)*** (4,488,307)***
Net Income (Loss) (3,863,654)* (13,987,008)* 2,937,591** (30,993,559)*** (7,124,126)*** (5,040,009)***
Basic Earnings (Loss) per
Share (0.68) (4.33) 0.54 (11.42) (6.44) (7.65)
Diluted Earnings (Loss) per
Share (0.68) (4.33) 0.34 (11.42) (6.44) (7.65)
BALANCE SHEET March 31 December 31 June 30
-------------------------------- -------------- -----------------------------------------------
2001 2000 2000 2000 1999 1998
-------------- --------------- -------------- ------------- --------------- --------------
Cash and Cash Equivalents $ 15,554,021 $ 5,175,577 $ 19,172,118 $ 24,016,345 $ 2,165,551 $ 354,225
Working Capital (Deficiency) 11,068,696 4,368,144 16,378,274 21,887,491 (165,708) (1,074,238)
Total Assets 21,537,808 7,570,111 24,041,876 26,702,824 3,820,598 1,276,853
Total Liabilities and Deferred
Revenues 8,445,875 5,832,698 7,260,906 6,720,887 8,527,898 2,523,714
Shareholders' Equity
(Deficiency) 13,091,933 1,737,413 16,780,970 19,981,937 (4,707,300) (1,246,861)
* Included in such amounts are noncash charges for stock-based compensation
costs of $159,778 for the quarter ended March 31, 2001 and $14,001,007 for the
quarter ended March 31, 2000.
**Included in such amount are noncash credits for stock based compensation of
$8,164,779 for the transition period ended December 31, 2000.
***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.
-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
Although we had net income of $2,937,591 for the six month transition
period ended December 31, 2000, we incurred net losses of $3,863,654 for the
three months ended March 31, 2001, $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. Included in the June 30, 2000 amount was a noncash
charge for stock-based compensation of $30,271,024. On March 31, 2001, we had an
accumulated deficit of $53,865,627. 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 the
introduction and market acceptance of new services, establishing alliances with
strategic marketing partners, competition and the regulatory environment. 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 is currently
able to market those applications licensed to DTN in both wireline and wireless
platforms with strategic marketing partners internationally, and effective
September 2001 will be able to market these applications in the United States
and Canada. 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 Semotus Solutions, Inc., I3 Mobile, Inc., Aether Systems,
Inc., 724 Solutions, Inc. and w-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 April 30, 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 4,045,938
shares of our common stock. Except for 1,683,000 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 "device agnostic" information
and transaction platform, made up of our patent-pending "W2W MiddlewareTM" and
our content and processing engines. This platform is comprised of the "W2W
MiddlewareTM", based on Windows NT operating system and the authorization,
quote, news and transaction engines, based on Hewlett-Packard Company's Unix
operating system and Oracle's Corp.'s version 8i parallel server database.
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.
-6-
We believe that our service mark "SmartServ Online" has significant
value and is important to the marketing of our services. There can be no
absolute assurance, however, that our mark does not or will not violate the
proprietary rights of others, that our mark would be upheld if challenged or
that we would not be prevented from using our mark, any of which could have an
adverse effect on us. In addition, there can be no assurance that we will have
the financial resources necessary to enforce or defend our mark. We believe that
our software, services, service mark and other proprietary rights do not
infringe on the proprietary rights of third parties. However, there can be no
assurance that third parties will not assert infringement claims against us with
respect to current features, content or services or that any such assertion may
not require us to enter into royalty arrangements or result in litigation.
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". 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 to 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 $12,216,000 if all of the warrants for
the underlying shares of common stock being registered are exercised and the
restricted shares of Messrs. Cassetta, Rossi and Pearl are sold. 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 $ 14.187 $ 4.156 $ 6.250 $ 1.530
Second Quarter through June
7, 2001 $ 11.650 $ 5.391 $ 4.250 $ 1.750
Six Months Ended December 31, 2000
- ----------------------------------
Quarter Ended December 31, 2000 $ 36.938 $ 6.750 $ 16.063 $ 1.625
Quarter Ended September 30, 2000 70.250 26.875 27.000 9.688
Year Ended June 30, 2000
- ------------------------
First Quarter $ 1.531 $ 0.719 $ 0.156 $ 0.063
Second Quarter 24.625 0.719 6.500 0.070
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 $ 0.375
Second Quarter 4.125 1.031 0.531 0.063
Third Quarter 4.875 1.500 0.625 0.063
Fourth Quarter 2.500 1.500 0.250 0.100
As of June 7, 2001, we had 6,012,573 shares of common stock outstanding
held by 82 record holders. 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 15 record holders.
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 Web and wireless applications developer providing
wireless applications, transaction platforms and middleware to financial
institutions, network service providers and other commercial enterprises that
drive device-independent, real time, transaction-intensive wireless data
services to their workforces and customers. SmartServ's breadth of products and
services ensures that businesses and their customers can fully exploit the
merits of wireless data exchange, using virtually any wired or mobile device to
make informed decisions and execute transactions based on real-time information.
SmartServ's solutions, which may be hosted or installed, speed time-to-market,
anticipate ever-changing technologies and lower costs.
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,
telecommunications carriers, 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 fifteen
people during the year 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
In October 2000, we announced the change of our year end from a fiscal
year ending on June 30 to a calendar year ending on December 31 in order to
conform to standard industry practice. This change in our fiscal year end gives
rise to a six month transition period ended December 31, 2000. The financial
statements for the six month period ended December 31, 2000 have been audited by
the Company's independent auditors.
-9-
SELECTED FINANCIAL DATA
THREE MONTHS ENDED MARCH 31 SIX MONTHS ENDED DECEMBER 31
------------------------------ ------------------------------
2001 2000 2000 1999
-------------- --------------- -------------- ---------------
(unaudited) (unaudited) (unaudited)
Revenues $ 1,224,971 $ 989,943 $ 2,232,476 $ 1,720,913
Costs and expenses
Operating costs (5,012,107) 1,011,481 (8,028,220) (1,882,608)
Stock based compensation (159,778) 14,001,007 8,164,779 (21,635,019)
-------------- --------------- -------------- ---------------
Total costs and expenses (5,171,885) 15,012,488 136,559 (23,517,627)
-------------- --------------- -------------- ---------------
Income (loss) from operations (3,946,914) (14,022,545) 2,369,035 (21,796,714)
-------------- --------------- -------------- ---------------
Net interest income (expense)
and other financing costs 83,260 35,537 568,556 700,483
-------------- --------------- -------------- ---------------
Net income (loss) $ (3,863,654) $(13,987,008) $ 2,937,591 $(21,096,231)
============== =============== ============== ===============
Basic earnings (loss) per share $ (0.68) $ (4.33) $ 0.54 $ (15.19)
============== =============== ============== ===============
Diluted earnings (loss) per
share $ (0.68) $ (4.33) $ 0.34 $ (15.19)
============== =============== ============== ===============
Weighted average shares
outstanding - basic 5,705,629 3,232,687 5,433,577 1,388,546
============== =============== ============== ===============
Weighted average shares
outstanding- diluted 5,705,629 3,232,687 8,697,917 1,388,546
============== =============== ============== ===============
BALANCE SHEET DATA:
- -------------------
Total assets $ 21,537,808 $ 7,570,111 $ 24,041,876 $ 2,459,843
Accumulated deficit $(53,865,627) $(57,029,244) $(50,001,973) $(43,042,236)
Stockholders' equity $ 13,091,933 $ 1,737,413 $ 16,780,970 $ (3,826,746)
(deficiency)
YEARS ENDED JUNE 30
--------------------------------------------------------------
2000 1999 1998 1997
--------------------------------------------------------------
Revenues $ 3,696,133 $ 1,443,781 $ 873,476 $ 688,610
Costs and expenses
Operating costs (5,335,495) (3,881,928) (4,701,207) (5,145,953)
Stock based compensation (30,271,024) (1,312,324) (660,576) --
--------------------------------------------------------------
Total costs and expenses (35,606,519) (5,194,252) (5,361,783) (5,145,953)
--------------------------------------------------------------
Income (loss) from operations (31,910,386) (3,750,471) (4,488,307) (4,457,343)
--------------------------------------------------------------
Net interest income (expense) and
other financing costs 916,827 (3,373,655) (551,702) 22,861
--------------------------------------------------------------
Net income (loss) $ (30,993,559) $(7,124,126) $(5,040,009) $(4,434,482)
==============================================================
Basic earnings (loss) per share $ (11.42) $ (6.44) $ (7.65) $ (1.20)
==============================================================
Diluted earnings (loss) per share $ (11.42) $ (6.44) $ (7.65) $ (1.20)
==============================================================
Weighted average shares
outstanding - basic 2,712,931 1,105,603 659,034 3,695,000
==============================================================
Weighted average shares
outstanding- diluted 2,712,931 1,105,603 659,034 3,695,000
==============================================================
-10-
BALANCE SHEET DATA:
- -------------------
Total assets $ 26,702,824 $ 3,820,598 $ 1,276,853 $ 1,246,689
Accumulated deficit $ (52,939,564) $(21,946,005) $(14,821,879) $(9,781,870)
Stockholders' equity (deficiency) $ 19,981,937 $ (4,707,300) $ (1,246,861) $ (698,328)
THREE MONTHS ENDED MARCH 31, 2001 VERSUS THREE MONTHS ENDED MARCH 31, 2000
During the quarters ended March 31, 2001 and 2000, we recorded revenues of
$1,224,971 and $989,943, respectively. Substantially all of such revenues were
earned through our licensing agreement with Data Transmission Network
Corporation. During the quarters ended March 31, 2001 and 2000, we recognized
$966,369 and $414,160, respectively, from the amortization of deferred revenues
associated with this agreement.
During the quarter ended March 31, 2001, we incurred costs of services of
$1,561,841. Such costs consisted primarily of information and communication
costs ($210,800), personnel costs ($322,200), systems consultants ($584,000) and
computer hardware leases, depreciation and maintenance costs ($411,500). During
the quarter ended March 31, 2000, we incurred costs of services of $157,942.
Such costs consisted primarily of information and communication costs ($32,700),
personnel costs ($29,200), and computer hardware leases, depreciation and
maintenance costs ($81,100). Product development costs were $495,878 and
$106,312 for the quarters ended March 31, 2001 and 2000, respectively. During
the quarter ended March 31, 2001, product development costs consisted primarily
of personnel costs ($239,400) and amortization expenses relating to capitalized
software development costs ($230,400). During the quarter ended March 31, 2000,
product development costs also consisted primarily of personnel costs ($17,900)
and amortization expense relating to capitalized software development costs
($88,400). During the quarters ended March 31, 2001 and 2000, we capitalized
$153,151 and $293,519, respectively, of development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed".
During the quarter ended March 31, 2001, we incurred general and administrative
expenses of $1,606,651. Such costs were incurred primarily for personnel costs
($718,400), professional fees ($340,200), facilities ($162,200), insurance
($114,300) and communications costs ($42,200). During the quarter ended March
31, 2000, we incurred general and administrative expenses of $612,630. Such
costs were incurred primarily for personnel costs ($267,000), facilities
($48,700), insurance ($43,300) and professional fees ($207,400). During the
quarter ended March 31, 2001, we incurred advertising and marketing expenses of
$1,347,737. Such costs were incurred primarily for personnel costs ($318,000),
marketing consultants ($574,000) and travel ($166,600). During the quarter ended
March 31, 2000, we incurred advertising and marketing expenses of $134,597. Such
costs were incurred primarily for marketing consultants ($52,700) and travel
($41,600).
During the quarter ended March 31, 2001, net noncash charges for stock-based
compensation amounted to $159,778 compared to $14,001,007 during the quarter
ended March 31, 2000. Such noncash amounts are primarily related to 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. Noncash charges for professional
fees for the quarters ended March 31, 2001 and 2000, were $306,500 and $366,200,
respectively, resulting primarily from the amortization of deferred costs
associated with the prior issuance of warrants to purchase common stock to
various financial, marketing and technical consultants. The value of
substantially all of
-11-
such common stock purchase warrants has been recorded in accordance with the
Black-Scholes pricing methodology.
Interest income for the quarters ended March 31, 2001 and 2000 amounted to
$193,363 and $45,537, respectively. Such amounts were earned primarily from our
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. During the quarters ended March 31, 2001 and 2000, interest and
other financing costs were $94,093 and $10,000, respectively. During the quarter
ended March 31, 2001, interest and other financing costs were incurred in
connection with the $20 million line of credit facility with Hewlett-Packard
Company. During the quarter ended March 31, 2000, interest and other financing
costs were related to the partial redemption of our Prepaid Warrants.
Basic and diluted loss per share was $0.68 for the quarter ended March 31, 2001
compared to $4.33 per share for the quarter ended March 31, 2000. The weighted
average shares outstanding increased to 5,705,629 at March 31, 2001 from
3,232,687 weighted average shares outstanding at March 31, 2000.
SIX MONTHS ENDED DECEMBER 31, 2000 VERSUS SIX MONTHS ENDED DECEMBER 31, 1999
During the six months ended December 31, 2000 and 1999 we recorded revenues of
$2,232,476 and $1,720,913, respectively. Substantially all of such revenues were
earned through our licensing agreement with Data Transmission Network
Corporation. During the six months ended December 31, 2000 and 1999, we
recognized $1,564,598 and $828,312, respectively, from the amortization of
deferred revenues associated with this agreement.
During the six months ended December 31, 2000, we incurred costs of services of
$2,199,749. Such costs consisted primarily of information and communication
costs ($242,071), personnel costs ($481,706), computer hardware leases and
maintenance ($63,874) and systems consultants ($1,330,165). During the six
months ended December 31, 1999, we incurred costs of services of $445,412. Such
costs consisted primarily of information and communication costs ($87,300),
personnel costs ($123,500) and computer hardware leases and maintenance
($161,300). Product development costs were $814,048 versus $134,222 for the six
months ended December 31, 2000 and 1999, respectively. During the six months
ended December 31, 2000, product development costs consisted primarily of
personnel costs ($334,200), and amortization expense relating to capitalized
software development costs ($392,100). During the six months ended December 31,
1999, product development costs consisted primarily of personnel costs ($13,500)
and amortization expense relating to capitalized software development costs
($120,700). During the six months ended December 31, 2000 and 1999, we
capitalized $333,648 and $553,295, respectively, of development costs in
accordance with Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed
("Statement No. 86"). Product development costs consisted primarily of the
amortization of capitalized software development costs.
During the six months ended December 31, 2000, we incurred selling, general and
administrative expenses of $5,014,423 versus $1,302,974 for the six months ended
December 31, 1999. During the six months ended December 31, 2000 such costs were
incurred primarily for personnel costs ($1,897,011), facilities ($266,490),
marketing and advertising costs ($425,185), professional fees ($1,353,961) and
depreciation ($265,210). Personnel costs increased by $1,283,511 primarily from
our efforts to build our marketing and sales infrastructure while marketing and
advertising costs increased $265,785 as a result of our efforts to increase
marketplace awareness of our company and its product line. During the six months
ended December 31, 1999, such costs were incurred primarily for personnel costs
($613,500), facilities ($97,100), marketing and advertising costs ($159,400) and
professional fees ($347,800).
-12-
During the six months ended December 31, 2000, noncash stock-based compensation
amounted to income of $8,164,779 compared to an expense of $21,635,019 during
the six months ended December 31, 1999. Such noncash amounts are primarily
related to 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. Noncash
charges for professional fees for the six months ended December 31, 2000 and
1999 were $643,710 and $682,510, respectively, resulting primarily from the
amortization of deferred costs associated with the prior issuance of warrants to
purchase common stock to various financial, marketing and technical consultants.
The value of substantially all of such common stock purchase warrants has been
recorded in accordance with the Black-Scholes pricing methodology.
Interest income for the six months ended December 31, 2000 amounted to $621,416
versus $13,033 for the six months ended December 31, 1999. Such amounts were
earned primarily from our 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 six months ended
December 31, 2000 and 1999 were $2,860 and $30,250, respectively. Debt
origination and other financing costs were $50,000 for the six months ended
December 31, 2000. Such amounts were incurred in connection with a $20 million
line of credit facility with Hewlett-Packard Company. During the six months
ended December 31, 1999, the Company recorded a credit of $717,700 as a reversal
of penalties pursuant to the default provision of the Prepaid Warrants.
Basic earnings were $0.54 per share for the six months ended December 31, 2000
versus a loss of $15.19 per share for the six months ended December 31, 1999.
Diluted earnings per share for the six months ended December 31, 2000 were $0.34
per share versus a loss of $15.19 per share for the six months ended December
31, 1999.
FISCAL YEAR ENDED JUNE 30, 2000 VERSUS FISCAL YEAR ENDED JUNE 30, 1999
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, we 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, we 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 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 Statement No. 86. Product development costs consisted primarily
of the amortization of capitalized software development costs.
During the year ended June 30, 2000, we 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). Personnel costs increased by $767,800
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 marketplace awareness of our company and its product line.
During the year ended June 30, 1999, such costs were
-13-
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, 2000, noncash charges for stock-based
compensation amounted to $30,271,000 compared to $1,312,000 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 substantially all of such common stock purchase
warrants has been 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
our 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 (credits)/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.
During the year ended June 30, 2000, we reversed $717,700 of such charge 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 debt origination and other financing
costs 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 year ended June 30, 2000 versus $6.44
per share for the year ended June 30, 1999. Our net loss increased $23,869,433
while our weighted average shares of common stock outstanding in 2000 increased
by 1,607,328 shares.
FISCAL YEAR ENDED JUNE 30, 1999 VERSUS FISCAL YEAR ENDED JUNE 30, 1998
During the year ended June 30, 1999, we recorded revenues of $1,443,781.
Substantially all of such revenues were earned through our licensing agreement
with Data Transmission Network. During the year ended June 30, 1998, we earned
revenues of $873,476. Of such amount, $210,000 was earned through the
relationship with Data Transmission Network, while $454,000 was earned from
sales of the SmartServ Pro stock quote services.
During the year ended June 30, 1999, we 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, we 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 Data Transmission
Network. 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
-14-
ended June 30, 1998. The decrease in the product development costs resulted from
the capitalization of software development costs related to certain product
enhancements in accordance with Statement No. 86. During the year ended June 30,
1999, we capitalized $765,000 of development costs in accordance with Statement
No. 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, we 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 our 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 our 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 a line of credit. Of such
amount, $463,600 represents the noncash charges associated with the issuance of
certain common stock purchase warrants.
Loss per share was $6.44 per share for year ended June 30, 1999 versus $7.65 per
share for the year ended June 30, 1998. While the net loss increased $2,084,117,
our 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 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
$0.60 per share of common stock. Such notes were repaid in June 1999.
In June 1999, SmartServ and Data Transmission Network Corporation entered into a
License Agreement that amended their previous agreement. In consideration of the
receipt of $5.175 million, 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.
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
-15-
application source code, Data Transmission Network Corporation would 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 provide operational support to Data Transmission Network
Corporation through August 2001. Revenues earned by SmartServ pursuant to this
amendment will be $83,000 per month through August 2001.
In July 1999, we entered into an agreement with Arnhold & S. Bleichroeder, Inc.
("ASB") to settle our obligation to ASB pursuant to the default provisions of
the Prepaid Warrants. In accordance with that agreement, we paid ASB $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.
During the year ended December 31, 2000, we issued 2,193,455 shares of common
stock to investors upon the exercise of warrants to purchase such shares.
Proceeds from the exercise of these warrants were $5,638,000.
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 respective products
and services, and to work on the build-out of SmartServ's domestic and
international infrastructure. In furtherance of these objectives Hewlett-Packard
has provided us with a line of credit of up to $20,000,000 for the acquisition
of approved hardware, software and services. At March 31, 2001, Hewlett-Packard
Company had advanced us $1,638,248 under this facility and will make available
additional funds as SmartServ complies with certain financial milestones. The
debt is evidenced by a secured 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.
At March 31, 2001, 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
0.5174 share of common stock at an exercise price of $7.73 per share and expire
on March 20, 2002. These warrants are redeemable by SmartServ on not less than
30 days written notice at the redemption price of $0.10 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 net loss of $3,863,654 for the three months ended March 31,
2001, our net loss exclusive of net stock-based compensation charges was
$3,703,876 during such period. Cash used in operations was $3,044,395. Cash used
for investing activities was $780,533, while cash provided by financing
activities was $206,831. While we reported net income of $2,937,591 for the six
months ended December 31, 2000, our net loss exclusive of net stock-based
compensation credits was $5,227,188 during
-16-
such period. Cash used in operations was $4,938,000, while cash provided by
financing activities was $1,826,000. Of the $1,732,000 used for investing
activities, $1,399,000 represents funds used to purchase equipment.
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, results of operations and cash flows. See
Note 8 of the Notes to the unaudited Financial Statements for the three months
ended March 31, 2001 for a more detailed discussion of these actions.
Since inception, we have met our cash flow needs through the issuance of common
stock and warrants to investors and the establishment of credit facilities with
investors and Hewlett-Packard Company. Based upon our current cash resources,
and our anticipated revenue stream and expenses, we believe that we will have
sufficient liquidity to meet our obligations during the ensuing year. Longer
term, we must execute our business plan and seek additional sources of
liquidity, such as the redemption and exercise of our outstanding warrants or
the sale of common stock.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Forward-looking statements in this document and those made from time-to-time by
our employees are made under the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements concerning
future plans or results are necessarily only estimates and actual results could
differ materially from expectations. Certain factors that could cause or
contribute to such differences include, and are not limited to, potential
fluctuations in quarterly results, the size and timing of awards and performance
on contracts, dependence on large contracts and a limited number of customers,
dependence on wireless and/or internet networks of third-parties for certain
products and services, lengthy sales and implementation cycles, availability and
cost of key components, market acceptance of new or enhanced products and
services, proprietary technology and changing technology, competitive
conditions, system performance, management of growth, the risk that our current
and future products and services may contain errors or be affected by technical
problems that would be difficult and costly to detect and correct, dependence on
key personnel and general economic and political conditions and other factors
affecting spending by customers, and other risks described in this prospectus
and our other filings with the Securities and Exchange Commission.
BUSINESS
THE COMPANY
SmartServ provides Web and wireless applications and infrastructure
that allow financial institutions, network service providers and other
businesses to deliver content and transaction-intensive services to their work
forces and customers - in real time and via virtually any wired or wireless
device. SmartServ's breadth of products includes a transaction processing
engine, capable of routing high-volume transactions to multiple destinations;
proprietary W2W MiddlewareTM that ensures content and applications are optimized
for the full array of present and future devices; and a suite of applications
designed so businesses and their customers can fully exploit the merits of
wireless data exchange and transactional capability.
-17-
SERVICES
SmartServ has developed applications and infrastructure products that
integrate and deliver Internet- and intranet-based information, as well as
effectuate m-commerce transactions via wireless networks and devices. The
SmartServ solution is comprised of a transaction processing engine capable of
identifying, queuing, and then routing transactions to multiple destinations,
our patent pending W2W MiddlewareTM that ensures content and applications are
optimized for specific devices, and a suite of applications. These applications
include MobileMarketsTM, a one-stop mobile application offering the ability to
trade, set alerts and access real-time quotes, time and sales, user-defined
watch lists, currency calculations and over 20 market indices; and Wireless
WallStreetTM, a wireless securities trading simulator that mirrors the actual
stock market. All have been designed to exploit wireless data communications
technologies, enabling businesses to offer their workforce or customers targeted
opportunities to make decisions and execute transactions based on real-time
information. Additionally, we offer integration, implementation, hosting and
customization services for customers in the event they require such services.
SmartServ offers businesses a platform that enables anytime, anywhere,
any-device access to real-time information and the ability to initiate financial
and commerce transactions. By developing fully integrated solutions, we offer
traditional and new-economy companies the ability to leverage the Internet and
their own content for both wireline and emerging wireless networks. Our
development efforts allow our customers to rapidly deliver solutions to their
customers with significantly lower development and maintenance costs than if
developed internally. We maintain the systems while making sure the technology
available to our customers remains state-of-the-art.
We believe our Web and wireless applications and infrastructure 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 processing engine, W2W MiddlewareTM and applications represent
an important competitive advantage.
MARKETING STRATEGY
SmartServ offers wireless applications and a transaction platform that
enables customers to provide transaction-intensive wireless data services to
both their workforces and customers. Our solutions are reliable and provide
access from virtually any mobile device. SmartServ's products and services are
designed to augment the traditional ways enterprises conduct business, providing
additional, alternative ways for businesses to reach their customers.
SmartServ has developed its application suites so that customers can
implement them in phases. SmartServ thus has the flexibility to satisfy our
customers' initial demands for core functionality within an application suite,
and then later offer components to enhance application functionality.
Our goal is to be the leading provider of Web and wireless applications
and infrastructure; to this end we will concentrate our efforts in the following
areas:
o FINANCIAL SERVICES SOLUTIONS
----------------------------
SmartServ seeks to expand its customer base among both institutional
and retail financial services enterprises by leveraging its transaction
routing engine and W2W MiddlewareTM with a suite of applications
designed to meet the rigorous demands of the financial community.
SmartServ's ability to provide these transaction management
-18-
systems via the Internet makes us well suited to provide these services
in an 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
manufactures 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 and a currency
converter.
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 MiddlewareTM provide the ideal platform
for a host of commerce applications.
We expect our sources of revenue to include licensing fees for our Web
and wireless applications, MobileMarketsTM and Wireless WallStreetTM, monthly
recurring per user and transaction fees, as well as hosting fees. We expect that
our customers will brand our information and transaction services and promote
them to their end-users.
GEOGRAPHIC EXPANSION
- --------------------
We have established a sales and marketing presence in Zurich, Switzerland and
Hong Kong, China in an effort to expand our services into Europe and Asia. The
extensive and growing reliance on wireless services makes these areas prime
candidates for SmartServ's information and m-commerce capabilities.
Additionally, we believe that new products and services developed for these
markets will also be introduced into the US 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.
-19-
COMPETITION
The market for wireless 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 applications and infrastructure makes the services "device agnostic",
we face competition from numerous services delivered through personal computers.
The wireless data arena has several competitors, such as Aether Systems, Inc.,
724 Solutions, Inc (including recently acquired Tantau Software, Inc),
Everypath, Outercurve Technologies and w-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 applications and
infrastructure 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 Web 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 applications and infrastructure 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 three months ended March
31, 2001 and the six months ended December 31, 2000, were $153,151 and $333,648,
respectively. Additionally, during the fiscal years ended June 30, 2000 and
1999, we capitalized software development costs amounting to $1,122,003 and
$765,445, respectively. No such costs were capitalized in the year ended June
30, 1998.
PROPRIETARY RIGHTS
We have designed and developed our own "device agnostic" information
and transaction platform, made up of our patent-pending "W2W MiddlewareTM" and
our content and processing engines. This platform is comprised of the "W2W
MiddlewareTM", based on Windows NT operating system and the
-20-
authorization, quote, news and transaction engines, based on Hewlett-Packard
Company's Unix operating system and Oracle's Corp.'s version 8i parallel server
database. Hewlett-Packard's Virtual Vault provides government-grade platform
security throughout. This platform supports a wide array of browsers operating
on wireless and wired networks and 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 have also designed and developed two financial service applications
to run across our Web and wireless platform. Wireless WallStreetTM is an
introduction for technology or Wall Street novices to the complexities of the
stock market and placing wireless and wired trades. Users can compete against
one another in a virtual environment that mirrors the actual stock market.
MobileMarketsTM is a one-stop mobile application, offering the ability to trade,
set real-time stock and news alerts and access real-time quotes, time and sales,
user-defined watch lists, currency calculations and over 20 market indices.
We rely upon a combination of contract provisions, trade secret laws,
patent, trademark and copyright laws to protect our proprietary 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 Corporation returned the
international marketing rights for the software applications to SmartServ and
that on August 31, 2001, the expiration date of the amendment, will return the
domestic marketing rights. As part of our strategy for providing information and
transaction capabilities with device independence, SmartServ will be able to
market these applications on both wireline and wireless platforms in conjunction
with strategic marketing partners worldwide.
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, the current
and future regulatory environment relating to the telecommunications and media
industry could have an effect on our business, including transborder data flow
regulations, 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 relevance 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
-21-
activities and the dissemination of pornography has 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
SmartServ employs fifty-eight people, of whom fifty are employed in the
United States, seven in Europe and one in Hong Kong. All are full-time
employees. We anticipate that staffing requirements associated with the
implementation of our plan of operation will result in the addition of fifteen
people during the year ending December 31, 2001. Such personnel will be added to
assist with the programming requirements of our customers' product offerings,
for customer support, and sales and marketing. None of our employees are covered
by a collective bargaining agreement, and we believe that our relationship with
our employees is satisfactory.
DESCRIPTION OF PROPERTY
We occupy approximately 10,300 square feet in a leased facility located
in Stamford, Connecticut. The lease expires in October 2010. Additionally, we
occupy office space in Zurich, London and Hong Kong on a month-to month basis.
LEGAL PROCEEDINGS
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.
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.
-22-
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 52 Chief Executive Officer, Chairman of the Board and
Class III Director
Mario F. Rossi (1) 61 Executive Vice President, 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
Robert Pearl 33 Senior Vice President, Business Development
Hendrik Hoets 47 Senior Vice President of Sales and Marketing
Claudio Guazzoni (2) 36 Class I Director
Charles R. Klotz 59 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
-23-
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 commercial litigation. Mr. Kerschner was in private practice with
the law firm of McCann & McCann from 1994 to 1997.
ROBERT PEARL joined SmartServ in September 1998 with over 7 years of
wireless industry experience. He was initially 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. In his current role
he is responsible for developing and managing worldwide partnerships and
business opportunities on behalf of SmartServ. Mr. Pearl is co-founder and
former co-chairman of the WAP Forum's Developer Expert Group. Prior to joining
SmartServ, Mr. Pearl was a Project Manager at Omnipoint from 1996 to 1998 and a
marketing liaison at AT&T 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.
-24-
STEPHEN LAWLER was elected a director of SmartServ on December 28,
1999. He has been the Group 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 ITAA, Junior
Achievement of New York, is a member of the Cornell University Engineering
College Advisory Council and serves on the Boards of INEA and AONET, small
private technology companies.
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 January 2001, Ms. Talmadge has been Vice President of Business
Development for Maher & Maher, a leading business integration and consulting
firm for the broadband industry. From May 1999 to January 2001, Ms. Talmadge was
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 Chairman and Chief Executive Officer of Terra Investors, Inc.,
a private, closely held investment company. Mr. Wood is also an advisor to
Capital Returns, Inc., a financial services company that is developing a series
of venture capital funds. Mr. Wood was Senior Vice President of Data
Transmission Network 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. 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. Mr. Klotz's term
will expire at the Annual Meeting of SmartServ's stockholders to be held in
2001. If re-elected at such Annual Meeting, Mr. Klotz will serve with the other
Class II Directors until the Annual Meeting of SmartServ's stockholders in 2003.
The directors elected at the 2001, 2002, and 2003 annual meetings will
-25-
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 18.09% 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 14.34% 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.
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 during the calendar year 2000, for services in
all capacities to SmartServ during the transition period ended December 31, 2000
and the three previous fiscal years.
-26-
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)(2) AWARDS (3) OPTIONS COMPENSATION
- --------------------------- ------- ----------- -------------- ------------------- ------------- ------------ ---------------
Sebastian E. Cassetta 2000* $ 130,812 $ 30,306 $ 4,875 -- 200,000 $ 13,545(11)
Chief Executive 2000 216,200 241,300 9,750 -- 23,000 27,100(11)
Officer 1999 155,000 116,414(4) 9,750 185,471(5) 92,000(7) 24,416(11)
1998 125,000 -- 9,750 -- 37,500(8) --
Mario F. Rossi 2000* $ 100,676 $ 11,846 $ 3,000 -- 75,000 $ 6,675(12)
Executive Vice 2000 162,000 104,100 6,000 -- 22,000 9,324(12)
President 1999 122,500 43,749(4) 6,000 61,824(6) 67,500(9) --
1998 92,400 -- 6,000 -- 20,834(8) --
+Alan Bozian 2000* $ 131,483 $ -- $ 16,200 -- 87,500 $ 5,316(12)
Executive Vice 2000 24,038 -- 700 -- 175,000 886(12)
President and Chief
Financial Officer
Thomas W. Haller 2000* $ 64,750 $ 30,000 $ 3,000 -- 50,000 $ 4,966(12)
Senior Vice President 2000 112,250 21,300 6,000 -- 79,000 9,600(12)
and Chief Financial 1999 89,400 2,600 6,000 -- 32,000(10) --
Officer 1998 77,700 -- 6,000 -- 15,000 (8) --
Robert Pearl 2000* $ 61,188 $ 30,000 $ -- -- 25,000 $ --
Senior Vice President 2000 104,634 19,788 -- -- -- --
Business Development 1999 48,538 541 -- -- 4,000 --
Richard Kerschner 2000* $ 67,500 $ 10,000 $ -- -- 50,000 $ --
Vice President and 2000 45,384 -- -- -- 100,000 --
General Counsel
* Amounts shown consist of compensation for the transition period.
+ Alan Bozian is no longer employed by SmartServ.
(1) Amounts shown consist of non-accountable expense allowance.
(2) 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.
(3) The Named Executive Officers did not receive any LTIP Payouts during
the transition period or in fiscal 2000, 1999 or 1998.
(4) 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.
-27-
(5) 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.
(6) 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.
(7) 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.
(8) Such options were canceled when repriced options were granted in lieu
thereof in fiscal 1999.
(9) 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.
(10) 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.
(11) Amounts represent premiums paid by SmartServ for life and disability
insurance for the benefit of Mr. Cassetta.
(12) Amounts represent premiums paid by SmartServ for life insurance for the
benefit of Mr. Rossi, Mr. Bozian and Mr. Haller.
STOCK OPTIONS
The following table sets forth information with respect to stock
options granted to the Named Executive Officers during the transition period
ended December 31, 2000:
-28-
OPTION GRANTS DURING THE TRANSITION PERIOD
ENDED DECEMBER 31, 2000
(INDIVIDUAL GRANTS) (1)
-----------------------
NUMBER OF % OF TOTAL OPTIONS
SECURITIES UNDERLYING GRANTED TO EMPLOYEES IN EXERCISE EXPIRATION
NAME OPTIONS GRANTED THE TRANSITION PERIOD PRICE DATE
- -------------------------- ----------------------- -------------------------- ------------------ ---------------------
Sebastian E. Cassetta 50,000 $ 19.0000 11/02/10
150,000 23.2% 19.0000 11/02/10
Mario F. Rossi 18,750 $ 19.0000 11/02/10
56,250 8.7% 19.0000 11/02/10
Alan Bozian -- -- $ -- --
Thomas W. Haller 50,000 5.8% $ 19.0000 11/02/10
Richard Kerschner 50,000 5.8% $ 19.0000 11/02/10
Robert Pearl 25,000 2.9% $ 19.0000 11/02/10
(1) No stock appreciation rights ("SARs") were granted to the Named Executive
Officers during the transition period ended December 31, 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 the end of the transition period:
AGGREGATED OPTION EXERCISES IN TRANSITION PERIOD AND
TRANSITION PERIOD END OPTION VALUE (1)(2)
-----------------------------------------
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SECURITIES UNDERLYING AT TRANSITION PERIOD
OPTIONS AT TRANSITION END
SHARES ACQUIRED VALUE PERIOD END EXERCISABLE/
NAME ON EXERCISE REALIZED EXERCISABLE/ UNEXERCISABLE
- ------------------------------ -------------------- ----------------- ---------------------- -------------------------
Sebastian E. Cassetta -- -- 112,000/165,500 $356,784/$46,172
Mario F. Rossi -- -- 68,500/70,750 $285,688/$46,172
Alan Bozian -- -- --/-- $0.00/$0.00
Thomas W. Haller -- -- 84,650/76,350 $401,653/$221,627
Richard Kerschner -- -- 16,650/133,350 $0.00/$0.00
Robert Pearl -- -- 11,992/18,750 $21,988/$12,313
-29-
(1) No SARs were exercised by the Named Executive Officers during the
transition period or held by them at December 31, 2000.
(2) Value is based on the closing bid price of SmartServ's common stock as
reported by the NASDAQ National Market on December 31, 2000 ($7.09) less
the exercise price of the option.
EMPLOYMENT AGREEMENTS
SmartServ and Mr. Cassetta have entered into an employment agreement
("Cassetta Agreement"), effective January 1, 1999 and originally 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. The Casetta Agreement, by its
terms, is renewed automatically each month for an additional one month period.
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 originally 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. The Rossi Agreement, by its terms,
is renewed automatically each month for an additional one month period. 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
-30-
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.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of April 25, 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 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 944,992 (4) 15.42%
c/o SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902
Steven Rosner 429,533 7.13%
1220 Mirabeau Lane
Gladwyn, Pennsylvania 19035
Mario F. Rossi 332,830 (5) 5.47%
c/o SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902
TecCapital, Ltd. 303,030 5.04%
Cedar House
41 Cedar Avenue
Hamilton, HM 12, Bermuda
Claudio Guazzoni 108,699 (6) 1.78%
Thomas W. Haller 94,892 (7) 1.55%
Robert Pearl 87,935 (8) 1.46%
Richard D. Kerschner 52,209 (9) *
L. Scott Perry 40,833(10) *
Catherine Cassel Talmadge 40,816(10) *
Stephen Lawler 35,000(11) *
Charles R. Wood 29,000(12) *
Robert H. Steele 25,000(13) *
Charles R. Klotz 15,000(14) *
All executive officers and directors as
a group (13 persons) 1,807,206(15) 27.23%
-31-
--------------------
* 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 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 April 25, 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 116,000 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 72,000 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 93,709 shares of common stock subject to currently exercisable
options and 517 shares of common stock subject to currently exercisable
warrants.
(8) Includes 11,117 shares of common stock subject to currently exercisable
options.
(9) Represents 52,209 shares of common stock subject to currently
exercisable options.
(10) Includes 40,000 shares of common stock subject to currently exercisable
options.
(11) Represents 35,000 shares of common stock subject to currently
exercisable options.
(12) Includes 15,000 shares of common stock subject to currently exercisable
options.
(13) Represents 25,000 shares of common stock subject to currently
exercisable options.
(14) 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.
(15) Includes 2,051 shares held in trust for the benefit of Mr. Cassetta's
wife and 624,251 shares of common stock subject to currently
exercisable options and warrants issued to all executive officers and
directors.
-32-
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 five (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 14.34% 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 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, 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., Sebastian E. Cassetta is the Chief Executive Officer, Chairman
of the Board and a director of SmartServ, Mario F. Rossi is Executive Vice
President, Chief Technology Officer and a director of SmartServ and Robert Pearl
is Senior Vice President of Business Development, 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 April 25, 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.(1) 303,030 303,030 --
The Abernathy Group(2) 20,202 20,202 --
Hare & Co.(3) 30,303 30,303 --
John E. Herzog 4,167 4,167 --
-33-
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.(4) 833 833 --
Andrew Seybold Group, LLC(5) 10,000 10,000 --
Ira Abbott 2,586 2,586 --
CLFS Equities(6) 2,586 2,586 --
Henry Snow 67,257 67,257 --
John and Anna Albanese 10,347 10,347 --
Marvin and Susan Numeroff 10,347 10,347 --
Goldie Grief 7,760 7,760 --
Duck Partners, L.P. 5,173 5,173 --
H.P. Hiranandani 5,173 5,173 --
Gail Markiewicz 5,173 5,173 --
Edward G. Brown 2,586 2,586 --
Andrew and Susan Carter 2,586 2,586 --
John and Donna Franco 2,586 2,586 --
Arthur George Frost 2,586 2,586 --
S.W. Ghali, MD 2,586 2,586 --
Ernest Gottdiener 2,586 2,586 --
Michael Miller 2,586 2,586 --
Frank and Diane Mills 2,586 2,586 --
Anthony Pirrera 2,586 2,586 --
Plushbottom & Peabody, Ltd. 2,586 2,586 --
Mark I. Silverman 2,586 2,586 --
-34-
Maceo K. Sloan 2,586 2,586 --
H. Diehl Suss 2,586 2,586 --
Ervin Tansky 2,586 2,586 --
Stephen and Anndra Martinelli 1,293 1,293 --
Evelyn, Lori and Lisa Martinelli 1,293 1,293 --
Ehrenkrantz King Nussbaum, Inc.(7) 16,667 16,667 --
Michael Kramer 16,000 16,000 --
Lindquist Global Advisors, LLC(8) 50,000 50,000 --
Steven Rosner 429,533 8,000 421,533
Bruno Guazzoni 116,866 116,866 --
Zanett Lombardier, Ltd.(9) 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 --
Sebastian E. Cassetta 944,992 50,000 894,992
Mario F. Rossi 332,830 50,000 282,830
Robert Pearl 87,935 76,818 11,117
------ ------ ----------
Total 2,606,888 996,416 1,610,472
========= ======= =========
- -----------------------------
(1) A Schedule 13G filed by TecCapital Ltd. on August 22, 2000, with respect to
an event that occurred on May 12, 2000, does not indicate that anyone has voting
power and/or investment power with respect to the shares of SmartServ being
resold for the account of TecCapital Ltd.
(2) Bruce Johnson and Steven Abernathy have sole voting and investment power
with respect to the shares of SmartServ being resold for the account of The
Abernathy Group.
(3) Conseco Capital Management has sole voting and investment power with respect
to the shares of SmartServ being resold for the account of Hare & Co.
-35-
(4) Richard Treibick has sole voting and investment power with respect to the
shares of SmartServ being resold for the account of Alexandra Building Corp. (5)
Andrew Seybold and Barney Dewey each has sole voting and investment power with
respect to 5,000 shares of SmartServ being resold for the account of Andrew
Seybold Group, LLC.
(6) Cynthia Farber, Debra Lustig and Shelly Sapkin have shared voting and
investment power with respect to the shares of SmartServ being resold for the
account of CLFS Equities.
(7) Joan King and Irwin Nussbaum as directors of Ehrenkrantz King Nussbaum,
Inc., have shared voting and investment power with respect to the shares of
SmartServ being resold for the account of Ehrenkrantz King Nussbaum, Inc.
(8) Anders Lindquist has sole voting and investment power with respect to the
shares of SmartServ being resold for the account of Lindquist Global Advisors,
LLC.
(9) Lombardier Management Ltd. has sole voting and investment power with respect
to the shares of SmartServ being resold for the account of Zanett Lombardier,
Ltd.
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,
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.
-36-
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 $45,000.
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 Data Transmission Network, Corp.
("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 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.
The Board of Directors of SmartServ authorized the issuance of a line
of credit to Sebastian Cassetta for an amount not to exceed $500,000. Such
amount bears interest at market and is payable upon demand. At April 30, 2001,
Mr. Cassetta has borrowed $500,000 under such line of credit.
-37-
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 June 7, 2001, we had 6,012,573 shares of common
stock issued and outstanding. No shares of preferred stock are issued and
outstanding. We have reserved 4,441,652 shares of common stock for issuance
pursuant to outstanding options and warrants.
COMMON STOCK
The holders of the common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders. Our Amended
and Restated Certificate of Incorporation and By-Laws do not provide for
cumulative voting rights in the election of directors. Accordingly, holders of a
majority of the shares of common stock entitled to vote in any election of
directors may elect all of the directors standing for election. Holders of
common stock are entitled to receive ratably such dividends as may be declared
by the Board out of funds legally available therefor. In the event of our
liquidation, dissolution or winding up, holders of common stock are entitled to
share ratably in the assets remaining after payment of liabilities. Holders of
common stock have no preemptive, conversion or redemption rights. All of the
outstanding shares of common stock are fully-paid and nonassessable.
PREFERRED STOCK
Our Board of Directors may, without stockholder approval, establish and
issue shares of one or more classes or series of preferred stock having the
designations, number of shares, dividend rates, liquidation preferences,
redemption provisions, sinking fund provisions, conversion rights, voting rights
and other rights, preferences and limitations that our Board may determine. The
Board may authorize the issuance of preferred stock with voting, conversion and
economic rights senior to the common stock so that the issuance of preferred
stock could adversely affect the market value of the common stock. The creation
of one or more series of preferred stock may adversely affect the voting power
or other rights of the holders of common stock. The issuance of preferred stock,
while providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things and under some circumstances, have
the effect of delaying, deferring or preventing a change in control without any
action by stockholders.
WARRANTS
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.
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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. The warrants expire on March 20, 2002.
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.
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.
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We have agreed to pay all registration expenses incurred in connection
with the registration of the common stock issuable upon exercise of the
warrants.
DELAWARE BUSINESS COMBINATION PROVISIONS
We are governed by the provisions of Section 203 of the Delaware
General Corporation Law ("DGCL"). In general, this statute prohibits a publicly
held Delaware corporation from engaging, under certain circumstances, in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder unless:
o prior to the date at which the stockholder became an interested
stockholder, the Board of Directors approved either the business
combination or the transaction in which the person became an interested
stockholder;
o the stockholder acquired more than 85% of the outstanding voting stock
of the corporation (excluding shares held by directors who are officers
and shares held in certain employee stock plans) upon consummation of
the transaction in which the stockholder became an interested
stockholder; or
o the business combination is approved by the Board of Directors and by
at least 66-2/3% of the outstanding voting stock of the corporation
(excluding shares held by the interested stockholder) at a meeting of
stockholders (and not by written consent) held on or after the date
such stockholder became an interested stockholder.
An "interested stockholder" is a person who, together with affiliates
and associates, owns (or at any time within the prior three years did own) 15%
or more of the corporation's voting stock. Section 203 defines a "business
combination" to include, without limitation, mergers, consolidations, stock
sales and asset-based transactions and other transactions resulting in a
financial benefit to the interested stockholder.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102(b)(7) of the DGCL enables a corporation in its original
certificate of incorporation or an amendment thereto to eliminate or limit the
personal liability of a director to a corporation or its stockholders for
violations of the director's fiduciary duty, except:
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
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best interests of the corporation, and, with respect to any criminal action or
proceeding, if they had no reasonable cause to believe their conduct was
unlawful; provided, that no indemnification may be made against expenses in
respect of any claim, issue or matter as to which they shall have been adjudged
to be liable to the corporation, unless and only to the extent that the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, they are fairly and reasonably entitled to indemnity for such expenses
which the court shall deem proper. Any such indemnification may be made by the
corporation only as authorized in each specific case upon a determination by the
stockholders or disinterested directors that indemnification is proper because
the indemnitee has met the applicable standard of conduct. SmartServ's By-Laws
entitle officers and directors of SmartServ to indemnification to the fullest
extent permitted by the DGCL.
SmartServ has agreed to indemnify each of its directors and certain
officers against certain liabilities, including liabilities under the Securities
Act of 1933. In addition, SmartServ maintains an insurance policy with respect
to potential liabilities of its directors and officers, including potential
liabilities under the Securities Act of 1933.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
SmartServ pursuant to the provisions described above, or otherwise, SmartServ
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by SmartServ of
expenses incurred or paid by a director, officer or controlling person of
SmartServ in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, SmartServ will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the
Securities and Exchange Commission. You may read and copy any report, proxy
statement or other information we file with the Commission at the Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's Regional Offices at 75 Park Place, Room 1400, New York, New York
10007 and Citicorp 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.
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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 Jenkens & Gilchrist 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 December 31, 2000
and for the six month transition period then ended, as well as the financial
statements at June 30, 2000, 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.
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[LOGO]
SMARTSERV ONLINE, INC.
1,888,877
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.
June ________, 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 $ 6,548
Legal fees and expenses $ 40,000
Accounting fees and expenses $ 30,000
Miscellaneous $ 3,452
---------
Total $ 80,000
Item 26. RECENT SALES OF UNREGISTERED SECURITIES.
Between January 1998 and March 2001, an aggregate of 3,121 prepaid common stock
purchase warrants ("Prepaid Warrants") were converted into an aggregate of
1,251,169 shares of our common stock. No
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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 March 1998, we issued warrants to purchase 20,833 shares of common stock to
Steven Rosner, a financial advisor to the Company, at exercise prices of $15.75
to $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 $0.60 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, we issued 32,953 shares of common stock to Zanett Lombardier
Ltd. 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, 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. 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. Such
warrants were exercisable at $3.00 per share of common stock. In January 2000,
in consideration of the receipt of $324,000, we issued to Data Transmission
Network Corporation, warrants for the purchase of 300,000 shares of our common
stock at $8.60 per share. In June and November 2000, we issued an aggregate of
303,000 shares of common stock upon the exercise of the warrants. Proceeds from
the exercise of the warrants were $2,589,000. 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 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 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 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.
During November 1998 through January 1999, we issued convertible promissory
notes in the amount of $550,000 and warrants to purchase 916,666 shares of
common stock to 7 investors for $550,000. Such warrants were exercisable at $.60
per share. Spencer Trask Securities, Inc., the placement agent, received a
commission of $55,000 and an unaccountable expense allowance of $16,500 in
connection with such transaction. Additionally, we issued warrants to purchase
183,334 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
II-2
June 30, 2000, we issued 1,015,176 shares of common stock upon exercise of these
warrants. Proceeds from the exercise of these warrants were $572,000.
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 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 July 1999, we issued 180,000 shares of common stock to Arnhold & S.
Bleichroeder, Inc. to settle our obligation to Arnhold & S. Bleichroeder, Inc.
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, we entered into a consulting agreement with Steven Rosner, a
financial advisor 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, expiring on July 2, 2003, to purchase 8,000 shares of common stock at
$18.375 per share, we extended this agreement for a two-year period commencing
October 24, 2000. 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 October 1999, SmartServ entered into a restricted stock agreement with Robert
Pearl, Senior Vice President Business 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 November 1999, Zanett Lombardier, Ltd. 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 4 (2) of the Securities Act.
In November 1999, we 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.
In December 1999, we issued 16,666 shares of common stock to Ehrenkrantz King
and Nussbaum, Inc. upon the exercise of warrants to purchase such shares. 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. Proceeds from the exercise of the warrants were
$62,497.
In December 1999, our Board of Directors approved the issuance of stock to
Sebastian E. Cassetta and Mario F. Rossi in satisfaction of the bonus payable to
them for 1999 under their employment agreements. Pursuant thereto, in March
2000, we issued 148,000 shares of common stock to Mr. Cassetta and 54,000
II-3
shares to Mr. Rossi. 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 December 1999, we 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 December 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. 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, we issued 618,239 shares of common stock to Sebastian E.
Cassetta in connection with a restricted 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 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, we issued 206,080 shares of common stock to Mario F. Rossi in
connection with a restricted 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, we issued 233,000 shares of common stock to 24 accredited
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 our common stock at an
exercise price of $15 per share. 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.
In January 2000, we issued 100,000 shares of common stock to 14 additional
accredited 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 May 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 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. This warrant was issued in
reliance upon the exemption from registration provided by Section 4 (2) of the
Securities Act.
II-4
In May 2000, we issued 353,535 shares of our 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 $17,700 in connection with this transaction.
The shares were issued in reliance upon the exemption from registration provided
by Section 4 (2) of the Securities Act.
During May through August 2000, we issued an aggregate of 102,615 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 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 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 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.
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 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 Jenkens & Gilchrist Parker Chapin LLP++
II-5
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 **
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+
II-6
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 Restricted Stock Purchase Agreement between SmartServ Online Inc. and Robert W. Pearl, dated October
13, 1999*
10.26 Promissory Note between SmartServ Online, Inc. and Robert W. Pearl, dated January 31, 2000*
10.27 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)
- ------------
+ 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)
**** 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
II-7
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.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment no. 3 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 12th day of June, 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. 3 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, June 12, 2001
- --------------------------------------- Chief Executive Officer,
Sebastian E. Cassetta and Director
/S/ THOMAS W. HALLER Senior Vice President and June 12, 2001
- --------------------------------------- Treasurer (Chief Financial
Thomas W. Haller and Accounting Officer)
/S/ MARIO F. ROSSI* Executive Vice President, June 12, 2001
- --------------------------------------- Chief Technology Officer
Mario F. Rossi and Director
Director June 12, 2001
- ---------------------------------------
Claudio Guazzoni
/S/ CHARLES R. KLOTZ* Director June 12, 2001
- ---------------------------------------
Charles R. Klotz
Director June 12, 2001
- ---------------------------------------
Stephen Lawler
/S/ L. SCOTT PERRY* Director June 12, 2001
- ---------------------------------------
L. Scott Perry
II-9
/S/ ROBERT H. STEELE* Director June 12, 2001
- ---------------------------------------
Robert H. Steele
/S/ CATHERINE CASSEL TALMADGE* Director June 12, 2001
- ----------------------------------
Catherine Cassel Talmadge
/S/ CHARLES R. WOOD* Director June 12, 2001
- ---------------------------------------
Charles R. Wood
*By: /S/ THOMAS W. HALLER
-----------------------------------
Thomas W. Haller as attorney-in-fact.
II-10
INDEX TO FINANCIAL STATEMENTS
UNAUDITED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 2001
Page
----
Consolidated Balance Sheets as of December 31, 2000 and March 31, 2001........................................F-2
Consolidated Statements of Operations for the three months ended
March 31, 2001 and March 31, 2000..............................................................................F-4
Consolidated Statement of Changes in Stockholders' Equity for the
three months ended March 31, 2001..............................................................................F-5
Consolidated Statements of Cash Flows for the three months ended
March 31, 2001 and March 31, 2000..............................................................................F-6
Notes to Unaudited Consolidated Financial Statements...........................................................F-7
FINANCIAL STATEMENTS FOR THE TRANSITION PERIOD ENDED DECEMBER 31, 2000 AND
THE FISCAL YEARS ENDED JUNE 30, 2000, JUNE 30, 1999 AND JUNE 30, 1998
Page
----
Report of Independent Auditors...............................................................................F-12
Balance Sheets as of December 31, 2000, June 30, 2000 and June 30, 1999......................................F-13
Statements of Operations for the six months ended December 31, 2000 and for
the years ended June 30, 2000, 1999 and 1998.................................................................F-15
Statement of Stockholders' Equity (Deficiency) for the six months ended
December 31, 2000 and for the years ended June 30, 2000, 1999 and 1998.......................................F-16
Statements of Cash Flows for the six months ended December 31, 2000 and
for the years ended June 30, 2000, 1999 and 1998.............................................................F-20
Notes to Financial Statements................................................................................F-21
F-1
SMARTSERV ONLINE, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2001 2000
-------------------- -------------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 15,554,021 $ 19,172,118
Accounts receivable 89,300 149,016
Due from officer 500,000 --
Prepaid expenses 122,390 294,809
-------------------- -------------------
Total current assets 16,265,711 19,615,943
-------------------- -------------------
Property and equipment, net 3,632,239 2,658,808
Other assets
Capitalized software development costs, net of
accumulated amortization of $1,034,763 at
March 31, 2001 and $804,345 at December 31, 2000 1,339,484 1,416,751
Security deposits 200,374 200,374
Deferred financing costs 100,000 150,000
-------------------- -------------------
1,639,858 1,767,125
-------------------- -------------------
Total Assets $ 21,537,808 $ 24,041,876
==================== ===================
F-2
SMARTSERV ONLINE, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2001 2000
-------------------- -------------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 4,135,396 $ 1,880,399
Accrued liabilities 1,061,619 1,357,270
-------------------- -------------------
Total current liabilities 5,197,015 3,237,669
-------------------- -------------------
Deferred revenues 1,610,612 2,576,981
Note payable 1,638,248 1,446,256
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 - 6,008,906 shares at March 31, 2001
and 5,973,140 shares at December 31, 2000 60,089 59,731
Additional paid-in capital 68,984,331 69,116,627
Notes receivable from officers (666,841) (666,841)
Unearned compensation (1,420,019) (1,726,574)
Accumulated deficit (53,865,627) (50,001,973)
-------------------- -------------------
Total stockholders' equity 13,091,933 16,780,970
-------------------- -------------------
Total Liabilities and Stockholders' Equity $ 21,537,808 $ 24,041,876
==================== ===================
SEE ACCOMPANYING NOTES.
F-3
SMARTSERV ONLINE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31
------------------------------------------
2001 2000
------------------- -------------------
Revenues $ 1,224,971 $ 989,943
------------------- -------------------
Costs and expenses:
Costs of services (1,561,841) (157,942)
Product development expenses (495,878) (106,312)
Advertising and marketing expenses (1,347,737) (134,597)
General and administrative expenses (1,606,651) (612,630)
Stock-based compensation (159,778) (14,001,007)
------------------- -------------------
Total costs and expenses (5,171,885) (15,012,488)
------------------- -------------------
Loss from operations (3,946,914) (14,022,545)
Other income (expense)
Interest income 193,363 45,537
Interest expense and other financing costs (94,093) (10,000)
Foreign exchange loss (16,010) --
------------------- -------------------
83,260 35,537
------------------- -------------------
Net loss $ (3,863,654) $ (13,987,008)
=================== ===================
Basic and diluted loss per common share $ (0.68) $ (4.33)
=================== ===================
Weighted average shares outstanding - basic and diluted 5,705,629 3,232,687
=================== ===================
SEE ACCOMPANYING NOTES.
F-4
SMARTSERV ONLINE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2001
(UNAUDITED)
NOTES
COMMON STOCK RECEIVABLE ADDITIONAL
PAR FROM PAID-IN UNEARNED ACCUMULATED
SHARES VALUE OFFICERS CAPITAL COMPENSATION DEFICIT
---------------------------- ------------- --------------- -------------- ----------------
Balances at December 31, 2000 5,973,140 $ 59,731 $(666,841) $ 69,116,627 $(1,726,574) $(50,001,973)
Issuance of Common Stock upon
exercise of employee stock
options 15,766 158 -- 14,681 -- --
Conversion of 28 prepaid
common stock purchase
warrants into common stock 20,000 200 -- (200) -- --
Amortization of unearned
compensation over the terms
of consulting agreement -- -- -- -- 306,555 --
Change in market value of
employee stock options -- -- -- (146,777) -- --
Net loss for the period -- -- -- -- -- (3,863,654)
------------------------------------------------------------------------------------------
Balances at March 31, 2001 6,008,906 $ 60,089 $(666,841) $68,984,331 $(1,420,019) $(53,865,627)
==========================================================================================
SEE ACCOMPANYING NOTES.
F-5
SMARTSERV ONLINE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31
----------------------------------------
2001 2000
------------------- ------------------
OPERATING ACTIVITIES
Net loss $ (3,863,654) $ (13,987,008)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 597,629 146,891
Noncash compensation costs (146,777) 13,624,852
Noncash consulting services 306,555 376,155
Amortization of deferred revenues (966,369) (414,160)
Amortization of deferred financing costs 50,000 --
Changes in operating assets and liabilities
Accounts receivable 59,716 120,542
Prepaid expenses 172,419 (152,284)
Accounts payable and accrued liabilities 746,086 75,705
Salaries payable -- 60,005
------------------- ------------------
Net cash used for operating activities (3,044,395) (149,302)
------------------- ------------------
INVESTING ACTIVITIES
Purchase of equipment (127,382) (127,901)
Capitalization of software development costs (153,151) (293,519)
Due from officer (500,000) --
------------------- ------------------
Net cash used for investing activities (780,533) (421,420)
------------------- ------------------
FINANCING ACTIVITIES
Proceeds from the issuance of note 191,992 --
Repayment of capital lease obligation -- (23,942)
Issuance of common stock 14,839 5,398,660
------------------- ------------------
Net cash provided by financing activities 206,831 5,374,718
------------------- ------------------
Increase (decrease) in cash and cash equivalents (3,618,097) 4,803,996
Cash and cash equivalents - beginning of period 19,172,118 371,581
------------------- ------------------
Cash and cash equivalents - end of period $ 15,554,021 $ 5,175,577
=================== ==================
SEE ACCOMPANYING NOTES.
F-6
SMARTSERV ONLINE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
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 m-commerce by providing
transactional and information services to our alliance partners. We have
developed online financial and transactional applications using a unique "device
agnostic" 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 m-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, both on the domestic and international fronts, 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.
In October 2000, we announced the change of our year end from a fiscal year
ending on June 30 to a calendar year ending on December 31 in order to conform
to standard industry practice. The new fiscal year commenced on January 1, 2001.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
- ---------------------
The accompanying unaudited consolidated 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 December 31, 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 period ended December
31, 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 March 31, 2001 are not necessarily
indicative of those expected for the year ending December 31, 2001.
F-7
USE OF ESTIMATES
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
- -------------------
Revenues are recognized as services are provided. Deferred revenues, resulting
from customer prepayments, are recognized as services are provided throughout
the term of the agreement. Deferred revenues resulting from our agreement with
Data Transmission Network Corporation ("DTN") were 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 performed maintenance and enhancement services through December
2000 and will continue to provide operational support through August 2001.
Therefore, commencing September 1, 2000, deferred revenues are being amortized
to income on a straight-line basis over the period through August 2001.
EARNINGS PER SHARE
- ------------------
Basic earnings per share is computed on the weighted average number of common
shares outstanding. Diluted earnings per share reflects the increase in the
weighted average common shares outstanding that would result from the assumed
exercise of outstanding stock options calculated using the treasury stock
method.
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".
On an ongoing basis, SmartServ reviews the future recoverability of its
long-lived assets for impairment or whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable. To date, no such
events or circumstances have occurred. If such events or changes in
circumstances do occur, we will recognize an impairment loss if the undiscounted
future cash flows expected to be generated by the asset are less than its
carrying value. The impairment loss would reduce the asset to its fair value.
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 three month
periods ended March 31, 2001 and 2000 were $1,800 and $800, 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. It is management's policy to invest in only those companies with a
AAA credit rating; therefore, our commercial paper investments are short-term
and highly liquid. We perform periodic credit evaluations of our customers and,
if applicable, provide for credit losses in the financial statements.
F-8
PROPERTY AND EQUIPMENT
- ----------------------
Property and equipment are stated at cost. Equipment purchased under a capital
lease is 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 $24,000 and
$-0- during the three months periods ended March 31, 2001 and 2000,
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 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.
3. DUE FROM OFFICER
Our Board of Directors authorized the issuance of a line of credit to Sebastian
Cassetta for an amount not to exceed $500,000. Such amount bears interest at
market and is payable upon demand.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
MARCH 31, DECEMBER 31,
2001 2000
------------------- -----------------
Data processing equipment $ 4,561,367 $ 3,221,833
Data processing equipment purchased under a capital lease 246,211 246,211
Office furniture and equipment 172,452 172,452
Display equipment 71,335 71,335
Leasehold improvements 55,569 54,462
------------------- -----------------
5,106,934 3,766,293
Accumulated depreciation, including $192,865 at March 31,
2001 and $180,555 at December 31, 2000 for equipment
purchased under a capital lease (1,474,695) (1,107,485)
------------------- -----------------
$ 3,632,239 $ 2,658,808
=================== =================
5. NOTE PAYABLE
In May 2000, we entered into a Business Alliance Agreement with Hewlett-Packard
Company whereby the companies agreed to jointly market their respective products
and services, and to work on the build-out of SmartServ's domestic and
international infrastructure. In furtherance of these objectives Hewlett-Packard
has provided us with a line of credit of up to $20,000,000 for the acquisition
of approved hardware, software and services. At March 31, 2001, Hewlett-Packard
Company had advanced us $1,638,248 under this facility and will make available
additional funds as SmartServ complies with certain financial milestones. The
debt is evidenced by a note, bearing an interest rate of 11%, secured by
F-9
the Company's assets, exclusive of its internally developed software products,
with a three year maturity and may be converted into our common stock at $33.56
per share.
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
(charges)/credits that would have been recorded in the categories of the
statement of operations had stock-based compensation not been separately stated
therein:
THREE MONTHS ENDED MARCH 31
--------------------------------------------
2001 2000
--------------------- ---------------------
Costs of revenues $ 27,760 $ (3,039,090)
Selling, general and administrative expenses (187,538) (10,961,917)
--------------------- ---------------------
$ (159,778) $ (14,001,007)
===================== =====================
Stock-based compensation for the three months ended March 31, 2001 and 2000
consists of the impact of changes in the market value of the Company's common
stock on the value of options to purchase common stock issued to employees, as
well as the amortization of deferred costs associated with the prior issuance of
warrants to purchase common stock.
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share:
THREE MONTHS ENDED MARCH 31
--------------------------------------------
2001 2000
--------------------- ---------------------
Numerator:
Net loss $ (3,863,654) $ (13,987,008)
===================== =====================
Denominator:
Weighted average shares - basic and diluted 5,705,629 3,232,687
===================== =====================
Basic and diluted loss per common share $ (0.68) $ (4.33)
===================== =====================
Outstanding employee stock options and other warrants to purchase an aggregate
of 4,360,000 shares of common stock at March 31, 2001 were not included in the
computation of diluted earnings per share because the Company reported a loss
for the period and, therefore their inclusion would be antidilutive.
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
F-10
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.
On or about February 29, 2000, Commonwealth Associates, L.P. ("Commonwealth")
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.
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
December 31, 2000, June 30, 2000 and 1999, and the related statements of
operations, stockholders' equity (deficiency), and cash flows for the six months
ended December 31, 2000, and 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
December 31, 2000, June 30, 2000 and 1999, and the results of its operations and
its cash flows for the six months ended December 31, 2000, and 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
New York, New York
February 27, 2001
F-12
SMARTSERV ONLINE, INC.
BALANCE SHEETS
DECEMBER 31 JUNE 30
--------------------- -------------------------------------
2000 2000 1999
--------------------- ------------------ ---------------
ASSETS
Current assets
Cash and cash equivalents $ 19,172,118 $ 24,016,345 $ 2,165,551
Accounts receivable 149,016 236,498 348,278
Prepaid expenses 294,809 213,956 50,150
--------------------- ------------------ ---------------
Total current assets 19,615,943 24,466,799 2,563,979
Property and equipment, net 2,658,808 687,439 498,448
Other assets
Capitalized software development costs, net of
accumulated amortization of $804,345 at December
31, 2000, $412,236 at June 30, 2000 and $82,108 at
June 30, 1999 1,416,751 1,475,212 683,337
Security deposit 200,374 73,374 74,834
Deferred financing costs 150,000 -- --
--------------------- ------------------ ---------------
1,767,125 1,548,586 758,171
--------------------- ------------------ ---------------
Total Assets $ 24,041,876 $ 26,702,824 $ 3,820,598
===================== ================== ===============
SEE ACCOMPANYING NOTES.
F-13
SMARTSERV ONLINE, INC.
BALANCE SHEETS
DECEMBER 31 JUNE 30
------------------ ------------------- --- -----------------
2000 2000 1999
------------------ ------------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable $ 1,880,399 $ 1,482,019 $ 780,543
Accrued liabilities 1,357,270 1,097,289 637,779
Accrued liabilities to warrant holders -- -- 1,311,365
------------------ ------------------- ------------------
Total current liabilities 3,237,669 2,579,308 2,729,687
Deferred revenues 2,576,981 4,141,579 5,798,211
Note payable 1,446,256 -- --
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 - 5,973,140 shares at
December 31, 2000, 5,576,894
shares at June 30, 2000 and 1,199,787
shares at June 30, 1999 59,731 55,768 11,998
Common stock subscribed -- -- 1,812,554
Additional paid-in capital 69,116,627 75,842,858 20,679,611
Notes receivable from officers (666,841) (666,841) (1,812,554)
Unearned compensation (1,726,574) (2,310,284) (3,452,904)
Accumulated deficit (50,001,973) (52,939,564) (21,946,005)
------------------ ------------------- ------------------
Total stockholders' equity (deficiency) 16,780,970 19,981,937 (4,707,300)
------------------ ------------------- ------------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 24,041,876 $ 26,702,824 $ 3,820,598
================== =================== ==================
SEE ACCOMPANYING NOTES.
F-14
SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
SIX MONTHS
ENDED
DECEMBER 31 YEAR ENDED JUNE 30
------------------- -----------------------------------------------------------
2000 2000 1999 1998
------------------- ------------------ ------------------ -------------------
Revenues $ 2,232,476 $ 3,696,133 $ 1,443,781 $ 873,476
------------------- ------------------ ------------------ -------------------
Costs and expenses
Cost of services (2,199,749) (954,048) (992,741) (1,216,761)
Product development expenses (814,048) (383,042) (193,188) (923,082)
Selling, general and administrative
expenses (5,014,423) (3,998,405) (2,695,999) (2,561,364)
Stock-based compensation 8,164,779 (30,271,024) (1,312,324) (660,576)
------------------- ------------------ ------------------ ---------------------
Total costs and expenses 136,559 (35,606,519) (5,194,252) (5,361,783)
------------------- ------------------ ------------------ ---------------------
Income (loss) from operations 2,369,035 (31,910,386) (3,750,471) (4,488,307)
------------------- ------------------ ------------------ ---------------------
Other income (expense):
Interest income 621,416 241,402 4,767 40,788
Interest expense (2,860) (2,275) (167,839) (57,485)
Debt origination and other
financing costs (50,000) 677,700 (3,210,583) (535,005)
------------------- ------------------ ------------------ ---------------------
568,556 916,827 (3,373,655) (551,702)
------------------- ------------------ ------------------ ---------------------
Net income (loss) $ 2,937,591 $ (30,993,559) $ (7,124,126) $ (5,040,009)
=================== ================== ================== =====================
Basic earnings (loss) per share $ 0.54 $ (11.42) $ (6.44) $ (7.65)
=================== ================== ================== =====================
Diluted earnings (loss) per share $ 0.34 $ (11.42) $ (6.44) $ (7.65)
=================== ================== ================== =====================
Weighted average shares outstanding - basic 5,433,577 2,712,931 1,105,603 659,034
=================== ================== ================== =====================
Weighted average shares outstanding - diluted 8,697,917 2,712,931 1,105,603 659,034
=================== ================== ================== =====================
SEE ACCOMPANYING NOTES.
F-15
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
COMMON STOCK NOTES ADDITIONAL
PAR COMMON STOCK RECEIVABLE PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED FROM 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 220,395 2,204 -- -- (2,204) -- --
Common Stock
Issuance of warrants to purchase
Common Stock to a financial
consultant in connection with
the issuance of 4,000 Prepaid
Common Stock Purchase -- -- -- -- 5,145,500 (5,145,500) --
Warrants
Issuance of warrants to
purchase Common Stock in
connection with the -- -- -- -- 388,900 -- --
issuance of notes
Issuance of warrants to
purchase Common Stock 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)
COMMON STOCK NOTES ADDITIONAL
PAR COMMON STOCK RECEIVABLE PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED FROM 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 60,000 600 -- -- 146,713 -- --
Warrants
Issuance of warrants to
purchase Common Stock in
connection with 6,300
prepayments made by a -- -- -- -- -- --
marketing partner
Issuance of warrants to
purchase Common Stock in
connection with the
issuance of 8% -- -- -- -- 1,573,000 -- --
convertible notes
Beneficial conversion 550,000
feature of 8% convertible -- -- -- -- -- --
notes
Issuance of Common Stock and
warrants to purchase
Common Stock in partial 144,500
settlement of litigation 125,000 1,250 -- -- -- --
Amortization of unearned
compensation -- -- -- -- -- 1,165,020 --
Common Stock subscriptions
and notes receivable in
connection with officers'
employment agreements -- -- 1,812,554 (1,812,554) -- -- --
Issuance of warrants to
purchase Common Stock as
compensation for services -- -- -- -- 59,000 -- --
Redemption of Prepaid Common
Stock Purchase Warrants -- -- -- (325,000) -- --
Issuance of warrants to
purchase Common Stock in
connection with a -- -- -- -- 324,000 -- --
licensing agreement
Change in market value of
employee stock options -- -- -- -- 18,304 -- --
Net loss for the year -- -- -- -- -- -- (7,124,126)
------------------------------------------------------------------------------------------------
Balance at June 30, 1999 1,199,787 11,998 1,812,554 (1,812,554) 20,679,611 (3,452,904) (21,946,005)
------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
F-17
SMARTSERV ONLINE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(CONTINUED)
COMMON STOCK NOTES ADDITIONAL
PAR COMMON STOCK RECEIVABLE PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED FROM OFFICERS CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
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 180,000 1,800 -- -- 266,895 -- --
holder
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 -- -- -- -- 137,300 (77,400) --
services
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.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(CONTINUED)
COMMON STOCK NOTES ADDITIONAL
PAR COMMON STOCK RECEIVABLE PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED FROM OFFICERS CAPITAL COMPENSATION DEFICIT
----------------------------------------------------------------------------------------------
Balance at June 30, 2000 5,576,894 $ 55,768 $ -- $(666,841) $75,842,858 $(2,310,284) $(52,939,564)
Amortization of unearned
compensation -- -- -- -- -- 643,710 --
Issuance of Common Stock
upon exercise of warrants
to purchase Common Stock 337,946 3,380 -- -- 1,984,414 -- --
Issuance of warrants to
purchase 50,000 shares of
Common Stock for -- -- -- -- 60,000 (60,000) --
consulting services
Change in market value of
employee stock options -- -- -- -- (8,808,489) -- --
Issuance of Common Stock
upon exercise of employee
stock options 36,871 369 -- -- 38,058 -- --
Conversion of 30 Prepaid
Common Stock Purchase
Warrants into Common Stock 21,429 214 -- -- (214) -- --
Net income for the period -- -- -- -- -- -- 2,937,591
-----------------------------------------------------------------------------------------------
Balance at December 31, 2000 5,973,140 $ 59,731 $ -- $(666,841) $69,116,627 $(1,726,574) $(50,001,973)
===============================================================================================
SEE ACCOMPANYING NOTES.
F-19
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS
ENDED
DECEMBER 31 YEAR ENDED JUNE 30
------------------ -------------------------------------------------------
2000 2000 1999 1998
------------------ ----------------- ---------------- -----------------
OPERATING ACTIVITIES
Net income (loss) $ 2,937,591 $ (30,993,559) $ (7,124,126) $ (5,040,009)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization 703,541 560,472 278,646 193,601
Provision for losses on receivables 24,133 -- -- (1,300)
Noncash interest costs -- -- 12,524 52,837
Noncash debt origination and other
financing costs 50,000 (717,670) 2,593,808 475,527
Noncash compensation costs (8,808,489) 28,991,104 18,304 --
Noncash consulting services 643,710 1,279,920 1,349,020 660,576
Amortization of unearned revenues (1,564,598) (1,656,632) (1,112,138) (251,058)
Settlement of litigation -- -- -- 145,750
Changes in operating assets and liabilities
Accounts receivable 63,349 111,780 (237,227) 40,031
Prepaid expenses (80,853) (163,806) (44,547) (25,878)
Accounts payable and accrued
liabilities 1,220,564 1,057,632 817,399 335,348
Unearned revenues -- -- 6,121,776 1,002,193
Security deposit (127,000) 1,460 (4,397) 10,781
------------------ ----------------- ---------------- -----------------
Net cash provided by (used for) operating
activities (4,938,052) (1,529,299) 2,669,042 (2,401,601)
------------------ ----------------- ---------------- -----------------
INVESTING ACTIVITIES
Capitalization of software development costs (333,648) (1,122,003) (765,445) --
Purchase of equipment (1,398,748) (419,335) (84,449) (60,424)
------------------ ----------------- ---------------- -----------------
Net cash used for investing activities (1,732,396) (1,541,338) (849,894) (60,424)
------------------ ----------------- ---------------- -----------------
FINANCING ACTIVITIES
Proceeds from the issuance of warrants 1,987,794 24,746 324,000 2,643,941
Proceeds from the issuance of common stock 38,427 26,031,723 -- --
Proceeds from the issuance of common stock to
officers -- 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 debt (200,000) -- -- --
Costs of issuing securities -- (1,073,903) (35,000) (25,000)
------------------ ----------------- ---------------- -----------------
Net cash provided by (used for) financing
activities 1,826,221 24,921,431 (7,822) 2,722,905
------------------ ----------------- ---------------- -----------------
Increase (decrease) in cash and cash equivalents (4,844,227) 21,850,794 1,811,326 260,880
Cash and cash equivalents - beginning of period 24,016,345 2,165,551 354,225 93,345
------------------ ----------------- ---------------- -----------------
Cash and cash equivalents - end of period $ 19,172,118 $ 24,016,345 $ 2,165,551 $ 354,225
================== ================= ================ =================
SEE ACCOMPANYING NOTES.
F-20
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 m-commerce by providing
transactional and information services to our alliance partners. We have
developed online financial and transactional applications using a unique "device
agnostic" 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 m-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.
In October 2000, we announced the change of our year end from a fiscal year
ending on June 30th to a calendar year ending on December 31st in order to
conform to standard industry practice. This change in fiscal year end gives rise
to the six month transition period ended December 31, 2000. The new fiscal year
commenced on January 1, 2001.
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 accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
- -------------------
Revenues are recognized as services are provided. Deferred revenues, resulting
from customer prepayments, are recognized as services are provided throughout
the term of the agreement. Deferred revenues resulting from our agreement with
Data Transmission Network Corporation were amortized over the anticipated future
revenue stream, a period of 42 months, commencing June 1, 1999. We have
F-21
amended our agreement with DTN such that, effective September 1, 2000, SmartServ
performed maintenance and enhancement services through December 2000 and will
continue to provide operational support through August 2001. Therefore,
commencing September 1, 2000, deferred revenues are being amortized to income on
a straight-line basis over the period through August 2001.
EARNINGS PER SHARE
- ------------------
Basic earnings per share is computed on the weighted average number of common
shares outstanding. Diluted earnings per share reflects the increase in the
weighted average common shares outstanding that would result from the assumed
exercise of outstanding stock options calculated using the treasury stock
method.
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.
On an ongoing basis, SmartServ reviews the future recoverability of its
long-lived assets for impairment or whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable. To date, no such
events or circumstances have occurred. If such events or changes in
circumstances do occur, we will recognize an impairment loss if the undiscounted
future cash flows expected to be generated by the asset are less than its
carrying value. The impairment loss would reduce the asset to its fair value.
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.
During December 2000, the Company satisfied an obligation to Hewlett-Packard
Company for the purchase of fixed assets and consulting services of $884,053 and
$562,203, respectively, by issuing Hewlett-Packard a note in the amount of
$1,446,256. This transaction is considered a non-cash transaction for the
purposes of the Statement of Cash Flows.
Interest, debt origination and other financing costs paid during the six month
period ended December 31, 2000 and the years ended June 30, 2000, 1999 and 1998
were $202,860, $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. It is management's policy to invest in only those companies with a
AAA credit rating; therefore, our commercial paper investments are short-term
and highly liquid. At December 31, 2000, accounts receivable consist principally
of amounts due from Data Transmission Network Corporation ($86,000), and a
financial services company ($7,500). 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 is recorded at the present value of the future minimum lease payments at
the date of acquisition. Depreciation is computed
F-22
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 $54,000,
$91,700, $20,500 and $97,100 in the six month period ended December 31, 2000 and
the fiscal years ended June 30, 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 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. The adoption of SAB 101 did not have a material
affect on our financial results.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31 JUNE 30
----------------- -------------------------------------
2000 2000 1999
----------------- ----------------- ----------------
Data processing equipment $ 3,221,833 $ 1,109,828 $ 700,210
Data processing equipment purchased under
a capital lease 246,211 246,211 246,211
Office furniture and equipment 172,452 81,140 71,423
Display equipment 71,335 9,635 9,635
Leasehold improvements 54,462 36,678 36,678
----------------- ----------------- ----------------
3,766,293 1,483,492 1,064,157
Accumulated depreciation, including $180,555
$155,933 and $106,691 for equipment
purchased under a capital lease (1,107,485) (796,053) (565,709)
----------------- ----------------- ----------------
$ 2,658,808 $ 687,439 $ 498,448
================= ================= ================
4. NOTE 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 $0.72 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
F-23
methodology and recorded as debt origination and other financing costs. Also in
connection with the 8% convertible notes, 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.
In May 2000, we entered into a Business Alliance Agreement with Hewlett-Packard
Company whereby the companies agreed to jointly market their respective products
and services, and to work on the build-out of SmartServ's domestic and
international infrastructure. In furtherance of these objectives Hewlett-Packard
has provided us with a line of credit of up to $20,000,000 for the acquisition
of approved hardware, software and services. At December 31, 2000,
Hewlett-Packard Company had advanced us $1,446,000 under this facility and will
make available additional funds as SmartServ complies with certain financial
milestones. The debt is evidenced by a note, bearing an interest rate of 11%,
secured by the Company's assets, exclusive of its internally developed software
products, with a three year maturity and may be converted into our common stock
at $33.56 per share.
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
December 31, 2000, Prepaid Warrants with a face value of $582,000 were
outstanding and are currently convertible into 415,714 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 Bruno
Guazzoni, 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 $582,500,
$1,165,000, $1,165,000 and $527,600 for the six months ended December 31, 2000
and the years ended June 30, 2000, 1999 and 1998, respectively.
F-24
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.
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 Corporation 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. In June and November 2000, we issued 203,000
and 100,000 shares, respectively, of common stock upon the exercise of the
warrants. Proceeds from the exercise of the warrants were $2,589,000.
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, to
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, Executive 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 common 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 common 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 common
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 common 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 $0.75 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
F-25
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 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 $0.60 per share for his efforts at arranging our relationship
with Spencer Trask Securities. These warrants have been recorded as professional
fees in accordance with the Black-Scholes pricing methodology. 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 $0.75 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 $717,000 of 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, Senior Vice President Business Development, providing for the sale to Mr.
Pearl of 76,818 shares of common stock at a purchase price of $0.75 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 common
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
January 2000, 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 in the
year ended June 30, 2000 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 under 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.
F-26
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 through
April 30, 2003. We recorded $74,000 as unearned compensation which is being
amortized over the terms of the consulting agreements.
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.
In August 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 and expire on April
30, 2003. During the six months ended December 31, 2000, we recorded a charge to
earnings of $60,000 in connection with these warrants.
In the six month period ended December 31, 2000, we issued 337,946 shares of
common stock to certain other 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 $1,987,800.
In December 2000, holders of 30 of our Prepaid Warrants converted such warrants
into 21,429 shares of common stock at an exercise price of $1.40 per share.
In the six month period ended December 31, 2000, we issued 36,871 shares of
common stock to employees pursuant to the exercise of employee stock options.
The options were exercised at prices ranging from $0.94 to $1.29 per share.
Proceeds from the exercise of these options were $38,427.
At December 31, 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
$0.5174 share of common stock at an exercise price of $7.73 per share and expire
on March 20, 2002. These warrants are redeemable by SmartServ on not less than
30 days written notice at the redemption price of $0.10 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.
At December 31, 2000, there were 4,774,000 shares reserved for issuance upon the
exercise of options and warrants to purchase common stock and 596,000 shares
reserved for issuance upon the conversion of convertible notes.
F-27
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
(charges)/credits that would have been recorded in the categories of the
statement of operations had stock-based compensation not been separately stated
therein:
SIX MONTHS ENDED
DECEMBER 31 YEAR ENDED JUNE 30
--------------------- -----------------------------------------------------
2000 2000 1999 1998
--------------------- ------------------ ---------------- --------------
Costs of revenues $ 2,301,539 $ (2,749,997) $ (1,724) $ --
Selling, general and administrative expenses 5,863,240 (27,521,027) (1,310,600) (660,576)
--------------------- ------------------ ---------------- --------------
$ 8,164,779 $ (30,271,024) $ (1,312,324) $ (660,576)
===================== ================== ================ ==============
As more fully described in Note 12 to the financial statements, stock-based
compensation for the six months ended December 31, 2000, consists primarily of
the impact of changes in the market value of the Company's common stock on the
value of options to purchase common stock issued to employees. During the fiscal
year ended June 30, 2000, stock-based compensation consists primarily of the
above, as well as the compensation issues related to the issuance of restricted
stock to Messrs. Cassetta and Rossi, as more fully described in Note 5 to the
financial statements.
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
SIX MONTHS ENDED
DECEMBER 31 YEAR ENDED JUNE 30
------------------- -----------------------------------------------------
2000 2000 1999 1998
------------------- ---------------- ---------------- ---------------
Numerator
Net earnings (loss) $ 2,937,591 $ (30,993,559) $ (7,124,126) $ (5,040,009)
=================== ================ ================ ==============
Denominator
Denominator for basic earnings
per share - weighted average
shares 5,433,577 2,712,931 1,105,603 659,034
Dilutive effect of warrants
to purchase common stock 2,214,176 -- -- --
F-28
Dilutive effect of employee stock
options and restricted shares 1,050,164 -- -- --
-------------------------------------------------------------------------------
Denominator for diluted earnings
per share 8,697,917 2,712,931 1,105,603 659,034
===============================================================================
Basic earnings (loss) per common
share $ 0.54 $ (11.42) $ (6.44) $ (7.65)
===================== ================ ================ =================
Diluted earnings (loss) per common
share $ 0.34 $ (11.42) $ (6.44) $ (7.65)
===================== ================ ================ =================
Outstanding employee stock options and other warrants to purchase an aggregate
of 518,000, 4,568,000, 6,563,000, and 2,223,000 shares of common stock at
December 31, 2000 and June 30, 2000, 1999 and 1998, respectively, were not
included in the computation of diluted earnings per share because either the
Company reported a loss for the period or their exercise prices were greater
than the average market price of the common stock and, therefore would be
antidilutive.
8. INCOME TAXES
At December 31, 2000, June 30, 2000 and June 30, 1999, SmartServ has deferred
tax assets as follows:
JUNE 30
DECEMBER 31 -------------------------------------
2000 2000 1999
----------------- ---------------- ----------------
Capitalized Start-up Costs $ 198,000 371,000 $ 741,600
Net Operating Loss Carryforwards 25,694,000 19,182,000 6,578,000
----------------- ---------------- ----------------
$ 25,892,000 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 allowances were
$25,892,000, $19,553,000 and $7,319,600 at December 31, 2000, June 30, 2000 and
June 30, 1999, respectively.
At December 31, 2000, we have net operating loss carryforwards for Federal
income tax purposes of approximately $59,431,000 which expire in the years 2009
through 2016. 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. We also lease office space in Zurich, Switzerland on a month-to-month
basis.
F-29
Rent expense amounted to approximately $266,490, $267,800, $290,600, and
$278,000 for the six month period ended December 31, 2000, and the years ended
June 30, 2000, 1999, and 1998, respectively.
Minimum future rental payments at December 31, 2000 are as follows:
YEAR ENDING DECEMBER 31
- -----------------------
2001 $ 369,000
2002 392,800
2003 475,500
2004 485,900
2005 496,300
Thereafter 2,550,700
-----------------
$ 4,770,200
=================
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.
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 Corporation 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 Corporation amended the
agreement such that in consideration of the receipt
F-30
of $5.175 million, we granted Data Transmission Network Corporation 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. In
November 2000, we amended the License Agreement to provide that in consideration
for a copy of the application source code, Data Transmission Network Corporation
will return both the domestic and international marketing rights of the software
applications to SmartServ. Pursuant to this amendment, Smartserv performed
maintenance and enhancement services through December 2000, and will provide
operational support through August 2001. Revenues received by SmartServ pursuant
to this amendment will be $83,000 per month through August 2001.
During the six month period ended December 31, 2000 our relationship with Data
Transmission Network Corporation accounted for substantially all of our revenue.
For the years ended June 30, 2000 and 1999, Data Transmission Network
Corporation 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 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 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 October 1999, our Board of Directors authorized the establishment of our 1999
Employee Stock Option Plan ("1999 Plan"). The 1999 Plan provided 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 provided for the
issuance of options to employees and directors for the purchase of a maximum of
750,000 shares of our common stock. In November 2000, our 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 1,350,000. 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
1,138,000 of such options to employees and non-employee directors at exercise
prices equal to the fair value on the dates of grant.
F-31
At December 31, 2000, there were options available for the issuance of 447,000
shares of common stock to employees under the Company's employee stock option
plans.
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
Granted 862,250 19.48
Exercised (36,871) 1.01
Cancelled (282,326) 43.19
-------------------- -----------------------
Balance at December 31, 2000 1,865,834 $ 20.82
==================== =======================
The following table summarizes information about employee stock options
outstanding as of December 31, 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
- --------------------------- ----------------- --------------- --------------- ---------------- ------------------
$0.94 to $2.34 594,910 $ 1.16 8.7 425,716 $ 1.24
15.00 to 19.00 803,887 18.70 4.5 225,315 18.82
49.50 467,037 49.50 9.9 162,683 49.50
----------------- ----------------
1,865,834 813,714
================= ================
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
F-32
pro forma effects on net income and earnings per share, as if the fair value
based method of accounting had been applied.
The pro forma information regarding net loss and loss per share required by
Statement 123 has been determined as if 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:
SIX MONTHS
ENDED DECEMBER 31 YEAR ENDED JUNE 30
---------------- ------------------------------------------------
2000 2000 1999 1998
---------------- -------------- -------------- ------------
Weighted average dividend yield for
options granted 0.0% 0.0% 0.0% 0.0%
Weighted average expected life in years 3.0 5.0 5.0 5.0
Weighted average volatility 160.5% 159.1% 147.0% 143.9%
Risk-free interest rate 6.18% 5.41% 5.75% 6.0%
Weighted average grant date fair value of
options $18.61 $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 earnings (loss) and earnings (loss) per share are not indicative of future
years.
SmartServ's pro forma information is as follows:
SIX MONTHS ENDED
DECEMBER 31, 2000 YEAR ENDED JUNE 30, 2000
--------------------------------------- -------------------------------------------
REPORTED PROFORMA REPORTED PROFORMA
------------------- ------------------- -------------------- ----------------------
Net income (loss) $2,937,591 $2,177,519 ($30,993,559) ($32,115,231)
=================== =================== ==================== ======================
Basic earnings (loss)
per share $0.54 $0.40 ($11.42) ($11.84)
=================== =================== ==================== ======================
Diluted earnings (loss)
per share $0.34 $0.25 ($11.42) ($11.84)
=================== =================== ==================== ======================
F-33
YEAR ENDED JUNE 30
--------------------------------------------------------------------------------------
1999 1998
--------------------------------------- -------------------------------------------
REPORTED PROFORMA REPORTED PROFORMA
------------------- ------------------- -------------------- ----------------------
Net loss ($7,124,126) ($7,308,036) ($5,040,009) ($5,654,512)
=================== =================== ==================== ======================
Basic loss per share ($6.44) ($6.61) ($7.65) ($8.58)
=================== =================== ==================== ======================
Diluted loss per share ($6.44) ($6.61) ($7.65) ($8.58)
=================== =================== ==================== ======================
13. COMPARATIVE FINANCIAL INFORMATION
The comparative statements of operations for the six months ended December 31,
2000 and 1999 are as follows:
SIX MONTHS ENDED DECEMBER 31
-----------------------------------------------------
2000 1999
----------------------- --------------------------
(UNAUDITED)
Revenues $ 2,232,476 $ 1,720,913
----------------------- --------------------------
Costs and expenses
Cost of services (2,199,749) (445,412)
Product development expenses (814,048) (134,222)
Selling, general and administrative expenses (5,014,423) (1,302,974)
Stock-based compensation 8,164,779 (21,635,019)
----------------------- --------------------------
Total costs and expenses 136,559 (23,517,627)
----------------------- --------------------------
Income (loss) from operations 2,369,035 (21,796,714)
----------------------- --------------------------
Other income (expense):
Interest income 621,416 13,033
Interest expense and other financing costs (52,860) 687,450
----------------------- --------------------------
568,556 700,483
----------------------- --------------------------
Net income (loss) $ 2,937,591 $ (21,096,231)
======================= ==========================
Basic earnings (loss) per share $ 0.54 $ (15.19)
======================= ==========================
Diluted earnings (loss) per share $ 0.34 $ (15.19)
======================= ==========================
Weighted average shares outstanding - basic 5,433,577 1,388,546
======================= ==========================
Weighted average shares outstanding - diluted 8,697,917 1,388,546
======================= ==========================
14. SUBSEQUENT EVENTS
In January 2001, a holder of 28 of our Prepaid Warrants converted such warrants
into 20,000 shares of common stock at an exercise price of $1.40 per share.
F-34